As filed with the Securities and Exchange Commission on March 28, 2001
Registration No. 333-54544
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Securities and Exchange Commission
Washington, DC 20549
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AMENDMENT NO. 2
to
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 1311 76-0380430
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code) Identification No.)
incorporation or
organization)
6733 South Yale
Tulsa, Oklahoma 74136
(918) 491-4500
(Address, including zip code, and telephone number,
including area code of Registrant's principal executive offices)
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Gary R. Christopher
President and Chief Executive Officer
6733 South Yale
Tulsa, Oklahoma 74136
(918) 491-4500
(Name, address, including zip code, and telephone number,
including area code of agent for service)
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Copies to:
Frederic Dorwart J. Vincent Kendrick
Tamara R. Wagman Howard B. Hacker
Frederic Dorwart, Lawyers Akin, Gump, Strauss, Hauer, Feld, L.L.P.
124 E. 4th Street 1900 Pennzoil Place--South Tower
Tulsa, Oklahoma 74103 711 Louisiana Street
(918) 583-9922 Houston, Texas 77002
(713) 220-5800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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Title of each class of
Securities to be Amount to be Proposed maximum Proposed maximum Amount of
registered registered offering price per share aggregate offering price registration fee(3)
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Common Stock, $0.01 par
value.................. 4,108,968(1) $7.67 $31,525,374 $7,881.34
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(1) Represents the maximum number of shares of common stock, par value $0.01
per share, of PetroCorp Incorporated, a Texas corporation, estimated to be
issuable in connection with the merger of Southern Mineral Corporation, a
Nevada corporation, into PetroCorp Acquisition Company, a Delaware
corporation and a direct wholly-owned subsidiary of PetroCorp, as described
in the Agreement and Plan of Merger, dated December 22, 2000, attached as
Annex I to the joint proxy statement/prospectus forming part of this
registration statement.
(2) Pursuant to Rules 457(c), 457(f)(1) and 457(f)(3) of the Securities Act of
1933, as amended, and solely for the purpose of calculating the
registration fee, the proposed maximum aggregate offering price is equal to
(a) 15,980,815, which represents Southern Mineral shares outstanding and
reserved for issuance on the exercise of outstanding options and warrants
on the date of the merger agreement, the maximum estimated number of shares
of Southern Mineral common stock to be exchanged in the merger, multiplied
by (b) $4.1797, the average of the high and low sale prices per share of
Southern Mineral common stock reported on the over-the-counter bulletin
board on January 26, 2001, less (c) $35,269,638, the minimum estimated
amount of cash to be received by Southern Mineral shareholders in the
merger.
(3) The registration fee for the securities to be registered has been
calculated in accordance with Section 6(b) of the Securities Act, and was
paid previously.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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[PETROCORP LOGO] [SOUTHERN MINERAL LOGO]
PROPOSED MERGER -- YOUR VOTE IS IMPORTANT
To our shareholders:
The boards of directors of PetroCorp Incorporated and Southern Mineral
Corporation have agreed on a merger transaction involving our two companies. We
are sending you this document to ask you to vote "FOR" the merger transaction.
In exchange for each share of Southern Mineral stock, Southern Mineral
shareholders will receive merger consideration of $4.71 in cash or, if the
shareholder timely elects, in PetroCorp common stock based on an exchange ratio
of .471, subject to proration as a result of oversubscription for PetroCorp
stock as further described in this document. Because of the potential
proration, Southern Mineral's shareholders will not know at that time they vote
the exact number of shares or amount of cash they will receive for all of their
shares in the merger.
PetroCorp common stock is listed on the American Stock Exchange and traded
under the symbol "PEX."
Your vote is very important. We cannot complete the merger unless both
companies' shareholders approve it. We have scheduled special meetings for you
on April 25, 2001, to vote on the merger agreement. The meetings will be held:
For PetroCorp shareholders: For Southern Mineral shareholders:
1:00 p.m., local time 9:00 a.m., local time
Bank of Oklahoma Tower The Doubletree Hotel
One Williams Center 400 Dallas Street
Tulsa, Oklahoma Houston, Texas
This document is a prospectus of PetroCorp relating to the issuance of
PetroCorp common stock in connection with the merger and a proxy statement for
both PetroCorp and Southern Mineral to use in soliciting proxies for our
shareholder meetings. It contains answers to frequently asked questions and a
summary description of the merger, followed by a more detailed discussion of
the merger and related matters. In addition, you may obtain information about
our companies from documents that we have filed with the Securities and
Exchange Commission. You should also consider the matters discussed under "Risk
Factors" beginning on page 18 of this document. We urge you to review carefully
this entire document.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this document. Any representation to the contrary is a
criminal offense.
This document is dated , 2001, and is being first mailed to
shareholders on or about , 2001.
SOUTHERN MINERAL CORPORATION
1201 Louisiana Street, Suite 3350
Houston, Texas 77002
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
April 25, 2001
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To the Shareholders of
Southern Mineral Corporation:
A Special Meeting of shareholders of Southern Mineral Corporation will be
held at The Doubletree Hotel, 400 Dallas Street, Houston, Texas, at 9:00 a.m.,
local time, on April 25, 2001 for the following purposes:
(1) To consider and vote upon a proposal to approve the merger
agreement among PetroCorp Incorporated, PetroCorp Acquisition Company,
which is a newly-formed, wholly-owned subsidiary of PetroCorp, and Southern
Mineral, relating to the merger of Southern Mineral into PetroCorp
Acquisition and the transactions contemplated by the merger agreement,
including the merger; and
(2) To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of record of shares of Southern Mineral common stock at the close of
business on March 26, 2001 are entitled to notice of and to vote at the meeting
and any adjournment thereof.
You are cordially invited to attend the meeting. Your vote is important to
ensure your representation at the meeting. Whether or not you are planning to
attend the meeting, you are urged to complete, date and sign the enclosed proxy
card and return it promptly. The delivery of the proxy does not preclude you
from voting in person if you attend the meeting. No additional postage is
necessary if mailed in the United States. If you desire to revoke your proxy,
you may do so at any time before the vote as discussed on page 80 of this
document. If you do not vote, it will have the same effect as voting against
the merger agreement and the merger.
After careful consideration, the Southern Mineral board of directors has
determined that the merger agreement and the transactions contemplated by it
are fair and in the best interests of Southern Mineral and its shareholders.
Accordingly, members of the Southern Mineral board of directors have
unanimously approved, and recommend that the shareholders vote at the special
meeting to approve, the merger agreement and the transactions contemplated by
it, including the merger.
Under Nevada law, you may be entitled to assert dissenters' rights under the
General Corporation Law of Nevada as further described in the enclosed proxy
statement.
Please do not send any Southern Mineral stock certificates at this time. If
the merger is approved by the shareholders of Southern Mineral and if the other
conditions to the merger are satisfied or waived, forms to be used to exchange
your shares of Southern Mineral common stock for shares of PetroCorp common
stock and/or cash will be mailed to you after the consummation of the merger.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Steven H. Mikel
Steven H. Mikel
President and Chief Executive
Officer
Houston, Texas
, 2001
PETROCORP INCORPORATED
6733 South Yale Avenue
Tulsa, Oklahoma 74136
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
April 25, 2001
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To the Shareholders of
PetroCorp Incorporated:
A Special Meeting of shareholders of PetroCorp Incorporated will be held at
the Tulsa Room, 9th Floor, Bank of Oklahoma Tower, One Williams Center, Tulsa,
Oklahoma, at 1:00 p.m., local time, on April 25, 2001 for the following
purposes:
(1) To consider and vote upon a proposal to approve the merger
agreement among PetroCorp, Southern Mineral Corporation and PetroCorp
Acquisition Company, which is a newly-formed, wholly-owned subsidiary of
PetroCorp, and the transactions contemplated by the merger agreement,
including the merger and the issuance of PetroCorp common stock; and
(2) To transact such other business as may be properly brought before
the meeting and any adjournments thereof.
Holders of record of shares of PetroCorp common stock at the close of
business on March 26, 2001 are entitled to notice of and to vote at the meeting
and any adjournment thereof.
You are cordially invited to attend the meeting. Your vote is important to
ensure your representation at the meeting. Whether or not you are planning to
attend the meeting, you are urged to complete, date and sign the enclosed proxy
card and return it promptly. The delivery of the proxy does not preclude you
from voting in person if you attend the meeting. No additional postage is
necessary if mailed in the United States. If you desire to revoke your proxy,
you may do so at any time before the vote as discussed on page 80 of this
document.
After careful consideration, the PetroCorp board of directors has determined
that the terms of the merger agreement and the transactions contemplated by it,
including the issuance of PetroCorp common stock, are fair and in the best
interests of PetroCorp and its shareholders. The members of the PetroCorp board
of directors have unanimously approved, and recommend that the shareholders
vote to approve, the merger agreement and the transactions contemplated by it
at the special meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Gary R. Christopher
Gary R. Christopher
President and Chief Executive
Officer
Tulsa, Oklahoma
, 2001
TABLE OF CONTENTS
Proposed Merger -- Your Vote Is Important.................................. COV
Questions and Answers about the Merger..................................... 1
Summary.................................................................... 4
Risk Factors............................................................... 18
Forward-looking Statements................................................. 25
The Merger................................................................. 26
Background of the Merger................................................. 26
Reasons for the Merger; Recommendations of the Board of Directors........ 29
Accounting Treatment..................................................... 33
Regulatory Approvals..................................................... 33
U. S. Federal Income Tax Consequences of the Merger...................... 33
Dissenters' Rights....................................................... 34
Opinion of Southern Mineral's Financial Advisor.......................... 35
Directors and Management of PetroCorp Following the Merger................. 46
Interests of Certain Persons in the Merger................................. 56
Legal Proceedings.......................................................... 57
Cancellation, Delisting and Deregistration of Southern Mineral Common
Stock..................................................................... 57
Federal Securities Law Consequences........................................ 57
The Merger Agreement....................................................... 58
The Merger............................................................... 58
Conversion of Southern Mineral Shares.................................... 58
Southern Mineral Stock Elections; Minimum and Maximum Share Issuances.... 58
Exchange of Shares....................................................... 59
Director Nominees........................................................ 59
Representations and Warranties........................................... 59
Material Covenants....................................................... 60
Conditions to Closing.................................................... 62
Termination.............................................................. 63
Termination Fees and Expenses............................................ 64
Amendment and Waiver..................................................... 64
Other Agreements........................................................... 65
Southern Mineral Shareholder Agreements.................................. 65
PetroCorp Shareholder Agreements......................................... 65
Shelf Registration....................................................... 65
Comparison of Shareholders' Rights......................................... 66
Authorized Capital Stock................................................. 66
Directors................................................................ 66
Removal of Directors..................................................... 67
Filling Vacancies of the Board of Directors.............................. 67
Amendment of Bylaws...................................................... 68
Amendment of Articles.................................................... 69
Shareholder Meetings..................................................... 70
Quorum................................................................... 70
Preemptive Rights........................................................ 71
Voting by Shareholders................................................... 71
Cumulative Voting........................................................ 72
Shareholder Action without a Meeting..................................... 73
Approval by Shareholders of a Merger, Share Exchange or Sale of All
Assets.................................................................. 73
i
Business Combinations.................................................... 75
Indemnification of Directors and Officers................................ 76
Limitation of Liability of Directors and Officers........................ 78
Shareholder Rights Plan.................................................. 79
The Shareholder Meetings................................................... 80
Information about the Shareholder Meetings and Voting.................... 80
Time and Place of the Shareholder Meetings............................... 80
Proposals................................................................ 80
Record Date for the Special Meetings..................................... 80
Outstanding Shares Held on Record Date................................... 80
Shares Entitled to Vote at the Meetings.................................. 80
Quorum Requirement for the Meetings...................................... 80
Shares Beneficially Owned by PetroCorp and Southern Mineral Directors and
Executive Officers as of Record Date.................................... 81
Votes Necessary at the Meetings to Approve PetroCorp and Southern Mineral
Proposals............................................................... 81
Voting by Proxy.......................................................... 81
Revoking Your Proxy...................................................... 82
Other Voting Matters..................................................... 82
Other Business; Adjournments and Postponements........................... 82
The Companies.............................................................. 83
Southern Mineral......................................................... 83
PetroCorp................................................................ 99
Southern Mineral Warrant Holders........................................... 102
Shareholder Proposals...................................................... 102
Where You Can Find More Information........................................ 104
Legal and Tax Matters...................................................... 105
Experts.................................................................... 105
Independent Public Accountants............................................. 106
Other Matters.............................................................. 106
Unaudited Pro Forma Combined Financial Statements.......................... F-2
Southern Mineral Corporation Historical Financial Statements............... F-8
Annex I............ Agreement and Plan of Merger
Annex II........... Shareholder Agreement of Kaiser-Francis Oil Company
Annex III.......... Shareholder Agreement of St. Paul Fire and Marine
Insurance Company
Annex IV........... Shareholder Agreement of Donald H. Wiese, Jr. and DHW
Energy, Inc.
Annex V............ Shareholder Agreement of Thomas R. Fuller and Michmatt,
Inc.
Annex VI........... Shareholder Agreement of CoMac Partners, L.P., CoMac
Endowment Fund, L.P., CoMac International N.V., CoMac
Opportunities Fund, L.P. and Carol Ann Coughlin.
Annex VII.......... Form of Southern Mineral Rule 145 Affiliate Letter
Annex VIII......... Opinion of Petrie Parkman & Co., Inc., dated March 9,
2001
Annex IX........... General Corporation Law of Nevada -- Dissenters' Rights
Annex X............ Southern Mineral Series B Perpetual Warrant Agreement
Annex XI........... PetroCorp Amended 2000 Annual Report on Form 10-K/A
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are PetroCorp and Southern Mineral proposing the merger?
A: Our companies are proposing the merger because we believe that the combined
company will be able to compete more effectively for, and secure, growth
opportunities, including accessing capital resources adequate to pursue a
more expansive exploration and development plan. The combined company
expects to benefit from combining the companies' operations in their core
operating area, the Gulf Coast region, while also benefiting from greater
diversity of operations in the Gulf Coast region and the added diversity of
properties in Canada. We also believe that the merger will result in
improved shareholder liquidity, including the opportunity it gives Southern
Mineral shareholders to receive cash payments for their Southern Mineral
shares at a fair price or to continue as a shareholder of the larger and
more diverse combined company. Please read the more detailed description of
our reasons for the merger on pages 28 through 32.
Q: What will happen to Southern Mineral shares in the merger?
A: In exchange for each share of Southern Mineral stock, Southern Mineral
shareholders will receive merger consideration of $4.71 in cash or, if the
shareholder timely elects, in PetroCorp common stock based on an exchange
ratio of .471, subject to possible proration as a result of oversubscription
for PetroCorp stock, as described below.
Q: What happens if PetroCorp's and Southern Mineral's shareholders approve the
merger and Southern Mineral's shareholders elect to receive more than
4,000,000 or less than 3,000,000 shares of PetroCorp stock?
A: Regardless of the number of shares of PetroCorp common stock desired by
Southern Mineral shareholders, Southern Mineral shareholders will not
receive as a result of stock elections more than 4,000,000 shares in the
merger. If the Southern Mineral shareholders elect to receive more than
4,000,000 shares of PetroCorp stock, the 4,000,000 shares available for
issuance will be prorated among shareholders electing to receive stock. For
example, if Southern Mineral shareholders make elections to receive
5,000,000 shares of PetroCorp stock in the merger, each shareholder electing
stock will receive only 80% (4,000,000 / 5,000,000) of the number of
PetroCorp shares requested. Any merger consideration that is not paid in
PetroCorp stock will be paid in cash.
If Southern Mineral shareholders do not elect to receive at least 3,000,000
shares of PetroCorp common stock, PetroCorp will not be obligated to
complete the merger. However, PetroCorp may waive this condition to the
merger closing.
Q: How do I elect to receive PetroCorp stock or a combination of PetroCorp
stock and cash in exchange for my Southern Mineral common stock?
A: Shortly after the special meetings, each Southern Mineral shareholder will
receive a stock election form pursuant to which she may designate the number
of shares, if any, she desires to have converted into PetroCorp common
stock, subject to possible proration.
Q: Can Southern Mineral warrant holders receive PetroCorp stock in the merger?
A: Southern Mineral warrant holders can receive PetroCorp stock in connection
with the merger only if, prior to the expiration of the merger stock
election period, they exercise their warrants (including paying the
applicable exercise price) and, as a shareholder, make a valid stock
election as provided in the merger agreement. In accordance with the terms
of the Southern Mineral warrants, if the merger is completed, PetroCorp will
assume each Southern Mineral warrant outstanding immediately prior to the
merger and holders of those warrants will be entitled to receive, after
payment of the applicable exercise
1
price, for each share of Southern Mineral stock underlying such warrant, the
per share merger consideration in cash, without interest.
Q: When are the shareholders' meetings?
A: Each company's shareholders' meeting will take place on April 25, 2001. The
time and location of each meeting is specified on the cover page of this
document.
Q: What do I need to do to vote?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your meeting. In order to
assure that we obtain your vote, please vote as instructed on your proxy
card even if you currently plan to attend your meeting in person. The board
of directors of each of Southern Mineral and PetroCorp recommend that
Southern Mineral shareholders vote in favor of the merger.
Q: When do you expect to complete the merger?
A: We expect to complete the merger as quickly as possible once all the
conditions to the merger, including obtaining the approvals of our
shareholders at the shareholder meetings, are fulfilled or waived. We are
required under the merger agreement to complete the merger before May 31,
2001, although we hope to complete it sooner.
Q: Should I send in my Southern Mineral stock certificates now?
A: No. After the merger is completed, we will send written instructions that
will explain how to exchange Southern Mineral stock certificates for cash
and/or PetroCorp stock. Please do not send your stock certificates with your
proxy.
Q: May I change my vote even after returning a proxy card?
A: Yes. If you are a Southern Mineral shareholder and want to change your vote,
you may do so at any time before the Southern Mineral meeting by sending to
the Secretary of Southern Mineral a proxy with a later date. Alternatively,
you may revoke your proxy by delivering to the Secretary of Southern Mineral
a written revocation prior to the Southern Mineral meeting or by voting in
person at the Southern Mineral shareholders meeting. Similarly, if you are a
PetroCorp shareholder and want to change your vote, you may do so at any
time before the PetroCorp meeting by sending to the Secretary of PetroCorp a
proxy with a later date. Alternatively, you may revoke your proxy by
delivering to the Secretary of PetroCorp a written revocation prior to the
PetroCorp meeting or by voting in person at the PetroCorp meeting.
Q: How do I vote my shares if my shares are held in "street name"?
A: You should vote this proxy in accordance with the instructions provided to
you by your broker. Your broker will not vote your shares unless the broker
receives appropriate instructions from you.
Q: What happens if I don't vote?
A: If a Southern Mineral shareholder does not submit a proxy or vote at the
Southern Mineral shareholder meeting, it will have the same effect as a vote
against adoption and approval of the merger agreement and approval of the
merger. If a PetroCorp shareholder does not submit a proxy or vote at the
PetroCorp shareholder meeting, it will not count for purposes of determining
if the merger agreement and the merger have been approved. Further,
abstentions by shareholders present at the meeting will have the same legal
effect as votes against either proposal.
2
Q: If I have more questions about the merger, voting or the two companies, how
can I find answers?
A: In addition to reading this document and its annexes, you can find more
information about the merger or about the two companies in our companies'
filings with the SEC and, in the case of PetroCorp, with the AMEX. We
incorporate by reference into this document PetroCorp's filings with the
SEC. However, we may not and do not incorporate by reference into this
document any of Southern Mineral's filings with the SEC. You may also
contact Gary R. Christopher at PetroCorp or Michael E. Luttrell at Southern
Mineral for additional information.
If you have questions about how to submit, revoke or change your proxy, you
should contact:
.if you are a Southern Mineral shareholder:
American Stock Transfer & Trust Company, at (800) 937-5449
.if you are a PetroCorp shareholder:
Corporate Stock Transfer, Inc., at (303) 282-4800.
3
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger more fully, and for a more complete description of the legal terms of
the merger, we recommend that you read carefully this entire document and the
other available information referred to in "Where You Can Find More
Information" on page 102. Each item in this summary includes a page reference
directing you to a more complete description of that item. We have included the
merger agreement as Annex I to this document. It is the legal document that
governs the merger and we encourage you to read it.
The Companies (page 81)
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002
(713) 658-9444
Southern Mineral is an independent oil and gas exploration and production
company headquartered in Houston, Texas, and engaged in the acquisition,
exploitation, exploration and operation of oil and gas properties, primarily in
the Gulf Coast region of the United States, in Canada and in Ecuador. As of
December 31, 2000, Southern Mineral had estimated proved reserves of
approximately 47.7 billion cubic feet of natural gas and 5.0 million barrels of
oil, or an aggregate, on an equivalent basis, of approximately 77.7 billion
cubic feet, 85% of which was classified as proved developed. On October 29,
1999, Southern Mineral filed for protection under Chapter 11 of the U.S.
Bankruptcy Code, and on August 1, 2000, Southern Mineral emerged from
bankruptcy.
PetroCorp Incorporated
6733 South Yale Avenue
Tulsa, Oklahoma 74136
(918) 491-4500
PetroCorp is an independent oil and gas exploration and production company
with reserves and producing properties located in the Gulf Coast and Mid-
Continent areas of the United States and in the province of Alberta, Canada. As
of December 31, 2000, PetroCorp had estimated proved reserves of approximately
75.3 million cubic feet of natural gas and 4.2 million barrels of oil, or an
aggregate, on an equivalent basis, of approximately 100.5 billion cubic feet,
90% of which was classified as proved developed. PetroCorp Acquisition is a
wholly-owned subsidiary of PetroCorp recently formed for the sole purpose of
effecting the merger.
The Merger (page 26)
We propose a merger transaction in which Southern Mineral will merge into
PetroCorp Acquisition. Southern Mineral shareholders will become PetroCorp
shareholders to the extent they receive PetroCorp common stock in exchange for
their Southern Mineral common stock.
What You Will Receive in the Merger (page 56)
In exchange for each share of Southern Mineral stock, each Southern Mineral
shareholder will receive merger consideration of $4.71 in cash or, if the
shareholder timely elects, in PetroCorp common stock based on an exchange ratio
of .471, subject to possible proration as a result of oversubscription for
PetroCorp stock as described further beginning on page 56.
Each share of PetroCorp common stock will remain issued and outstanding
after the merger. Former Southern Mineral shareholders will own between
approximately 26% and 32% of the shares of PetroCorp
4
common stock outstanding after the merger, depending on how many stock
elections Southern Mineral shareholders make.
Election Process for Southern Mineral Shareholders (page 56)
If the Southern Mineral and PetroCorp shareholders approve the merger at the
special meetings, shortly after the special meetings Southern Mineral
shareholders will receive stock election forms pursuant to which they may
designate the number of shares they desire to have converted into PetroCorp
common stock, subject to proration to the extent Southern Mineral shareholders
submit stock election forms to receive more than 4,000,000 shares of PetroCorp
stock. Each share of Southern Mineral common stock which has not been
designated to be converted into PetroCorp common stock will automatically be
converted into the right to receive the per share merger consideration in cash.
Shareholders shall have 20 days (or a later date if agreed upon by us prior to
mailing stock election forms) from the date the stock elections are mailed to
return their stock election forms. We intend to close the transaction promptly
after the expiration of the stock election period. In any event, if the merger
is not closed by May 31, 2001, either party may terminate the merger agreement.
Dissenters' Rights (page 34)
Under Nevada law, Southern Mineral shareholders may be entitled to
dissenters' rights in connection with the merger. In order to preserve their
dissenters' rights, Southern Mineral shareholders must follow strictly the
Nevada law regarding dissenters' rights. For further description of these
rights, see page 34 and Annex IX, which contains a copy of the Nevada
dissenters' statutes.
Holders of PetroCorp common stock are not entitled to dissenters' rights in
connection with the merger.
Material Tax Consequences (page 33)
If the merger qualifies as a tax-free reorganization and is consummated,
Southern Mineral shareholders generally will not recognize any taxable gain or
loss on their exchange of Southern Mineral shares for PetroCorp shares.
Southern Mineral shareholders will not know at the time they vote on the merger
whether the exchange of their Southern Mineral shares for PetroCorp shares will
be subject to tax. A Southern Mineral shareholder will, however, recognize
taxable gain or loss on any cash payment received pursuant to the merger.
Because shares of PetroCorp common stock will remain unchanged, the merger
should not cause a PetroCorp shareholder to recognize any taxable gain or loss
for U.S. federal income tax purposes.
This tax treatment may not apply to certain shareholders. Determining the
actual tax consequences of the merger to you may be complicated. These
consequences will depend on your specific situation and on variables not within
our control. You should consult your own tax advisor for a full understanding
of the merger's tax consequences for you.
Accounting Treatment (page 32)
The merger will be accounted for under the purchase method for accounting
and financial reporting purposes.
Management and Operations after the Merger (page 45)
After the merger, the combined companies will be known as PetroCorp and will
be headquartered in Tulsa, Oklahoma. PetroCorp's day-to-day operations will
continue to be managed by employees of Kaiser-Francis Oil Company, PetroCorp's
largest shareholder owning 49.7% of PetroCorp's stock as of March 13, 2001,
pursuant to a management agreement.
5
PetroCorp's board will expand by two seats to a total of nine members upon
the closing of the date of the merger, and Mr. Fuller and Paul J. Coughlin,
III, who are currently on the Southern Mineral board, will fill the newly
created vacancies and serve at least until PetroCorp's 2003 annual meeting of
shareholders.
Our Recommendations to Shareholders (pages 28-32)
Southern Mineral Shareholders. The members of the Southern Mineral board of
directors, each of whom is independent and not otherwise employed by or
affiliated with Southern Mineral, unanimously approved the merger and
unanimously recommend that you vote FOR the proposal to approve the merger
agreement and the transactions contemplated by the merger agreement, including
the merger.
PetroCorp Shareholders. The members of the PetroCorp board of directors
unanimously approved the merger and unanimously recommend that you vote FOR the
proposal to approve the merger agreement and the transactions contemplated by
the merger agreement, including the merger and the issuance of PetroCorp common
stock in connection with the merger.
Interests of Officers, Directors and Large Shareholders in the Merger that are
Different from Your Interests (page 54)
In considering the recommendation of the Southern Mineral or PetroCorp board
to vote in favor of the merger, you should be aware that certain officers,
directors and large shareholders of Southern Mineral have interests in the
merger that may be different from, or in addition to, yours. In particular, we
note that if Southern Mineral shareholders elect to receive more than 4,000,000
shares of PetroCorp stock resulting in a proration of the available stock,
PetroCorp has agreed to sell up to 108,968 shares in addition to the 4,000,000
shares, to two Southern Mineral directors who have agreed to buy that number of
shares equal to their pro rata reduction in connection with their entering into
shareholder agreements agreeing to support the merger.
In addition, subsequent to the signing of the merger agreement, PetroCorp
purchased 738,836 shares of Southern Mineral stock in open-market and
negotiated transactions, representing 6.0% of Southern Mineral common stock
outstanding as of March 13, 2001. PetroCorp will be able to vote its shares at
the Southern Mineral special meeting, but will not be eligible to receive any
merger consideration.
Opinion of Southern Mineral's Financial Advisor (page 35)
On December 22, 2000, Petrie Parkman & Co., Inc., Southern Mineral's
financial advisor, delivered to the Southern Mineral board its written opinion
as to the fairness from a financial point of view, as of that date and based
upon and subject to the matters set forth therein, of the merger consideration
to the holders of Southern Mineral common stock. In connection with the
Southern Mineral board's approval of the first amendment to the merger
agreement, Petrie Parkman confirmed its opinion by delivery of a written
opinion to the board dated March 9, 2001. We have attached the opinion dated
March 9, 2001 as Annex VIII to this document. We urge you to read this opinion
in its entirety to understand the assumptions made and matters considered by
Petrie Parkman in rendering its opinion.
Petrie Parkman provided its opinions to Southern Mineral's board of
directors for its use and benefit and such opinions address only the fairness
from a financial point of view as of the dates of the opinions of the merger
consideration to the holders of Southern Mineral common stock. The Petrie
Parkman opinions are not a recommendation to any Southern Mineral shareholder
as to how that shareholder should vote at the special meeting.
Special Meetings and Votes Required (pages 78-80)
We will hold the Southern Mineral special meeting on April 25, 2001, at 9:00
a.m., local time, at The Doubletree Hotel, 400 Dallas Street, Houston, Texas.
We will hold the PetroCorp special meeting on April 25, 2001, at 1:00 p.m.,
local time, at the Tulsa Room, 9th Floor, Bank of Oklahoma Tower, One Williams
Center, Tulsa, Oklahoma.
6
Approval of the merger agreement and the transactions contemplated by the
merger agreement, including the merger, requires the approval of the holders of
a majority of the outstanding shares of Southern Mineral common stock entitled
to vote on the merger. Three directors, solely in their capacity as
shareholders of Southern Mineral, are parties to shareholder agreements
pursuant to which they have agreed to vote their 2,239,618 shares of Southern
Mineral common stock in favor of the merger, representing approximately 18.3%
of the shares of Southern Mineral common stock outstanding as of the record
date for voting at the special meeting.
Approval of the merger agreement and the transactions contemplated by the
merger agreement, including the merger and the issuance of PetroCorp common
stock, requires approval by the holders of a majority of all outstanding shares
of PetroCorp common stock present (in person or by proxy) at a meeting at which
a quorum is present. PetroCorp is seeking a majority shareholders approval of
the transaction as required by AMEX rules which provide that a company issuing
common stock in an amount which could result in an increase in outstanding
common shares of 20% or more must have approval of a majority of PetroCorp
shares represented (in person or by proxy) at a meeting at which a quorum
exists. Two large shareholders are parties to shareholder agreements pursuant
to which they have agreed to vote their 6,065,457 outstanding shares of
PetroCorp common stock in favor of the merger, representing approximately 69.6%
of the shares of PetroCorp common stock outstanding as of the record date for
voting at the special meeting. Because 69.6% of the outstanding shares of
PetroCorp have agreed to vote for the merger, approval of the merger by
PetroCorp's shareholders at the special meeting is assured.
Overview of the Merger Agreement (pages 56-62)
We have included the merger agreement as Annex I to this document. It is the
legal document that governs the merger and we encourage you to read it.
Conditions to the Merger (page 60)
We will complete the merger only if a number of conditions are satisfied or
waived including, among others:
.PetroCorp's and Southern Mineral's shareholders approve the merger
agreement;
.Southern Mineral shareholders elect to receive at least 3,000,000
PetroCorp shares in the merger;
. the representations and warranties contained in the merger agreement are
accurate, except insofar as the inaccuracy would not have a materially
adverse effect, and the parties have fulfilled in all material respects
their covenants and other agreements;
.no law, rule, regulation or court order prohibits the merger;
. there has been no change that would have a material adverse effect on
either Southern Mineral or PetroCorp; and
.all necessary consents from third parties have been obtained.
No Solicitation (page 60)
Southern Mineral has agreed not to initiate any discussions with another
party regarding a business combination while the merger is pending.
Termination of the Agreement (pages 61-62)
Southern Mineral and PetroCorp may, by mutual agreement, terminate the
merger agreement at any time, even after the shareholders have approved the
merger. In addition, either party may terminate the agreement:
.if the other party is in material breach of the merger agreement;
.if a statute, rule, court order, regulation or executive order permanently
prohibits the merger;
7
. if either the PetroCorp or Southern Mineral shareholders fail to approve
the merger at a duly held meeting of shareholders; or
.if the merger has not been consummated on or before May 31, 2001.
In addition, Southern Mineral has the right to terminate the merger
agreement if the Southern Mineral board has received a superior proposal which
it has resolved to accept. PetroCorp may terminate the merger agreement if the
Southern Mineral board fails to reject a superior proposal within 30 days of
receipt.
Termination Fees (page 62)
If Southern Mineral terminates the merger agreement because it is accepting
a superior proposal, it is required to pay PetroCorp $2,350,000.
PetroCorp will pay Southern Mineral $250,000 if the merger does not occur
for any reason other than:
. a breach by Southern Mineral of its representations, warranties,
covenants or obligations under the merger agreement;
. Southern Mineral shareholders failing to approve the merger at a duly
held meeting of shareholders;
. Southern Mineral or PetroCorp having a material adverse change in their
financial conditions, businesses or operations;
. Southern Mineral not obtaining the necessary consents and waivers to
consummate the merger; or
. PetroCorp electing to terminate the merger agreement because the
Southern Mineral board has not rejected a superior proposal within 30
days of receipt.
Either of us may choose to complete the merger even though a condition has
not been satisfied if applicable law allows us to do so.
Regulatory Approvals (page 32)
Neither Southern Mineral nor PetroCorp is aware of a material governmental
or regulatory approval required for completion of the merger, other than
compliance with applicable laws.
8
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
PetroCorp's shares are listed on the AMEX under the symbol "PEX" and
Southern Mineral's shares are quoted on the OTC Bulletin Board under the symbol
"SMOP.OB." On December 21, 2000, the last trading day before we announced the
merger, PetroCorp's shares closed at $9.875 per share and Southern Mineral's
shares closed at $3.125 per share. On March 27, 2001, the most recent
practicable date before the mailing of this document, PetroCorp's shares closed
at $9.85 per share and Southern Mineral's shares closed at $4.30 per share.
Based on an exchange ratio in the merger of .471 shares of PetroCorp common
stock per share of Southern Mineral common stock, the market value of the
consideration that Southern Mineral shareholders will receive in the merger for
shares of PetroCorp common stock would be $4.65 based on the closing price of
shares of PetroCorp on December 21, 2000, and $4.64 per share based on the
closing price of shares of PetroCorp common stock on March 27, 2000. Of course,
the market price of shares of PetroCorp will fluctuate prior to and after the
merger, whereas the exchange ratio is fixed. See page 18 with regard to risk
factors related to this fluctuation. You should obtain current stock price
quotations for PetroCorp and Southern Mineral common stock.
Historical Market Prices of PetroCorp and Southern Mineral
The following table sets forth the high and low trading prices per share of
PetroCorp common stock on the AMEX and the Southern Mineral common stock on the
OTC Bulletin Board and, prior to August 4, 1999, the Nasdaq National Market.
High and low prices for Southern Mineral stock have been adjusted to reflect a
five for one reverse split effected on August 1, 2000.
PetroCorp Southern Mineral
Common Stock Common Stock
------------ -----------------
High Low High Low
------ ----- -------- --------
1999
First Quarter................................... $ 5.88 $5.19 $ 5.00 $ 1.25
Second Quarter.................................. $ 6.13 $4.38 $ 2.95 $ 1.55
Third Quarter................................... $ 7.50 $5.50 $ 2.65 $ 1.10
Fourth Quarter.................................. $ 6.88 $5.75 $ 1.70 $ 0.45
2000
First Quarter................................... $ 6.75 $5.25 $ 2.42 $ 0.78
Second Quarter.................................. $ 7.25 $5.50 $ 3.13 $ 0.78
Third Quarter................................... $ 9.88 $7.00 $ 4.19 $ 2.73
Fourth Quarter.................................. $10.19 $8.63 $ 4.00 $ 2.91
2001
First Quarter (through March 27)................ $10.75 $9.62 $ 4.33 $ 3.88
No History of Dividends and No Dividends Expected in the Foreseeable Future
Neither PetroCorp nor Southern Mineral is currently paying dividends on its
common stock. After the merger, PetroCorp expects that it will retain all
available earnings generated by its operations for the development and growth
of the business. Therefore, PetroCorp does not anticipate paying cash dividends
on its common stock in the foreseeable future. The debt instruments of both
PetroCorp and Southern Mineral limit their ability to pay dividends on their
common stock.
9
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
We are providing the following financial information to aid you in your
analysis of the financial aspects of the merger. This information is only a
summary and you should read it together with the historical consolidated
financial statements of PetroCorp and Southern Mineral and the related notes in
this prospectus, and the historical consolidated financial statements of
PetroCorp incorporated by reference in this document and delivered as part of
Annex XI with this prospectus.
The historical financial information reflects the following items that you
should consider in making period-to-period comparisons:
PetroCorp
. On August 3, 1999, as part of a restructuring plan, PetroCorp entered
into its management agreement with Kaiser-Francis. As a result of the
restructuring, PetroCorp terminated 52 employees in 1999 and one
employee in 2000, but several employees terminated in 1999 elected to
defer receipt of their termination benefits until 2000. In addition,
PetroCorp closed its Houston, Oklahoma City and Calgary offices.
Southern Mineral
. On October 29, 1999, Southern Mineral and its wholly-owned subsidiaries
(other than Southern Mineral's Canadian subsidiary, Neutrino Resources,
Inc.) filed voluntary petitions for relief under Chapter 11, Title 11 of
the United States Code, in order to facilitate the restructuring of
Southern Mineral's long-term debt, revolving credit, trade debt and
other obligations. Southern Mineral and its subsidiaries emerged from
bankruptcy on August 1, 2000. All debts of Southern Mineral, except
those of Neutrino, as of October 29, 1999 were stayed by the bankruptcy
petitions, and were subject to compromise pursuant to such proceedings
until August 1, 2000. Southern Mineral operated as a debtor-in-possesion
subject to the bankruptcy court's supervision and orders.
. Weighted average shares outstanding and per share calculations have been
adjusted to reflect the five for one reverse split of Southern Mineral
stock effected on August 1, 2000.
10
PetroCorp Incorporated
For the Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Oil and gas................. $ 42,264 $ 25,162 $ 23,621 $ 33,502 $ 29,718
Plant processing............ 1,934 1,785 1,550 1,420 1,658
Other....................... 375 179 36 172 170
-------- -------- -------- -------- --------
44,573 27,126 25,207 35,094 31,546
-------- -------- -------- -------- --------
Expenses:
Production costs............ 8,038 6,733 7,344 7,793 6,660
Depreciation, depletion and
amortization 9,471 9,906 16,568 17,065 12,433
Oil and gas property
valuation adjustment -- -- 33,600 -- --
General and administrative.. 1,529 4,311 4,482 4,846 4,542
Restructuring costs......... (445) 3,643 -- -- --
Other operating expenses.... 309 281 265 367 333
-------- -------- -------- -------- --------
18,902 24,874 62,259 30,071 23,968
-------- -------- -------- -------- --------
Income (loss) from
operations.................. 25,671 2,252 (37,052) 5,023 7,578
-------- -------- -------- -------- --------
Other income (expenses):
Investment and other
income..................... 584 585 1,151 558 1,910
Interest expense............ (3,381) (3,865) (3,622) (3,528) (3,391)
Other income (expenses)..... 295 (132) 14 (47) (46)
-------- -------- -------- -------- --------
(2,502) (3,412) (2,457) (3,017) (1,527)
-------- -------- -------- -------- --------
Income (loss) before income
taxes....................... 23,169 (1,160) (39,509) 2,006 6,051
Income tax provision
(benefit):
Current..................... 5,497 -- -- -- --
Deferred.................... 4,612 (954) (15,114) 136 1,807
-------- -------- -------- -------- --------
10,109 (954) (15,114) 136 1,807
-------- -------- -------- -------- --------
Income (loss) from continuing
operations ................. $ 13,060 $ (206) $(24,395) $ 1,870 $ 4,244
======== ======== ======== ======== ========
Income (loss) from continuing
operations per share --
basic(1)................... $ 1.50 $ (0.02) $ (2.82) $ 0.22 $ 0.49
======== ======== ======== ======== ========
Income (loss) from continuing
operations per share --
diluted(1)................. $ 1.49 $ (0.02) $ (2.82) $ 0.22 $ 0.49
======== ======== ======== ======== ========
Weighted average number of
common shares -- basic...... 8,692 8,658 8,637 8,586 8,585
Weighted average number of
common shares -- diluted... 8,786 8,658 8,637 8,688 8,669
Balance Sheet Data (at
December 31):
Working capital............. $ 9,029 $ 3,642 $ 2,080 $ 2,638 $ 1,946
Total assets................ 117,319 105,395 103,992 130,924 122,864
Long-term debt.............. 29,992 43,410 47,305 42,192 33,462
Shareholders' equity........ 54,277 42,363 40,744 66,557 65,665
- --------
(1) Basic and diluted net income per share before extraordinary loss for the
year ended December 31, 2000 was $1.50 and $1.49, respectively.
11
Southern Mineral Corporation
For the Year Ended December 31,
--------------------------------------------
2000 1999 1998 1997 1996
------- ------- -------- ------- -------
(in thousands, except per share data)
Revenue:
Oil and gas..................... $33,581 $25,865 $ 21,722 $13,790 $11,780
Gain (loss) on sales of
properties and other assets.... (1) 11,976 (250) 413 453
------- ------- -------- ------- -------
33,580 37,841 21,472 14,203 12,233
Expenses:
Production...................... 8,730 8,898 8,518 3,682 2,742
Exploration..................... 511 2,501 3,635 1,776 262
Depreciation, depletion and
amortization................... 8,306 12,302 10,505 4,211 2,875
General and administrative...... 3,248 3,926 3,622 2,308 1,682
Impairment...................... -- 8,686 9,344 2,838 603
Restructuring and bankruptcy
items
Restructuring expenses.......... 754 1,372 -- -- --
Bankruptcy expenses............. 4,790 3,016 -- -- --
------- ------- -------- ------- -------
26,339 40,701 35,624 14,815 8,164
------- ------- -------- ------- -------
Income (loss) from operations.... 7,241 (2,860) (14,152) (612) 4,069
Other income, expenses and
deductions
Interest and other income....... 239 456 330 328 286
Interest and debt expense
(contractual amounts of $4,069
and $6,727 for 2000 and 1999,
respectively).................. (2,470) (6,236) (5,362) (1,591) (1,242)
------- ------- -------- ------- -------
Income (loss) before income taxes
and extraordinary gain.......... 5,010 (8,640) (19,184) (1,875) 3,113
Provision (benefit) for foreign,
federal and state income taxes
Current provision (benefit)..... (24) 575 6 304 400
Deferred provision (benefit).... 2,439 (3,457) (2,781) (130) 279
------- ------- -------- ------- -------
2,415 (2,882) (2,775) 174 679
------- ------- -------- ------- -------
Income (loss) from continuing
operations before extraordinary
gain............................ $ 2,595 $(5,758) $(16,409) $(2,049) $ 2,434
======= ======= ======== ======= =======
Extraordinary gain from
extinguishment of debt, net of
tax............................. 8,259 -- -- -- --
------- ------- -------- ------- -------
Net income (loss) from continuing
operations...................... $10,854 $(5,758) $(16,409) $(2,049) $ 2,434
======= ======= ======== ======= =======
Income (loss) per share from
continuing operations --
basic........................... $ 0.39 $ (2.25) $ (6.60) $ (1.10) $ 1.85
======= ======= ======== ======= =======
Income (loss) per share from
continuing operations --
diluted......................... $ 0.39 $(2.25) $ (6.60) $ (1.10) $ 1.70
======= ======= ======== ======= =======
Weighted average number of shares
outstanding -- basic............ 6,708 2,568 2,484 1,822 1,324
Weighted average number of shares
outstanding -- diluted.......... 6,725 2,568 2,484 1,822 1,423
Balance Sheet Data (at end of
period):
Working capital (deficit)....... $ 949 $(1,777) $ 34,138 $10,499 $ 2,235
Liabilities subject to
compromise -- 61,269 -- -- --
Total assets.................... 81,896 94,734 128,290 61,875 24,386
Long-term debt, less current
portion 16,814 -- 64,370 41,400 3,900
Shareholders' equity............ 51,784 11,024 14,727 16,480 18,634
12
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL AND OPERATING DATA
The pro forma combined balance sheet data as of December 31, 2000 gives
effect to the merger as if it occurred on that date. The pro forma combined
income statement data gives effect to the merger as if it occurred on January
1, 2000. This information does not necessarily indicate what the future
operating results or financial position of the combined company will be. You
should read this summary pro forma combined financial data in conjunction with
the "Unaudited Pro Forma Combined Financial Statements" and notes thereto
beginning on page F-2.
Based on 4,108,968 shares issued:
Year Ended
December 31, 2000
-----------------
(in thousands,
except per share
data)
Revenues:
Oil and gas................................................. $ 75,273
Plant processing............................................ 1,934
Other....................................................... 947
--------
78,154
--------
Expenses:
Production costs............................................ 16,768
Depreciation, depletion and amortization.................... 17,105
General and administrative.................................. 4,777
Restructuring costs......................................... 5,099
Other operating expenses.................................... 309
--------
44,058
--------
Income from operations........................................ 34,096
--------
Other income (expenses):
Investment income........................................... 823
Interest expense............................................ (5,851)
Other income (expenses)..................................... 295
--------
(4,733)
--------
Income (loss) before income taxes............................. 29,363
--------
Income tax provision (benefit):
Current..................................................... 5,473
Deferred.................................................... 7,501
--------
12,974
--------
Income (loss) from continuing operations...................... $ 16,389
========
Per Share Information:
Income (loss) from continuing operations -- basic............. $ 1.28
========
Income (loss) from continuing operations -- diluted........... $ 1.27
========
Balance Sheet Data (at end of period)
Total assets.................................................. $191,941
Long-term debt................................................ 46,806
Shareholders' equity.......................................... 94,164
13
Based on 3,000,000 shares issued:
Year Ended
December 31, 2000
-----------------
(in thousands,
except per share
data)
Revenues:
Oil and gas................................................. $ 75,273
Plant processing............................................ 1,934
Other....................................................... 947
--------
78,154
--------
Expenses:
Production costs............................................ 16,768
Depreciation, depletion and amortization.................... 17,140
General and administrative.................................. 4,777
Restructuring costs......................................... 5,099
Other operating expenses.................................... 309
--------
44,093
--------
Income (loss) from operations................................. 34,061
--------
Other income (expenses):
Investment income........................................... 823
Interest expense............................................ (6,641)
Other income (expenses)..................................... 295
--------
(5,523)
--------
Income (loss) before income taxes............................. 28,538
--------
Income tax provision (benefit):
Current..................................................... 5,473
Deferred.................................................... 7,187
--------
12,660
--------
Net income (loss)............................................. $ 15,878
========
Per Share Information:
Income (loss) from continuing operations -- basic............. $ 1.36
========
Income (loss) from continuing operations -- diluted........... $ 1.35
========
Balance Sheet Data (at end of period)
Total assets.................................................. $191,208
Long-term debt................................................ 56,806
Shareholders' equity.......................................... 83,352
14
COMPARATIVE PER SHARE DATA
The following table summarizes the per share information for our companies
concerning net income (loss) from continuing operations, cash dividends
declared and book value on both a historical, pro forma combined and equivalent
basis. You should read the table together with the financial information for
PetroCorp and Southern Mineral included in this document. Please also note that
we computed:
. the historical book value per share amounts by dividing each company's
shareholders' equity by its actual common shares outstanding as of
December 31, 2000;
. the pro forma combined book value per share amounts by dividing pro
forma shareholders' equity by the pro forma number of common shares of
PetroCorp outstanding as of December 31, 2000, assuming the merger
occurred on that date;
. the pro forma combined per Southern Mineral equivalent share amounts by
multiplying the pro forma combined share amounts by the exchange ratio
of .471 for each share of Southern Mineral common stock; and
. Southern Mineral per share calculations to reflect the five for one
reverse split of Southern Mineral stock effected on August 1, 2000.
The pro forma comparative per share data, which is derived from the
Unaudited Pro Forma Combined Financial Statements and notes thereto beginning
on page F-2, does not purport to represent the results that PetroCorp would
have achieved if the merger had taken place earlier or of the results of
operations of PetroCorp after the merger.
Year Ended
December 31, 2000
-----------------
PetroCorp Historical -- Per Common Share
Net income (loss) from continuing operations
Basic..................................................... $1.50
Diluted................................................... $1.49
Cash dividends............................................. $ --
Book value................................................. $6.24
Southern Mineral Historical -- Per Common Share
Net income (loss) from continuing operations
Basic..................................................... $0.39
Diluted................................................... $0.39
Cash dividends............................................. $ --
Book value................................................. $4.23
Pro Forma Combined (4,108,968 shares) -- Per Common Share
Net income (loss) from continuing operations
Basic..................................................... $1.28
Diluted................................................... $1.27
Cash dividends............................................. $ --
Book value................................................. $7.35
Pro Forma Combined (4,108,968 shares) -- Per Southern
Mineral Equivalent Common Share
Net income (loss) from continuing operations
Basic..................................................... $0.60
Diluted................................................... $0.60
Cash dividends............................................. $ --
Book value................................................. $3.46
15
Year Ended
December 31, 2000
-----------------
Pro Forma Combined (3,000,000 shares) -- Per Common Share
Net income (loss) from continuing operations:
Basic..................................................... $1.36
Diluted................................................... $1.35
Cash dividends............................................. $ --
Book value................................................. $7.12
Pro Forma Combined (3,000,000 shares) -- Per Southern
Mineral Equivalent Common Share
Net income (loss) from continuing operations:
Basic..................................................... $0.64
Diluted................................................... $0.64
Cash dividends............................................. $ --
Book value................................................. $3.35
16
PRO FORMA OIL AND GAS RESERVES INFORMATION (UNAUDITED)
The following table summarizes information with respect to estimates of
proved oil and gas reserves and the estimated discounted future net cash flows
before income taxes for these reserves as of December 31, 2000 for PetroCorp,
Southern Mineral and on a pro forma combined basis. It represents the present
value of the estimated future net cash flows before income taxes and general
administrative overhead and has not been adjusted for outstanding loans that
may exist or cash on hand or undistributed income. These future net cash flows
are discounted at a rate of 10% per annum. For additional information relating
to reserves, see "Risk Factors" in this document and in PetroCorp's SEC filings
included in and incorporated by reference into this document.
Southern Pro Forma
PetroCorp Mineral Combined
--------- -------- ---------
(dollars in thousands)
Proved Developed:
Oil (million barrels)........................... 3,956 4,654 8,610
Gas (million cubic feet)........................ 67,175 37,718 104,893
Total proved developed (Million cubic feet
equivalent)................................... 90,911 65,642 156,553
Proved Undeveloped:
Oil (million barrels)........................... 254 360 614
Gas (million cubic feet)........................ 8,084 9,939 18,023
Total proved undeveloped (million cubic feet
equivalent)................................... 9,608 12,099 21,707
Total Proved Reserves (million cubic feet
equivalent) .................................... 100,519 77,741 178,260
Present value of estimated future net cash flows
before income taxes............................. $410,255 $253,099 $663,354
17
RISK FACTORS
In considering whether to vote in favor of the merger transaction involving
our companies, you should consider all of the information we have included in
this document and its annexes and all of the information included in the
documents we have incorporated by reference. In addition, you should pay
particular attention to the following risks related to the merger and the
combined company.
Risks Relating to the Merger
The per share merger consideration will not be adjusted due to changes in the
price of PetroCorp or Southern Mineral common stock, and as a result, Southern
Mineral shareholders receiving stock may receive less value for their shares.
In exchange for each share of Southern Mineral stock, Southern Mineral
shareholders will receive merger consideration of $4.71 in cash or, if the
shareholder timely elects, in PetroCorp common stock based on an exchange ratio
of .471, subject to proration as described in "The Merger Agreement -- Southern
Mineral Stock Elections; Minimum and Maximum Share Issuances" on page 56. The
exchange ratio will not be adjusted as a result of any decrease or increase in
the price of PetroCorp common stock. Therefore, because the market price of
PetroCorp common stock is subject to fluctuation, the value at the time of the
merger of the consideration to be received by the Southern Mineral shareholders
that make valid stock elections will depend on the market price of PetroCorp
common stock at that time and may be lower than the market price of PetroCorp
common stock on the date of this document or the date of the special meetings.
The business, operations or prospects of PetroCorp, regulatory considerations,
general market and economic conditions and other factors may affect the price
of PetroCorp common stock. Most of those factors are beyond our control. You
are encouraged to obtain current market quotations for PetroCorp common stock.
For historical and current market prices of PetroCorp common stock, see
"Comparative Per Share Market Price and Dividend Information" on page 9.
We may not realize the benefits of integrating our companies.
Integrating our businesses involves a number of risks, including:
. the possibility that management may be distracted from regular business
concerns by the need to integrate operations;
. unforeseen difficulties in integrating operations and systems; and
. the possibility that Kaiser-Francis may not be able to assume all
employee and management responsibilities for the business and assets of
the combined company pursuant to the PetroCorp management agreement
discussed on page 97.
Any of these could lead to potential adverse short-term or long-term effects
on operating results. As a result, we may not realize any of the anticipated
benefits of the merger.
We have incurred and will incur charges and expenses as a result of the merger,
which must be paid even if the merger fails to close.
PetroCorp and Southern Mineral expect to incur approximately $3.5 million of
costs related to the merger, including severance and retention bonuses payable
to Southern Mineral employees upon completion of merger totaling $1,357,124,
investment banking expenses, legal and accounting fees, printing expenses,
transition and integration costs and other related charges. See "Interests of
Certain Persons in the Merger -- Southern Mineral" on page 54. The companies
may also incur additional unanticipated expenses in connection with the merger.
Southern Mineral and PetroCorp will have to pay all merger related costs and
expenses, other than retention and severance bonuses and investment banking
fees, even if the merger does not close.
18
Some directors, officers and affiliates of the companies have interests in the
merger that are different from your interests which may make them more likely
to recommend approval of the merger.
Two directors of Southern Mineral, Messrs. Fuller and Wiese, are parties to
agreements that allow them to purchase up to 108,968 shares of PetroCorp stock
to the extent of any pro rata reduction in their stock elections. In addition,
Messrs. Fuller and Coughlin will be elected to serve on the PetroCorp board
until PetroCorp's 2003 annual meeting, and will be eligible for compensation
from PetroCorp for that service. See "Interests of Certain Persons in the
Merger -- Southern Mineral" on page 54.
Also, in August 1999, Kaiser-Francis, the majority shareholder of PetroCorp,
and PetroCorp entered into a management agreement under which Kaiser-Francis
agreed to provide management, technical and administrative support for all of
PetroCorp's operations in the United States and Canada. In the event of the
merger, Kaiser-Francis will assume these same management functions for the
combined company, for which it will receive additional revenue. In addition,
Steve Berlin, an officer of PetroCorp, owned 15,000 Southern Mineral shares as
of the record date for voting at the special meeting, and Craig Dolinsky, also
an officer of PetroCorp, owned 5,000 Southern Mineral shares as of the record
date for voting at the special meeting. See "Interests of Certain Persons in
the Merger -- PetroCorp" on page 54.
As a result of these interests, Southern Mineral directors and PetroCorp
officers and directors affiliated with Kaiser-Francis could be more likely to
support or recommend approval of the merger agreement and the merger than if
they did not have these interests. Southern Mineral and PetroCorp shareholders
should consider whether these interests may have influenced these officers and
directors to support or recommend the approval of the merger agreement and the
merger.
Risks Related to PetroCorp after the Merger
It may be difficult for PetroCorp to replace Kaiser-Francis if PetroCorp
desires to terminate the Kaiser-Francis management agreement or Kaiser-Francis
terminates the agreement.
PetroCorp has no employees, and all of its technical and corporate services
are provided by Kaiser-Francis pursuant to a management agreement. As a result,
PetroCorp does not have full control over its operations. Either PetroCorp or
Kaiser-Francis may terminate the Kaiser-Francis management agreement at any
time upon six months notice. If the agreement is terminated, and if we are
unable to engage third parties to perform these services and have to replicate
facilities, services or employees that we are not using fulltime, or are not
able to engage a third party at costs similar to those charged by Kaiser-
Francis, PetroCorp's costs would increase. PetroCorp may not be able to find
another contractor to provide substantially similar services at the same rates
or replicate such services without incurring additional costs.
Kaiser-Francis and its affiliates may have conflicts of interest with us and,
accordingly, you.
Kaiser-Francis, PetroCorp's largest shareholder, and its subsidiaries
explore for and produce oil and gas in some of the same geographic areas in
which we operate. Kaiser-Francis is not required to pursue a business strategy
that will favor PetroCorp business opportunities over the business
opportunities of Kaiser-Francis, its affiliates, or any other competitor of
PetroCorp acquired by Kaiser-Francis. In fact, Kaiser-Francis may have
financial motives to favor itself.
In addition, because of PetroCorp's management agreement with Kaiser-
Francis, PetroCorp, Kaiser-Francis and its affiliates share, and therefore will
compete for, the time and effort of Kaiser-Francis personnel who provide
services to PetroCorp. Officers of Kaiser-Francis and its affiliates do not,
and will not be required to, spend any specified percentage or amount of time
on our business. Since these shared officers function as both PetroCorp
representatives and those of Kaiser-Francis and its affiliates, conflicts of
interest could arise between Kaiser-Francis and its affiliates, on the one
hand, and PetroCorp or you, on the other. See "The Companies -- PetroCorp --
PetroCorp's Management Agreement with Kaiser-Francis" on page 98.
19
Oil price declines and volatility could adversely affect our revenues, cash
flows and profitability.
PetroCorp's revenues, profitability and future rate of growth depend
substantially upon the prevailing prices of oil and gas. Because approximately
74.9% of our pro forma estimated proved reserves as of December 31, 2000 were
natural gas reserves, our financial results are more sensitive to movements in
natural gas prices.
Natural gas and oil and are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand these changes may arise from:
. weather conditions,
. the ability of the members of OPEC to agree to and maintain oil price
and production controls,
. political instability or armed conflict in oil-producing regions,
. the price and availability of alternative fuels,
. the availability of pipeline capacity, and
. domestic and foreign governmental regulations and taxes.
Historically, the markets for natural gas and oil have been volatile, and
they are likely to continue to be volatile in the future. For example, natural
gas and oil prices declined significantly in late 1997, 1998, and early 1999,
and, for an extended period of time, remained substantially below prices
obtained in previous years. Southern Mineral's inability to satisfy its debt
obligations in 1999 was in part a result of this decline in oil prices and
ultimately led Southern Mineral to file for bankruptcy protection in October
1999. Lower oil and gas prices may reduce the amount of oil and gas PetroCorp
produces. Significant reductions in oil and gas prices may require PetroCorp to
reduce its capital expenditures. Reducing drilling will make it more difficult
for PetroCorp to replace the reserves it produces.
If PetroCorp is not able to replace reserves, it may not be able to sustain
current production rates.
PetroCorp's future success depends largely upon its ability to find, develop
or acquire additional oil and gas reserves that are economically recoverable.
Unless PetroCorp replaces the reserves it produces through successful
development, exploration or acquisition, its proved reserves will decline over
time. In addition, approximately 10% by volume of its total estimated proved
reserves at December 31, 1999, and 16% by volume of Southern Mineral's total
estimated proved reserves at December 31, 1999 were undeveloped. By their
nature, undeveloped reserves are less certain. Recovery of such reserves will
require significant capital expenditures and successful drilling operations.
PetroCorp may fail to successfully find and produce reserves economically in
the future.
PetroCorp's increased reserve base will make it more difficult to find
exploration and acquisition opportunities to replace production. Drilling
levels required to replace reserves will likely increase PetroCorp's exposure
to drilling risk.
If PetroCorp does not make significant capital expenditures, it may not be able
to exploit reserves.
PetroCorp must make substantial capital expenditures in connection with the
exploration, development and production of its oil and gas properties.
PetroCorp anticipates that its oil and gas capital expenditures for the
combined company will be approximately $6 million for drilling and recompletion
activity in 2001. PetroCorp intends to finance its capital expenditures
primarily with funds provided by operations and borrowings under its credit
agreement, to be supplemented from time to time with funds obtained from
additional equity offerings. If PetroCorp's cash flow from operations and
availability under existing credit facilities are not sufficient to
20
satisfy capital expenditure requirements, additional debt or equity financing
may not be available to allow it to fund its continued growth. PetroCorp will
utilize up to approximately $10 million of the total $29.5 million available at
December 31, 2000, under its existing credit facility to effect the merger.
PetroCorp has a $75 million credit facility with a current borrowing base
limitation of $58 million.
PetroCorp's industry experiences numerous operating risks. Insurance may not be
adequate to protect PetroCorp against all these risks.
Oil and gas drilling and production activities are subject to numerous
risks, including the risk that no commercially productive oil and gas reserves
will be found. The cost of drilling and completing wells is often uncertain.
Oil and gas drilling and production activities may be shortened, delayed or
canceled as a result of a variety of factors, many of which are beyond our
control, including:
. pressure or irregularities in formations;
. equipment and materials failures or accidents;
. blowouts and surface cratering;
. fires and explosions;
. uncontrollable flows of oil and formation water; and
. environmental hazards such as oil spills, pipeline ruptures and
discharges of toxic gases.
If any of these events occur, we could incur substantial losses as a result
of:
. injury or loss of life;
. severe damage to and destruction of property, natural resources and
equipment;
. pollution and other environmental damage;
. regulatory investigation and penalties;
. suspension of our operations; and
. repairs to resume operations.
Our insurance does not protect us against all operational risks. We do not
carry business interruption insurance at levels that would provide enough funds
for us to continue operating without access to other funds. For some risks, we
may not obtain insurance if we believe the cost of available insurance is
excessive relative to the risks presented. Because third party drilling
contractors are used to drill our wells, we not may not realize the full
benefit of workmen's compensation laws in dealing with their employees. In
addition, pollution and environmental risks generally are not fully insurable.
PetroCorp's articles of incorporation, bylaws and rights plan discourage
corporate takeovers and could prevent shareholders from realizing a premium on
their investment.
PetroCorp's articles of incorporation and bylaws and provisions of the Texas
Business Corporation Act may have the effect of delaying or preventing a change
in control. PetroCorp's directors are elected to staggered terms. Also,
PetroCorp's articles of incorporation authorize PetroCorp's board of directors
to issue preferred stock without shareholder approval and to set the rights,
preferences and other designations, including voting rights of those shares as
the board may determine, and PetroCorp has available authorized but unissued
common stock. In addition, PetroCorp has adopted a rights plan, as further
described on page 77, which could, alone or in combination with the articles of
incorporation and the bylaws, discourage transactions involving actual or
potential changes of control, including transactions that otherwise could
involve payment of a premium over prevailing market prices to shareholders for
their common stock.
21
Reserve estimates depend on many assumptions that may turn out to be
inaccurate. Any material inaccuracies in these reserve estimates or underlying
assumptions will materially affect the quantities and net present value of our
reserves.
The calculations of proved reserves of oil and gas included in this document
have been prepared by independent petroleum engineers retained by PetroCorp and
Southern Mineral. The accuracy of any reserve estimate is a function of the
quality of available data, engineering and geological interpretations and
judgment and the assumptions used regarding quantities of recoverable oil and
natural gas reserves and prices for crude oil and natural gas. Any significant
variance between the assumptions used in our estimates and the actual data
could result in the actual quantity of our reserves and future net cash flow
being materially different from the estimates in our reserve reports. In
addition, results of drilling, testing and production and changes in crude oil
and natural gas prices after the date of the estimate may result in substantial
upward or downward revisions.
Also, we may adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing natural gas and oil
prices and other factors, many of which are beyond our control. At December 31,
2000, 10 percent of our pro forma proved reserves were proved undeveloped or
proved non-producing. Further, because most of our reserve estimates are not
based on a lengthy production history and are calculated using volumetric
analysis, these estimates are less reliable than estimates based on a lengthy
production history.
You should not assume that the present value of future net cash flows from
our proved reserves included or incorporated by reference in this prospectus is
the current market value of our estimated natural gas and oil reserves. In
accordance with SEC requirements, we base the estimated discounted future net
cash flows from our proved reserves on prices and costs on the date of the
estimate, which may vary materially from actual future prices and costs.
PetroCorp may be unable to identify liabilities associated with the properties
that it acquires or obtain protection from sellers against them.
The successful acquisition of producing properties involves an assessment of
recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors beyond PetroCorp's
control. This assessment is inexact and uncertain. In connection with this
assessment, PetroCorp will perform a review of the subject properties, but this
review will not reveal all existing or potential problems. Inspections may not
be performed on every well, and structural and environmental problems are not
necessarily observable even when an inspection is undertaken. PetroCorp may in
many cases assume pre-closing liabilities, including environmental liabilities,
and will likely acquire interests in properties on an "as is" basis.
PetroCorp's acquisitions may be unsuccessful. The failure of PetroCorp to
successfully complete acquisitions could have a material adverse effect on
PetroCorp.
Hedging activities could result in losses to PetroCorp.
PetroCorp and Southern Mineral use, and it is expected that PetroCorp will
continue to use, energy swap arrangements and financial futures to reduce
sensitivity to oil and gas price volatility. If PetroCorp's reserves are not
produced at the rates estimated by PetroCorp due to inaccuracies in the reserve
estimation process, operational difficulties or regulatory limitations,
PetroCorp will be required to satisfy obligations it may have under fixed price
sales and hedging contracts on potentially unfavorable terms without the
ability to hedge that risk through sales of comparable quantities of its own
production. Further, the terms under which PetroCorp enters into fixed price
sales and hedging contracts are based on assumptions and estimates of numerous
factors such as cost of production and pipeline and other transportation costs
to delivery points. Substantial variations between the assumptions and
estimates used and actual results experienced could materially adversely affect
anticipated profit margins and PetroCorp's ability to manage the risk
associated with fluctuations in oil and gas prices.
22
Additionally, fixed price sales and hedging contracts limit the benefits
PetroCorp will realize if actual prices rise above the contract prices. Based
upon prices in effect at December 31, 2000, the fair value (loss) of Southern
Mineral's crude oil and natural gas hedging instruments were unrealized losses
of $3.2 million. PetroCorp had no hedging contracts at December 31, 2000. In
addition, fixed price sales and hedging contracts are subject to the risk that
the counter-party may prove unable or unwilling to perform its obligations
under these contracts. Any significant nonperformance could have a material
adverse financial effect on PetroCorp.
PetroCorp's significant indebtedness could have important adverse consequences
to you.
After the merger PetroCorp will have a substantial amount of indebtedness.
At December 31, 2000, on a pro forma basis with 4,108,968 shares issued,
PetroCorp's total long-term debt outstanding would have been approximately
$46.8 million and PetroCorp would have had a long-term debt to total
capitalization ratio of 50 percent. Based on 3,000,000 shares issued,
PetroCorp's total long-term debt outstanding would be $56.8 million and its
long-term debt to total capitalization ratio would be 68 percent as of December
31, 2000. PetroCorp may incur additional indebtedness under PetroCorp's credit
facility. Additionally, the merger agreement provides that PetroCorp shall pay
off debt under Southern Mineral's credit facilities which, as of December 31,
2000, equaled $16.8 million. After the merger, repaying this debt may be
refinanced under PetroCorp's existing credit facility. Our significant
indebtedness could have important consequences to you. For example:
. PetroCorp's ability to obtain any necessary financing in the future for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes may be limited;
. a portion of PetroCorp's cash flow from operations must be utilized for
the payment of interest on PetroCorp's indebtedness and will not be
available for financing capital expenditures or other purposes;
. PetroCorp's level of indebtedness and the covenants governing
PetroCorp's current indebtedness could limit PetroCorp's flexibility in
planning for, or reacting to, changes in PetroCorp's business because
financing options may be limited or prohibited;
. PetroCorp's level of indebtedness may make PetroCorp more vulnerable
during periods of low oil and gas prices or in the event of a downturn
in PetroCorp's business because of PetroCorp's fixed debt service
obligations; and
. if the requirements of PetroCorp's credit facilities are not satisfied,
the lenders under these facilities would be entitled to accelerate the
payment of all outstanding indebtedness under this facility and, in such
event, PetroCorp may not have sufficient funds available, or may not be
able to obtain the financing required, to meet its obligations.
Costs to comply with environmental laws are significant.
Environmental and other governmental laws, some of which are applied
retroactively, have increased the costs to plan, design, drill, install,
operate and abandon oil and natural gas wells and related facilities. We may be
required to make large expenditures to comply with environmental laws.
Under these laws and regulations, we could be liable for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. We do not believe that full
insurance coverage for all potential environmental damages is available at a
reasonable cost. Failure to comply with these laws and regulations also may
result in the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties. Moreover, these laws and
regulations could change in ways that substantially increase our costs. For
example, Congress or the Minerals Management Service could decide to limit
exploratory drilling or natural gas production in some areas of the Gulf of
Mexico. Accordingly, any of these liabilities, penalties, suspensions,
terminations or regulatory changes could materially and adversely affect our
financial condition and results of operations.
23
Marketability of PetroCorp's production may be affected by factors beyond its
control.
The marketability of PetroCorp's production depends in part upon the
availability, proximity and capacity of oil and gas gathering systems,
pipelines and processing facilities. Most of PetroCorp's oil and gas will be
delivered through gathering systems and pipelines that are not owned by
PetroCorp. Federal and state regulation of oil and gas production and
transportation, tax and energy policies, changes in supply and demand and
general economic conditions all could adversely affect PetroCorp's ability to
produce and market its oil and gas.
A small number of shareholders will control PetroCorp, making it difficult for
other PetroCorp shareholders to affect PetroCorp's management.
Upon completion of the merger, directors, executive officers and principal
shareholders of PetroCorp, and their affiliates, will beneficially own
approximately
. 63.4% of PetroCorp's outstanding common stock, including 37.0% owned by
Kaiser-Francis, if 3,000,000 shares of PetroCorp stock are issued in the
merger, and
. 58.3% of PetroCorp's outstanding common stock, including 34.1% owned by
Kaiser-Francis, if 4,000,000 shares of PetroCorp stock are issued in the
merger.
Accordingly, these shareholders, as a group, will be able to control the
outcome of shareholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in PetroCorp's articles of
incorporation or bylaws, and the approval of mergers and other significant
corporate transactions. The existence of these levels of ownership concentrated
in a few persons makes it unlikely that any other holder of PetroCorp common
stock will be able to affect the management or direction of PetroCorp. These
factors may also have the effect of delaying or preventing a change in the
management or voting control of PetroCorp, including transactions that
otherwise could involve payment of a premium over prevailing market prices to
holders of PetroCorp common stock.
Future sales of PetroCorp common stock may result in a decrease in value to
existing shareholders.
After the merger, assuming no additional issuances of common stock prior to
the merger, PetroCorp will have between approximately 11,703,719 and 12,812,687
shares of common stock outstanding. Of those shares, from approximately
8,224,509 to 9,224,509 shares of common stock will be freely transferable
without restriction except with regard to certain transactions by affiliates.
Future sales of substantial amounts of common stock, or the perception that
these sales could occur, may affect the market price of our common stock.
PetroCorp does not expect to pay dividends on its common stock.
After the merger, PetroCorp expects that it will retain all available
earnings generated by its operations for the development and growth of the
business. Therefore, PetroCorp does not anticipate paying cash dividends on its
common stock in the foreseeable future. PetroCorp's debt instruments limit its
ability to pay dividends on its common stock.
24
FORWARD-LOOKING STATEMENTS
This document includes "forward-looking statements" made by PetroCorp within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include statements
regarding oil and gas reserve estimates, planned capital expenditures, expected
oil and gas production, PetroCorp's financial positions, business strategy and
other plans and objectives for future operations, expected future expenses,
realization of deferred tax assets, the proposed acquisition of Southern
Mineral, PetroCorp's ability to meet the closing conditions in the merger
agreement and the combined entity's future operations. In addition to these
statements, forward-looking statements may be included within this document
under the following captions:
. ""Risk Factors"
. ""PetroCorp Reasons for the Merger"
. ""Recommendations of the Board of Directors"
Although we believe the expectations reflected in these and other forward-
looking statements are reasonable, we can give no assurance that our
expectations will prove to have been correct. Factors that could cause actual
results to differ materially from expected results, include:
. uncertainties relating to the proposed business combination with Southern
Mineral;
. our substantial indebtedness;
. fluctuations in the prices of oil and gas;
. need to replace reserves;
. substantial capital requirements;
. uncertainties inherent in estimating quantities of oil and gas reserves;
. projecting future rates of production and the timing of development
expenditures;
. operating risks;
. restrictions imposed by lenders;
. the effects of governmental and environmental regulation;
. pending or future litigation; and
. conflicts of interest our officers and directors may have.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this proxy statement/prospectus,
and we undertake no obligation to update this information. We urge you to
carefully review and consider the disclosures made in this document and in our
other reports filed with the SEC that attempt to advise interested parties of
the risks and factors that may affect our business.
25
THE MERGER
Background of the Merger
PetroCorp's business strategy includes continuously identifying and
reviewing opportunities to acquire assets, divisions and companies. Consistent
will PetroCorp's strategy, Mr. Christopher, President and Chief Executive
Officer of PetroCorp, contacted Steven H. Mikel, President and Chief Executive
Officer of Southern Mineral, in October 1999 and requested that Mr. Mikel
consider a merger of Southern Mineral into PetroCorp. PetroCorp executed a
Confidentiality Letter dated October 11, 1999, and Southern Mineral forwarded
its most current reserve reports to PetroCorp at that time. After Southern
Mineral filed a bankruptcy petition on October 29, 1999, Mr. Christopher and
Mr. Mikel spoke and decided to suspend any discussion of a merger until
Southern Mineral had worked further into its bankruptcy proceedings.
On June 27, 2000, PetroCorp sent a letter to the Southern Mineral board,
which expressed PetroCorp's intent to work toward a purchase of Southern
Mineral or combination with Southern Mineral as one potential avenue for the
reorganization of Southern Mineral. Southern Mineral was in the midst of
negotiating a reorganization arrangement with its principal creditors, and
proceeded to finalize negotiations with its creditors rather than seek a
combination with PetroCorp within the bankruptcy case.
Southern Mineral and its creditors reached a negotiated reorganization
arrangement in early July 2000. On August 1, 2000, Southern Mineral
successfully emerged from bankruptcy with a restructured balance sheet and a
reorganized board of directors. The terms of the reorganization called for the
holders of Southern Mineral's debentures to exchange the debentures for 78% of
the common equity of Southern Mineral with the remaining 22% to go to prior
equity owners of Southern Mineral. Shareholders, option holders and warrant
holders of record on July 24, 2000, received approximately 3,667,000 warrants
allowing them to increase their ownership from 22% to up to 40% of the
outstanding common stock. The Series B warrants issued in the bankruptcy
reorganization are for a perpetual term with an exercise price of $4.21 per
share, subject to adjustment for certain customary anti-dilution events, such
as stock splits, stock dividends and other recapitalization events. Southern
Mineral's board was restructured, with five of seven new members being
appointed by the creditors' committee or by large former debenture holders.
On August 9, 2000, the newly restructured Southern Mineral board met with
representatives of Petrie Parkman and FirstEnergy Capital Corp. At that
meeting, the board directed management to engage the services of Petrie Parkman
and FirstEnergy Capital as financial advisors to evaluate strategies to
maximize shareholder value. Petrie Parkman was directed to undertake an
evaluation of strategic alternatives available to Southern Mineral, and
FirstEnergy Capital was directed to evaluate strategies related to Neutrino
Resources, Southern Mineral's wholly-owned Canadian subsidiary, in connection
with a possible stand-alone Canadian transaction.
Petrie Parkman identified and provided to Southern Mineral a list of
companies, including PetroCorp, that might offer Southern Mineral one or more
strategic opportunities, including joint ventures, mergers, acquisitions and
divestitures. After further review, Petrie Parkman was authorized and directed
to contact various companies, including PetroCorp, to determine their type and
level of interest in a possible transaction involving Southern Mineral. Based
on the information received from such companies, Southern Mineral directed
Petrie Parkman to conduct a more extensive inquiry and request the most
desirable candidates to deliver written expressions of interest. Of the 44
companies Petrie Parkman contacted, 12 companies completed a review in a data
room set up by Southern Mineral and Petrie Parkman, and six companies,
including PetroCorp, made either written or oral expressions of interest to
merge with or acquire Southern Mineral.
On October 11, 2000, representatives of FirstEnergy Capital made
presentations regarding the Canadian process to the Southern Mineral board and
representatives of Petrie Parkman made a presentation regarding the status of
the U.S. process. Based upon the progress of discussions with interested
parties being conducted by Petrie Parkman, the board determined that it was in
the best interests of Southern Mineral and its shareholders to attempt to merge
with one company. As a result, the FirstEnergy Capital-led process to evaluate
strategies related to Nuetrino Resources was given secondary status as it would
require two transactions to sell or merge Neutrino Resources and then to sell
or merge Southern Mineral.
26
Southern Mineral's board determined that the written expression of interest
received from PetroCorp on September 6, 2000, proposing a merger, provided one
of the more desirable potential transactions. PetroCorp's offer was to merge
Southern Mineral into PetroCorp. It appeared the combined company would possess
operating efficiencies and complementary geographical asset bases that were
attractive to the Southern Mineral board.
On October 19, 2000, Mr. Christopher met with representatives of Petrie
Parkman and with Michael E. Luttrell, chief financial officer of Southern
Mineral, and Mr. Mikel at the offices of Petrie Parkman in Houston. Mr.
Christopher described in more detail the businesses and goals of PetroCorp. Mr.
Christopher also discussed the oil and gas business in general and the
possibility of, among other things, combining Southern Mineral and PetroCorp in
the future to create a larger independent public oil and gas company with more
potential growth prospects and access to capital markets. The parties agreed to
explore the possibility of such a transaction and agreed to exchange further
information with each other. Mr. Christopher also discussed PetroCorp's
management contract with Kaiser Francis, and indicated that following the
merger PetroCorp would terminate the management and staff of Southern Mineral.
The parties discussed in detail their respective properties, financial
position, objectives and philosophies. The parties agreed to enter into
discussions regarding a proposed merger structure and to conduct further due
diligence investigations. During the final weeks of October and into early
November, there were general discussions regarding proposed structures and
merger consideration. On November 8, 2000, PetroCorp submitted a revised
proposal to Southern Mineral to merge in exchange for stock and cash.
On November 10, 2000, the Southern Mineral board again met with
representatives of FirstEnergy and Petrie Parkman to discuss the status of
current efforts relative to their respective engagements. During the meeting,
Petrie Parkman discussed with the board of directors a revised stock and cash
proposal from PetroCorp dated November 9, 2000, together with five other oral
or written proposals. Of the six expressions of interest, PetroCorp's was most
attractive because it provided for a merger of all of Southern Mineral into
PetroCorp. Three of the other expressions indicated a preference for only U.S.
assets. The board considered the other two remaining merger proposals to be
less favorable than the PetroCorp written proposal because the other two merger
proposals offered less merger consideration and did not offer a combination of
stock and cash, a feature the Southern Mineral board found attractive.
Following a general discussion, the board directed management and Petrie
Parkman to focus most of their efforts on discussions with the management and
board of PetroCorp.
Following the board meeting on November 10, 2000, representatives of Petrie
Parkman held several telephonic discussions with Mr. Christopher and his
associates regarding possible structures for a combination. Thereafter, Petrie
Parkman, at the direction of Southern Mineral, informed other potential
counterparties that Southern Mineral had decided to focus on one transaction,
but that they might be contacted again if discussions did not result in a
satisfactory transaction.
On November 24, 2000, PetroCorp sent a letter of intent directed to Petrie
Parkman, as Southern Mineral's financial advisor. The letter of intent was not
as favorable to Southern Mineral's shareholders as the terms of the final
definitive agreements. It included the following material terms:
. a merger consideration per Southern Mineral share of $4.51, compared
with the final per share merger consideration of $4.71;
. additional adjustments to the merger consideration not included in the
final agreements; and
. additional conditions to closing not included in the final agreements
which the Southern Mineral board was not certain would be satisfied.
Nevertheless, the November 24 letter provided a framework for further
discussion. On November 28, 2000, Mr. Mikel transmitted a response to Mr.
Christopher's letter of November 24, 2000, outlining numerous deal points that
he felt would be required before the Southern Mineral board would be willing to
commit Southern
27
Mineral's time and resources to any further discussions, analysis and
negotiations. On November 30, 2000, Mr. Christopher and Mr. Mikel and their
associates, and representatives of Petrie Parkman held a conference call
concerning several aspects of the transaction structure, including the amount
of stock and cash consideration. During the ensuing few days, there were
numerous discussions and negotiations conducted between Southern Mineral and
PetroCorp management as well as their legal and financial advisors. On December
6, 2000, Mr. Christopher transmitted to Mr. Mikel a revised letter of intent
providing merger consideration in the amount of $4.71 per Southern Mineral
common share payable in cash, PetroCorp common stock or a combination of the
two.
On December 8, 2000, the Southern Mineral board of directors met to discuss
the letter of intent submitted by PetroCorp. Following a presentation on the
status of these negotiations by members of management and representatives of
Petrie Parkman, the board authorized management to execute the letter of
intent, which included, among other things, provisions relating to the exchange
of confidential information, and other due diligence matters, and directed the
management of Southern Mineral to continue to discuss, analyze and negotiate a
possible merger with PetroCorp. During the next two weeks, Southern Mineral
personnel and representatives of various consulting firms, including
Netherland, Sewell & Associates, Inc., Alan C. Prigge & Associates, Inc.,
Environmental Compliance Associates, and KPMG LLP, as well as representatives
of Akin Gump, and Petrie Parkman, conducted and concluded the due diligence on
PetroCorp. On December 14, 2000, various members of Southern Mineral's
management and board, plus representatives of its consulting groups and
financial advisor, attended an all-day due-diligence meeting in PetroCorp's
offices in Tulsa, Oklahoma. At the same time, Southern Mineral's counsel
initiated the drafting of an agreement and plan of merger among PetroCorp,
PetroCorp Acquisition and Southern Mineral.
To assist Southern Mineral in its due diligence, PetroCorp provided Southern
Mineral with a statement of its summary financial data, including estimates
that for 2001 PetroCorp would have discretionary cash flow of $29.5 million and
EBITDX, or earnings before interest, taxes, depreciation, depletion and
amortization and exploration expense, of $39.9 million .
On December 22, 2000, the Southern Mineral board met with management and
representatives of Petrie Parkman to discuss the PetroCorp transaction.
Management reported on the results of its due diligence. Southern Mineral
management then presented its views of the proposed transaction and recommended
that the board accept the agreement to merge with PetroCorp. Southern Mineral's
legal counsel, Akin Gump, presented a summary of the terms of the merger
agreement and discussed various legal issues with the board. Petrie Parkman
presented its financial analyses and delivered to the Southern Mineral board
its written opinion that, as of December 22, 2000 and based upon and subject to
the matters set forth in such opinion, the merger consideration to be received
by the holders of Southern Mineral common stock pursuant to the merger
agreement was fair from a financial point of view to the holders of Southern
Mineral common stock. Following additional discussion on the merits of the
proposed transactions, the Southern Mineral board approved the terms of the
merger, merger agreement, voting agreements, affiliate agreements and the
transactions contemplated by such agreements, and agreed to recommend the
merger to the shareholders of Southern Mineral.
Following the approval by Southern Mineral's board and the approval of
PetroCorp's board of the merger, Southern Mineral and PetroCorp each executed
the agreement and plan of merger and later that day issued a press release
publicly announcing that PetroCorp and Southern Mineral had entered into the
merger agreement. All of the shareholder agreements were executed concurrent
with the merger agreement except for St Paul's shareholder agreement, which was
executed on January 5, 2001.
In connection with Southern Mineral board's approval of the first amendment
to the merger agreement on March 9, 2001, Petrie Parkman confirmed its opinion
dated December 22, 2000 by delivery of a written opinion to the Southern
Mineral board dated March 9, 2001. The opinion dated March 9, 2001 is attached
as Annex VIII to this document and we urge you to read it in its entirety. For
a discussion of the amendment to the merger agreement, see "The Merger
Agreement -- Amendment No. 1 to Merger Agreement" on page 62.
28
Reasons for the Merger; Recommendations of the Board of Directors
PetroCorp Reasons for the Merger
The members of PetroCorp's board of directors have unanimously determined
that the merger agreement and the merger are fair to and in the best interest
of its shareholders. In reaching its decision to approve the merger agreement
and the transactions contemplated by the merger agreement, including the merger
and the issuance of PetroCorp common stock, the PetroCorp board of directors
consulted with PetroCorp's legal advisors and its management, as well as the
acquisitions department and other financial and engineering personnel of
Kaiser-Francis. The material factors considered by the PetroCorp board of
directors included the following:
. Increased Financial Strength, Critical Mass and Scope. The merger will
give PetroCorp increased size, which could allow it to aggressively
compete for and secure future growth opportunities both in the United
States and Canada.
. Increased Shareholder Liquidity and Diversity. The merger will increase
the PetroCorp shareholder base, resulting in greater liquidity for
shares and the dilution of ownership interests of significant
shareholders.
. Expanded Prospect Portfolio. The merger will expand PetroCorp's existing
portfolio with several new targets distributed across core areas where
both companies have achieved high rates of return.
. Enhanced Reserve Base and Growth Potential. The merger will increase
PetroCorp's reserves by approximately 75% and expand potential reserve
growth.
. Increased Cash Flows Stability. The combination of the two producing
property portfolios will decrease the reliance on cash flow from any
individual well or area, reducing operational risk.
. Geographic and Operational Efficiencies. Southern Mineral's properties
and prospects complement, and are located in the same core areas as,
PetroCorp's, resulting in economic and operational efficiencies.
. Leverage of Existing Expertise and Infrastructure. The merger will
enable PetroCorp to more fully use its existing technical and
operational expertise and in-place infrastructure through its management
agreement with Kaiser-Francis, in the United States and in Canada. The
PetroCorp management agreement with Kaiser-Francis allows PetroCorp to
add Southern Mineral's reserves at a per mcf level of general and
administrative expense below Southern Mineral's current levels.
. Ability to Grow While Incurring Comparatively Less Debt. By giving
merger consideration consisting of part cash and part PetroCorp common
stock, PetroCorp is able to acquire substantial oil and gas reserves, on
favorable terms at a time of high oil and gas prices, with less debt
than would otherwise be required.
The potential risks and disadvantages to PetroCorp's shareholders identified
by the PetroCorp board of directors as material included the following:
. Cost Related to Closing the Merger Transaction. The process of effecting
the merger transaction will require the investment of a significant
amount of time and resources, including time spent by PetroCorp
management away from daily operations and monies paid to legal,
accounting and other financial professionals, with closing being subject
to various conditions, including shareholder approval. See "The Merger
Agreement -- Conditions to Closing" on page 60. PetroCorp will have to
pay most of its merger related costs and expenses, even if the merger
does not close;
. Difficulties Inherent in Combining Companies. The integration of
PetroCorp and Southern Mineral operations and systems may involve
unforseen difficulties and fail to achieve the cost savings and other
benefits anticipated by the parties, while at the same time distracting
PetroCorp management from regular business concerns;
29
. Sharing of PetroCorp Assets. As a result of the merger, the benefits of
PetroCorp's long-term exploration projects and high-quality reserves,
will be shared by stockholders of Southern Mineral, rather than enjoyed
solely by PetroCorp's stockholders; and
. Increase in Size. The increased size and property portfolio of PetroCorp
would result in increased regulation which may in turn distract
management from asset development and create additional compliance
expense. PetroCorp's increased reserve base will also make it more
difficult to find exploration and acquisition opportunities to replace
production. Drilling levels required to replace reserves will likely
increase PetroCorp's exposure to drilling risk. PetroCorp's increased
operation levels will also increase the risk that Kaiser-Francis may
fail to perform under its management agreement with PetroCorp.
For additional discussion of the risks associated with the merger see "Risk
Factors" beginning on page 18.
Because of the wide variety of factors considered in connection with its
evaluation of the merger, the PetroCorp board of directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
significance to the specific factors considered in reaching its conclusions. In
addition, individual directors may have given different significance to
different factors.
For the reasons discussed above, the members of the PetroCorp board of
directors have determined that the terms of the merger are fair to, and in the
best interests of, PetroCorp and the PetroCorp shareholders. Accordingly, the
members of the PetroCorp board of directors unanimously recommend that the
PetroCorp shareholders vote to approve the merger agreement and the
transactions contemplated by the merger agreement, including the merger and the
issuance of PetroCorp common stock.
Southern Mineral Reasons for the Merger
The members of the Southern Mineral board of directors, each of which is an
independent director, have unanimously determined that the merger agreement is
fair to and in the best interests of Southern Mineral and its shareholders.
Accordingly, the board has approved the merger agreement and the transactions
contemplated thereby, including the merger and the transactions contemplated by
the shareholder agreements. In reaching these decisions, the board consulted
with senior management, as well as its legal counsel, independent accountants
and financial advisors and considered the following as material factors:
. Benefits Created by the Merger. The benefits created by the merger,
including the opportunities for costs savings and economies of scale,
should result in an improved financial condition and improved results of
operations of the combined company. PetroCorp's business platform
provides the ready-made operating resources and experience, inventory of
properties, and strategic plan for Southern Mineral, which recently
restructured its operations. In turn, Southern Mineral provides
PetroCorp with additional high-quality properties and related cash flow.
. Complementary Assets. Both PetroCorp and Southern Mineral have
operations in the Gulf Coast region and own oil and gas properties in
Alberta, Canada. The combined company expects to benefit from combining
its operations in this core operating area while also benefiting from
greater diversity of operations in the Gulf Coast region and the added
diversity of properties in Canada.
. Premium to Trading Price. The consideration offered under the
transaction represented approximately a 49% premium over the average
closing price of Southern Mineral's common stock for the 20 trading days
preceding the announcement of the merger.
. Adequate Capital Resources and Liquidity. After the merger, Southern
Mineral anticipates that the combined company will have access to
capital resources adequate to pursue a more expansive exploration and
development plan. In addition to cash on hand, substantial cash flows
from operations and funds available under an existing credit facility,
we anticipate that the combined company will be
30
able to access the private and public capital markets with equity and
debt offerings on more favorable terms than would have been available to
Southern Mineral as a separate company.
. Ability to Consider Competing Offers. The merger agreement does not
preclude the initiation of competing offers by other potential bidders.
If another party delivers an unsolicited offer to Southern Mineral, the
Southern Mineral board may consider and accept it if the offer is
superior to the merger from a financial point of view and the board
determines in good faith that it is required to further investigate such
offer to comply with its fiduciary duty imposed by law. If the board
accepts a superior offer, Southern Mineral is required to pay PetroCorp
a cash termination fee of $2,350,000. As of the date of this document,
Southern Mineral has not received any competing offers.
. Increased Critical Mass and Scope. The combined company's ability to
compete should be substantially enhanced by the merger, which will
create a larger, better capitalized, more widely-held company, with
greater operational strengths and exploration and development
opportunities.
. Business Strategy/Hiring and Evaluating Staff. The merger will provide
Southern Mineral with immediate access to substantial additional
expertise and infrastructure, including experienced personnel and
proprietary information. Southern Mineral's recent bankruptcy
reorganization required it to divest certain non-core assets and to
substantially reduce its technical and administrative staff. In order to
realize its growth potential, Southern Mineral would have to expand its
strategic plan beyond the bankruptcy reorganization context, and hire
and retain substantial additional personnel to implement and execute
that plan. After the merger, the combined company will continue to have
access to and utilize the staff of Kaiser-Francis under its management
agreement with PetroCorp.
. Increased Stability of Cash Flows and Growth Potential Through
Diversification. Following the transaction, the production value of the
combined company's properties will be dispersed among a greater number
of properties. This diversification of operations over a greater number
of properties is expected to mitigate risks inherent in operating a
small number of properties in a concentrated area. The combined company
will also have a larger prospect inventory, which is expected to provide
the combined company with a greater ability to sustain growth.
. Increased Shareholder Liquidity. The PetroCorp common stock to be
received by the Southern Mineral shareholders will be listed on the AMEX
and may be more widely traded than shares of Southern Mineral common
stock, resulting in enhanced liquidity for our shareholders. Listing on
the AMEX, as compared to Southern Mineral's current listing on the OTC
Bulletin Board, exposes Southern Mineral shareholders to a larger
investor population as certain larger institutions limit their
investments to companies listed with a national exchange or market.
Additionally, if Southern Mineral's shareholders do not elect to receive
PetroCorp stock, they will receive cash in exchange for their shares of
Southern Mineral stock.
In reaching its determination approving the merger for submission to the
shareholders, the Southern Mineral board also considered and evaluated
information presented by the management of Southern Mineral with respect to the
transaction. In this regard, the Southern Mineral board considered information
relating to:
. the results of operations, financial and operating performance,
financial condition and prospects of and the opportunities available to
PetroCorp, Southern Mineral and the combined company, and the risks
involved in attempting to grow Southern Mineral as an independent
company;
. the reserves, asset quality and cost structure of PetroCorp and Southern
Mineral;
. the strategic and financial alternatives available to Southern Mineral;
. the results and scope of the due diligence review conducted by Southern
Mineral's management with respect to PetroCorp's business, properties,
operations and prospects;
. historical, recent and potential future trading prices and trading
multiples of the common stock of PetroCorp and Southern Mineral;
31
. historical, recent and potential future commodity prices of oil and gas;
. the terms of the merger agreement;
. the financial analyses and written opinion of Petrie Parkman dated
December 22, 2000 with respect to the fairness from a financial point of
view, as of December 22, 2000 and based upon and subject to the matters
set forth in such opinion, of the merger consideration to the holders of
Southern Mineral common stock; and
. the advice of outside counsel to Southern Mineral with respect to the
fiduciary duties and obligations of the disinterested members of the
board in considering the transaction.
The potential risks and disadvantages to Southern Mineral's shareholders
identified by the Southern Mineral board of directors as material included the
following:
. Lack of Liquidity of PetroCorp Stock. Southern Mineral shareholders'
liquidity may not be enhanced by the merger because PetroCorp's stock
has traditionally not been very liquid. For example, during November
2000, the month before the merger agreement was signed, 59,400 Southern
Mineral shares were traded while only 2,200 PetroCorp shares were
traded, even though PetroCorp's stock, as discussed above, is traded on
the AMEX, a national exchange, while Southern Mineral's shares are
traded on the OTC Bulletin Board.
. Cost Related to Closing the Merger Transaction. The process of effecting
the merger transaction will require Southern Mineral management to
invest a significant amount of time and resources, meaning they will
have less time to devote to daily operations. The merger also involves
significant expenses payable to legal, accounting and other financial
professionals, with closing being subject to various conditions,
including shareholder approval. See "The Merger Agreement--Conditions to
Closing" on page 60. Southern Mineral will have to pay many merger
related costs and expenses even if the merger does not close;
. Difficulties Inherent in Combining Companies. The integration of
PetroCorp and Southern Mineral operations and systems may involve
unforseen difficulties and fail to achieve the cost savings and other
benefits anticipated by the parties, while at the same time distracting
PetroCorp management from regular business concerns;
. Volatility of PetroCorp stock prices. The exchange ratio will not be
adjusted as a result of any decrease or increase in the price of
PetroCorp common stock. Therefore, because the market price of PetroCorp
common stock is subject to fluctuation, the market price at the time of
the merger of the PetroCorp stock to be received by the Southern Mineral
shareholders that make valid stock elections may be lower than $10.00
per share, which was the value attributed to the PetroCorp stock at the
time we signed the merger agreement, and lower than the market price of
PetroCorp common stock on the date of this document, the date of the
special meetings, or the date that the stock election period ends.
For additional discussion of the risks associated with the merger, including
these risk factors, see "Risk Factors" beginning on page 18.
The board also considered the option of remaining independent versus the
relative merits of the combination with PetroCorp.
Based on all of these matters the board unanimously approved the merger and
unanimously recommended the merger agreement and the merger for approval to its
shareholders. In reaching the determination to approve and recommend the merger
agreement and the merger to its shareholders, the Southern Mineral board did
not assign any relative or specific weight to the foregoing factors which were
considered, and individual directors may have given differing significance to
the various factors.
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Accounting Treatment
The merger will be accounted for as a purchase. Under this accounting
method, PetroCorp will record Southern Mineral's assets and liabilities at
their fair values, and, if the purchase price exceeds the total of these fair
values, PetroCorp will record the excess as goodwill. PetroCorp will include
the revenues and expenses of Southern Mineral in PetroCorp's financial
statements from the date of the consummation of the merger.
Regulatory Approvals
No filing under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 was
required in connection with the merger. Neither Southern Mineral nor PetroCorp
is aware of a material governmental or regulatory approval required for
completion of the merger, other than compliance with the applicable corporate
laws of Texas and Nevada.
U.S. Federal Income Tax Consequences of the Merger
The following discussion summarizes the anticipated material U.S. federal
income tax consequences of the merger to Southern Mineral shareholders. Akin,
Gump, Strauss, Hauer & Feld, L.L.P. has acted as counsel to Southern Mineral
and this discussion constitutes its legal opinion as to the matters discussed
herein. This discussion addresses only those shareholders who hold their shares
of Southern Mineral common stock as a capital asset, and does not address all
of the U.S. federal income tax consequences that may be relevant to particular
Southern Mineral shareholders in light of their individual circumstances, or to
Southern Mineral shareholders that are subject to rules, such as:
. financial institutions;
. mutual funds;
. tax-exempt organizations;
. insurance companies;
. dealers in securities or foreign currencies;
. traders in securities who elect to apply a mark-to-market method of
accounting;
. foreign holders;
. persons who hold shares of Southern Mineral common stock as a hedge
against currency risk or as part of a straddle, constructive sale or
conversion transaction; or
. holders who acquired their shares of Southern Mineral common stock upon
the exercise of warrants or employee stock options or otherwise as
compensation.
The following discussion is not binding on the Internal Revenue Service. It
is based upon the Internal Revenue Code of 1986, as amended, and the
regulations, rulings and decisions thereunder in effect as of the date of this
document, all of which are subject to change, possibly with retroactive effect.
Tax consequences under state, local and foreign laws and U.S. federal laws
other than U.S. federal income tax laws, are not addressed. Southern Mineral
shareholders are urged to consult their tax advisors as to the specific tax
consequences to them of the merger, including the applicability and effect of
U.S. federal, state and local and foreign income and other tax laws in their
particular circumstances.
If the merger qualifies as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code, holders of shares of Southern Mineral
common stock that receive shares of PetroCorp common stock in the merger will
not recognize gain or loss for U.S. federal income tax purposes, except with
respect to cash they receive as part of the merger consideration. Each
shareholder's aggregate tax basis in the shares of PetroCorp common stock
received in the merger would be the same as such shareholder's aggregate tax
basis
33
in the shares of Southern Mineral common stock surrendered in the merger
increased by any gain recognized and, decreased by any cash received and the
amount of any tax basis allocable to any fractional share interest for which
cash is received. The holding period of the shares of PetroCorp common stock
received in the merger by a holder of shares of Southern Mineral common stock
would include the holding period of shares of Southern Mineral common stock
that such shareholder surrendered in the merger. A holder of shares of Southern
Mineral common stock that receives cash in lieu of a fractional share of
PetroCorp common stock would recognize gain or loss equal to the difference
between the amount of cash received and such shareholder's tax basis in the
shares of Southern Mineral common stock allocable to the fractional share. That
gain or loss generally would constitute capital gain or loss. In the case of an
individual shareholder, any of this capital gain generally would be subject to
a maximum U.S. federal income tax rate of 20% if the individual has held his
shares of Southern Mineral common stock for more than 12 months on the date of
the merger. The deductibility of capital losses is subject to limitations for
both individuals and corporations.
If, however, the merger does not qualify as a tax free reorganization, a
Southern Mineral shareholder would recognize gain (or loss) equal to the amount
by which the cash and fair market value of the PetroCorp shares received in
exchange for his Southern Mineral shares pursuant to the merger exceeds (or is
less than) her basis in her Southern Mineral shares surrendered or cancelled in
the merger. Assuming the Southern Mineral shareholder held her shares as a
capital asset, any such gain or loss would be capital gain or loss for federal
income tax purposes, and, if her holding period were at least 12 months, long
term capital gain. Long term capital gain is generally taxed at a maximum rate
of twenty percent (20%). A Southern Mineral shareholder's basis in his shares
would be equal to their fair market value on the date of the exchange and his
holding period would begin on the date of exchange.
Because shares of PetroCorp common stock will remain unchanged in the
merger, the merger will not cause PetroCorp shareholders to recognize any gain
or loss. No gain or loss will be recognized by PetroCorp, Southern Mineral or
PetroCorp Acquisition.
Dissenters' Rights
Under Nevada law, Southern Mineral shareholders may be entitled to
dissenters' rights in the merger. Under our merger structure, the availability
of dissenters' rights for Southern Mineral shareholders depends on the OTC
Bulletin Board, on which the Southern Mineral stock is listed, being a
"national securities exchange," as contemplated by the Nevada statutes.
Currently, Nevada law is unsettled on this point. The following information is
presented in case it is determined that Southern Mineral's shareholders have
dissenters' rights in connection with the merger. A copy of the applicable
Nevada statutes regarding dissenters' rights are attached to this document as
Annex IX. Southern Mineral shareholders who are considering exercising
dissenters' rights, to the extent that they apply to the merger, should review
the statute carefully, particularly the steps required to perfect dissenters'
rights. Set forth below is a summary of the steps to be taken by a holder of
record to exercise the right to dissent. This summary should be read in
conjunction with the full text of the attached statute.
To exercise a right to dissent:
. before the vote is taken, you must deliver written notice to the
Southern Mineral secretary stating that you intend to demand payment for
your shares if the merger is completed; and
. you must NOT vote your shares in favor of the merger either by proxy or
in person.
If you send written notice of your intent to dissent before the vote on the
merger, Southern Mineral must send you a written dissenters' notice within 10
days after the merger is effective telling you:
. where your demand for payment must be sent and where and when your stock
certificates must be deposited;
. what happens if you own shares but do not have the stock certificate;
and
34
. the date by which Southern Mineral must receive the demand form, which
must be between 30 and 60 days after notice delivery, and providing you:
. a form to demand payment; and
. a copy of the statute.
Your failure to demand payment in the proper form or deposit your
certificates as described in the dissenters' notice will terminate your right
to receive payment for your Southern Mineral shares. Your rights as a Southern
Mineral shareholder will continue until those rights are cancelled or modified
by the completion of the merger.
If you acquired your shares before the merger was made public, within 30
days of receipt of a properly executed demand for payment, Southern Mineral
must pay you what it determines to be the fair market value plus interest for
your shares. Payment must be accompanied by specific financial records of
Southern Mineral, a statement of Southern Mineral's fair value estimate,
including how interest was calculated, information regarding your right to
challenge the fair value estimate, and copies of relevant portions of the
Nevada Revised Statutes.
If you acquired your shares after the merger was first made public, you are
only entitled to receive payment of the amount Southern Mineral estimates is
the fair value of your shares if you accept that estimate. If you wish to
contest that estimate, you may do so, but you will receive no payment until the
contest is resolved.
Within 30 days from the receipt of the fair value payment or notice, you may
notify Southern Mineral in writing of your own fair value estimate and demand
payment of the amount not yet paid. Failure to demand payment within 30 days of
receipt of payment or notice terminates your right to challenge Southern
Mineral's calculation of fair value. If you and Southern Mineral cannot agree
on fair market value within 60 days after Southern Mineral receives a
shareholder demand, Southern Mineral must commence legal action seeking court
determination of fair market value. If Southern Mineral fails to commence a
legal action within the 60 day period, it must pay each dissenter whose demand
remains unsettled the amount they demanded. Proceedings instituted by Southern
Mineral will be in Washoe County, Nevada. Costs of legal action will be
assessed against Southern Mineral, unless the court finds that the dissenters'
acted arbitrarily, vexatiously or not in good faith, in which case costs will
be equitably distributed. Attorneys' and expert fees may be awarded in such
amount as the court deems equitable against any party the court determines has
acted wrongfully.
Opinion of Southern Mineral's Financial Advisor
Southern Mineral engaged Petrie Parkman & Co., Inc. as its financial advisor
on August 18, 2000 in connection with a possible transaction involving Southern
Mineral. On December 22, 2000, Petrie Parkman delivered to the Southern Mineral
board of directors its written opinion that, as of that date and based upon and
subject to the matters set forth in such opinion, the merger consideration
described in the merger agreement to be received by the holders of Southern
Mineral common stock was fair from a financial point of view to the holders of
Southern Mineral common stock. In connection with Southern Mineral board's
approval of the first amendment to the merger agreement, Petrie Parkman
confirmed its opinion by delivery of a written opinion to the Southern Mineral
board of directors dated March 9, 2001.
Pursuant to an engagement letter between Petrie Parkman and Southern Mineral
dated August 18, 2000, Southern Mineral agreed to pay to Petrie Parkman a
transaction fee based on the transaction value and conditioned upon closing of
a merger. Assuming the merger is consummated at the merger consideration
described in the merger agreement, Southern Mineral and Petrie Parkman estimate
that Petrie Parkman's transaction fee will be equal to approximately
$1,140,000. In addition, Southern Mineral also agreed to reimburse Petrie
Parkman for its reasonable out-of-pocket expenses related to its rendering of
financial advisory and investment banking services to Southern Mineral,
including the fees and expenses of its legal counsel.
35
Southern Mineral also agreed to indemnify Petrie Parkman and its affiliates,
the respective directors, officers, partners, agents and employees of Petrie
Parkman and its affiliates, and controlling persons for certain losses, claims,
damages, liabilities and expenses related to or arising out of its engagement
as financial advisor.
The full text of Petrie Parkman's opinion dated March 9, 2001, which
contains a description of the assumptions made and matters considered by Petrie
Parkman in rendering its opinion, is attached as Annex VIII. Southern Mineral
shareholders are encouraged to, and should, read the Petrie Parkman opinion
carefully in its entirety.
Petrie Parkman's opinions were provided to the Southern Mineral board for
its use and benefit and address only the fairness from a financial point of
view of the merger consideration to the holders of Southern Mineral common
stock. Petrie Parkman's opinions do not address the merits of the underlying
decision by Southern Mineral to engage in the merger and do not constitute a
recommendation to any shareholder as to how that shareholder should vote at the
special meeting. The amount and form of consideration to be paid in the
transaction was the result of arms-length negotiations between PetroCorp and
Southern Mineral. Petrie Parkman's opinion dated December 22, 2000 and its
presentation to the Southern Mineral board on December 22, 2000, and Petrie
Parkman's opinion dated March 9, 2001 confirming its opinion dated December 22,
2000, were among many factors taken into consideration by the Southern Mineral
board in making its determination to approve and recommend the transaction
described in the merger agreement and to approve the first amendment to the
merger agreement, respectively.
In arriving at its opinion dated March 9, 2001, Petrie Parkman, among other
things:
1. reviewed certain publicly available business and financial information
relating to PetroCorp and Southern Mineral, including
. Annual Reports on Form 10-K and related audited financial statements
for the fiscal years ended December 31, 1998 and December 31, 1999,
and
. Quarterly Reports on Form 10-Q and related unaudited financial
statements for the fiscal quarters ended March 31, 2000, June 30,
2000 and September 30, 2000;
2. reviewed a draft dated March 6, 2001, of the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 of Southern Mineral and a
draft dated March 6, 2001 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 of PetroCorp;
3. reviewed certain estimates of Southern Mineral's reserves, including
. estimates of proved and probable oil and gas reserves prepared by
Netherland, Sewell & Associates, Inc. (as to United States and
Ecuador reserves only) as of December 31, 2000, and
. estimates of proved and probable oil and gas reserves prepared by
Chapman Petroleum Engineering Ltd. (as to Canadian reserves only) as
of December 31, 2000;
4. reviewed certain estimates of PetroCorp's reserves, including
. estimates of proved and probable oil and gas reserves prepared by
Huddleston & Co., Inc. as of December 31, 2000;
5. analyzed certain historical and projected financial and operating data
of
. PetroCorp prepared by the management and staff of PetroCorp, and
. Southern Mineral prepared in conjunction with, and approved by, the
management and staff of Southern Mineral;
6. discussed the current and projected operations and prospects of
PetroCorp and Southern Mineral with the management and staff of
PetroCorp and Southern Mineral, respectively;
36
7. reviewed the trading history of PetroCorp common stock and Southern
Mineral common stock;
8. compared recent stock market capitalization indicators for PetroCorp and
Southern Mineral with recent stock market capitalization indicators for
certain other publicly-traded independent energy companies;
9. compared the financial terms of the merger with the financial terms of
certain other transactions that Petrie Parkman deemed to be relevant;
10. participated in certain discussions and negotiations among the
representatives of Southern Mineral, PetroCorp and their financial and
legal advisors;
11. reviewed the merger agreement;
12. reviewed a draft dated March 7, 2001 of the first amendment to the
merger agreement; and
13. reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as Petrie
Parkman had deemed necessary or appropriate.
In preparing its opinions, Petrie Parkman assumed and relied upon, without
assuming any responsibility for or independently verifying, the accuracy and
completeness of any information supplied or otherwise made available to it.
Petrie Parkman further relied upon the assurances of the management of Southern
Mineral and PetroCorp that they were unaware of any facts that would make the
information provided to Petrie Parkman incomplete or misleading in any material
respect.
With respect to projected financial and operating data, Petrie Parkman
assumed that the data had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management and staff of
Southern Mineral and PetroCorp, respectively, relating to the future financial
and operational performance of each company.
With respect to the estimates of oil and gas reserves, Petrie Parkman
assumed that they had been reasonably prepared on bases reflecting the best
available estimates and judgments of the management and staff of Southern
Mineral or PetroCorp or their respective engineering consultants relating to
the oil and gas properties of Southern Mineral and PetroCorp, respectively.
Petrie Parkman did not make an independent evaluation or appraisal of the
assets or liabilities of Southern Mineral or PetroCorp nor, except for the
estimates of oil and gas reserves referred to above, was Petrie Parkman
furnished with such an evaluation or appraisal. In addition, Petrie Parkman did
not assume any obligation to conduct, and did not conduct, any physical
inspection of the properties or facilities of Southern Mineral or PetroCorp.
In developing its opinions, Petrie Parkman relied upon Southern Mineral as
to certain legal, tax, and accounting aspects of the transaction described in
the merger agreement.
Petrie Parkman assumed, based on discussions with the management and staff
of Southern Mineral, that no adjustments to the merger consideration will be
required under the merger agreement on the basis of the transaction costs
incurred by Southern Mineral. For purposes of the March 9, 2001 opinion, Petrie
Parkman also assumed that the first amendment to the merger agreement executed
and delivered by the parties was substantially similar to the draft of the
first amendment to the merger agreement reviewed by Petrie Parkman. Petrie
Parkman further assumed that the merger will be consummated on the terms and
conditions contemplated in the merger agreement.
Petrie Parkman was not asked to consider, and its opinions do not address,
the after-tax consequences of the merger to any particular shareholder of
Southern Mineral or the price at which PetroCorp common stock will actually
trade following the announcement or consummation of the merger.
37
Petrie Parkman's opinions were rendered on the basis of conditions in the
securities markets and the oil and gas markets prevailing as of the respective
dates of its opinions and the condition and prospects, financial and otherwise,
of PetroCorp and Southern Mineral as they had been represented to Petrie
Parkman as of the respective dates of its opinions or as they were reflected in
the materials and discussions described above.
The following is a summary of the financial analyses performed by Petrie
Parkman in connection with the preparation of the Petrie Parkman opinion dated
December 22, 2000 and presented to the Southern Mineral board of directors on
December 22, 2000. Petrie Parkman reviewed and updated such analyses in
connection with its preparation of the opinion dated March 9, 2001.
This summary includes information presented in tabular format. In order to
fully understand these financial analyses, the tables must be read together
with the text accompanying each summary. The tables alone do not constitute a
complete description of these financial analyses. Considering the data set
forth in the tables without considering the full narrative description of these
analyses, including the methodologies and assumptions underlying these
analyses, could create a misleading or incomplete view of these financial
analyses performed by Petrie Parkman.
Historical Stock Trading Ratio Analysis. Petrie Parkman analyzed the
historical ratios of the closing prices of Southern Mineral common stock
divided by corresponding closing prices of PetroCorp common stock for the
period from August 4, 2000, the first full day of trading after the
announcement by Southern Mineral that the order confirming its plan of
reorganization became effective, to December 19, 2000. The average stock
trading ratio for the period from August 4, 2000 to December 19, 2000 was 0.353
as compared to the exchange ratio of .471 shares of common stock of PetroCorp
per share of common stock of Southern Mineral, unadjusted for transaction
costs, applicable to the stock portion of the merger consideration.
Discounted Cash Flow Analysis - Southern Mineral. Petrie Parkman conducted a
discounted cash flow analysis for the purpose of determining the equity
reference value range per share of Southern Mineral common stock. Petrie
Parkman calculated the net present value of after-tax cash flows of Southern
Mineral's oil and gas reserve assets based on the proved and probable reserve
estimates referred to above and for its non-reserve assets utilizing
information provided by Southern Mineral.
Petrie Parkman evaluated five scenarios in which the principal variables
were oil and gas prices. The five pricing scenarios, which were referred to by
Petrie Parkman as "Pricing Case I", "Pricing Case II", "Pricing Case III", the
"Strip Pricing Escalated Case", and the "Strip Pricing Flat Case" were based on
benchmarks for spot sales of West Texas Intermediate crude oil and for spot
sales of Henry Hub gas. The Strip Pricing Escalated Case and the Strip Pricing
Flat Case were based upon the average of oil and gas futures contract prices
quoted on the New York Mercantile Exchange. Petrie Parkman applied appropriate
quality and transportation adjustments to these benchmarks. Year 2000 oil
prices utilized in the analysis for Pricing Cases I, II, III, Strip Pricing
Escalated and Strip Pricing Flat were based on the blended average of actual
oil prices from October 1, 2000 through December 19, 2000 and benchmark
scenarios for the remainder of 2000. Projected benchmark prices for Pricing
Cases I, II and III of $19.00, $21.00 and $23.00 per barrel, respectively, were
escalated at the rate of 3% per year starting in 2001. The Strip Pricing
Escalated Case assumed benchmark oil prices of $26.30, $23.20, $22.01, $21.22
and $20.92 for the years 2001, 2002, 2003, 2004 and 2005, respectively, and was
escalated annually following the year 2005 at the rate of 3%. Benchmark oil
prices for the Strip Pricing Flat Case were projected to be the same as the
Strip Pricing Escalated Case through 2005, with prices held constant
thereafter.
Year 2000 gas prices utilized in the analysis for Pricing Cases I, II, III,
Strip Pricing Escalated and Strip Pricing Flat were based on the blended
average of actual gas prices from October 1, 2000 through December 19, 2000 and
benchmark scenarios for the remainder of 2000. Projected benchmark prices for
Pricing Cases I, II and III of $2.50, $3.00 and $3.50 per million British
thermal units, respectively, were escalated at the rate of 3% per year starting
in 2001. The Strip Pricing Escalated Case assumed benchmark gas prices of
$6.07, $4.37 and $3.86 for the years 2001, 2002 and 2003 respectively, and was
escalated annually
38
following the year 2003 at the rate of 3%. Benchmark gas prices for the Strip
Pricing Flat Case were projected to be the same as the Strip Pricing Escalated
Case through 2003, with prices held constant thereafter. Operating and capital
costs were escalated at 3% per year starting in year 2001.
Applying various after-tax discount rates ranging from 10.0% to 40.0%
depending on reserve category to the after-tax cash flows, assuming a carry-
over of Southern Mineral's existing tax position as of December 31, 1999 and
deducting long term debt of $19.7 million and adding net working capital of
$0.2 million, the discounted cash flow analysis indicated the following equity
reference value ranges per fully-diluted share of Southern Mineral common stock
as compared to the merger consideration, unadjusted for transaction costs,
valued at $4.71 per share.
Pricing Case Pricing Case
I II Pricing Case III Strip Pricing Esc. Strip Pricing Flat
------------- ------------- ---------------- ------------------ ------------------
Equity Reference Value
Range per Common
Share................. $2.78 - $3.29 $3.60 - $4.23 $4.44 - $5.18 $4.87 - $5.59 $4.57 - $5.18
Property Transactions Analysis - Southern Mineral. Petrie Parkman reviewed
selected publicly available information for 78 announced oil and gas property
transactions and proprietary information for two oil and gas property
acquisition transactions between January 1997 and December 2000 in the Gulf
Coast region of the United States and in Canada. Petrie Parkman focused on
transactions involving assets and properties which it determined to be most
comparable to assets and properties of Southern Mineral based on certain
attributes of each transaction, such as size of the transaction, mix of gas and
oil reserves, location of the assets, operational profile of the assets and
other known characteristics. Petrie Parkman calculated the purchase price of
reserves per unit of equivalent reserves for the acquired assets in each
transaction. For purposes of this analysis, equivalency is used to compare
quantities of oil with quantities of gas using a one barrel of oil to six
thousand cubic feet of gas conversion ratio, or Mcfe6. Based on a review of the
purchase price of reserves per unit of equivalent reserves, Petrie Parkman
determined benchmark ranges of purchase prices to Southern Mineral's
corresponding proved reserve figures in order to yield enterprise reference
value ranges for Southern Mineral's proved reserves. The number of transactions
per region and the maximum, mean and minimum purchase prices for these
transactions are set forth in the following table.
Gulf
Coast Canada
----- ------
Number of Transactions......... 47 33
Purchase Price of Reserves /
Proved
Reserves ($/Mcfe6)
Maximum.................... $1.63 $1.29
Mean....................... $0.86 $0.81
Minimum.................... $0.20 $0.52
Petrie Parkman selected benchmark ranges of purchase price per unit of
equivalent reserves of $0.81 to $1.00 for Southern Mineral's proved U.S. assets
and $0.80 to $0.90 for Southern Mineral's proved Canadian assets. Petrie
Parkman applied the benchmark ranges of purchase price per unit to Southern
Mineral's proved reserve figures and, after adjusting for Southern Mineral's
non-reserve assets, determined an enterprise reference value range. Petrie
Parkman then deducted long-term debt of $19.7 million and added net working
capital of $0.2 million to such enterprise reference value range and divided
the resulting figure by the fully-diluted number of shares of Southern Mineral
common stock outstanding to arrive at an equity reference value range per
fully-diluted share of Southern Mineral common stock of $2.95 to $3.90 as
compared to the merger consideration, unadjusted for transaction costs, valued
at $4.71 per share.
Company Transaction Analysis - Southern Mineral. Petrie Parkman reviewed
selected publicly available information on the following 18 company acquisition
transactions and offers for control involving companies in the oil and gas
exploration and production industry that were announced between January 1997
and December
39
2000. Petrie Parkman focused on certain transactions because of the
similarities between Southern Mineral and the target companies in such
transactions, such as the company's size, size of reserve base, mix of gas and
oil reserves and other characteristics of the targets' reserves, capitalization
and other identifiable characteristics.
Acquirer or Bidder for Control Target Date of Announcement
- ------------------------------ ------ --------------------
Stone Energy Corporation Basin Exploration, Inc. 10/30/00
Key Production Company, Inc. Columbus Energy Corp. 8/29/00
Forest Oil Corporation Forcenergy Inc 7/10/00
Anderson Exploration Ltd. Ulster Petroleums Ltd. 4/17/00
Union Oil Company of
California Titan Exploration, Inc. 12/14/99
Prize Energy Corp. Vista Energy Resources, Inc. 10/11/99
Calpine Corporation Sheridan Energy, Inc. 8/25/99
Talisman Energy Inc. Rigel Energy Corporation 8/23/99
St. Mary Land and Exploration
Company King Ranch Energy, Inc. 6/27/99
Santa Fe Energy Resources,
Inc. Snyder Oil Corporation 1/14/99
Pogo Producing Company Arch Petroleum Inc. 5/29/98
Lomak Petroleum, Inc. Domain Energy Corp. 5/12/98
Seneca Resources Corp. HarCor Energy, Inc. 3/31/98
Chesapeake Energy Corp. Hugoton Energy Corp. 11/13/97
Belco Oil & Gas Corp. Coda Energy, Inc. 11/3/97
Meridian Resources Corp. Cairn Energy USA 7/8/97
Louis Dreyfus Natural Gas
Corp. American Exploration Company 6/24/97
Forcenergy Inc Convest Energy Corporation 6/20/97
Using publicly available information, Petrie Parkman calculated purchase
price equity multiples of estimated current year discretionary cash flow and
total investment, which Petrie Parkman defined for the purposes of this
analysis as purchase price of equity plus net obligations assumed, multiples of
estimated current year earnings before interest, taxes, depreciation, depletion
and amortization and exploration expense, or EBITDX, for the target company in
each transaction. Petrie Parkman also calculated the implied purchase price of
reserves, which Petrie Parkman defined for the purposes of this analysis as
total investment less undeveloped acreage value and other assets at book value,
multiples of equivalent proved reserves for the target company in each
transaction and multiples of standardized measure of future net cash flows
(referred to as "Standardized Value") for the target company in each
transaction. The minimum, median, mean, and maximum implied multiples in these
transactions are set forth below. The table also includes benchmark multiple
ranges selected by Petrie Parkman based on a review of the implied multiples in
the recent transactions.
Implied Multiples in Recent
Transactions
---------------------------- Benchmark
Minimum Median Mean Maximum Range
------- ------ ----- ------- -------------
Purchase Price / Current Year's
Estimated Discretionary Cash
Flow............................... 3.7x 5.7x 5.4x 9.2x 2.0x - 3.0x
Total Investment / Current Year's
Estimated EBITDX................... 2.4x 5.7x 6.2x 10.8x 3.0x - 4.0x
Implied Purchase Price of
Reserves / Equivalent Proved
Reserves ($/Mcfe6)................. $0.57 $1.10 $1.20 $2.25 $1.00 - $1.25
Implied Purchase Price of
Reserves / Standardized Value...... 0.6x 1.2x 1.3x 2.4x 0.9x - 1.1x
Petrie Parkman applied the benchmark multiples to Southern Mineral's current
year estimated discretionary cash flow and EBITDX, equivalent proved reserves,
and Standardized Value to determine enterprise reference value ranges.
40
Petrie Parkman also performed a premium analysis for the same universe of
company acquisition transactions and offers for control, which compared the
offer price per target company share with the target company's share price
measured one day and 30 days prior to the public announcement of the offer. The
maximum, mean, median and minimum premiums (which Petrie Parkman defined for
the purposes of this analysis as excess of offer price over target company's
stock price stated as a percentage above the target company's stock price),
together with benchmark premium ranges selected by Petrie Parkman based on a
review of the implied premiums, for these periods were as follows:
Implied Premiums in Recent
Transactions
---------------------------- Benchmark
Minimum Median Mean Maximum Range
------- ------ ---- ------- ---------
One Day Prior............................ -9.8% 8.3% 11.5% 66.9% 17% - 21%
30 Days Prior............................ -5.3% 11.5% 20.1% 74.7% 20% - 25%
Petrie Parkman applied the range of benchmark premiums to the corresponding
prices of Southern Mineral common stock at one day and 30 days prior to the
public announcements of the offer to determine enterprise reference value
ranges.
After selecting a composite enterprise reference value range and deducting
long-term debt of $19.7 million, adding net working capital of $0.2 million and
dividing by the fully-diluted number of shares of Southern Mineral common stock
outstanding, the resulting equity reference value range per fully-diluted share
was $3.98 to $5.17 as compared to the merger consideration, unadjusted for
transaction costs, valued at $4.71 per share.
Capital Market Comparison - Southern Mineral. Using publicly available
information, Petrie Parkman calculated market capitalization multiples of
estimated current year's and estimated 2001 discretionary cash flow for six
publicly traded companies. Petrie Parkman also calculated enterprise value
multiples of estimated current year's and estimated 2001 EBITDX, proved
reserves, and Standardized Value for those companies. In each case, multiples
of estimated discretionary cash flow and EBITDX were based upon published
equity research analyst estimates. Petrie Parkman defined market capitalization
for purposes of this analysis as the market value of common equity as of
December 19, 2000. Petrie Parkman determined the enterprise value of each
company 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
(or, if not publicly traded, liquidation or book value) and the book value of
its minority interest in other companies and subtracting net working capital.
Based upon Petrie Parkman's view of the comparability of operating and
financial characteristics (such as size of reserve base, mix of gas and oil
reserves, reserve life, market value of equity, enterprise value and
capitalization), Petrie Parkman selected the following companies for this
analysis:
. 3TEC Energy Corporation . Bellwether Exploration Company
. Clayton Williams Energy, Inc. . Hallwood Energy Corporation
. Key Production Company, Inc. . Remington Oil & Gas
Corporation
The minimum, median, mean and maximum multiples for the six companies are set
forth below. The table also includes benchmark multiple ranges selected by
Petrie Parkman based on a review of the comparable company multiples.
Comparable Company
Multiples
--------------------------- Benchmark
Measure Minimum Median Mean Maximum Range
- ------- ------- ------ ---- ------- -----------
Market Capitalization / 2000
Estimated Discretionary Cash Flow...... 1.5x 3.2x 3.1x 4.6x 2.0x - 3.0x
Market Capitalization / 2001
Estimated Discretionary Cash Flow...... 1.3x 2.9x 2.8x 4.4x 1.5x - 2.5x
41
Comparable Company Multiples
---------------------------- Benchmark
Measure Minimum Median Mean Maximum Range
- ------- ------- ------ ----- ------- -------------
Enterprise Value / 2000
Estimated EBITDX.................. 3.5x 4.1x 4.1x 4.7x 3.5x - 4.0x
Enterprise Value / 2001
Estimated EBITDX.................. 2.8x 3.5x 3.8x 5.2x 3.0x - 3.5x
Enterprise Value / Proved Reserves
($/Mcfe6)......................... $0.84 $1.76 $1.76 $2.84 $1.00 - $1.20
Enterprise Value / Standardized
Value............................. 0.9x 1.5x 1.6x 2.6x 1.0x - 1.1x
From the enterprise reference value ranges implied by applying the benchmark
multiples to Southern Mineral's estimated current year and 2001 estimated
discretionary cash flow, estimated current year and 2001 estimated EBITDX,
proved reserves and Standardized Value, Petrie Parkman determined a composite
enterprise reference value range. After deducting long term debt of $19.7
million and adding net working capital of $0.2 million to the composite
enterprise reference value range and dividing by the fully-diluted number of
shares of Southern Mineral common stock outstanding, the equity reference value
range per fully-diluted share of Southern Mineral common stock was $3.98 to
$4.77 as compared to the merger consideration, unadjusted for transaction
costs, valued at $4.71 per share.
Discounted Cash Flow Analysis - PetroCorp. Petrie Parkman conducted a
discounted cash flow analysis for the purpose of determining the equity
reference value range per share of PetroCorp common stock. Petrie Parkman
calculated the net present value of after-tax cash flows of PetroCorp's oil and
gas reserve assets based on the proved and probable reserve estimates referred
to above and for its non-reserve assets utilizing information provided by
PetroCorp.
Petrie Parkman evaluated the same five pricing scenarios and used the same
operating and capital cost escalation assumptions that were used in the
Southern Mineral Discounted Cash Flow Analysis.
Applying various after-tax discount rates ranging from 10.0% to 40.0%
depending on reserve category to the after-tax cash flows, assuming a carry-
over of PetroCorp's existing tax position as of December 31, 1999 and deducting
long term debt of $34.4 million and adding net working capital of $6.2 million,
the discounted cash flow analysis indicated the following equity reference
value ranges per share of PetroCorp common stock, on a fully-diluted basis.
Pricing Case
Pricing Case I Pricing Case II III Strip Pricing Esc. Strip Pricing Flat
-------------- --------------- --------------- ------------------ ------------------
Equity Reference Value
Range per Common
Share................ $6.37 - $7.21 $8.21 - $9.28 $10.05 - $11.34 $11.45 - $12.72 $10.68 - $11.71
Property Transactions Analysis - PetroCorp. Petrie Parkman reviewed selected
publicly available information for 155 announced oil and gas property
transactions and proprietary information for six oil and gas property
acquisition transactions between January 1997 and December 2000 in the Mid-
Continent, Gulf Coast, and Rocky Mountain regions of the United States, and in
Canada. Petrie Parkman focused on transactions involving assets and properties
which it determined to be most comparable to assets and properties of PetroCorp
based on certain attributes of each transaction, such as size of the
transaction, mix of gas and oil reserves, location of the assets, operational
profile of the assets and other known characteristics. Petrie Parkman
calculated the purchase price of reserves per unit of equivalent reserves for
the acquired assets in each transaction. Based on a review of the purchase
price of reserves per unit of equivalent reserves, Petrie Parkman determined
benchmark ranges of purchase prices to PetroCorp's corresponding proved reserve
figures in order to yield enterprise reference value ranges for PetroCorp's
proved reserves. The number of transactions per
42
region and the maximum, mean and minimum purchase prices for these transactions
are set forth in the following table.
Mid Gulf Rocky
Continent Coast Mountain Canada
--------- ----- -------- ------
Number of
Transactions......... 36 47 45 33
Purchase Price of
Reserves / Proved
Reserves ($/Mcfe6)
Maximum........... $1.42 $1.63 $1.39 $1.29
Mean.............. $0.77 $0.86 $0.75 $0.81
Minimum........... $0.21 $0.20 $0.30 $0.52
Petrie Parkman selected benchmark ranges of purchase price per unit of
equivalent reserves of $0.90 to $1.10 for PetroCorp's proved U.S. assets and
$0.85 to $1.15 for PetroCorp's proved Canadian assets. Petrie Parkman applied
the benchmark ranges of purchase price per unit to PetroCorp's proved reserve
figures and, after adjusting for PetroCorp's non-reserve assets, determined an
enterprise reference value range. Petrie Parkman then deducted long-term debt
of $34.4 million and added net working capital of $6.2 million to such
enterprise reference value range and divided the resulting figure by the fully-
diluted number of shares of PetroCorp common stock outstanding to arrive at an
equity reference value range per fully-diluted share of PetroCorp common stock
of $7.67 to $10.53.
Company Transaction Analysis - PetroCorp. Petrie Parkman reviewed selected
publicly available information on the same 18 company acquisition transactions
and offers for control that were reviewed in the Southern Mineral Company
Transaction Analysis. Petrie Parkman focused on certain transactions because of
the similarities between PetroCorp and the target companies in such
transactions, such as the target company's size, size of reserve base, mix of
gas and oil reserves and other characteristics of the targets' reserves,
capitalization and other identifiable characteristics.
Using publicly available information, Petrie Parkman calculated purchase
price of equity multiples of estimated current year discretionary cash flow and
total investment, which Petrie Parkman defined for the purposes of this
analysis as purchase price of equity plus net obligations assumed, multiples of
estimated current year earnings before interest, taxes, depreciation, depletion
and amortization and exploration expense, or EBITDX, for the target company in
each transaction. Petrie Parkman also calculated the implied purchase price of
reserves, which Petrie Parkman defined for the purposes of this analysis as
total investment less undeveloped acreage value and other assets at book value,
multiples of equivalent proved reserves for the target company in each
transaction and multiples of standardized measure of future net cash flows
(referred to as "Standardized Value") for the target company in each
transaction. The minimum, median, mean and maximum implied multiples in these
transactions are set forth below. The table also includes benchmark multiple
ranges selected by Petrie Parkman based on a review of the implied multiples in
the recent transactions.
Implied Multiples in Recent
Transactions
---------------------------- Benchmark
Minimum Median Mean Maximum Range
------- ------ ----- ------- -------------
Purchase Price / Current Year's
Estimated Discretionary Cash
Flow.............................. 3.7x 5.7x 5.4x 9.2x 2.5x - 3.5x
Total Investment / Current Year's
Estimated EBITDX.................. 2.4x 5.7x 6.2x 10.8x 3.5x - 4.5x
Implied Purchase Price of Reserves
/ Equivalent
Proved Reserves ($/Mcfe6) ........ $0.57 $1.10 $1.20 $2.25 $1.00 - $1.35
Implied Purchase Price of Reserves
/ Standardized Value.............. 0.6x 1.2x 1.3x 2.4x 0.9x - 1.1x
43
Petrie Parkman applied the benchmark multiples to PetroCorp's current year
estimated discretionary cash flow and EBITDX, equivalent proved reserves, and
Standardized Value to determine enterprise reference value ranges.
Petrie Parkman also performed a premium analysis for the same universe of
company acquisition transactions and offers for control, which compared the
offer price per target company share with the target company's share price
measured one day and 30 days prior to the public announcement of the offer. The
minimum, median, mean and maximum premiums (which Petrie Parkman defined for
the purposes of this analysis as excess of offer price over target company's
stock price stated as a percentage above the target company's stock price),
together with benchmark premium ranges selected by Petrie Parkman based on a
review of the implied premiums, for these periods were as follows:
Implied Premiums in Recent
Transactions
---------------------------- Benchmark
Minimum Median Mean Maximum Range
------- ------ ---- ------- ---------
One Day Prior............................ -9.8% 8.3% 11.5% 66.9% 17% - 21%
30 Days Prior............................ -5.3% 11.5% 20.1% 74.7% 20% - 25%
Petrie Parkman applied the range of benchmark premiums to the corresponding
prices of PetroCorp common stock to determine enterprise reference value
ranges.
After selecting a composite enterprise reference value range and deducting
long-term debt of $34.4 million, adding net working capital of $6.2 million and
dividing by the fully-diluted number of shares of PetroCorp common stock
outstanding, the resulting equity reference value range per fully-diluted
common share was $9.80 to $11.49.
Capital Market Comparison - PetroCorp. Using publicly available information,
Petrie Parkman calculated market capitalization multiples of estimated current
year's and estimated 2001 discretionary cash flow for six publicly traded
companies. Petrie Parkman also calculated enterprise value multiples of
estimated current year's and estimated 2001 EBITDX, proved reserves, and
Standardized Value for those companies. In each case, multiples of estimated
discretionary cash flow and EBITDX were based upon published equity research
analyst estimates. Petrie Parkman defined market capitalization for purposes of
this analysis as the market value of common equity as of December 19, 2000.
Petrie Parkman determined the enterprise value of each company 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 (or, if not publicly
traded, liquidation or book value) and the book value of its minority interest
in other companies and subtracting net working capital.
Based upon Petrie Parkman's view of the comparability of operating and
financial characteristics (such as size of reserve base, mix of gas and oil
reserves, reserve life, market value of equity, enterprise value and
capitalization), Petrie Parkman selected the following companies for this
analysis:
. 3TEC Energy Corporation . Bellwether Exploration Company
. Clayton Williams Energy, Inc. . Hallwood Energy Corporation
. Key Production Company, Inc. . Remington Oil & Gas
Corporation
44
The minimum, median, mean and maximum multiples for the six companies are
set forth below. The table also includes benchmark multiple ranges selected by
Petrie Parkman based on a review of the comparable company multiples.
Comparable Company Multiples
---------------------------- Benchmark
Measure Minimum Median Mean Maximum Range
- ------- ------- ------ ----- ------- -------------
Market Capitalization / 2000
Estimated Discretionary
Cash Flow.......................... 1.5x 3.2x 3.1x 4.6x 3.5x - 4.0x
Market Capitalization / 2001
Estimated Discretionary
Cash Flow.......................... 1.3x 2.9x 2.8x 4.4x 3.0x - 4.0x
Enterprise Value / 2000 Estimated
EBITDX............................. 3.5x 4.1x 4.1x 4.7x 3.5x - 4.0x
Enterprise Value / 2001 Estimated
EBITDX ............................ 2.8x 3.5x 3.8x 5.2x 3.0x - 4.0x
Enterprise Value / Proved Reserves
($/Mcfe6) ......................... $0.84 $1.76 $1.76 $2.84 $1.00 - $1.25
Enterprise Value / Standardized
Value.............................. 0.9x 1.5x 1.6x 2.6x 1.2x - 1.4x
From the enterprise reference value ranges implied by applying the benchmark
multiples to PetroCorp's estimated current year and 2001 estimated
discretionary cash flow, estimated current year and 2001 estimated EBITDX,
proved reserves and Standardized Value, Petrie Parkman determined a composite
enterprise reference value range. After deducting long term debt of $34.4
million and adding net working capital of $6.2 million to the composite
enterprise reference value range and dividing by the fully-diluted number of
shares of PetroCorp common stock outstanding, the equity reference value range
per fully-diluted share of PetroCorp common stock was $9.80 to $12.06.
Relative Contribution Analysis. Using information provided to it by the
management and staff of PetroCorp, with respect to PetroCorp, and prepared in
conjunction with, and approved by, the management and staff of Southern
Mineral, with respect to Southern Mineral, Petrie Parkman analyzed certain
historical and projected operational and financial effects of the merger. In
this respect, Petrie Parkman calculated relative contributions by Southern
Mineral and PetroCorp to the pro forma combined entity resulting from the
merger of proved reserves of Southern Mineral and PetroCorp as of October 1,
2000, estimated production for the fiscal year ended December 31, 2000, and
estimated EBITDX, estimated discretionary cash flow and estimated net income
for each of the fiscal years ended December 31, 2000 and ending December 31,
2001. The table below sets forth the contribution of Southern Mineral to the
pro forma combined entity with respect to each of these operational and
financial parameters, which can be compared (without giving effect to the cash
portion of the merger consideration) with the pro forma ownership of Southern
Mineral shareholders in the combined entity following the merger of up to 32%
(depending on the stock elections that Southern Mineral shareholders will
make).
Southern
Mineral's
Measure Contribution
------- ---------------
2000E 2001E
------ ------
Proved Reserves (as of 10/1/00)............................ 44% N/A
Production................................................. 43% N/A
EBITDX..................................................... 39% 36%
Discretionary Cash Flow.................................... 43% 40%
Net Income................................................. 42% 39%
Each analysis performed by Petrie Parkman supported its conclusion that the
merger consideration was fair from a financial point of view as of the dates of
its opinions to the holders of Southern Mineral common stock
45
whether such holders receive the merger consideration in cash, in PetroCorp
stock or a combination of cash and PetroCorp stock. The equity value ranges of
the PetroCorp common stock support the conclusion that the exchange ratio
contemplated by the merger agreement implies a value within the range of
fairness for the Southern Mineral common stock.
The description set forth above constitutes a summary of the analyses
employed and factors considered by Petrie Parkman in rendering its opinion to
the Southern Mineral board. Petrie Parkman believes that its analyses must be
considered as a whole and that selecting portions of its analyses, 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, analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and is not necessarily
susceptible to partial analysis or summary description.
In arriving at its opinion, Petrie Parkman did not attribute any particular
weight to any analysis considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis. Any estimates resulting
from the analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth in this document.
In addition, 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 these 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 the estimates are inherently
subject to uncertainty and based upon numerous factors or events beyond the
control of the parties and Petrie Parkman, Petrie Parkman cannot assure that
the estimates will prove to be accurate.
No company used in the analyses of other publicly traded companies nor any
transaction used in the analyses of comparable transactions is identical to
Southern Mineral, PetroCorp or the proposed merger. Accordingly, these analyses
must take into account differences in the financial and operating
characteristics of the selected publicly traded companies and differences in
the structure and timing of the selected transactions and other factors that
would affect the public trading values and acquisition values of the companies
considered.
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 corporate and other purposes. Southern Mineral selected Petrie
Parkman as its financial advisor because it is an internationally recognized
investment banking firm that has substantial experience in transactions similar
to the proposed merger. Petrie Parkman has in the past provided financial
advisory services to Southern Mineral in connection with Southern Mineral's
bankruptcy proceedings. In addition to the transaction fee described above that
Petrie Parkman will receive from Southern Mineral if the transaction with
PetroCorp is consummated, since January 1, 1999, Petrie Parkman received from
Southern Mineral aggregate fees of approximately $750,000. In the last two
years, Petrie Parkman did not have any material relationship with PetroCorp and
did not receive any fees from PetroCorp. In the ordinary course of business,
Petrie Parkman or its affiliates may trade in the debt or equity securities of
Southern Mineral and PetroCorp for its account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
Directors and Management of PetroCorp Following the Merger
After the merger, the combined companies will be known as PetroCorp and will
be headquartered in Tulsa, Oklahoma. The PetroCorp management and board of
directors will continue to manage the business of PetroCorp, including the
business of PetroCorp Acquisition, which will succeed to the rights and
obligations of Southern Mineral. PetroCorp's day-to-day operations will
continue to be managed by employees of Kaiser-Francis pursuant to the
management agreement with Kaiser-Francis as described further beginning on page
97.
46
Directors
The following table sets forth the name and age of each current directors of
Petrocorp, his principal position with PetroCorp, the year he became a director
of PetroCorp and the year that his term as a director expires. The directors
whose terms are to expire in 2001 shall be up for re-election at PetroCorp's
annual shareholders meeting to be held May 24, 2001.
Term Director
Name Position Age Expires Since
- ------------- --- ------- --------
Lealon L. Sargent
Chairman of the Board.................................... 71 2003 1983
Gary Christopher
President & Chief Executive Officer...................... 51 2002 1996
Thomas N. Amonett
Director................................................. 57 2001 1993
Mark W. Files
Director................................................. 59 2003 2000
W. Neil McBean
Director................................................. 53 2001 1983
Stephen M. McGrath
Director................................................. 65 2002 1985
Robert C. Thomas
Director................................................. 72 2001 2000
Lealon L. Sargent has been Chairman of the Board of PetroCorp and a director
since 1983. Mr. Sargent co-founded PetroCorp in July 1983, and previously
served as Chief Executive Officer and as President and Chief Operating Officer.
Mr Sargent worked in the oil and gas industry for over 39 years before retiring
from PetroCorp's management at the end of 1997. From 1981 to 1983, Mr. Sargent
was President of ENI Exploration Company. From 1980 to 1981, he was President
of Hamilton North America. Prior to that time, Mr. Sargent spent the majority
of his career with Tenneco Oil Company, rising to the position of Senior Vice
President of Worldwide Exploration and of North American Onshore Exploration
and Production. He received a B.S. in Geology from the University of Oklahoma
and an A.M.P. from Harvard Graduate School of Business.
Gary R. Christopher has been a director of PetroCorp since August 1996 and
was elected President and Chief Executive Officer of PetroCorp as of August 3,
1999. He has been Acquisitions Coordinator of Kaiser-Francis Oil Company since
January 1996. Prior to that, he served for five years as Senior Vice President
and Manager of Energy lending for Bank of Oklahoma.
Thomas N. Amonett has been a director of PetroCorp since 1993. He has served
as President and Chief Executive Officer of Champion Technologies, Inc., which
manufactures and sells oil field chemicals, since October 1999. Prior thereto,
he served as President and Chief Executive Officer of American Residential
Services, Inc., a home repair business, from October 1997 until April 1999. He
served as an independent business consultant from April 1999 until October
1999. He served as interim President and Chief Executive Officer of Weatherford
Enterra, Inc., an oil field service company, from July 1996 to October 1997.
From 1992 to 1996, he served as Chairman of the Board and President of Reunion
Resources Company. Prior to that time, he was engaged in the practice of law
with Fulbright & Jaworski, L.L.P., where he was of counsel from 1986 to 1992.
Mr. Amonett also currently serves as a director of ITEQ, Inc., and Reunion
Industries, Inc.
Mark W. Files has been a director since May 2000. Since 1993, he has been a
member of the firm, Graham Partners, LLC, a company engaged in consulting for
emerging businesses on growth strategies. Prior to such time, he was the Chief
financial Officer of Graham Resources, an independent oil and gas company.
W. Neil McBean served as Chief Executive Officer of PetroCorp from 1996
until August 1999 and President from 1986 until August 1999. Mr McBean is
currently an independent consultant in the oil and gas industry. He has been a
director since 1983. Mr. McBean co-founded PetroCorp in 1983, and previously
served as Senior Vice President. Mr. McBean has 30 years of experience in the
oil and gas industry. During 1982 and
47
1983, he was Vice President of Production for ENI Exploration Company. Prior to
that time, he spent 13 years with Tenneco Oil Company, where he served in a
range of management and technical capacities. Mr. McBean received a B.A.Sc. in
Chemical Engineering from the University of British Columbia.
Stephen M. McGrath has been a director of PetroCorp since 1986. Mr. McGrath
served as a Managing Director for CIBC-Oppenheimer Corp. from 1997 until his
retirement in April 1998. Previously Mr. McGrath served as an Executive Vice
President of Oppenheimer & Co., Inc. and as the Director of its Corporate
Finance Department. Prior to his employment by Oppenheimer in 1983, he was with
Warner-Lambert Company for 11 years as Senior Vice President of Planning and
Development. Before joining Warner-Lambert Company, Mr. McGrath was Controller
and Assistant Treasurer of Sterling Drug, Inc. and a CPA for Price Waterhouse &
Co. He also serves as a director of Alliance Pharmaceutical Corporation and of
several privately held companies.
Robert C. Thomas has been a director since April 1997. Since 1994, Mr.
Thomas has been retired from Tenneco Gas Company, where he served as Chairman
and Chief Executive Officer from 1990. He originally joined Tenneco in 1956 and
served in a variety of engineering, management and executive position in both
Tenneco Oil Company and Tenneco Gas Company. Mr. Thomas is currently a Senior
Associate with Cambridge Energy Research Associates and a director of marine
Drilling Companies, Inc.
PetroCorp's board has passed resolutions expanding its board by two seats to
a total of nine members effective as of the date of the merger and nominating
individuals designated by the Southern Mineral board to fill the newly created
vacancies immediately after the merger.
The following sets forth information respecting the two Southern Mineral
directors, Messrs. Coughlin and Fuller, who will serve on the PetroCorp board
until the 2003 annual meeting if the merger is completed:
Paul J. Coughlin, III, 36, has been a director of Southern Mineral since
2000. Mr. Coughlin is a founder and General Partner of CoMac Partners'
L.P., a private investment fund where he has been employed since September
1992. Prior to CoMac, he worked in the Distressed Securities Group for
Whitehead/Sterling in Stanford, CT from August 1991 until September 1992
and with Alan B. Slifka & Company in New York, NY in the Distressed
Securities Group from July 1988 until August 1991.
Thomas R. Fuller, 53, has been a director of Southern Mineral since
1995. Mr. Fuller is a partner in Diverse Energy Investments, an oil and gas
property acquisition company. He has been with the company since it was
formed in 1985. Mr. Fuller formerly held positions with Hillin Oil Company,
First City National Bank and Exxon Company, U.S.A., and has consulted for
various companies on oil and gas matters.
Each director who is not an employee of PetroCorp is reimbursed for expenses
incurred in attending meetings of the Board of Directors or a committee thereof
and receives an annual retainer (paid on a quarterly basis) of $10,000, plus a
fee of $1,000 for each meeting of the board attended and $500 for each meeting
of a committee attended.
Under the PetroCorp 2000 Stock Option Plan, each director not an employee of
PetroCorp receives options to purchase 5,000 shares of common stock on the date
of his election or appointment. Each year thereafter, as of the date following
the date of the annual meeting to the shareholders, each non-employee director
who has served as a member of the board for no less than one year automatically
receives an option to purchase 1,000 shares of common stock.
48
Executive and Other Officers
The following table sets forth the names, ages and positions of each
executive officer of PetroCorp, all of whom serve at the discretion of the
Board of Directors.
Name Age Position
- ---- --- --------
Gary R. Christopher..... 51 President and Chief Executive Officer
A. F. (Tony) Pelletier.. 48 Vice President--U.S. Operations
Steve Berlin............ 56 Chief Financial Officer, Secretary and Treasurer
Richard L. (Rick)
Dunham................. 48 Vice President--Engineering
Craig Dolinsky.......... 46 Vice President--Land
Ted Jacobson............ 60 Vice President--Operations
Michael W. Moore........ 57 Vice President--Marketing
David H. Stevens........ 52 Vice President--Exploration
J. Les Watson........... 54 Vice President--Canadian Operations
Steven E. Amos.......... 45 Corporate Controller
Gary R. Christopher's background information is set forth above.
A.F. (Tony) Pelletier was elected Chief Operating Officer and Executive Vice
President in January 2000, Mr. Pelletier had previously served as Vice
President--U.S. Operations since November 1997 after serving as Vice
President--Production since May 1996. With 23 years experience in the oil and
gas industry, Mr. Pelletier is responsible for the Company's exploration and
production activities in the United States. Mr. Pelletier joined the Company in
1984 and has previously served as General Manager--Gulf, rockies and Canada
Division, Engineering Manager and Chief Reservoir Engineer. From 1978 to 1984,
he served in a variety of engineering and supervisory positions with Exxon
Company, USA. Mr. Pelletier is a registered professional engineer and received
a B.S. in Mechanical Engineering and an M.Eng. in Civil Engineering from Texas
A&M University.
Steve Berlin was elected Chief Financial Officer, Secretary and Treasurer in
November 1999. Mr. Berlin is also Vice President, Chief Financial Officer and
Assistant Secretary of Kaiser-Francis, where he has been employed since
February 1999 on a part time basis and since September 1999 on a full time
basis. Prior to joining Kaiser-Francis, Mr. Berlin was on the faculty of the
University of Tulsa, where he taught business and finance courses to graduate
and undergraduate students from September 1996 through August 1999. From 1973
through September 1996, Mr. Berlin worked for CITGO Petroleum Corporation and
its predecessors in various financial and management positions, including the
last ten years as Chief Financial Officer. Mr. Berlin has an MBA from the
University of Wisconsin and is a graduate of the Stanford Executive Program. He
is a Certified Public Accountant and has been honored by the Oklahoma society
of CPA's as its Outstanding CPA in Industry. Mr. Berlin has served on several
boards including the Goodwill Industries, the American Petroleum Institute, and
the American Assembly of Collegiate Schools of Business.
Richard L. (Rick) Dunham was elected Vice President--Engineering in November
1999. Mr. Dunham is an employee of Kaiser-Francis and has held various
positions since joining Kaiser-Francis in 1985. He has been a member of the
management committee, Manager of Canadian Enhancements, Special Projects
Manager, and has performed duties as a Petroleum, Reservoir, and Acquisitions
Engineer. In addition, Mr. Dunham has considerable experience in reserve
analysis, economics and risk analysis, gas marketing and contracts, and oil and
gas litigation throughout the U.S. and western Canada. Mr. Dunham graduated
Magna Cum Laude in Petroleum Engineering from the University of Missouri at
Rolla in 1973, and joined Shell Oil Company in New Orleans, working South
Louisiana and Offshore in Operations and Reservoir Engineering. From 1979
through 1985 he held positions as Acquisitions Engineer, Enhanced Recovery
Projects Manager, Operations and Engineering Manager for MAPCO, R&R
Exploration, Twin Eagle Petroleum, Petra Petroleum, and Santa Fe Minerals.
Craig Dolinsky was elected Vice President--Land in November 1999. Mr.
Dolinsky has been a Landman with Kaiser-Francis from 1981 to present. His land
responsibilities have included several large acquisitions as
49
well as exploration an development of key plays in Oklahoma, Texas and Wyoming.
In 1991, he began Kaiser-Francis' land efforts in Canada. He continues to be
involved in exploration and development strategies, contracts, acquisitions and
litigation in both the US and Canada. Mr. Dolinsky has a B.A. in Business
Administration from Western State College of Colorado and is a member of the
American Association of Petroleum Landmen, Tulsa Association of Petroleum
Landmen and Canadian Association of Petroleum Landmen.
Ted Jacobson was elected Vice President--Operations in November 1999. Mr.
Jacobson is also manager of Drilling and Production for Kaiser-Francis. He has
been employed by Kaiser-Francis since 1980. Mr. Jacobson began his oil and gas
career in 1967 with Sunray DX Oil Company (later Sun Oil Company) in Corpus
Christi, Texas, as a drilling and production engineer. From 1969 through 1978,
he served in various positions such as Production Engineer, Manager of
Conversation, Area Engineer and Region Manager of engineering in Tulsa,
Oklahoma. From 1978 until 1980, he was District Engineer with Sun Gas in the
Houston, Texas, offshore office. Mr. Jacobson graduated from St. Johns
University in Minnesota in 1963 with a B.A. in Math and Physics. He served in
the U.S. Army Corp of Engineers from 1963 until 1967, when he was discharged
with the rank of Captain.
Michael W. Moore was elected Vice President--Marketing in November 1999. Mr.
Moore is an assistant Secretary for Kaiser-Francis and has been Manager of
Marketing for Kaiser-Francis since he joined the Company in 1980. Prior to that
time, he served as General Counsel and Manager of Gas Marketing for Edwin L.
Cox in Dallas, Texas. He also worked as an attorney for Tennessee Gas Pipeline
Co., Columbia Gulf Pipeline Co. and Texas Oil and Gas Corp. Mr Moore has an
undergraduate degree from Southern Methodist University and graduated from the
University of Houston Law School in 1969.
David H. Stevens was elected Vice President--Exploration in November 1999.
Mr. Stevens has been employed at Kaiser-Francis as a geologist and geophysicist
since 1987. He has supervised Kaiser-Francis prospect generating efforts in the
Gulf Coast as well as all Kaiser-Francis geophysical operations during that
time. Mr. Stevens has held various exploration management positions since
graduating from the University of Wyoming with a bachelors degree in geology
and geophysics in 1971, including Exploration Offshore Project Leader with
Conoco in Houston, Exploration Projects Director with Conoco in Oklahoma City,
Regional Exploration Manager with Grace Petroleum in Oklahoma City and
Exploration Vice President with Indian Wells Oil Co. in Tulsa.
J. Les Watson was elected Vice President--Canadian Operations in November
1997 after serving as the Company's Canadian Exploration Manager for five
years. With 30 years experience in the Canadian oil and gas industry. Mr.
Watson is responsible for the Company's exploration and production activities
in Canada. Prior to joining the Company in 1993, Mr. Watson was Exploration
Manager for BHP Petroleum (Canada) Ltd. and previously held various management
positions with several independent oil companies in Calgary after his initial
employment with Amoco Canada in 1969. Mr. Watson is a registered professional
geologist and has a B.Sc. in Honours Geology from the University of British
Columbia.
Steven E. Amos was elected Corporate Controller in February 2000. Mr. Amos
has been an employee of Kaiser-Francis for nine years. Prior to that, he held
various positions with several independent oil companies in Tulsa and worked
for the C.P.A. firm of Arthur Young & Company. Mr. Amos is a C.P.A. and has a
degree in accounting from the University of Arkansas and an M.B.A. from the
University of Tulsa.
Except for Mr. Pelletier, PetroCorp's principal officers serve pursuant to a
management agreement with Kaiser-Francis. See "The Companies -- PetroCorp --
PetroCorp's Management Agreement with Kaiser-Francis" on page 97. The majority
of PetroCorp's officers devote a portion of their time to companies other than
PetroCorp. The allocation of officer time to PetroCorp varies depending upon
the current state of PetroCorp's business including the number of transactions
in progress, management and operational issues at
50
hand, and regulatory requirements which must be addressed. The following sets
forth an estimated percentage of time, or range of time, currently spent by the
principal officers of PetroCorp on PetroCorp business:
Name Percentage of Time
---- ------------------
Gary R. Christopher 65 to 80%
A.F. (Tony) Pelletier 100
Steve Berlin 15 to 35
Richard L. (Rick) Dunham 50 to 60
Craig Dolinsky 50 to 60
Ted Jacobson 5
Michael W. Moore 5
David H. Stevens 20 to 25
J. Les Watson 100
Steven E. Amos 60 to 90
Executive Compensation
All of PetroCorp's principal officers, with the exception of Tony Pelletier,
are employees of Kaiser-Francis helping Kaiser-Francis fulfill its management
obligations under the management agreement with PetroCorp. See "The Companies
- -- PetroCorp -- PetroCorp's Management Agreement with Kaiser-Francis" on page
97. In this capacity, the principal officers of PetroCorp do not receive
compensation from PetroCorp, but instead receive compensation from Kaiser-
Francis. This compensation reflects efforts, not only on behalf of PetroCorp,
but also for the other companies they may serve, including Kaiser-Francis. For
a further description of officers' allocation of time, see the relevant
discussion under "Directors and Management of PetroCorp Following the Merger --
Executive and Other Officers" on page 49.
Instead of paying compensation to its principal officers, rent and other
overhead costs, PetroCorp pays Kaiser-Francis a management fee. For the year
ended December 31, 2000, PetroCorp paid Kaiser-Francis $1,491,000 in management
fees under the management agreement. Of that $1,491,000, $744,000 (or 49.9%) is
considered by PetroCorp to be reimbursement of officers' salaries and expenses.
The remaining 50.1% of management fees are related to other non-employee
related costs and expenses. The Kaiser-Francis management fee provided in the
management agreement is based on a per well rate that varies as to each type of
well, without reference to any compensation paid by Kaiser-Francis to PetroCorp
officers.
The table below sets forth for the three fiscal years ended December 31,
2000, 1999 and 1998, all compensation paid to the chief executive officer and
Mr. Pelletier by PetroCorp. All executive officers, other than Mr. Pelletier,
which might otherwise be named executive officers are employees of Kaiser-
Francis and are compensated by Kaiser-Francis, which in turn has a management
agreement with PetroCorp.
Summary Compensation Table
Long-Term
Annual Compensation Compensation(1)
------------------------------------- ---------------
Securities
Name and Principal Fiscal Other Annual Underlying All Other
Position Year Salary ($) Bonus ($) Compensation ($) Stock Options Compensation(2)
------------------ ------ ---------- --------- ---------------- --------------- ---------------
Gary R.
Christopher(3)........ 2000 $ 0 $ 0 $ 0 19,650 $ 0
President and Chief 1999 0 0 0 0 0
Executive Officer
A. F. (Tony)
Pelletier............. 2000 120,000 15,500 0 5,000 0
Executive Vice
President 1999 235,093 0 0 0 165,000
and Chief Operating
Officer 1998 155,000 31,000 0 0 9,500
51
- --------
(1) No officers or employees of PetroCorp participate in a restricted stock
plan, stock appreciation right plan or other long-term incentive plan.
(2) The amounts for 1999 consist of (i) PetroCorp's matching 401(k)
contribution of $10,000 and (ii) severance payments in the amount of
$155,000. Severance payments are included as part of the restructuring
cost in PetroCorp's 1999 financial statements.
(3) Mr. Christopher began serving as an executive officer on August 3, 1999.
No direct compensation is paid to Mr. Christopher by PetroCorp. He is an
employee of Kaiser-Francis and is compensated by Kaiser-Francis, which in
turn has a management agreement with PetroCorp.
The following table sets forth certain information concerning stock options
granted to Messrs. Christopher and Pelletier during the 2000 fiscal year.
Options/SAR Grants in Last Fiscal Year
% of Total
Options/SARs Exercise
Options/SARs Granted to or Base Grant Date
Granted Employees in Price Expiration Present
Name (#)(1) Fiscal Year ($/Sh) Date Value $(3)
---- ------------ ------------ -------- ---------- ----------
Gary R. Christopher..... 19,650 18.4% $7.06 (2) $87,400
A. F. (Tony) Pelletier.. 5,000 4.7 6.13 (2) 19,650
- --------
(1) Granted pursuant to 2000 awards under PetroCorp 2000 Stock Option Plan.
(2) The options granted pursuant to 2000 awards under the PetroCorp 2000 Stock
Option Plan vest and become exercisable 12 months after they are granted.
Vested options are exercisable only during the 10 year period commencing on
the grant date.
(3) Present value at date of grant is based on the Black-Scholes Option Pricing
Model adopted for use in valuing executive stock options based on the
following assumptions: 41% volatility factor; underlying price of $7.06 for
Mr. Christopher and $6.13 for Mr. Pelletier; option price of $7.06 for Mr.
Christopher and $6.13 for Mr. Pelletier; risk free rate of return of 6% for
Mr. Christopher and 6.5% for Mr. Pelletier; and no dividends. The actual
value, if any, an executive may realize will depend on the excess of the
stock price over the exercise price on the date the option is exercised, so
there is no assurance the value realized by the named executive will be at
or near the value estimated by the Black-Scholes Model.
The following table sets forth certain information concerning the exercise
of stock options by Messrs. Christopher and Pelletier during fiscal year 2000
and the 2000 fiscal year-end value of unexercised options.
Aggregated Option/SAR Exercises in
Last Fiscal Year and FY-End Option/SAR Values(1)
Value of
Unexercised In
Number of the Money
Unexercised Options/SARs
Options/SARs at FY-End
at FY-End (#) ($)(1)
------------- --------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- --------------
Gary R. Christopher.... 0 $ 0 6,000/19,650 $7,125/$52,859
A. F. (Tony)
Pelletier............. 0 0 93,000/5,000 195,650/18,100
(1) Values are calculated by subtracting the exercise or base price from the
fair market value of the stock as of the exercise date or fiscal year-end,
as appropriate.
52
Ownership of Petrocorp, Southern Mineral and Petrocorp after the Merger
The following tables set forth as of February 28, 2001:
-- the number and percentage of the outstanding shares of PetroCorp common
stock that are beneficially owned by the directors and executive officers of
PetroCorp, as well as by each person or entity known by PetroCorp to
beneficially own more than 5% of the PetroCorp common stock;
-- the number and percentage of the outstanding shares of PetroCorp's common
stock that will be owned by PetroCorp's directors, executive officers and 5%
shareholders after the merger; and
-- the number and percentage of the outstanding shares of Southern Mineral
common stock that are beneficially owned by the directors and executive
officers of Southern Mineral, as well as by each person or entity known by
Southern Mineral to beneficially own more than 5% of the Southern Mineral
common stock.
Shares of common stock which were not outstanding but which could be
acquired by a person upon exercise of an option or warrant within 60 days of
February 28, 2001, are deemed outstanding for the purpose of computing the
percentage of outstanding shares of common stock beneficially owned by that
person. These shares, however, are not deemed to be outstanding for the purpose
of computing the percentage of outstanding shares of common stock beneficially
owned by any other person.
Except as otherwise indicated below, PetroCorp or Southern Mineral, as
applicable, respectively believes that each individual or entity named has sole
investment and voting power with respect to shares of stock indicated as
beneficially owned by them.
As or March 13, 2001, PetroCorp had 8,720,619 shares of common stock
outstanding and Southern Mineral had 12,231,934 shares of common stock
outstanding.
53
PetroCorp
Common Stock
--------------------------------------------------------------------------------
3,000,000 shares 4,000,000 shares
Percent of Percent of
Outstanding Option(a) Total Percent Class After Class After
Beneficial Owner(4) Shares Shares Ownership of Class Merger(5) Merger(6)
------------------- ----------- --------- --------- -------- ---------------- ----------------
Kaiser-Francis.............. 4,327,457 0 4,327,457 49.7% 37.0% 34.1%
6733 South Yale
Tulsa, Oklahoma 74136
St. Paul.................... 1,731,000 7,000 1,738,500 19.9% 14.8% 13.7%
385 Washington Street
St. Paul, Minnesota 55102
Royce & Associate, Inc. .... 601,600(b) 0 601,600 6.9% 5.3% 4.7%
1414 Avenue of the Americas
New York, New York 10009
Gary R. Christopher(1)(2)... 4,330,957(c) 6,000(d) 4,340,457 49.8% 37.0% 34.1%
6733 South Yale
Tulsa, Oklahoma 74136
Thomas N. Amonett(1)........ 1,000 7,000 8,000 (3) (3) (3)
Mark W. Files(1)............ 0 5,000 5,000 (3) (3) (3)
W. Neil McBean(1)........... 91,296(e) 154,250 245,546 2.8% 2.1% 1.9%
Steve McGrath(1)............ 0 7,000 7,000 (3) (3) (3)
Robert C. Thomas(1)......... 1,000 7,000 8,000 (3) (3) (3)
Lealon L. Sargent(1)........ 170,435(f) 159,750 330,185 3.7% 2.7% 2.6%
Steven R. Berlin(2)......... 2,000 5,000 7,000 (3) (3) (3)
Richard L. Dunham(2)........ 5,000 15,000 20,000 (3) (3) (3)
A.F. Tony Pelletier(2)...... 0 98,000 98,000 1.1% (3) (3)
J. Les Watson(2)............ 250 25,000 25,250 (3) (3) (3)
All directors and executive
officers as a group (11
persons)................... 4,601,938(g) 489,000 5,090,938 54.4%(g) 41.7%(h) 38.6%(i)
- --------
(1) Director
(2) Executive Officer
(3) Less than 1%
(4) Pursuant to a management agreement with PetroCorp, Kaiser-Francis provides
management services for PetroCorp. As such, the executive officers of
PetroCorp are not compensated by PetroCorp, other than through the receipt
of stock options, none of which exceed $100,000 in value per annum, but
instead serve as employees of Kaiser-Francis. As such, the beneficial owner
table above contains information for the chief executive officer and the
four highest ranking officers of PetroCorp.
(5) Assumes the issuance of 3,000,000 shares of PetroCorp common stock.
(6) Assumes the issuance of 4,000,000 shares of PetroCorp common stock.
(a) Represents shares of common stock which may be acquired on February 28,
2001 or 60 days thereafter through the exercise of options.
(b) Includes 39,500 shares owned by Royce Management Company. Mr. Charles M.
Royce may be deemed to be a controlling person of both Royce Management and
Royce & Associates, and as such the shares owned by Royce Management may be
deemed to beneficially owned by Royce & Associates, Inc.
(c) Includes 4,327,457 shares owned by Kaiser-Francis. This director is an
employee of Kaiser-Francis and may be deemed to be the beneficial owner of
these shares. The director disclaims beneficial ownership of these shares.
(d) Does not include 19,650 stock options which may not be exercised within 60
days of February 28, 2001.
(e) Includes 1,340 shares held in trust for the benefit of Mr. McBean's
children.
(f) Includes 690 shares owned by Mr. Sargent's wife, Elizabeth Sargent.
(g) Includes all directors and executive officers of PetroCorp. Also includes
certain shares as to which beneficial ownership is disclaimed by Mr.
Christopher. If the 4,327,457 shares as to which beneficial ownership is
disclaimed by Mr. Christopher were excluded, the percentage as a group
would be 8.3%.
(h) Includes all directors and executive officers of PetroCorp. Also includes
certain shares as to which beneficial ownership is disclaimed by Mr.
Christopher. If the 4,327,457 shares as to which beneficial ownership is
disclaimed by Mr. Christopher were excluded, the percentage as a group
would be 6.3%.
(i) Includes all directors and executive officers of PetroCorp. Also includes
certain shares as to which beneficial ownership is disclaimed by Mr.
Christopher. If the 4,327,457 shares as to which beneficial ownership is
disclaimed by Mr. Christopher were excluded, the percentage as a group
would be 5.8%.
54
Southern Mineral
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership of Class
------------------------------------ -------------------- --------
John C. Capshaw................................. 14,500 *
Paul J. Coughlin, III........................... 1,737,877(/1/) 14.1%
David E. Fite................................... 32,186 *
Thomas R. Fuller................................ 253,388(/2/) 2.0%
Michael E. Luttrell............................. 51,425(/3/) *
Steven H. Mikel................................. 285,707(/4/) 2.3%
James L. Payne.................................. 16,500 *
Myron M. Sheinfeld.............................. 16,500 *
Donald H. Wiese, Jr............................. 248,353(/5/) 2.0%
PetroCorp Incorporated
6733 South Yale
Tulsa, Oklahoma 74136.......................... 738,836 6.0%
All directors and officers as a group (9
persons)....................................... 2,651,025 20.5%
- --------
* Less than one percent.
(1) Includes 1,722,377 shares held by CoMac Partners, L.P., CoMac Endowment
Fund, L.P., CoMac International, N.V., CoMac Opportunities Fund, L.P., and
Coughlin Partners, L.P., partnerships controlled by Mr. Coughlin, and
74,644 shares owned by Mr. Coughlin's wife, of which Mr. Coughlin possesses
voting and dispositive power.
(2) Includes 75,397 shares held by Michmatt, Inc., a corporation controlled by
Mr. Fuller, 1,584 shares issuable upon exercise of presently exercisable
options held by Mr. Fuller, 13,915 shares issuable upon exercise of
presently exercisable options held by Michmatt, 22,223 shares issuable upon
exercise of presently exercisable warrants held by Mr. Fuller and 105,305
shares issuable upon exercise of presently exercisable warrants held by
Michmatt.
(3) Includes 20,000 shares issuable upon exercise of presently exercisable
options and 27,825 shares issuable upon exercise of presently exercisable
warrants held by Mr. Luttrell.
(4) Includes 92,000 shares issuable upon exercise of presently exercisable
options, 4,610 shares held in trusts for his children of which Mr. Mikel is
trustee and possesses voting and dispositive power, and 152,097 shares
issuable upon exercise of presently exercisable warrants held by Mr. Mikel.
(5) Includes 73,897 shares held by DHW Energy, Inc., a corporation controlled
by Mr. Wiese, 1,584 shares issuable upon exercise of presently exercisable
options held by Mr. Wiese and 13,915 shares issuable upon exercise of
presently exercisable options held by DHW Energy, and 22,458 shares
issuable upon exercise of presently exercisable warrants held by Mr. Wiese
and 103,535 shares issuable upon exercise of presently exercisable warrants
held by DHW Energy.
55
Interests of Certain Persons in the Merger
Southern Mineral
Arrangements with Messrs. Fuller and Wiese--In considering the
recommendation of the Southern Mineral board of directors with respect to the
merger, you should be aware that Messrs. Fuller and Wiese, directors of
Southern Mineral, have interests in the merger which provide them with the
following benefits that are in addition to their interests as shareholders of
Southern Mineral. In consideration for entering into a shareholder agreement
with PetroCorp, Mr. Fuller's and Mr. Wiese's stock elections, if any, will not
be treated the same as other Southern Mineral shareholders if Southern Mineral
shareholders make valid stock elections to receive more than 4,000,000 shares
of PetroCorp stock. If such an oversubscription occurs, the stock elections of
the Southern Mineral shareholders will be proportionately reduced to the extent
of the oversubscription. However, PetroCorp has agreed to sell, and Messrs.
Fuller and Wiese and certain of their affiliates have agreed to buy, that
number of shares equal to their pro rata reduction. As a consequence, PetroCorp
may issue up to approximately 108,968 shares, in addition to the 4,000,000
shares, of PetroCorp common stock to these directors in lieu of cash.
Employee Retention and Severance Plan--Southern Mineral has an employee
retention and severance plan which, together with employment agreements and
other arrangements approved by the bankruptcy court as part of the plan of
reorganization, provide for bonuses and performance incentives to be paid to
certain executive officers and key employees, including all full-time employees
at the time the bankruptcy plan became effective, in the event of a merger and
in the event their employment is terminated in connection with the merger.
Southern Mineral has an employee retention and severance plan which provides
for a total of $325,000 in bonuses to be paid to certain Southern Mineral
executive officers should the merger with PetroCorp be consummated. In
addition, if such executive officers are terminated, without cause, by
PetroCorp subsequent to the merger or if the merger results in a reduction of
their responsibilities, they will also receive $487,500 in aggregate severance
payments. The employee retention and severance plan expires on June 1, 2001 and
requires the unanimous consent of the Southern Mineral Board to agree to any
extension of the plan. Except for Messrs. Fuller and Coughlin, who will be
appointed by the board to serve as directors of PetroCorp until the 2003 annual
meeting, PetroCorp does not intend to retain any other members of the Southern
Mineral board or any Southern Mineral employees, other than potentially certain
operational employees, following the merger.
New PetroCorp Directors--The Southern Mineral board has designated Mr.
Coughlin and Mr. Fuller to fill the newly created vacancies, and serve until
PetroCorp's 2003 annual meeting of shareholders, at which time they will be
subject to being renominated as a director at the discretion of PetroCorp's
board; provided, however, that if at any time after Southern Mineral's
selection of such directors, either director appointed by Southern Mineral is
unable to serve as a director, the other remaining Southern Mineral director
will nominate and elect a replacement director. Messrs. Fuller and Coughlin
will be eligible for compensation for that service.
PetroCorp
In August 1999, Kaiser-Francis, the largest shareholder of PetroCorp, owning
49.7% of PetroCorp's common stock outstanding as of March 13, 2001, and
PetroCorp entered into a management agreement under which Kaiser-Francis agreed
to provide management, technical and administrative support for all of
PetroCorp's operations in the United States and Canada. In the event of the
merger, Kaiser-Francis will assume these same management functions for the
combined company for which it will receive additional revenue. Other than the
management agreement with Kaiser-Francis, PetroCorp has not identified any
interests of its directors or officers in the merger which are in conflict with
those of PetroCorp shareholders.
In addition, two PetroCorp officers are shareholders of Southern Mineral.
Mr. Berlin, PetroCorp's chief financial officer, secretary and treasury, owns
15,0000 shares of Southern Mineral common stock. He purchased 5,000 shares in
an open-market transaction on March 2, 2001 at a price of $4.10 per share and
another 5,000 shares in an open-market transaction on March 8, 2001 at a price
of $4.13 per share. The remaining shares have been held in a brokerage account
since 1999. Mr. Dolinsky, Vice President-Land of PetroCorp, owns 5,000 Southern
Mineral shares, which he purchased in an open-market transaction on March 14,
2001 at a price of $4.26 per share.
56
Our boards of directors knew about these interests, and considered them, in
approving the merger and recommending that our shareholders approve the merger.
PetroCorp Acquisition of Southern Mineral Shares
Subsequent to the signing of the merger agreement, PetroCorp purchased
shares of Southern Mineral common stock via open-market and negotiated
transactions. As of March 13, 2001 PetroCorp had acquired 738,836 shares of
Southern Mineral stock at an average price of $4.21 per share. As a result,
PetroCorp currently owns 6% of the outstanding shares of Southern Mineral
stock.
PetroCorp will have the ability to vote its shares at the special meeting,
but will not be eligible to receive any merger consideration pursuant to the
terms of the merger agreement.
Legal Proceedings
Southern Mineral is, from time to time, a party to litigation arising in the
normal course of its business operations. Based on information currently
available, management of Southern Mineral believes that it is not a party to
any litigation the results of which it expects to have a material adverse
effect on its business, financial position or results of operations.
PetroCorp is, from time to time, a party to litigation arising in the normal
course of its business operations. Based on information currently available,
management of PetroCorp believes that it is not a party to any litigation the
results of which it expects to have a material adverse effect on its business,
financial position or results of operations.
Cancellation, Delisting and Deregistration of Southern Mineral Common Stock
If the merger is completed, the shares of Southern Mineral common stock will
be cancelled, delisted from the OTC Bulletin Board and deregistered under the
Exchange Act. After the merger, holders of Southern Mineral warrants will be
entitled to receive for each share of Southern Mineral stock underlying such
warrant the per share merger consideration in cash, without interest, after
payment of any applicable exercise price. PetroCorp's stock will continue to be
listed on the AMEX under the trading symbol "PEX."
Federal Securities Law Consequences
All shares of PetroCorp common stock that Southern Mineral shareholders will
receive in the merger will be freely transferable, except for shares of
PetroCorp common stock that are received by persons who are deemed to be
"affiliates" of Southern Mineral under the Securities Act at the time of the
Southern Mineral shareholder meeting. These affiliates may resell the shares of
PetroCorp common stock they receive in the merger only in transactions
permitted by Rule 145 under the Securities Act or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of Southern
Mineral for the above purposes generally include individuals or entities that
control, are controlled by or are under common control with Southern Mineral,
and include directors and certain executive officers of Southern Mineral. The
merger agreement requires that Southern Mineral use commercially reasonable
efforts to cause each of these affiliates to deliver to PetroCorp, within 30
days of the date of entering into the merger agreement (and in any event prior
to the effective time), a written agreement to the effect that these persons
will not sell, transfer or otherwise dispose of any of the shares of PetroCorp
common stock issued to them in the merger in violation of the Securities Act or
the related SEC rules. A copy of the form affiliate letter is attached as Annex
VII.
This document does not cover any resales of the PetroCorp common stock
received in the merger, and no person is authorized to make any use of this
document in connection with any such resales.
57
THE MERGER AGREEMENT
The following summarizes the material terms of the merger agreement, a copy
of which we have attached as Annex I to this document and is incorporated
herein by reference. We urge you to read the merger agreement in its entirety
for a more complete description of the terms and conditions of the merger.
The Merger
Under the merger agreement, Southern Mineral will merge into PetroCorp
Acquisition, a wholly-owned subsidiary of PetroCorp. The merger will become
effective when we have filed certificates of merger with the Secretaries of
State of Delaware and Nevada. We will make such filings shortly after the end
of the Southern Mineral shareholders' stock election period further described
below under "Southern Mineral Stock Elections; Minimum and Maximum Share
Issuances" or, if later, after the last of the conditions precedent to the
merger set forth in the merger agreement has been satisfied or waived.
Conversion of Southern Mineral Shares
At the effective time of the merger:
. each issued and outstanding share of Southern Mineral stock (excluding
shares held in treasury or owned by PetroCorp or its subsidiaries) will
be converted into the right to receive the per share merger
consideration of $4.71 in cash or, if the shareholder timely elects, in
PetroCorp common stock based on an exchange ratio of .471.
. each share of Southern Mineral stock will be cancelled, delisted and
deregistered.
. each warrant to purchase shares of Southern Mineral stock outstanding
immediately prior to the effective time of the merger will remain
outstanding and will be assumed by PetroCorp and PetroCorp Acquisition
and represent the right to receive, upon exercise of such warrant
(including the payment of the applicable exercise price), an amount of
cash (without interest) equal to the product of the number of Southern
Mineral shares underlying such warrant immediately prior to the
effective time of the merger, multiplied by the per share merger
consideration of $4.71, being the amount of merger consideration such
holder would have been entitled to receive had such warrant holder
become a Southern Mineral shareholder immediately prior to the effective
time of the merger.
. each option to purchase shares of Southern Mineral stock outstanding
immediately prior to the effective time of the merger will remain
outstanding and will be assumed by PetroCorp and converted into an
option to purchase a number of shares of PetroCorp stock equal to the
product of the number of Southern Mineral shares underlying such option
multiplied by the exchange ratio of .471, unless the option holder
elects by written notice to Southern Mineral prior to the effective time
of the merger to receive cash; in which case, the option will represent
the right to receive an amount in cash equal to the product of the
number of shares underlying the option multiplied by the positive
difference, if any, between the per share merger consideration of $4.71
and the exercise price.
Under Nevada law, Southern Mineral shareholders may be entitled to
exercise dissenter's rights and to receive an appraisal of the value of
their shares. See "The Merger -- Dissenter's Rights."
Southern Mineral Stock Elections; Minimum and Maximum Share Issuances
If PetroCorp and Southern Mineral shareholders each approve the merger,
Southern Mineral shareholders will be sent a stock election form shortly after
the Southern Mineral shareholders meeting. Each Southern Mineral shareholder
desiring to receive any portion of its merger consideration in the form of
PetroCorp stock will need to deliver a valid stock election form to PetroCorp's
exchange agent within 20 days following the date on which the forms were mailed
- -- PetroCorp will publicly announce this date once it is established -- and
until that time any election may be changed. Southern Mineral and PetroCorp may
agree to extend the final deadline for receipt of stock elections.
58
If Southern Mineral shareholders do not elect to receive at least 3,000,000
shares of PetroCorp stock, PetroCorp's conditions to closing will not be
satisfied and PetroCorp will not be obligated to close the merger, although
PetroCorp could waive that condition. For additional information, refer to
"Conditions to Closing" below.
If Southern Mineral shareholders elect to receive more than 4,000,000 shares
of PetroCorp stock in the merger, the 4,000,000 shares of PetroCorp stock
available for issuance will be prorated among shareholders electing to receive
stock, and PetroCorp has agreed to sell up to 108,968 shares, in addition to
the 4,000,000 shares, to two Southern Mineral directors, Messrs. Fuller and
Wiese, who have agreed to buy that number of shares equal to their pro rata
reduction in connection with entering into shareholder agreements agreeing to
support the merger. For example, if Southern Mineral shareholders elect to
receive 5,000,000 PetroCorp shares in the merger, each shareholder electing
stock will receive only 80% (4,000,000 / 5,000,000) of the number of PetroCorp
shares requested. Any merger consideration that is not paid in PetroCorp stock
will be paid in cash.
Exchange of Shares
As soon as practicable after the effective time of the merger, the exchange
agent will mail you a letter of transmittal and instructions for exchanging
your Southern Mineral stock certificates for cash, or, if a proper election is
made, PetroCorp stock or a combination of cash and PetroCorp stock. PetroCorp's
exchange agent is Corporate Stock Transfer, Inc.
Holders of Southern Mineral stock will not be entitled to receive any
dividends or other distributions payable by PetroCorp until their Southern
Mineral certificates are surrendered for exchange as provided in the merger
agreement. Upon surrender, however, such holders will receive accumulated
dividends and distributions without interest. Holders of unexchanged shares of
Southern Mineral stock will have no further claim upon the exchange agent six
months after the effective time of the merger or for such longer time as
PetroCorp determines and will thereafter look only to PetroCorp and PetroCorp
Acquisition for payment in respect of Southern Mineral shares.
Fractional shares of PetroCorp stock will not be issued to holders of
Southern Mineral stock. For each fractional share of PetroCorp stock that would
otherwise be issued, the holder will instead receive an amount of money equal
to such fraction multiplied by the cash per share merger consideration of
$4.71.
Director Nominees
PetroCorp has amended its bylaws to create two vacancies on its board upon
the effective time of the merger, which will be filled by Messrs. Fuller and
Coughlin, persons selected by Southern Mineral's board of directors to serve
from the effective time of the merger until the second annual meeting of
PetroCorp shareholders after the effective time of the merger. If one of
Southern Mineral's board representatives ceases to serve on PetroCorp's board
of directors for any reason, the remaining Southern Mineral board
representative will appoint his successor.
Representations and Warranties
The merger agreement contains various representations and warranties of
PetroCorp and Southern Mineral, relating, among other things, to the following:
. their incorporation, existence, good standing, capitalization, corporate
power and similar corporate matters;
. their authorization, execution, delivery and performance and the
enforceability of the merger agreement and related agreements;
. the absence of conflicts, violations and defaults under their
certificate or articles of incorporation and bylaws and other material
agreements and documents;
59
. the documents and reports filed with the SEC and the accuracy and
completeness of the information contained therein;
. compliance with environmental laws; and
. certain matters regarding the oil and gas properties and operations of
each party.
All representations and warranties of PetroCorp and Southern Mineral expire
at the effective time of the merger, or, if sooner, the termination of the
merger agreement, subject to any claims a party may have under the merger
agreement.
Material Covenants
Conduct of Business Pending the Merger
From the date of the merger agreement until the closing, Southern Mineral
and PetroCorp have agreed to continue to operate their respective businesses
according to their customary course of business, subject to exceptions included
in the merger agreement.
Additional Covenants
The merger agreement also provides that, from the date of the merger
agreement until the closing, Southern Mineral and PetroCorp will not, without
the consent of the other:
. declare, set aside, authorize or pay any dividend or other distribution;
. split, combine or reclassify their outstanding stock or issue or
authorize or propose the issuance of any other securities in respect of
or in substitution for any of their shares;
. redeem, acquire, or otherwise encumber any of their, or of their
subsidiaries, shares, or any rights, warrants or options to acquire any
such shares or other securities, other than the issuance of shares upon
the exercise of options or warrants outstanding on the date of the
merger agreement;
. amend their charter or bylaws;
. merge or consolidate with, or purchase a substantial equity interest in,
any other entity or make any acquisition of assets, except that Southern
Mineral may engage in such transactions to the extent they do not exceed
$100,000 individually or $3,000,000 in the aggregate, and PetroCorp may
engage in such transactions to the extent they are not material to
PetroCorp;
. sell, lease, license, mortgage or otherwise encumber, any of their
assets, other than transactions that are in the ordinary course of
business consistent with past practice and not material to such party;
. incur any indebtedness other than indebtedness incurred in the ordinary
course of business consistent with past practice that is prepayable at
any time without premium or penalty; or
. enter into, amend, terminate or waive any provision of, any agreement or
arrangement with any related party.
Additionally Southern Mineral has agreed not to take any of following
actions without the consent of PetroCorp:
. enter into or adopt any new, or amend any existing, severance plan or
arrangement, or any existing employee benefit plan or employment or
consulting agreement;
. alter its corporate structure or ownership;
. increase the compensation payable or to become payable to its officers
or employees;
60
. grant or award any stock options or other equity-based incentive awards
other than to directors and employees;
. take any action with respect to accounting policies or procedures for
tax or accounting purposes, or make or change any election with respect
to taxes, except that Southern Mineral can elect to forgo the carryback
of net operating losses;
. make or agree to make any new capital expenditure in excess of $100,000
individually or $3,000,000 in the aggregate except for capital
expenditures in the ordinary course of business consistent with past
practice to repair or replace casualty losses;
. pay, discharge or satisfy any claims, liabilities or obligations, other
than in the ordinary course of business consistent with past practice or
in accordance with their terms; or
. settle or compromise any material federal, state, local or foreign tax
liability.
Other Agreements
The merger agreement contains covenants and agreements of PetroCorp and
Southern Mineral customary for transactions like the merger relating to, among
other things:
. the preparation of the registration statement of which this document is
a part, and including in this document the recommendation by Southern
Mineral and PetroCorp's boards that their respective shareholders vote
to approve the merger;
. listing of the PetroCorp stock to be issued pursuant to the merger on
the AMEX;
. Southern Mineral using commercially reasonable efforts to cause each of
its affiliates, which generally includes Southern Mineral officers,
directors and holders of at least 5% of the outstanding shares of its
common stock, to execute and deliver to PetroCorp an affiliate agreement
prior to the effective time of the merger wherein each of Southern
Mineral's affiliates will agree to comply with the applicable
requirements of Rule 145;
. if any "fair price," "moratorium," "control share acquisition" or other
form of antitakeover statute or regulation becomes applicable to the
transactions contemplated by the merger agreement, each party will take
any actions as are commercially reasonable so that the merger may close
as promptly as practicable; and
. each party using best efforts to consummate the merger.
Employee Matters
Neither PetroCorp nor any Southern Mineral employee will be obligated to
continue any employment relationship or any specific terms of employment for
any specific period of time after the merger. PetroCorp does not anticipate
continuing to employ any Southern Mineral employees following the merger, other
than potentially certain operational employees. PetroCorp will sponsor Southern
Mineral's employee benefit plans after the merger, and will satisfy all
obligations under Southern Mineral's employee benefit plans. After the merger,
PetroCorp may amend, modify or terminate any Southern Mineral employee benefit
plans. To the extent PetroCorp makes available any of its employee benefit
plans, programs or policies to any Southern Mineral employee:
. PetroCorp will credit service with Southern Mineral for eligibility and
vesting purposes and for purposes of qualifying for any additional
benefits tied to periods of service under such plan, program or policy;
and
. PetroCorp will cause any welfare benefit plans to provide credit for any
copayments or deductibles by such employees and waive all pre-existing
condition exclusions and waiting periods.
61
At the reasonable request of PetroCorp, Southern Mineral will amend or
terminate any of its employee benefit plans at or immediately prior to the
effective time of the merger (whichever PetroCorp may request) and will take
such other steps as PetroCorp may reasonably request to facilitate the
administration after the effective time of the merger of PetroCorp's
compensation and benefit plans, programs and arrangements.
Within 30 days after the effective time of the merger, PetroCorp will file a
registration statement on Form S-8 or other appropriate form with the SEC to
register PetroCorp stock issuable upon exercise of the assumed Southern Mineral
options and will use commercially reasonable efforts to cause the registration
statement to remain effective, and to maintain the current status of the
prospectus or prospectuses contained therein, until the exercise or expiration
of the options.
Indemnification
PetroCorp will indemnify the present and former directors, officers and
employees of Southern Mineral and its respective subsidiaries against all
losses, damages, costs, expenses and liabilities arising out of the
transactions contemplated by the merger agreement existing at or before the
effective date of the merger, including actions taken in connection with the
merger. All indemnification in favor of such person under Southern Mineral's
charter documents will remain in effect. PetroCorp will also be obligated to
advance expenses pursuant to reimbursement agreements.
For six years after the effective date of the merger, PetroCorp will
maintain Southern Mineral's existing directors' and officers' liability
insurance policies covering the existing directors and officers to the extent
related to liabilities prior to the merger. The coverage will be at least as
favorable as the existing coverages, but PetroCorp will not be required to
spend over 200% of the annual premium paid by Southern Mineral for its existing
coverage.
No Solicitation
Southern Mineral has agreed that it will immediately cease and cause to be
ceased any existing activities, discussions or negotiations for a merger or
similar transaction and it will not solicit, initiate or encourage any proposal
for a merger or similar transaction. This includes engaging in negotiations
with or giving any nonpublic information to any person that has made or may be
considering making such a proposal.
However, if required by their fiduciary duties under law, the merger
agreement permits Southern Mineral to furnish information to, and enter into
negotiations with, any party that makes an unsolicited proposal for a merger or
similar transaction if the Southern Mineral board has determined that the
proposal is superior from a financial point of view, and the board determines
in good faith that it is required to investigate further such proposal to
comply with its fiduciary duty imposed by law.
Southern Mineral has agreed to inform PetroCorp of any merger or similar
proposal or any discussions or negotiations regarding such a proposal. Southern
Mineral has also agreed to use all reasonable efforts to keep PetroCorp
informed of the status and terms of any developments with respect to such
discussions or negotiations. If Southern Mineral accepts a superior proposal
(as more particularly described in the merger agreement) and terminates the
merger agreement, it must pay PetroCorp $2,350,000. In addition, PetroCorp will
have the right to terminate the merger agreement if Southern Mineral fails to
reject such an offer within 30 days, but in such an instance, neither party
will pay any termination or break-up fee.
Conditions to Closing
The obligations of PetroCorp and Southern Mineral to effect the merger are
subject to fulfillment or waiver of the following conditions:
. the effectiveness of the registration statement of which this document
is a part;
62
. the absence of any preliminary or permanent injunction or order by any
federal or state court in the United States of competent jurisdiction
prohibiting the consummation of the merger;
. approval for listing on the AMEX of the PetroCorp shares to be issued in
the merger; and
. approval of the merger by the PetroCorp shareholders and the Southern
Mineral shareholders.
The obligation of Southern Mineral to effect the merger is also subject to
the fulfillment of the following conditions:
. the accuracy of the representations and warranties of PetroCorp, without
regard to materiality qualifiers, unless such inaccuracy would not have
a material adverse effect on PetroCorp or its subsidiaries and PetroCorp
having performed in all material respects its obligations and covenants;
. PetroCorp obtaining all consents, waivers, approvals, authorizations or
orders required for the consummation of the merger, except for those
which would not reasonably be expected to adversely affect the closing
of the merger; and
. PetroCorp having no change in its financial condition, business or
operations which amounts to a material adverse effect on its business.
The obligation of PetroCorp to effect the merger is also subject to the
fulfillment of the following conditions, any of which may be waived by
PetroCorp:
. the accuracy of the representations and warranties of Southern Mineral,
without regard to materiality qualifiers, unless such inaccuracy would
not have a material adverse effect on Southern Mineral or its
subsidiaries and Southern Mineral having performed in all material
respects its obligations and covenants;
. Southern Mineral obtaining all consents, waivers, approvals,
authorizations or orders required for the consummation of the merger,
except for those which would not reasonably be expected to adversely
affect the closing of the merger;
. Southern Mineral having no change in its financial condition, business
or operations which amounts to a material adverse effect on its
business; and
. Southern Mineral shareholders having elected to receive at least
3,000,000 PetroCorp shares in the merger.
Termination
Southern Mineral and PetroCorp may terminate the merger agreement by mutual
written consent. In addition, either party may terminate the agreement as
follows:
. if the other party is in material breach of the merger agreement and
this breach is not cured in all material respects within 10 business
days after notice of the breach;
. if a statute, rule, regulation or executive order will have been enacted
prohibiting the consummation of the merger substantially on the terms
contemplated by the merger agreement;
. if a final and non-appealable order, decree, ruling or other act of a
court or other competent authority restrains or prevents the
consummation of the merger;
. if the PetroCorp or Southern Mineral shareholders fail to approve the
merger at a duly held meeting of shareholders; or
. if the merger has not been consummated on or before May 31, 2001.
In addition, Southern Mineral has the right to terminate the merger
agreement if the Southern Mineral board has received a superior proposal which
the board of directors has resolved to accept, and PetroCorp may
63
terminate the merger agreement if the Southern Mineral board fails to reject a
superior proposal within 30 days of receipt.
If the merger agreement is terminated by PetroCorp other than for a breach
by Southern Mineral of its representations, warranties, covenants or
agreements, PetroCorp has agreed not to make an attempt to acquire the
securities of Southern Mineral for two years following the termination of the
merger agreement.
Termination Fees and Expenses
If Southern Mineral terminates the merger agreement because it is accepting
a superior proposal, it is required to pay PetroCorp $2,350,000.
PetroCorp will pay Southern Mineral $250,000 if the merger does not occur
for any reason other than:
. a breach by Southern Mineral of its representations, warranties,
covenants or obligations under the merger agreement;
. Southern Mineral shareholders failing to approve the merger at a duly
held meeting of shareholders;
. Southern Mineral or PetroCorp having a material adverse change in their
financial conditions, businesses or operations;
. Southern Mineral not obtaining the necessary consents and waivers to
consummate the merger; or
. PetroCorp electing to terminate the merger agreement because the
Southern Mineral board has not rejected a superior proposal within 30
days of receipt.
If the merger agreement is terminated by reason of a willful breach by a
party of its representations, warranties, covenants or agreements, in addition
to other remedies available to the non-breaching party, the breaching party
will be required to reimburse the non-breaching party for all out-of-pocket
costs and expenses incurred by the non-breaching party in connection with the
merger.
Amendment and Waiver
The merger agreement may be amended or supplemented in writing before the
effective time of the merger by Southern Mineral and PetroCorp except as
otherwise provided by law. The law provides that after the PetroCorp and
Southern Mineral shareholders approve the merger, there may not be any change
materially adverse to the PetroCorp or Southern Mineral shareholders without
further approval of the PetroCorp and Southern Mineral shareholders, as
applicable.
Amendment No. 1 to Merger Agreement
On March 13, 2001, PetroCorp and Southern Mineral agreed to amend the
merger agreement as follows:
. The condition to the parties' obligation to close that the parties
receive an opinion of counsel that the merger would qualify as a tax-
free reorganization under Section 368 of the Internal Revenue Code of
1986 was removed.
. The condition to Southern Mineral's obligation to close that its
shareholders elect to receive at least 3,000,000 shares of PetroCorp
stock was removed.
. The potential adjustments to the merger consideration based on Southern
Mineral's transaction costs was removed.
Such amendments were intended to eliminate uncertainties regarding the
closing of the merger and simplify the decision for each party's shareholders.
64
OTHER AGREEMENTS
Southern Mineral Shareholder Agreements
In connection with the execution and delivery of the merger agreement,
PetroCorp entered into shareholder agreements with Messrs. Fuller, Wiese and
Coughlin, who are directors and shareholders of Southern Mineral, and persons
and entities related to them. The Fuller group owned 105,861 shares and options
and warrants for an additional 143,027 shares; the Wiese group owned 103,341
shares and options and warrants for an additional 141,512 shares; and the
Coughlin group owned 1,730,243 shares of the 12,231,934 shares of Southern
Mineral stock outstanding on March 13, 2000. These shareholders agreed:
. to vote their shares of Southern Mineral stock in favor of the merger;
. not to solicit alternative takeover proposals for Southern Mineral; and
. not to sell or otherwise dispose of any of their shares of Southern
Mineral stock.
The agreements signed by the Wiese and Fuller groups also have the effect of
ensuring that, if Southern Mineral shareholders make valid stock elections to
receive more than 4,000,000 shares of PetroCorp stock, the stock elections of
these two groups will not be prorated downward. As a consequence, PetroCorp may
issue up to approximately 108,968 additional shares of PetroCorp common stock
to these shareholders in lieu of cash. The shareholder agreements terminate
upon the earlier to occur of the completion of the merger or the termination of
the merger agreement in accordance with its terms.
PetroCorp Shareholder Agreements
In connection with the execution and delivery of the merger agreement,
Southern Mineral entered into shareholder agreements with St. Paul Fire and
Marine Insurance Company and Kaiser-Francis. St. Paul owned 1,738,500 shares,
and Kaiser-Francis owned 4,327,457 shares of the 8,720,619 shares of PetroCorp
stock outstanding on March 13, 2001. These shareholders agreed:
. to vote their shares of PetroCorp stock in favor of the merger;
. not to solicit alternative proposals for a PetroCorp merger or
consolidation; and
. not to sell or otherwise dispose of any of their shares of PetroCorp
stock.
The shareholder agreement signed by Kaiser-Francis also stipulates that
Kaiser-Francis will amend its management agreement with PetroCorp by removing
the provisions granting Kaiser-Francis royalties on new oil and gas prospects
in exchange for being compensated for certain services to be rendered by
Kaiser-Francis which are currently not contemplated in the management
agreement.
In the shareholder agreement signed by St. Paul, Southern Mineral agreed
that its two nominees to be selected to serve on the PetroCorp board after the
merger will not have served as executive officers of Southern Mineral.
The shareholder agreements terminate upon the earlier to occur of the
completion of the merger or the termination of the merger agreement in
accordance with its terms.
Shelf Registration
Pursuant to shareholder agreements and affiliate letters, PetroCorp must
file and have effective by the merger closing date, a shelf registration
statement pursuant to Rule 415 of the Securities Act registering the transfer
of the shares they received by Messrs. Fuller, Wiese and Coughlin and other
Southern Mineral affiliates in the merger, subject to blackout periods imposed
by underwriters of any underwritten offerings and other limitations.
65
COMPARISON OF SHAREHOLDERS' RIGHTS
As a result of the merger, the holders of Southern Mineral common stock who
elect to receive PetroCorp stock will become holders of PetroCorp common stock.
The rights of the shareholders of PetroCorp will be governed by applicable
Texas law, including the Texas Business Corporation Act, and by PetroCorp's
articles of incorporation and bylaws. Southern Mineral shareholders will cease
to be governed by applicable Nevada law and the articles of incorporation and
bylaws of Southern Mineral.
The following summarizes the material differences between the rights of
PetroCorp shareholders and Southern Mineral shareholders. The following
summaries do not purport to provide a complete description of the specific
rights of PetroCorp shareholders under Texas law and PetroCorp's articles of
incorporation and bylaws, as compared with the rights of Southern Mineral
shareholders under Nevada law, Southern Mineral's articles of incorporation and
bylaws. These summaries are qualified in their entirety by reference to the
governing corporate instruments of PetroCorp and Southern Mineral to which
shareholders are referred and the applicable Texas and Nevada laws.
PetroCorp Southern Mineral
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Authorized Capital Stock
The total number of authorized shares of capital stock of PetroCorp is
26,000,000, consisting of 25,000,000 shares of common stock, par value $0.01
per share, and 1,000,000 shares of preferred stock, par value $0.01 per share.
The total number of authorized shares of capital stock of Southern Mineral
is 80,000,000, consisting of 75,000,000 shares of common stock, par value $0.01
per share, and 5,000,000 shares of preferred stock, par value $0.01 per share.
Directors
Under Texas law, the board of directors consists of one or more members,
which number is stated in the articles of incorporation or bylaws. The number
may by changed by amendment to the articles of incorporation or bylaws, or as
provided in the articles of incorporation. Texas law permits, but does not
require, a classified board of directors with staggered terms under which the
board of directors is divided into two or three classes as nearly equal as
possible and are elected for terms of two or three years, respectively.
The board of directors of PetroCorp currently has seven members, which
number will be increased to nine at the effective time of the merger. Pursuant
to the merger agreement, Messrs. Fuller and Coughlin of Southern Mineral will
be added to PetroCorp's board for a total of nine members. The PetroCorp board
of directors is divided into three separate classes, consisting, as nearly as
possible, of equal numbers of directors, with one class being elected annually.
Nevada law permits, but does not require a classified board of directors
with staggered terms. Southern Mineral's bylaws do not create a classified
board of directors.
The Southern Mineral board of directors has seven members. The Southern
Mineral bylaws provide that the Southern Mineral board of directors will
consist of seven members until the first annual or special meeting after August
1, 2001, and thereafter the Southern Mineral board of directors may, by
resolution, increase or decrease the number of directors, provided that:
. such number shall be no more than twelve and shall be at least one, and
. no amendment to the Bylaws may shorten the term of any incumbent
director.
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Removal of Directors
Under Texas law, a corporation may provide for the removal of a director or
the entire board of directors with or without cause in its articles of
incorporation or bylaws.
Under the PetroCorp bylaws, any director or the entire board of directors
may be removed with or without cause by the holders of two-thirds of the shares
then entitled to vote at an election of directors.
Under Nevada law, any director or the entire board may be removed, with or
without cause, by the holders of a two-thirds majority of the shares then
entitled to vote at an election of directors. In addition, if the holders of a
class or series of shares are entitled to elect a director, then removal is by
two-thirds vote of that class.
Under the Southern Mineral articles of incorporation, any director, may be
removed from office only at a meeting of shareholders called for such purpose,
and by the affirmative vote of holders of not less than two-thirds of the then
holders of that class or series of stock.
Filling Vacancies of the Board of Directors
Under Texas law, any vacancy occurring in the board of directors may be
filled by the shareholders or by the affirmative vote of a majority of the
remaining directors, although less than a quorum. A directorship to be filled
by reason of an increase in the number of directors may be filled by the
shareholders or by the board of directors for a term of office continuing only
until the next election of one or more directors by the shareholders, provided
that the board of directors may not fill more than two such directorships
during the period between any two successive annual meetings of shareholders.
If shareholders of any class or series of shares or group of classes or series
of shares are entitled to elect any directors, any vacancies may be filled by a
majority vote of the directors elected by such class, series, or group
remaining in office or by vote of the shareholders of the outstanding shares of
such class, series, or group.
The PetroCorp bylaws provide that the PetroCorp board of directors will be
fixed at seven and then may be increased or decreased from time to time by
amendment of the bylaws. Amendment of the bylaws may occur through the
affirmative vote of not less than two thirds of the shareholders entitled to
vote or an affirmative vote of a majority of directors in office. The PetroCorp
board of directors is divided into three separate classes, consisting, as
nearly as possible, of equal numbers of directors, with one class being elected
annually.The PetroCorp bylaws provide that
Under Nevada law, unless otherwise provided in the articles of
incorporation, vacancies, including those caused by newly-created
directorships, may be filled by a majority of the remaining directors then in
office, even if the remaining directors do not constitute a quorum.
Except for the rights relating to any series of preferred stock to elect
directors, the Southern Mineral articles of incorporation provide that newly
created directorships resulting from any increase in the authorized number of
directors, and any vacancies on the board resulting from death, resignation,
disqualification, removal or other cause, may be filled only by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum.
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vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled only by the affirmative vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. The bylaws further provide that if the PetroCorp
articles of incorporation entitle the holders of any class or classes of stock
or series thereof to elect one or more directors, vacancies and newly created
directorships of such class or classes or series may be filled only by a
majority of the directors elected by such class or classes or series thereof
then in office, or by a sole remaining director so elected.
Both the PetroCorp bylaws and the Southern Mineral articles of
incorporation provide that any director elected to fill vacancies or newly
created directorships shall hold office for the remainder of the full term of
the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor has been elected and
qualified.
Amendment of Bylaws
Under Texas law, the board of directors may amend, repeal or adopt a
corporation's bylaws, unless the articles of incorporation reserve this power
exclusively to the shareholders, or the shareholders in amending, repealing or
adopting a particular bylaw expressly provide that the board of directors may
not amend or repeal that bylaw. A corporation's shareholders may always amend,
repeal or adopt the corporation's bylaw even though the bylaws may be amended,
repealed or adopted by the board of directors, unless the articles of
incorporation or bylaws provide otherwise.
The PetroCorp articles of incorporation expressly authorize the PetroCorp
board of directors to adopt, amend or repeal the bylaws of the corporation,
without any action on the part of the shareholders. However, bylaws adopted or
amended by the board and any powers thereby conferred may be amended, altered,
or repealed by at least a majority vote of the shareholders.
Under Nevada law, the directors are authorized to adopt, amend and repeal
the bylaws, subject to bylaws, if any, adopted by shareholders.
In addition to any affirmative vote required by law, the Southern Mineral
articles of incorporation provided the bylaws may be altered, amended,
repealed or rescinded by either
. an affirmative vote of at least a majority of the then-authorized board
of directors, or
. by a majority vote of the shareholders.
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Amendment of Articles
Under Texas law, an amendment to the articles of incorporation requires the
approval of the holders of at least two-thirds of the outstanding shares of the
corporation entitled to vote on the matter. The articles of incorporation may
provide for a different vote, but not less than a majority of the shares
entitled to vote on that matter. The PetroCorp articles do not so provide and
thus changes to the PetroCorp articles of incorporation requires a two thirds
vote of the shareholders.
Under Nevada law, a corporation's board and its shareholders may amend the
corporation's articles of incorporation if the board of directors recommends
the amendment and the holders of at least a majority of shares of stock
entitled to vote approve the amendment.
In addition to any affirmative vote required by law, the Southern Mineral
articles of incorporation may be altered, amended, repealed or rescinded by at
least a majority vote of the then-combined voting power of the then-outstanding
voting stock (common and preferred stock, voting pursuant to the terms of such
preferred stock); provided however that any change to Articles II
(Definitions), VI (Election of Directors) or VII (Amendment of Corporate
Documents) requires a vote of at least two-thirds of the voting stock unless
the proposed change has been recommended by at least two-thirds of the then-
authorized number of directors. Notwithstanding any provisions in the articles
to the contrary, if any proposed amendment would alter or change any preference
or any relative or other right given to any class or series of outstanding
shares, then the amendment must be approved by the vote, in addition to the
affirmative vote otherwise required, of the holders of shares representing a
majority of the voting power of each class or series affected by the amendment
regardless of limitations or restrictions on the voting power of such class.
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Shareholder Meetings
Under Texas law, the president, the board of directors, other persons
authorized in the bylaws or articles of incorporation, or the shareholders of
not less than 10% of all of the shares entitled to vote have the right to call
a special shareholders' meeting, unless the articles of incorporation provide
for a number of shares greater than or less than 10%, in which event, special
meetings of the shareholders may be called by the holders of at least the
percentage of shares so specified in the articles of incorporation, but in no
event may the articles of incorporation provide for a number of shares greater
than 50% that would be required to call a special meeting.
The PetroCorp articles do not alter the statutory rule described herein. Its
bylaws provide that a special meeting of the shareholders may be called by the
chairman of the board and chief executive officer, the president, any one of
the directors or holders of at least 10% of all the shares entitled to vote at
the proposed special meeting.
Nevada law provides no separate provision for the calling of a special
meeting. Special meetings are called in accordance with the bylaws of the
company or the requirements of a specific provision of Nevada law.
The Southern Mineral bylaws provide that special meetings of shareholders
may be called by the president and shall be called by the president or
secretary at the request in writing of a majority of the board of directors, or
at the request in writing of shareholders owning a majority in amount of the
entire capital stock of the corporation issued and outstanding and entitled to
vote.
Quorum
Under Texas law, with respect to any action by the directors, a majority of
the number of directors fixed by the articles of incorporation or the bylaws
shall constitute a quorum for the transaction of business. With respect to any
meeting of shareholders, a quorum shall be present if the holders of a majority
of the shares entitled to vote at the meeting are represented at the meeting in
person or by proxy.
Pursuant to both the PetroCorp bylaws and the Southern Mineral bylaws, a
quorum for the transaction of business at any meeting of the board of directors
consists of a majority of the entire board of directors.
Under Nevada law, unless the articles of incorporation or bylaws provide
otherwise, a majority of the directors then in office constitute a quorum. With
respect to meetings of shareholders, unless the articles of incorporation or
bylaws provide otherwise, a majority of the voting power, present in person or
by proxy, constitutes a quorum.
Under both the PetroCorp and Southern Mineral bylaws, a quorum for the
transaction of business at any shareholder meeting consists of the holders of a
majority of the shares of voting stock issued and outstanding and entitled to
vote, present in person or represented by proxy.
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Preemptive Rights
Under Texas law, shareholders of a corporation have a preemptive right to
acquire additional, unissued, or treasury shares of the corporation, or
securities of the corporation convertible into or carrying a right to subscribe
to or acquire shares, except to the extent limited or denied by statute or by
the articles of incorporation.
Under Nevada law, for corporations organized before October 1, 1991, except
to the extent limited or denied by the articles of incorporation, shareholders
have a statutorily limited preemptive right to acquire unissued shares,
treasury shares, or securities convertible into such shares.
Both the PetroCorp and Southern Mineral articles of incorporation expressly
deny preemptive rights.
Voting by Shareholders
Under Texas law, with respect to any action to be taken by the shareholders
of a corporation, a vote of the majority of the shares entitled to vote and
represented at a meeting at which a quorum is present shall be sufficient to
take action, unless the vote of a greater number is required by law, articles
of incorporation or bylaws.
Under the PetroCorp bylaws, unless otherwise required by law, the PetroCorp
articles of incorporation or the PetroCorp bylaws, action by PetroCorp
shareholders is taken by the vote of the holders of a majority of the votes
cast at a meeting of shareholders at which a quorum is present.
Under Nevada law, with respect to any action taken by the stockholders of
the corporation other than the election of directors, unless otherwise provided
in the articles of incorporation or the bylaws, the action is taken if at a
meeting which a quorum is present the votes cast in favor of the action exceed
those against it. Directors are elected by a plurality.
Pursuant to the Southern Mineral bylaws, action by Southern Mineral
shareholders is taken by the vote of the holders of a majority of the stock
represented and entitled to vote at a shareholders meeting at which a quorum is
present, subject to applicable law, the Southern Mineral articles of
incorporation or the Southern Mineral bylaws.
Nevada's control share act, Sections 78.378 through 78.3793 of Nevada
Revised Statutes, generally prohibits an acquirer from voting newly acquired
shares of a Nevada corporation's stock after crossing the threshold ownership
percentages of at least one-fifth but less than one-third, at least one-third
but less than a majority, and a majority or more of all of the outstanding
voting power, unless the acquirer obtains the approval of the corporation's
stockholders, excluding shares as to which the acquirer exercises voting
rights. The thresholds are computed based on the number of shares directly or
indirectly held by the acquirer individually or in association with others. The
control share act only applies to Nevada corporations doing business directly
or through an affiliated corporation in Nevada with at least 200 stockholders
of record, at least 100 of whom have addresses in Nevada. The act applies to
all such corporations unless the articles of incorporation or bylaws in effect
on the
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PetroCorp Southern Mineral
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tenth day following the crossing the thresholds described above provide
otherwise. If the corporation's articles or bylaws in effect on such tenth day
so provide, the corporation may call for redemption certain of the acquirer's
shares if the stockholders do not grant full voting rights or the acquirer
fails to timely deliver information to the corporation. Unless the articles of
incorporation or bylaws in effect on the tenth day following acquisition of
such majority provide otherwise, if an acquirer's shares are accorded full
voting rights and the acquirer has acquired control shares with at least a
majority of all the voting power, any stockholder of record who has not voted
for approval of voting rights is entitled to demand payment for the fair value
of his or her shares, which is generally not less than the highest price per
share paid in the transaction subjecting the acquirer to the control share act.
Cumulative Voting
Under Texas law, cumulative voting is available unless prohibited by a
corporation's articles of incorporation.
The Petrocorp articles of incorporation prohibit cumulative voting in any
matter; therefore, the shareholders do not have a right to cumulative voting.
Under Nevada law, articles of incorporation may provide for cumulative
voting in director elections. In order to exercise the right of cumulative
voting, one or more of the shareholders requesting cumulative voting must give
written notice that cumulative voting is desired, in advance of the meeting, to
the president or the secretary of the corporation.
Since Southern Mineral's articles of incorporation are silent regarding
cumulative voting, Southern Mineral does not have cumulative voting.
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Shareholder Action without a Meeting
Under Texas law, any action that
may be taken at a meeting of the
shareholders may be taken without a
meeting if written consent thereto
is signed by all the holders of
shares entitled to vote on the
action. The articles of
incorporation of a Texas corporation
may provide that action by written
consent in lieu of a meeting may be
taken by the holders of that number
of shares which, under the
corporation's articles of
incorporation, would be required to
take the action which is the subject
of the consent at a meeting at which
the holders of all shares entitled
to vote on the action were present
and voted.
The PetroCorp bylaws provide for
any action which may be taken at a
shareholder meeting to be taken
without a meeting if written consent
or consents setting forth the action
to be taken are signed by
shareholders of all the shares
entitled to vote on the action.
Under Nevada law, unless
otherwise provided in the articles
of incorporation or the bylaws, any
action required or permitted to be
taken at a meeting of the
stockholders may be taken without a
meeting if, before or after the
action, a written consent thereto is
signed by stockholders holding at
least a majority of the voting
power, except that if a different
proportion of voting power is
required for such an action at a
meeting, then that proportion of
written consents is required.
The Southern Mineral bylaws
provide that any action, except
election of directors, which may be
taken by the vote of the
stockholders at a meeting, may be
taken without a meeting if
authorized by the written consent of
stockholders holding at least a
majority of the voting power, unless
the provisions of the statutes or of
the articles of incorporation
require a greater proportion of
voting power to authorize such
action in which case such greater
proportion of written consents shall
be required.
Approval by Shareholders of a Merger, Share Exchange or Sale of All Assets
Under Texas law, a plan of
merger, a share exchange, or a sale
of all or substantially all of the
assets of a corporation not in the
regular course of business requires
shareholder approval by at least a
two-thirds vote of the outstanding
shares entitled to vote on the
matter, unless the articles of
incorporation require a lesser
number. However, unless the articles
of incorporation provide otherwise,
shareholder approval is not required
in a merger where
. the corporation is the sole
surviving corporation in the
merger;
. the articles of incorporation
will not differ from the
articles of incorporation
before the merger;
. each shareholder of the
corporation whose shares were
outstanding immediately
before the merger will hold
the same number of shares
with identical rights after
the merger;
. the voting power of the
number of voting shares
outstanding immediately after
the merger, plus the voting
power of the
Under Nevada law, generally a
plan of merger or exchange must be
recommended by the board of
directors and approved by a majority
of the voting power unless the
articles of incorporation or the
board of directors require a greater
vote. Written notice stating the
purpose, or one of the purposes, of
the meeting is to consider the plan,
together with a copy or a summary of
the plan, shall be given to each
shareholder of record, whether or
not such shareholder is entitled to
vote at the meeting, within the time
and in the manner for the giving of
notice of meetings of shareholders.
Nevada law also provides dissenters'
rights as further described under
"Dissenters' Rights" on page 37.
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number of voting shares that
the corporation will issue as
a result of the merger, if
any, does not exceed 20% of
the voting power of the total
number of voting shares
outstanding immediately before
the merger;
. the number of participating
shares, plus the number of
participating shares issued
as a result of the merger,
will not exceed by more than
20% the total number of
participating shares of the
corporation outstanding
immediately before the
merger; and
. the board of directors adopts
a resolution approving the
plan of merger; or
. where the merger is of a
corporation with or into a
direct or indirect wholly
owned subsidiary of the
corporation and after the
merger the corporation or its
successor is a direct or
indirect wholly owned
subsidiary of a holding
company and other requirements
are met.
Texas law provides that a
shareholder shall have the right
to dissent to any merger where
shareholder approval was
required and the shareholder was
entitled to vote on the merger.
A shareholder shall have the
right to dissent to a plan of
exchange where the shareholder's
shares are to be acquired, or to
a merger if the shareholder was
entitled to vote on the matter.
However, under certain
conditions, the shareholder
shall not have a right to
dissent to a merger where there
is a single surviving or new
corporation, nor to a share
exchange.
Neither the PetroCorp articles of incorporation nor the Southern Mineral
articles of incorporation vary their respective state laws regarding the above.
Because Southern Mineral is merging into PetroCorp Acquisition, and not
PetroCorp, Texas law does not require approval by two-thirds of PetroCorp's
shareholders. The rules of the AMEX, on which PetroCorp's stock is listed,
require the transaction be approved by a majority of the PetroCorp shares
represented (in person or by proxy) at a meeting at which a quorum exists.
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Business Combinations
Under Texas law, certain business combinations between public corporations
and affiliated shareholders (or any affiliate or associate of the affiliated
shareholder) are prohibited during the three year period immediately following
the affiliated shareholders share acquisition unless two-thirds of the
unaffiliated shareholders approve the transaction at a meeting held no earlier
than six months after the shareholder acquires the shares. Such a vote of the
shareholders is not required for business combinations where
. the board of directors of the issuing public corporation approves the
business combination or the acquisition of shares by the affiliated
shareholder prior to the affiliated shareholder becoming an affiliated
shareholder;
. the affiliated shareholder was affiliated before December 31, 1996 and
continued as such through the transaction;
. the affiliated shareholder became affiliated through transfer of shares
by will or intestate succession;
. the affiliated shareholder became affiliated inadvertently and
subsequently divests itself of shares;
. the issuing public corporation combines with a domestic wholly owned
subsidiary, if the domestic subsidiary is not an affiliate or associate
of the affiliated shareholder other than by reason of the affiliated
shareholder's beneficial ownership of voting shares in the issuing
public corporation; or
. the issuing public corporation's articles of incorporation elect not to
be governed by this particular Texas statute. An affiliated shareholder
is a person other than the issuing public corporation or its subsidiary
that beneficially owns 20% or more of the outstanding voting shares of
the issuing public corporation, or within the preceding three years was
such an owner.
Sections 78.411 to 78.444 of the Nevada Revised Statutes restrict the
ability of a Nevada corporation having at least 200 stockholders of record to
engage in any "combination" with an "interested stockholder" for three years
after the interested stockholder's date of acquiring the shares that cause the
stockholder to become an interested stockholder, unless the combination or the
purchase of shares by the interested stockholder is approved by the board of
directors before that date. The statute also puts certain restrictions on such
combinations after the three year period expires. An "interested stockholder"
means the beneficial owner of 10% or more of the voting power of the
corporation and certain affiliates and associates of the corporation. For
purposes of this computation various attribution rules will deem a person to be
the owner of stock considered under the statute to be under that person's
control even though not actually owned by that person. A "combination" is
broadly defined to include almost all, if not all, but relatively minor
transactions. A merger would be considered a combination.
The Southern Mineral articles of incorporation also include an election to
be governed by the business combination statute.
The Nevada business combination statute is not applicable to the merger.
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Although PetroCorp's articles of incorporation do not provide for exemption
from the Texas business combination voting requirements, PetroCorp was not an
affiliate of Southern Mineral or any affiliate or associate of Southern Mineral
that owned a material amount of Southern Mineral Stock. Accordingly, the Texas
Business Combination Statute is not applicable to the merger.
Indemnification of Directors and Officers
Under the Texas law, a corporation may indemnify a director against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses actually incurred in connection with a proceeding, if
it is determined by the requisite vote of directors or shareholders or by legal
counsel that the person:
. conducted himself in good faith;
. reasonably believed, in the case of official conduct as a director, that
his conduct was in the corporation's best interests, and, in all other
cases, that his conduct was not opposed to the corporation's best
interests; and
. in the case of any criminal proceeding, had no reasonable cause to
believe his conduct was unlawful.
. A director may not be indemnified in respect of a proceeding in which
the person is found liable on the basis that personal benefit was
improperly received by him or in which the person is found liable to the
corporation, except that indemnification may be provided if it is
limited to reasonable expenses actually incurred by the person in
connection with the proceeding and shall not be made in respect to any
proceeding in which the person is found liable for willful or
intentional misconduct in the performance of his duty to the
corporation.
. Under the Texas law, a corporation must indemnify a director or officer
against reasonable expenses incurred by him in connection with a
proceeding in which he is a named defendant or respondent because he is
or was a director if he has
Nevada law provides that a corporation may indemnify any person who was, or
is, or is threatened to be made a party in a completed, pending, or threatened
proceeding, whether civil, criminal, administrative, or investigative (except
an action by or in the right of the corporation), by reason of being or having
been an officer, director, employee, or agent of the corporation or serving in
certain capacities at the request of the corporation. Indemnification may
include attorney's fees, judgments, fines and amounts paid in settlement. The
person to be indemnified must have acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful.
With respect to actions by or in the right of the corporation,
indemnification may not be made for any claim, issue, or matter as to which
such a person has been finally adjudged by a court of competent jurisdiction to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action
was brought or other court of competent jurisdiction determines upon
application that in view of all circumstances the person is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper.
Unless indemnification is ordered by a court in an action by or in the right
of the corporation, the indemnification determination must be made by the
stockholders, by a majority vote of a quorum of the board of directors who were
not parties to the action, suit or proceeding, or in certain circumstances by
independent legal counsel in a written opinion. The articles of incorporation,
bylaws, or an agreement made by the corporation
76
PetroCorp Southern Mineral
--------- ----------------
been wholly successful in the defense of the proceeding. Under certain
circumstances a corporation may pay or reimburse a director for
reasonable expenses incurred in advance of the final disposition of the
proceeding.
. A corporation may also indemnify and advance expenses to any officer,
employee, agent or certain other persons serving at the request of the
corporation to the extent permitted by law, the articles of
incorporation, bylaws, action of directors or contract.
. A corporation may purchase insurance on behalf of such persons against
any liability asserted against him and incurred in or arising out of
such person's capacity with respect to the corporation.
The PetroCorp bylaws provide that PetroCorp must indemnify its directors and
officers from and against any and all liabilities, costs and expenses incurred
by them in such capacities to the fullest extent permitted by the Texas law and
that PetroCorp has the power to purchase and maintain liability insurance for
such persons as permitted by the Texas law.
may, however, provide for payment to an officer or director of the expenses of
defending an action as incurred and in advance of final disposition upon
receipt of an undertaking to repay the amount if it is ultimately determined by
a court of competent jurisdiction that the person is not entitled to
indemnification.
Nevada law also provides that to the extent a director, officer, employee,
or agent has been successful on the merits or otherwise in the defense of any
action, he or she must be indemnified by the corporation against expenses,
including attorneys' fees, actually and reasonably incurred in connection with
the defense.
Indemnification, unless ordered by a court in an action by or in the right
of the corporation or for advancement of expenses subject to an undertaking to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that the person is not entitled to indemnification, may not be
made to or on behalf of any director or officer if a final adjudication
establishes that his or her acts or omissions involved intentional misconduct,
fraud, or a knowing violation of the law and was material to the cause of
action.
The Southern Mineral bylaws provide that Southern Mineral must indemnify its
directors and officers from and against any and all liabilities, costs and
expenses incurred by them in such capacities to the fullest extent permitted by
the Nevada law and that Southern Mineral has the power to purchase and maintain
liability insurance for such persons as permitted by the Nevada law.
77
PetroCorp Southern Mineral
--------- ----------------
Limitation of Liability of Directors and Officers
Texas law permits a corporation to include in its articles of incorporation
a provision that a director of the corporation is not liable to the corporation
or its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except that such a provision cannot
eliminate or limit the liability of a director for:
. a breach of a director's duty of loyalty to the corporation or its
shareholders;
. an act or omission not in good faith that constitutes a breach of duty
of the director to the corporation or an act or omission that involves
intentional misconduct or a knowing violation of the law;
. a transaction from which a director received an improper benefit,
whether or not the benefit resulted from an action taken within the
scope of the director's office; or
. an act or omission for which the liability of a director is expressly
provided for by statute. A director who votes for or assents to a
distribution that is not permitted by statute and who did not use
ordinary care or good faith reliance on appropriate information to make
the decision is jointly and severally liable to the corporation for the
amount by which the distributed amount exceeds the amount permitted by
statute; however, if the distribution would have been permitted by
statute on any date after the date of the vote or assent, the director
shall have no liability.
Under Texas law, an officer is not liable for discharging any duty or power in
good faith and with ordinary care in reliance on reports, opinions, information
or statements prepared or presented by other officers or employees of the
corporation, including members of the board of directors; or legal counsel,
accountants or other persons believed to have expertise in the matter.
The PetroCorp and Southern Mineral articles both contain provisions which
eliminate director liability to the fullest extent provided by law.
Nevada law provides that the articles of incorporation may contain a
provision which limits the liability of directors or officers to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director or officer. The limitation of liability does not apply to
acts or omissions which involved intentional misconduct, fraud, a knowing
violation of law, or payment of a dividend in violation of Nevada law. Such
provision limits recourse for money damages which might otherwise be available
to the corporation or its shareholders for certain acts or omissions in breach
of fiduciary duty by individuals while acting as officers or directors.
Although this provision would not prohibit injunctive or similar actions
against directors or officers, the practical effect of such relief would be
limited.
78
PetroCorp Southern Mineral
--------- ----------------
Shareholder Rights Plan
On November 12, 1998, the PetroCorp board of directors adopted a shareholder
rights plan. Under the plan, each shareholder of record at the close of
business on November 23, 1998 received one Series A Preferred Stock Purchase
Right for each share of common stock held. Approximately 8,656,019 million
rights were distributed. The rights expire on November 12, 2008.
Each right entitles the shareholder to purchase 1/1000 of a preferred share
for a purchase price of $24.00. Each such fraction of a preferred share has
terms designed to make it essentially equivalent to one share of common stock.
The rights will become exercisable only in the event a person or group acquires
55% or more of PetroCorp's common stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning 55% of the
common stock. Prior to such an event, the rights are evidenced by and traded in
tandem with the common stock.
If a person or group acquires a 55% or larger position in PetroCorp, each
right (except those held by the acquiring party) will then entitle its holder
to purchase, at a price of $24, fractional shares of preferred stock having a
value equal $48, or twice the purchase price, with each fractional preferred
share valued at the market price of common stock. The effect will be to entitle
the holder to buy PetroCorp common stock at 50% of the market price.
Also, if following an acquisition of 55% or more of PetroCorp's common
stock, PetroCorp is acquired by that person or group in a merger or other
business combination transaction, each right would entitle its holder to
purchase common stock of the acquiring company having a value of twice the
purchase price. The effect will be to entitle the PetroCorp shareholder to buy
stock in the acquiring company at 50% of its market price.
PetroCorp may redeem the rights at $.001 per right at any time on or prior
to the tenth business day following the acquisition of 55% or more of its
common stock by a person or group or commencement of a tender offer for such
55% ownership.
Southern Mineral does not have any shareholder rights plans.
79
THE SHAREHOLDER MEETINGS
Information about the Shareholder Meetings and Voting
The PetroCorp and Southern Mineral boards are using this document to solicit
proxies from their shareholders for use at the special meetings.
Time and Place of the Shareholder Meetings
PetroCorp: Southern Mineral:
1:00 p.m., local time 9:00 a.m., local time
Tulsa Room, 9th Floor The Doubletree Hotel
Bank of Oklahoma Tower 400 Dallas Street
One Williams Center Houston, Texas 77002
Tulsa, Oklahoma 74172
Proposals
PetroCorp shareholders will vote on a proposal to approve the merger
agreement and the transactions contemplated by the merger agreement, including
the merger and the issuance of PetroCorp common stock in connection with the
merger.
Southern Mineral shareholders will vote on a proposal to approve the merger
agreement and the transactions contemplated by the merger agreement, including
the merger.
Record Date for the Special Meetings
You may vote at your shareholders' meeting if you owned shares of PetroCorp
or Southern Mineral common stock at the close of business on March 26, 2001.
Outstanding Shares Held on Record Date
On the record date, 8,721,819 shares of PetroCorp common stock, and
12,261,460 shares of Southern Mineral common stock were outstanding.
Shares Entitled to Vote at the Meetings
For each share of common stock that you own on that date, you will have one
vote on each proposal to be presented at the meeting. Shares of common stock
deemed beneficially held by PetroCorp or Southern Mineral or their subsidiaries
will not be voted.
Quorum Requirement for the Meetings
The presence at the meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of common stock is necessary to constitute a
quorum. If a quorum is not represented at the meeting, a vote for adjournment
will be taken among the shareholders present or represented by proxy vote for
adjournment. Abstentions and broker non-votes count as present for establishing
a quorum. Shares of common stock held by PetroCorp or Southern Mineral or their
subsidiaries do not count towards a quorum. A "broker non-vote" occurs with
respect to a proposal when a broker is not permitted to vote on that proposal
without instruction from the beneficial owner of the shares of common stock and
no instruction is given.
80
Shares Beneficially Owned By PetroCorp and Southern Mineral Directors and
Executive Officers As Of Record Date
Executive officers and directors of PetroCorp collectively own 4,601,938
shares of PetroCorp common stock. Executive officers and directors of Southern
Mineral collectively own 2,651,025 shares of Southern Mineral common stock.
These shares represent approximately 54.4% of the shares of PetroCorp common
stock outstanding as of record date and 21.6% of Southern Mineral shares as of
record date. These individuals are not a party to a shareholder agreement,
with the exception of Messrs. Coughlin, Wiese and Fuller, but they have
indicated that they intend to vote their outstanding shares of common stock in
favor of the proposals.
Votes Necessary at the Meetings to Approve PetroCorp and Southern Mineral
Proposals
Approval of the merger agreement and the transactions contemplated by the
merger agreement, including the merger, requires the approval of the holders
of a majority of the outstanding shares of Southern Mineral common stock
entitled to vote on the merger. Three directors, Messrs. Fuller, Coughlin and
Wiese, solely in their capacity as shareholders of Southern Mineral, are
parties to shareholder agreements pursuant to which they have agreed to vote
their shares of Southern Mineral common stock in favor of the merger,
representing approximately 18.3% of the shares of Southern Mineral common
stock outstanding as of the record date for voting at the special meeting.
Approval of the merger agreement and the transactions contemplated by the
merger agreement, including the merger and the issuance of PetroCorp common
stock requires approval by the holders of a majority of all outstanding shares
of PetroCorp common stock present, in person or by proxy, at a meeting at
which a quorum is present. Two large shareholders are parties to shareholder
agreements pursuant to which they have agreed to vote their shares of
PetroCorp common stock in favor of the merger, representing approximately
69.6% of the shares of PetroCorp common stock outstanding as of the record
date.
Voting By Proxy
You may vote in person at your meeting or by proxy. We recommend you vote
by proxy even if you plan to attend your meeting. You can always revoke your
proxy by changing your vote prior to or at your meeting.
You may vote by proxy by completing, signing, dating and returning the card
in the enclosed envelope.
The members of the PetroCorp board of directors unanimously approved and
recommend that you vote for approval of the merger agreement and the
transactions contemplated by the merger agreement, including the merger and
the issuance of PetroCorp common stock in connection with the merger.
The members of the Southern Mineral board of directors, each of which is an
independent director, unanimously approved and recommend that you vote for
approval of the merger agreement and the transactions contemplated by the
merger agreement, including the merger.
Approval by Southern Mineral and PetroCorp shareholders of the merger
agreement and the transactions contemplated by the merger agreement, are
conditions to consummation of the merger.
81
Revoking Your Proxy
You may revoke your proxy before it is voted by:
. submitting a new proxy with a later date,
. notifying your company's Secretary in writing before your
shareholder's Meeting that you have revoked your proxy; or
. voting in person, or notifying the Secretary orally of your wish to
revoke your proxy, at your shareholder's meeting.
Other Voting Matters
Voting in Person. If you plan to attend your meeting and wish to vote in
person, we will give you a ballot at your meeting. However, if your shares of
common stock are held in the name of a brokerage firm or trustee, you must
obtain from the firm or trustee an account statement, letter or other evidence
of your beneficial ownership of the common shares.
People with Disabilities. We can provide reasonable assistance to help you
participate in your shareholder's meeting if you tell us about your disability
and your plan to attend. Please call or write the Secretary of your company at
least two weeks before your shareholder's meeting at the number or address
provided on page .
Proxy Solicitation. We will each pay our own costs of soliciting proxies,
including the reasonable expenses of brokers, banks, fiduciaries and other
nominees in forwarding solicitation material to beneficial owners. In addition
to the solicitation of proxies by use of the mail, solicitation may be made by
telephone and facsimile and PetroCorp and Southern Mineral may utilize the
services of some of their respective officers and employees to solicit proxies
personally. Such officers and employees will not be additionally compensated
for such solicitation, but may be reimbursed for out-of-pocket expenses
incurred in connection therewith. If undertaken, we expect the expense of such
solicitation by officers and employees to be nominal. Both parties will file
with the SEC all materials used to aid in the solicitation of proxies.
You should submit your proxy without delay by mail. Also will reimburse
brokers and other nominees for their expenses in sending these materials to you
and getting your voting instructions.
Do not send in any Southern Mineral stock certificates with your proxy
cards. If the conditions to the merger, including the condition that Southern
Mineral shareholders submit stock election forms covering at least 3,000,000
shares of PetroCorp stock, are satisfied or waived, the exchange agent will
mail transmittal forms with instructions for the surrender of stock
certificates promptly after the closing of the merger.
Other Business; Adjournments and Postponements
We currently are not aware of any other business to be acted upon at either
meeting. If, however, other matters are properly brought before either meeting,
or any adjourned or postponed meeting, your proxies will have discretion to
vote or act on those matters according to their best judgment, including to
adjourn the meeting.
Adjournments or postponements of the shareholder meetings may be made for
the purpose of, among other things, soliciting additional proxies. Any
adjournment may be made from time to time by approval of the holders of common
shares representing a majority of the votes present in person or by proxy at
the meeting, whether or not a quorum exists, without further notice other than
by an announcement made at the special meeting. A vote by proxy against the
merger will result in such proxy being voted against an adjournment or
postponement of the shareholder meeting to solicit additional proxies. A vote
by proxy in favor of the merger will result in such proxy being voted for an
adjournment or postponement of a shareholder meeting to solicit additional
proxies.
82
THE COMPANIES
Southern Mineral
Overview and History
Southern Mineral is an independent oil and gas company headquartered in
Houston, Texas, and engaged in the acquisition, exploitation, exploration and
operation of oil and gas properties, primarily along the Gulf Coast of the
United States, in Canada and in Ecuador.
Southern Mineral was incorporated in 1937 as a vehicle to consolidate
mineral tracts retained as its parent company lumbered large tracts of southern
Mississippi forestlands. For the next 50 years, Southern Mineral was largely a
passive participant in the oil and gas business, merely granting leases on its
spread of mineral interests in Mississippi. In the mid-1980s, Southern Mineral
became a more active participant in the oil and gas business, redeploying its
significant cash flow from revenues derived from the Poplarville Field in
southern Mississippi into exploration activities. For the next ten years,
Southern Mineral pursued the sole strategy of exploration for oil and gas. As a
result of generally poor results, Southern Mineral changed its focus beginning
in 1995 to one of a more balanced program of acquisitions, exploitation and
exploration.
Southern Mineral completed a series of acquisitions over the next few years,
including, among others, the following:
. Diverse GP III. In April 1995, Southern Mineral acquired Diverse
Production Co., subsequently named SMC Production Co., whose primary
asset was a 18.906% general partnership interest in Diverse GP III. At
the time of the acquisition, Diverse GP III owned interests in over four
hundred oil and gas properties located in eleven states. As a result of
the acquisition, Southern Mineral's proven reserves more than doubled
from its January 1, 1995, reported reserves.
. Big Escambia Creek, Alabama. During 1997 and 1998, Southern Mineral
acquired working interests in the Big Escambia Creek Field and the
surrounding area in a series of six transactions. The largest
acquisition was the purchase of BEC Energy in May 1997, for $10.6
million. Thereafter, Southern Mineral acquired additional working
interests in the area for $12.1 million. The Big Escambia Creek Field
represents Southern Mineral's largest asset in terms of reserves with
approximately 2.2 million barrels of oil equivalent proved reserves as
of December 31, 1999. In addition to sales of oil and gas, Southern
Mineral earned $779,000 in revenues during 1999 from the sale of sulfur
from the field.
. Amerac Energy. In January 1998, Southern Mineral issued 3,333,333 shares
for all the outstanding shares of Amerac Energy. At January 1, 1998,
Amerac had proved reserves of 32.7 billion cubic feet of gas equivalent.
Subsequent to the acquisition, Southern Mineral sold a number of non-
strategic Amerac properties, and the remainder became a part of Southern
Mineral's U.S. oil and gas asset base.
. Neutrino Resources. In July 1998, Southern Mineral acquired, for cash,
all of the outstanding shares of Neutrino Resources, an independent oil
and gas company located in Calgary, Canada, for a total purchase price
of $57,198,000, including assumption of debt and working capital
deficit. Following the acquisition, Southern Mineral consolidated its
other Canadian assets into Neutrino, and began to operate in Canada
exclusively through Neutrino. Neutrino's principal assets at December
31, 1999 were in the Pine Creek Field and the Inverness/Swan Hills Field
in central and southern Alberta, Canada. At year-end 1999, Neutrino's
proved reserves totaled 3.9 million barrels of liquids (oil, condensate
and natural gas liquids) and 18.8 billion cubic feet of natural gas. In
1999, Southern Mineral's Canadian production was approximately 494,000
barrels of liquids and 2,300 million cubic feet of natural gas. In March
2000, Neutrino sold its interests in Inverness and Swan Hills in
Alberta, Canada, for $9.0 million.
Southern Mineral endured poor operating results in 1998 and its financial
condition at the end of 1998 resulted in Southern Mineral's independent
auditors, in their opinion on the 1998 financial statements,
83
disclosing their substantial doubt about Southern Mineral's ability to continue
as a going concern. In February 1999, the Southern Mineral board retained CIBC
World Markets Corp. as independent advisors to assist in evaluating various
strategic alternatives for maximizing shareholder value.
On July 21, 1999, Southern Mineral announced that its board had approved a
restructuring of Southern Mineral that involved a $20.6 million equity
infusion, the sale of the Brushy Creek and Texan Garden Fields in Texas and an
exchange offer for its 6.875% Convertible Subordinated Debentures due 2007.
However, based upon discussions with certain of the holders of its debentures,
the Southern Mineral board concluded that the restructuring could not be
consummated on the terms previously contemplated.
On October 29, 1999, Southern Mineral and its wholly-owned subsidiaries
(other than Neutrino) filed voluntary petitions for relief under Chapter 11,
Title 11 of the United States Code, in order to facilitate the restructuring of
Southern Mineral's long-term debt, revolving credit, trade debt and other
obligations. The filings were made in the U.S. Bankruptcy Court for the
Southern District of Texas, Victoria Division. All debts of Southern Mineral,
except those of Neutrino Resources, Inc., as of October 29, 1999 were stayed by
the bankruptcy petitions, and were subject to compromise pursuant to such
proceedings.
Southern Mineral decided to seek protection because it concluded that a
restructuring of its indebtedness could not be completed without the protection
and assistance of the bankruptcy court. The timing of the bankruptcy filing was
imposed by several factors, including the possible acceleration of Southern
Mineral's $16.1 million of indebtedness by its domestic bank creditors and the
inability of Southern Mineral to reach a satisfactory compromise with its
debenture holders regarding the consideration to be received in a previously
proposed restructuring. The bankruptcy petitions were filed in order to
preserve cash and to give Southern Mineral the opportunity to restructure its
debt. Southern Mineral operated as a debtor-in-possession subject to the
bankruptcy court's supervision and orders.
Southern Mineral emerged from bankruptcy on August 1, 2000. The terms of the
reorganization called for the holders of Southern Mineral's debentures to
exchange the debentures for 78% of the common equity of Southern Mineral with
the remaining 22% to go to prior equity owners of Southern Mineral. In the
reorganization, $41.4 million worth of debentures and $1.6 million of accrued
interest was satisfied in exchange for 9,536,422 shares of Southern Mineral
common stock. Prior to the reorganization Southern Mineral had 2,608,760 shares
outstanding; subsequent to the reorganization Southern Mineral had 12,145,182
shares outstanding. Shareholders, option holders and warrant holders of record
on July 24, 2000, received approximately 3,667,000 Series B perpetual warrants
allowing them to increase their ownership from 22% to up to 40% of the
outstanding common stock. Southern Mineral's board of directors was
restructured with five of seven new members appointed by the creditors'
committee or by large former debenture holders.
Corporate Overview
The following table shows Southern Mineral's principal subsidiaries and
equity investments, including their domicile and our percentage ownership in
each:
Percentage
Entity Domicile Ownership
------ -------- ----------
BEC Energy............................................... Texas 100%
SMC Ecuador.............................................. Delaware 100%
SMC Production........................................... Texas 100%
Neutrino Resources....................................... Alberta 100%
Spruce Hills Production.................................. Delaware 100%
84
Canadian Operations
Approximately 37% of Southern Mineral's oil and gas revenues during the year
ended December 31, 2000 were derived from Canadian properties. The costs and
revenues associated with Southern Mineral's Canadian operations are denominated
in Canadian dollars. Southern Mineral prepares its consolidated financial
statements in U.S. dollars. Fluctuations in the value of the two currencies may
cause currency translation losses for Southern Mineral or reduced revenues and
earnings, or both, with respect to its Canadian operations. Southern Mineral
cannot predict the effect of exchange rate fluctuations upon future operating
results.
Neutrino's principal assets at December 31, 2000 include one core area in
the Pine Creek Field in central and southern Alberta, Canada. At year-end 2000,
Neutrino's proved reserves totaled 2.0 million barrels of liquids (oil,
condensate and natural gas liquids) and 15.5 billion cubic feet of natural gas.
In 2000, Southern Mineral's Canadian production was approximately 308,000
barrels of liquids and 1,555 million cubic feet of natural gas. On March 1,
2000, Southern Mineral sold its interests in the Inverness/Swan Hills Field for
approximately $9.0 million resulting in a loss of $5.3 million, which was
recorded in Southern Mineral's financial statements as an impairment charge at
December 31, 1999.
Customers
We usually sell our oil and gas in the spot market or on such other bases
that may be impacted by the effect of changes in current market prices. Sales
of oil and gas to customers accounting for 10% or more of our revenues were as
follows years ended December 31, (in thousands):
% of % of % of
Oil & Gas Oil & Gas Oil & Gas
Customer 2000 Revenue 1999 Revenue 1998 Revenue
-------- ------ --------- ------ --------- ------ ---------
Damsco Distribution..... $7,298 21.7% $4,117 15.9% $3,747 17.2%
Global Petroleum
Marketing.............. -- -- 2,931 11.3% -- --
Canpet Energy Group,
Inc.................... 4,220 12.56% 2,793 10.8% -- --
Oil and Gas Reserve Information
The following table reflects Southern Mineral's estimated proved reserves at
December 31, 2000. The oil and gas reserves are principally onshore in the
continental United States, Canada and Ecuador. Southern Mineral's reserve
information has been based on estimates prepared by or audited by independent
petroleum engineers. Netherland, Sewell & Associates, Inc. prepared the
domestic and Ecuador reserve estimates. Chapman Petroleum Engineering Ltd.
prepared most of the Canadian reserve estimates, while Gilbert Laustsen Jung
Associates Ltd. prepared the remaining Canadian reserves estimates as of such
dates. Southern Mineral's U.S. oil reserves (including oil, condensate and
natural gas liquids) have been prepared using year-end oil prices received by
Southern Mineral of $25.52 per barrel and gas reserves were prepared using
year-end prices received by Southern Mineral of $10.05 per thousand cubic feet
(Mcf). The Canadian reserves have been prepared using year-end oil prices
received by Southern Mineral of $26.42 per barrel and year-end natural gas
prices of $9.38 per Mcf. Ecuador reserves were prepared using a year-end oil
price of $28.53. See "Risk Factors -- Reserve estimates depend on many
assumptions that may not turn out to be accurate. Any material inaccuracies in
these reserve estimates or underlying assumptions will materially affect the
quantities and net present value of our reserves" on page 22, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 90 and "Notes to the Consolidated Financial Statements"
beginning on page F-13.
U.S. Ecuador Canada Total
-------------------- --------------------- -------------------- --------------------
Gas Gas Gas
(thousand Gas (thousand (thousand
Oil cubic Oil (thousand Oil cubic Oil cubic
(Barrels) feet) (Barrels) cubic feet) (Barrels) feet) (Barrels) feet)
--------- ---------- --------- ----------- --------- ---------- --------- ----------
Proved Reserves......... 2,774,395 32,134,959 254,080 -- 1,986,000 15,522,000 5,014,475 47,656,959
========= ========== ======= === ========= ========== ========= ==========
Proved Developed
Reserves............... 2,518,217 22,816,013 254,080 -- 1,882,000 14,922,000 4,654,297 37,738,013
========= ========== ======= === ========= ========== ========= ==========
85
The following table sets forth the standardized measure of discounted future
net cash flows from projected production of Southern Mineral's proved oil and
gas reserves as of December 31, 2000 (in thousands):
United
States Ecuador Canada Total
-------- ------- -------- ---------
Future cash inflows................... $393,777 $ 7,249 $163,186 $ 564,212
Future production and development
costs................................ (87,391) (3,828) (30,250) (121,469)
Future income taxes................... (87,087) (174) (54,122) (141,393)
-------- ------- -------- ---------
Future net cash flows............... 219,289 3,247 78,814 301,350
10% Annual discount................... (93,695) (804) (34,482) (128,981)
-------- ------- -------- ---------
Standardized measure of discounted
future net cash flows................ $125,594 $ 2,443 $ 44,332 $ 172,369
======== ======= ======== =========
Production and Price History
The following table sets forth certain information concerning Southern
Mineral's annual net oil and gas production and average price information for
the year ended December 31:
2000 1999 1998
--------- --------- ---------
Production:
Oil and natural gas liquids (Barrels)
U.S............................................ 351,839 326,584 406,920
Ecuador........................................ 35,716 35,473 28,592
Canada......................................... 307,753 494,350 321,040
--------- --------- ---------
Total....................................... 695,308 856,407 756,552
========= ========= =========
Gas (thousand cubic feet)
U.S............................................ 2,491,537 3,095,456 4,219,528
Ecuador........................................ -- -- --
Canada......................................... 1,554,655 2,299,527 2,212,983
--------- --------- ---------
Total....................................... 4,046,192 5,394,983 6,432,511
========= ========= =========
Average sales prices:
Oil and natural gas liquids ($ per Barrel)
U.S............................................ $ 27.50 $ 15.30 $ 12.11
Ecuador........................................ 32.27 17.60 10.15
Canada......................................... 23.89 15.28 10.51
--------- --------- ---------
Average........................................ $ 26.15 $ 15.39 $ 11.36
========= ========= =========
Gas ($ per thousand cubic feet)
U.S............................................ $ 3.83 $ 2.21 $ 2.13
Canada......................................... 3.24 1.90 1.42
--------- --------- ---------
Average........................................ $ 3.60 $ 2.08 $ 1.89
========= ========= =========
Average costs ($ per thousand cubic feet
equivalent)
Operating expenses and production taxes......... $ 1.06 $ 0.84 $ 0.78
Depreciation, depletion and amortization........ 0.99 1.15 0.96
Productive Wells Statistics
The following table sets forth information concerning productive wells in
which Southern Mineral has an interest as of December 31, 2000. In the
following data "Gross" refers to the total wells in which Southern
86
Mineral has a working interest and "Net" refers to gross wells multiplied by
the percentage of the working interest owned by Southern Mineral.
Oil Gas Total
----------- ---------- -----------
Gross Net Gross Net Gross Net
----- ----- ----- ---- ----- -----
U.S.................................... 1,062 46.0 268 12.0 1,330 58.0
Canada................................. 855 85.5 -- -- 855 85.5
Ecuador................................ 204 41.9 276 27.1 480 69.0
----- ----- --- ---- ----- -----
Total.................................. 2,121 173.4 544 39.1 2,665 212.5
===== ===== === ==== ===== =====
Development and Exploratory Wells Drilled
The following table sets forth the drilling results of wells in which
Southern Mineral has a working interest for the year ended December 31:
2000 1999 1998
----------- ----------- -----------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- -----
Exploratory:
Oil.................................. -- -- -- -- 2 1.002
Gas.................................. 1 .094 8 2.620 1 .250
Dry.................................. 1 .250 1 .500 6 2.586
Development:
Oil.................................. 53 5.412 11 .457 11 .970
Gas.................................. 15 .754 13 .426 26 2.588
Dry.................................. 4 1.091 -- -- 5 2.135
Total:
Productive........................... 69 6.260 32 3.503 40 4.810
Dry.................................. 5 1.341 1 .500 11 4.721
87
Developed and Undeveloped Leasehold Acreage
The following table shows Southern Minerals's leasehold interest in
developed and undeveloped oil and gas acreage as of December 31, 2000. In the
following data "Gross" refers to the total acres in which Southern Mineral has
a working interest and "Net" refers to gross acres multiplied by the percentage
of the working interest owned by Southern Mineral.
Developed Undeveloped
Acreage Acreage
-------------- --------------
Gross Net Gross Net
------- ------ ------- ------
United States
Alabama......................................... 11,539 2,346 -- --
Arkansas........................................ -- -- 1,799 450
Colorado........................................ 1,920 21 -- --
Kansas.......................................... 1,360 53 -- --
Louisiana....................................... 34,728 2,780 392 131
Mississippi..................................... 2,880 84 -- --
Montana......................................... 160 2 -- --
New Mexico...................................... 18,720 227 -- --
North Dakota.................................... 800 48 -- --
Oklahoma........................................ 13,380 578 -- --
Oregon.......................................... 80 80 -- --
Texas........................................... 80,125 9,072 18,300 14,153
Utah............................................ 5,120 228 20,880 4,391
Wyoming......................................... 70,699 811 -- --
------- ------ ------- ------
Total--United States.......................... 241,511 16,330 41,371 19,125
------- ------ ------- ------
Canada
Alberta......................................... 155,824 13,209 111,734 22,641
Saskatchewan.................................... 2,815 252 5,347 5,188
British Columbia................................ 7,415 547 12,046 813
Manitoba........................................ 2,180 2,020 120 0
------- ------ ------- ------
Total--Canada................................. 168,234 16,028 129,247 28,642
------- ------ ------- ------
Ecuador........................................... 15,400 1,540 279,819 27,982
------- ------ ------- ------
Total Leasehold Acreage....................... 425,145 33,898 450,437 75,749
======= ====== ======= ======
Developed acreage consists of lease acres spaced or assignable to production on
which wells have been drilled or completed to a point that would permit
production of commercial quantities of oil or gas.
Competition
There is a high degree of competition in the oil and gas exploration and
production industry. Consequently, Southern Mineral competes with many other
entities for capital and desirable potential acquisitions and exploration and
development prospects. Southern Mineral's competitors include the major
integrated oil companies, as well as numerous independent oil and gas companies
and other producers of energy sources and fuels. Many of these competitors have
capital resources much greater than that of Southern Mineral, and may therefore
be better able than Southern Mineral to withstand and compete during adverse
market conditions. Southern Mineral's ability to generate revenues and reserves
in the future will be dependent upon, among other things, its success in
competing with these competitors. Southern Mineral's geographic diversity of
operations in Canada and the Gulf of Mexico provides Southern Mineral with an
advantage with respect to its competition.
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Regulations
Domestic Environmental Regulation. Southern Mineral's operations are subject
to numerous federal, state, and local laws and regulations relating to
environmental protection. These laws and regulations may require the
acquisition of permits before drilling commences; restrict or prohibit the
types, quantities and concentration of substances that can be released into the
environment in connection with drilling and production activities; prohibit
drilling activities on certain lands lying within wetlands or other protected
areas, impose restrictions on the injection of liquid into subsurface
formations, require remedial measures to mitigate pollution from former
operations (such as pit closure and plugging abandoned wells), and impose
substantial liabilities for pollution resulting from drilling and production
operations. Moreover, state and federal environmental laws and regulations may
become more stringent, and public interest in the protection of the environment
has increased dramatically in recent years. While we do not anticipate that
Southern Mineral will be required in the near future to spend amounts that are
material in relation to our total capital expenditure program due to
environmental laws and regulations, because such laws and regulations are
frequently changed, we are unable to predict with certainty the ultimate cost
of compliance.
Southern Mineral generates wastes that may be subject to the federal
Resource Conservation and Recovery Act of 1976, as amended, or the RCRA, and
comparable state statutes. The U.S. Environmental Protection Agency and various
state agencies have limited the approved methods of disposal for certain
hazardous and non-hazardous wastes. Moreover, legislation has been proposed in
Congress from time to time that would amend the RCRA to reclassify oil and gas
production wastes as "hazardous waste." If such legislation were enacted, it
could have a significant impact on the Company's operating costs, as well as on
the oil and gas industry in general.
Southern Mineral currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas.
Although Southern Mineral believes that it has used good operating and waste
disposal practices, prior owners and operators of these properties may not have
used similar practices, and hydrocarbons or other wastes may have been disposed
of or released on or under Southern Mineral's properties or on or under
locations where such wastes have been taken for disposal. In addition, many of
these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes was not under Southern
Mineral's control. The properties and the wastes disposed thereon may be
subject to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, or CERCLA, RCRA and analogous state laws as well as
state laws governing the management of oil and gas wastes. Under such laws,
Southern Mineral could be required to remove or remediate previously disposed
wastes (including wastes disposed or released by prior owners or operators) or
property contamination (including groundwater contamination), or to perform
remedial plugging operations to prevent future contamination.
The Oil Pollution Act, or OPA, contains numerous requirements relating to
the prevention of and response to oil spills into waters of the United States.
The OPA subjects persons responsible for "offshore facilities" to strict joint
and several liability for all containment and cleanup costs and certain other
damages arising from a spill, including, but not limited to, the costs of
responding to a release of oil to surface waters. OPA also requires owners and
operators of offshore facilities that could be the source of an oil spill into
federal or state waters, including wetlands, to post a bond, letter of credit
or other form of financial assurance in amounts ranging from $10 million in
specified state waters to $35 million in federal outer continental shelf waters
to cover costs that could be incurred by governmental authorities in responding
to an oil spill. Such financial assurances may be increased by as much as $150
million if a formal risk assessment indicates that the increase is warranted.
Noncompliance with OPA would subject Southern Mineral to varying civil and
criminal penalties and liabilities.
OPA imposes a variety of additional requirements on "responsible parties"
for vessels or oil and gas facilities related to the prevention of oil spills
and liability for damages resulting from such spills in waters of the United
States. The "responsible party" includes the owner or operator of an onshore
facility, pipeline, or vessel or the lessee or permittee of the area in which
an offshore facility is located. OPA assigns liability to
89
each responsible party for oil spill removal costs and a variety of public and
private damages from oil spills. While liability limits apply in some
circumstances, a party cannot take advantage of liability limits if the spill
is caused by gross negligence or willful misconduct or resulted from violation
of a federal safety, construction or operating regulation. If a party fails to
report a spill or to cooperate fully in the cleanup, liability limits likewise
do not apply. OPA establishes a liability limit for offshore facilities
(including pipelines) of all removal costs plus $75 million. Few defenses exist
to the liability for oil spills imposed by OPA. OPA also imposes other
requirements on facility operators, such as the preparation of an oil spill
contingency plan. Failure to comply with ongoing requirements or inadequate
cooperation in a spill event may subject a responsible party to civil or
criminal enforcement actions.
The Federal Water Pollution Control Act, as amended, commonly known as the
Clean Water Act or CWA, and comparable state laws and regulations require
certain owners or operators of facilities that store or otherwise handle oil,
such as Southern Mineral, to prepare and implement spill prevention, control,
countermeasure and response plans relating to the possible discharge of oil
into surface waters. The CWA also imposes restrictions and strict controls
regarding the discharge of produced waters and other oil and gas wastes into
navigable waters. Under the CWA, permits must be obtained to discharge
pollutants into state and federal waters. The CWA and analogous state laws
provide for civil, criminal and administrative penalties for any unauthorized
discharges of oil and other hazardous substances in reportable quantities and,
along with the OPA, may impose substantial potential liability for the costs of
removal, remediation and damages. State water discharge regulations and the
federal permits prohibit, or severely restrict the discharge of, produced water
and sand, and some other substances related to the oil and gas industry, to
coastal waters. Although the costs to comply with zero discharge mandates under
federal or state law may be significant, the entire oil and gas industry has
experienced or is experiencing similar costs. Southern Mineral believes that
these costs will not have a material adverse impact on its financial condition
and results of operations. Some oil and gas exploration and production
facilities are also required to obtain permits for their storm water
discharges. Costs may be incurred in connection with treatment of wastewater or
developing storm water pollution prevention plans.
Our operations may be subject to the Clean Air Act and comparable state and
local requirements. Amendments to the CAA were adopted in 1990 and contain
provisions that may result in the gradual imposition of certain pollution
control requirements with respect to air emissions from Southern Mineral's
operations. The EPA and various states have been developing regulations to
implement these requirements. Southern Mineral may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emission-related issues. However, Southern
Mineral does not believe its operations will be materially affected by any such
requirements.
International Environmental Regulation. Southern Mineral's operations in
Canada and Ecuador are subject to numerous federal, provincial and local laws
and regulations. Environmental legislation provides for restrictions and
prohibitions on releases or emissions of various substances produced in
association with certain oil and gas industry operations and can affect the
location and operation of wells and other facilities and the extent to which
exploration and development is permitted. In Canada, legislation also requires
that well and facility sites be abandoned and reclaimed to the satisfaction of
provincial authorities and local landowners. A breach of such legislation may
result in the suspension or revocation of licenses and authorizations, and the
suspension of operations, as well as the imposition of clean-up orders, fines
and penalties. In addition, certain types of operations may require
environmental assessment and reviews to be completed before approvals are
obtained and before exploration or development projects are begun. Southern
Mineral does not anticipate that it will be required to make capital or other
expenditures by reason of international environmental laws and regulations that
are material in relation to its total capital expenditure program or that would
have a material adverse effect on its earnings, but inasmuch as such laws and
regulations, are frequently changed, Southern Mineral is unable to predict the
ultimate cost of compliance.
Domestic Oil and Gas Regulation. Complex regulations concerning all phases
of energy development at the local, state and federal levels apply to Southern
Mineral's operations and often require interpretation by
90
Southern Mineral's professional staff or outside advisors. The federal
government and various state governments have adopted numerous laws and
regulations respecting the production, transportation, marketing and sale of
oil and natural gas. Regulation by state and local governments usually covers
matters such as the spacing of wells, allowable production rates, environmental
protection, pollution control, taxation and other related matters. Moreover,
future changes in local, state or federal laws and regulations could adversely
affect Southern Mineral's operations.
Domestic exploration for, and production of, oil and gas are extensively
regulated at both the federal and state levels. Legislation affecting the oil
and gas industry is under constant review for amendment or expansion,
frequently increasing the regulatory burden. Numerous departments and agencies,
both federal and state, are also authorized by statute to issue, and have
issued, rules and regulations binding on the oil and gas industry that often
are costly to comply with and that carry substantial penalties for non-
compliance. In addition, production operations are affected by changing tax and
other laws relating to the petroleum industry, by constantly changing
administrative regulations, and possible interruption or termination by
government authorities.
As a producer and seller of natural gas, Southern Mineral depends on
transportation and storage services offered by various interstate and
intrastate pipeline companies for the delivery and sale of its gas supplies.
Transportation and storage services rendered by interstate natural gas
pipelines are subject to the jurisdiction of the Federal Energy Regulatory
Commission, or the FERC, under the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. Competition across the natural gas industry has intensified
in recent years as a result of certain major rulemakings promulgated by the
FERC requiring interstate natural gas pipelines to unbundle transportation and
sales services and to render open-access transportation service on a
nondiscriminatory basis for third-party gas supplies. These FERC initiatives
have resulted in interstate pipelines abandoning their traditional merchant
function and offering various types and levels of services to their customers,
which, in turn, has greatly enhanced the ability of producers and others to
market natural gas supplies to local distribution companies and large
commercial and industrial end users.
The rates charged for interstate natural gas pipeline services are often
subject to negotiation between customers and the pipeline within certain FERC-
approved parameters. These rates are subject to change depending upon
individual system usage and other variables. Additionally, the availability of
interstate transportation and storage service necessary for Southern Mineral to
make sales or deliveries of gas can at times be preempted by other users of a
particular pipeline system in accordance with FERC-approved methods for
allocating open-access pipeline capacity.
The regulations affecting interstate pipeline services are subject to
ongoing review and amendment. Within the past year, FERC has issued several
notices of proposed rulemakings and inquiry through which it has indicated that
it is considering modifying certain existing regulations and policies in an
effort to
. maximize competition in short-term transportation markets,
. provide interstate pipelines with additional flexibility in order to
better tailor rates and terms and conditions of service to individual
customer needs, and
. better fashion regulatory policies that provide the correct incentives
and price signals for all segments of the industry while continuing to
guard against the exercise of market power. While these and other
potential FERC-initiatives may further facilitate market access for
natural gas producers, they will also likely result in increased
competition in markets in which the Company's natural gas is sold which
could negatively affect revenues in the future.
As a producer and seller of oil, Southern Mineral depends on services
offered by various interstate and intrastate oil pipelines. Services provided
by intrastate oil pipelines are subject to the jurisdiction of individual state
regulatory commissions, and the rules and regulations of these individual
commissions are subject to ongoing review and possible amendment. The rates,
terms and conditions of service and certain other aspects of
91
interstate oil pipeline service are subject to regulation under the Interstate
Commerce Act, which is administered by the FERC.
Canadian Oil and Gas Regulation. The oil and natural gas industry in Canada
is subject to extensive legislation and regulation governing its operations
including land tenure, exploration, development, production, refining,
transportation, marketing, environmental protection, exports, taxes, labor
standards and health and safety standards imposed by legislation enacted by
various levels of government. In addition, extensive legislation and regulation
exists with respect to pricing and taxation of oil and natural gas and related
products.
Employees
At March 7, 2001, Southern Mineral employed 16 full-time persons and 11
consultants. Southern Mineral is not subject to a collective bargaining
agreement and believes that its relations with its employees and consultants
are good.
Legal Proceedings
Southern Mineral is involved in several lawsuits arising in the ordinary
course of business. Management believes that the outcome of such proceedings
will not have a material adverse effect in the aggregate on Southern Mineral's
financial position or results of operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In addition to the above discussion, the following is intended to assist you
in understanding our financial condition and results of operations for each of
the years ended December 31, 2000, 1999 and 1998. This discussion should be
read together with the selected consolidated financial data and the
consolidated financial statements and related footnotes included in this
document. The following information contains forward-looking statements based
on our current expectations, assumptions, estimates and projections about us
and our industry which involve risks and uncertainties.
Accounting Policies
We use the successful efforts method of accounting for oil and gas property
acquisition, exploration, development, and production activities. Property
acquisition, exploration well and development well costs are capitalized as
incurred. Unsuccessful exploration well costs are subsequently charged to
exploration expense. Other exploration costs, including geological and
geophysical costs, the costs of retaining unproved property and costs to
operate and maintain wells and equipment are expensed as incurred. Capitalized
costs are amortized by field using the units-of-production method. Acquisition
costs are amortized based on proved reserves. Development costs are amortized
based on proved developed reserves. Capitalized costs of unproved properties
are excluded from amortization until such time as proved reserves are
established or impairment is determined.
External Factors
Our results of operations and the period to period comparability of our
financial results are affected by external factors, including changes in the
price of crude oil. Oil prices have historically been highly volatile. See
"Risk Factors--Risks Related to PetroCorp after the Merger."
Results of operations for the year ended December 31, 2000 as compared to the
year ended December 31, 1999
Oil and gas revenues for the year ended December 31, 2000 were $33,581,000
compared to oil and gas revenues of $25,865,000 for the same period in 1999.
Oil and natural gas liquids, or NGL, production
92
decreased 19% to 695,308 barrels and natural gas production decreased 25% to
4,046 million cubic feet, or mmcf, in the year ended December 31, 2000 compared
to the year ended December 31, 1999. The lower production levels in the year
ended December 31, 2000 are due primarily to the sale of properties in 1999 and
the first quarter of 2000 and natural declines in producing properties.
Increases in commodity prices more than offset the impact of the lower volumes.
Southern Mineral's average realized oil and NGL price increased 70% from
$15.39 per barrel in the year ended December 31, 1999 to $26.15 in the year
ended December 31, 2000. Southern Mineral's average realized natural gas prices
increased 73% to $3.60 per thousand cubic feet during the year ended December
31, 2000 compared to $2.08 per thousand cubic feet in the same period a year
earlier.
During the first quarter of 1999, Southern Mineral sold its mineral
interests and substantially all of its royalty interests in Texas, New Mexico
and Mississippi for approximately $6,000,000. The gain on the sale of these
assets was $5,073,000. The proceeds from asset sales in the first quarter of
1999 were used to reduce bank indebtedness and for other corporate purposes.
During the third quarter of 1999, Southern Mineral sold domestic properties
resulting in a net gain of approximately $7.1 million with no significant sales
in 2000.
For the year ended December 31, 2000, production costs, including production
and ad valorem taxes, decreased 2% to $8,730,000 compared to $8,898,000 in the
year ended December 31, 1999. However, on an energy equivalent unit basis,
production costs rose 26%, resulting primarily from non-recurring workovers and
other operations
Exploration, dry hole and lease impairment expenses incurred in the year
ended December 31, 2000 were $511,000, compared to $2,501,000 in the same
period in 1999. The 1999 expense is primarily from impairments of a portion of
the property held for sale and non-producing properties. Since Southern Mineral
uses the successful efforts method of accounting, exploration expenses may vary
greatly from period to period based upon the level of exploration activity.
General and administrative expenses were $3,248,000 in the year ended
December 31, 2000, a 17% decrease from $3,926,000 in the prior year's period
primarily related to reductions in force through attrition and layoffs in 1999
offset by charges related to issuance of common shares to Southern Mineral's
new directors in lieu of cash compensation and application of FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, or FIN 144. On an energy equivalent unit basis, costs increased
6% from the year ended December 31, 1999 to the same period in 2000.
Depreciation, depletion and amortization, or DD&A, decreased 32% to
$8,306,000 in the year ended December 31, 2000 compared to $12,302,000 in 1999
primarily related to decrease in production due to property sales. On a unit of
equivalent production basis, DD&A decreased 14% from $1.15 per thousand cubic
feet equivalent to $0.99 per thousand cubic feet equivalent.
Restructuring and bankruptcy costs were $5,544,000 in the year ended
December 31, 2000 compared to $4,388,000 in 1999. The costs for 2000 relate
primarily to charges associated with Southern Mineral's plan of reorganization,
which became effective August 1, 2000 and application of FIN 44. The 1999 costs
relate to charges associated with the proposed restructuring as filed with the
Securities and Exchange Commission on July 21, 1999, which was not consummated.
Interest and debt expense in the year ended December 31, 2000 was $2,470,000
compared to $6,236,000 in the same period in 1999. The decrease primarily
reflects the reduced indebtedness outstanding due to the application of
proceeds from property sales to debt reduction and no accrual of interest
related to subordinated debt in accordance with Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, or
SOP 90-7, through the effective date of the plan of reorganization.
Tax provision in the year ended December 31, 2000 was $2,415,000 compared to
tax benefit of $2,882,000 in the same period in 1999. The increase in tax
provision primarily reflects increased pre-tax income from
93
Company's Canadian operations in the year ended December 31, 2000 compared to a
loss in the same period in 1999, state income tax liability associated with
Southern Mineral's U.S. operations in 2000 and change in Southern Mineral's tax
strategy for its Canadian operations subsequent to December 31, 1999.
The extraordinary gain occurred in the third quarter of 2000 resulting from
the exchange of Southern Mineral's debentures for shares of common stock based
on the closing price of Southern Mineral's common stock on the plan of
reorganization confirmation date.
Southern Mineral recorded net income of $10,854,000, or $1.62 per basic
share for the year ended December 31, 2000 compared to a net loss of $5,758,000
or $2.25 per basic share for the year ended December 31, 1999.
Results of operations for the year ended December 31, 1999 as compared to the
year ended December 31, 1998
Oil and gas revenues for 1999, were $25,865,000, up 19% compared to oil and
gas revenues for the same period in 1998 of $21,722,000. The increase in
revenues reflects higher production volumes of crude oil and natural gas
liquids and increased natural gas and crude oil prices. The higher production
volumes are primarily the result of the inclusion of Neutrino for an entire
year in 1999 compared to six months of 1998 offset by decreased production
related to properties sold during 1999.
Natural gas production for 1999 was 5,395 million cubic feet, a 16% decrease
as compared to production for the same period in 1998 of 6,433 million cubic
feet. Southern Mineral's crude oil and natural gas liquids production for 1999
increased 13% to 856,407 barrels as compared to 756,552 barrels for the same
period in 1998. Production levels for 1999, when compared to 1998, reflect
increased production from Neutrino beginning in July 1998, offset by decreased
production related to property sales from Neutrino in the fourth quarter of
1998, the domestic mineral and royalty interests in the first quarter of 1999
and the Brushy Creek and Texan Gardens Field in the third quarter of 1999.
Average realized natural gas prices for 1999 increased 10% to $2.08 per
thousand cubic feet compared to $1.89 per thousand cubic feet in the same
period of 1998. During 1999, crude oil prices increased 35% to $15.39 per
barrel, compared to $11.36 per barrel in the same period in 1998.
Gain on sale of properties in 1999 was $11,976,000 compared to a loss of
$250,000 in 1998. The 1999 gain is primarily the result of sales of mineral
interests in the first quarter and Brushy Creek and Texan Garden Fields in the
third quarter of 1999.
Production costs, including production and ad valorem taxes, increased in
1999 to $8,898,000, up 4% from $8,518,000 in the same period in 1998, due in
part to the acquisition of Neutrino, which occurred in July 1998. On a cost per
thousand cubic feet equivalent basis, production costs in 1999 increased to
$0.84 per thousand cubic feet equivalent, or up 8% from $0.78 per thousand
cubic feet equivalent in 1998.
Exploration, dry hole and lease impairment expenses decreased for 1999 to
$2,501,000, compared to $3,635,000 in the same period of 1998. The 1999 expense
is primarily from impairments of properties held for sale and non-producing
properties. The amount recorded for 1998 was due primarily to a dry hole
drilled in Lafourche Parish, Louisiana in which Southern Mineral had a 93%
working interest. Since Southern Mineral uses the successful efforts method of
accounting, exploration expenses may vary greatly from period to period based
upon the level of exploration activity.
Depreciation, depletion and amortization expense for 1999 increased to
$12,302,000, up 17% from $10,505,000 in 1998. Southern Mineral computes
depreciation and depletion on each producing property using the unit-of-
production method. Since this method employs estimates of remaining reserves,
depreciation and depletion expenses may vary from period to period because of
revisions to reserve estimates, production rates and other factors.
Depreciation, depletion and amortization expense increased in 1999 to $1.15 per
thousand
94
cubic feet equivalent, up 20% from $0.96 per thousand cubic feet equivalent in
1998. The increase reflects inclusion of Neutrino beginning in July 1998 at a
higher per unit average depletion cost and the sales of primarily natural gas
properties of Neutrino in the fourth quarter of 1998, the domestic mineral and
royalty interests in the first quarter of 1999 and the Brushy Creek Field in
the third quarter of 1999, all with lower per unit average depletion costs.
General and administrative expenses increased to $3,926,000 in 1999, up 8%
from $3,622,000 in 1998. However, on a cost per thousand cubic feet equivalent
basis, general and administrative expenses increased 12% for 1999 to $0.37 per
thousand cubic feet equivalent from $0.33 per thousand cubic feet equivalent in
the same period of 1998. The increase in general and administrative expenses
for 1999, when compared to 1998, is not as great as would have been expected
due to the full year effect of Neutrino. Significant reductions in work force
through attrition and layoffs have occurred in 1999. In 1998 Southern Mineral
accrued and paid bonuses of $360,000 with no corresponding amounts in 1999.
Impairment of proved oil and gas properties decreased to $8,686,000, down 7%
compared to $9,344,000 in 1998. The 1999 impairments were primarily $3,386,000
to reflect revision of previous estimates and $5,300,000 to adjust Neutrino's
cost basis in Inverness and Swan Hills Fields to their net realized value based
on the estimated sales price received in 2000. Significant declines in world
oil prices during 1998 resulted in a writedown in the book value of a number of
proved oil and gas properties during the fourth quarter of 1998.
Restructuring and bankruptcy costs were $4,388,000 in 1999 compared to no
such costs in 1998. The Southern Mineral board concluded that the proposed
restructuring plan as filed with the SEC on July 21, 1999 could not be
consummated on the terms contemplated. Therefore, the estimated costs
associated with the restructuring of approximately $1,372,000 were expensed
during the third and fourth quarters of 1999. Since Southern Mineral's filing
for bankruptcy on October 29, 1999, it has incurred approximately $553,000
related to the bankruptcy. In addition $2,463,000 capitalized as other assets
for fees and expenses related to securing the domestic bank debt and
convertible subordinated debentures were expensed during the fourth quarter of
1999 pursuant to Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code."
Interest and debt expense in 1999 was $6,236,000, compared to $5,362,000 in
the same period in 1998. Interest expense increased as a result of an increase
in the outstanding bank debt incurred and assumed with Neutrino in July 1998
and because of increased rates of interest charged by Southern Mineral's
domestic and Canadian banks. Subsequent to the filing of bankruptcy, no
additional interest was accrued in accordance with Statement of Position 90-7.
The additional interest from October 29, 1999 to December 31, 1999 would have
been $474,375.
Tax benefits in 1999 and 1998 were $2,882,000 and $2,775,000, respectively,
resulting from pre-tax loss from Southern Mineral's Canadian operations.
As a result of the above items, Southern Mineral reported a net loss in 1999
of $5,758,000 or $2.25 per basic share, compared to a loss of $16,409,000, or
$6.60 per basic share in 1998.
Liquidity and Capital Resources
Southern Mineral has historically funded its operations, acquisitions,
exploration and development expenditures from cash flows from operating
activities, bank borrowing, issuance of common stock and debt securities, and
the sale of assets.
Southern Minerals's cash flow provided by operating activities for the year
ended December 31, 2000 was $14,144,000, for the year ended December 31, 1999
was $3,396,000, and for the year ended December 31, 1998 was $6,670,000.
Additional cash from the sale of assets was received in the amount of
$9,142,000 in 2000, $26,119,000 in 1999 and $11,508,000 in 1998.
95
On October 29, 1999, Southern Mineral and its wholly-owned subsidiaries
(other than Neutrino) filed voluntary petitions for relief under Chapter 11,
Title 11 of the United States Code, in order to facilitate the restructuring of
Southern Mineral's long-term debt, revolving credit, trade debt and other
obligations. The filings were made in the U.S. Bankruptcy Court for the
Southern District of Texas, Victoria Division. Southern Mineral emerged from
bankruptcy on August 1, 2000. All debts of Southern Mineral, except those of
Neutrino, as of October 29, 1999 were stayed by the bankruptcy petitions, and
were subject to compromise pursuant to such proceedings until August 1, 2000.
Southern Mineral operated as a debtor-in-possession subject to the bankruptcy
court's supervision and orders.
Southern Mineral decided to seek protection because it concluded that a
restructuring of its indebtedness could not be completed without the protection
and assistance of the bankruptcy court. The timing of the bankruptcy filing was
imposed by several factors, including the possible acceleration of Southern
Mineral's $16.1 million of indebtedness by its domestic bank creditors and the
inability of Southern Mineral to reach a satisfactory compromise with its
debenture holders regarding the consideration to be received in a previously
proposed restructuring. The bankruptcy petitions were filed in order to
preserve cash and to give Southern Mineral the opportunity to restructure its
debt.
In the ordinary course of business, Southern Mineral makes substantial
capital expenditures for the acquisitions, exploration and development of oil
and natural gas reserves. Historically, Southern Mineral has financed its
capital expenditures, debt service and working capital requirements with cash
flow from operations, public offerings of equity, private offerings of debt,
asset sales, borrowings under its senior credit facility and other financings.
Cash flow from operations is sensitive to the prices Southern Mineral receives
for its oil and natural gas production. Lower hydrocarbon production associated
with a reduction in planned capital spending or an extended decline in oil and
gas prices could result in less than anticipated cash flow from operations in
later years, which could have a material adverse effect on Southern Mineral.
On August 23, 2000, Southern Mineral entered into a new credit facility with
BankOne Texas in the principal amount of up to $30,000,000. At December 31,
2000, this domestic credit facility provides for a borrowing base of
$17,625,000 and matures on August 23, 2003. The borrowing base reduces $275,000
per month. We used proceeds from the domestic credit facility to repay the
prior domestic facility as provided in Southern Mineral's final plan of
reorganization. The obligations under the domestic credit facility are secured
by substantially all of the assets, other than Neutrino's assets. The domestic
credit facility prohibits the payment of dividends and contains covenants
relating to Southern Mineral's financial condition, including the following:
. Southern Mineral must maintain at all times no less than a 1 to 1 ratio
of current assets to current liabilities;
. Southern Mineral's tangible net worth as of the close of any fiscal
quarter must be equal to or greater than 85% of Southern Mineral's
tangible net worth on September 1, 2000 plus 75% of Southern Mineral's
positive quarterly net income and 100% of any new equity; and
. Southern Mineral's ratio as of the close of any fiscal quarter of its
EBITDA, or earnings before interest, taxes, and depreciation and
amortization expense, to payments of principal and interest on its debt
must exceed 1.2 to 1.
Southern Mineral is in compliance as of the most recent applicable date with
the covenants relating to financial condition in its domestic credit facility.
At December 31, 2000, the outstanding borrowing was $14,282,512. On March 7,
2001 outstanding borrowings under the domestic credit facility were $13,582,512
with borrowing availability of $3,767,488. Outstanding principal under the
domestic credit facility bears interest at the index rate published by BankOne
Texas plus 0.5% (10.0% at December 31, 2000) to the extent of the borrowing
base utilized. The borrowing base is redetermined semi-annually in May and
November at the sole discretion of the domestic lender. Southern Mineral may
request four additional borrowing base redeterminations during any calendar
year except that no more than one redetermination will be made each calendar
quarter.
On August 29, 2000, Neutrino repaid its prior Canadian credit facility and
entered into a new loan facility in the principal amount of up to U.S.
$30,000,000 loan facility with BankOne Canada. At December 31, 2000
96
the borrowing base under the Canadian credit facility is U.S. $10,075,000 and
is due August 29, 2003. At December 31, 2000, outstanding borrowings under the
Canadian credit facility were U.S. $2,531,814. The Canadian credit facility is
secured by substantially all of Neutrino's assets and guaranteed by Southern
Mineral. On March 7, 2001, outstanding borrowings under the Canadian credit
facility were U.S. $1,950,000 (Canadian $3,000,000) with a borrowing available
of U.S. $7,940,000 (Canadian $12,215,384). Outstanding principal under the
Canadian credit facility bears interest at BankOne Canada prime rate plus 0.5%
(8.0% at December 31, 2000) to the extent of the borrowing base utilized. The
Canadian credit facility contains certain covenants relating to the financial
condition of Neutrino, including the following:
. Neutrino must maintain at all times no less than a 1 to 1 ratio of
current assets to current liabilities;
. Neutrino's tangible net worth as of the close of any fiscal quarter must
be equal to or greater than 85% of Neutrino's tangible net worth on
August 31, 2000 plus 75% of Neutrino's positive quarterly net income and
100% of any new equity; and
. Neutrino's ratio as of the close of any fiscal quarter of its EBITDA, or
earnings before interest, taxes, and depreciation and amortization
expense, to payments of principal and interest on its debt must exceed
1.2 to 1.
Neutrino is in compliance as of the most recent applicable date with the
covenants relating to financial condition in its credit facility. The borrowing
base under the Canadian credit facility is subject to semi-annual
redeterminations beginning November 2000. The borrowing base is redetermined
semi-annually beginning November 2000 and will be made at the sole discretion
of the Canadian lender. Neutrino may request four additional borrowing base
redeterminations during any calendar year except that no more than one
redetermination will be made each calendar quarter.
The outstanding balance under the old Canadian credit facility was
classified as a current liability because of the demand feature of the loan.
However, it was management's intention that the facility be utilized to provide
long-term financing for Southern Mineral.
The domestic credit facility would require the consent of BankOne Texas, and
the Canadian facility would require the consent of BankOne Canada, to remain
outstanding following the merger. However, PetroCorp has agreed under the
merger agreement to fully pay off such credit facilities upon the closing of
the merger.
Southern Mineral did not declare dividends in the years ended December 31,
2000 and 1999. Southern Mineral does not expect, under its existing capital
structure, to be able to pay dividends for the foreseeable future. Payment of
dividends is currently prohibited by the terms of Southern Mineral's domestic
credit facility.
Quantitative and Qualitative Disclosures about Market Risk
Southern Mineral is exposed to a variety of market risks including the
potential for adverse changes in oil and gas natural gas prices, foreign
currency exchange rates and interest rates.
Southern Mineral's revenue stream is significantly affected by the level of
oil and natural gas prices, which can be volatile and over which Southern
Mineral has no control or influence. Southern Mineral has utilized natural gas
and oil price swaps and collars on a limited basis to hedge a portion of its
exposure to commodity price fluctuations. The effect of price swaps is to fix
the price for a specific quantity of gas or oil for a specific
time and collars are to secure a maximum and minimum price for a specific time.
During 1998 and 1999, the Company entered into natural gas and oil price
swaps and collars with third parties to hedge a portion of its production from
the effects of fluctuations in the market price of natural gas and oil. Due to
the bankruptcy filing, all third-party oil and gas hedges were cancelled by the
counter-parties to these contracts, resulting in the Company's recognition of a
loss of approximately $163,000 during 1999.
97
Subsequent to the Company's emergence from bankruptcy and as required by the
Company's Domestic and Canadian Credit Facilities, the Company has entered into
the following crude oil and natural gas costless collars in 2000.
Oil Hedges
US$ NYMEX WTI
Monthly ---------------------
Period Total Bbl Bbl Floor Cap
------ ---------- ---------- ---------------------
United States
Jan-01 - Dec-01................... 132,400 11,033 $ 22.00 $ 32.20
Jan-02 - Sep-02................... 88,200 9,800 $ 22.00 $ 25.60
Canada
Jan-01 - Dec-01................... 111,100 9,258 $ 22.00 $ 33.30
Jan-02 - Sep-02................... 70,300 7,811 $ 22.00 $ 27.00
Gas Hedges
US$
Houston Ship Channel
Total Monthly --------------------
Mmbtu Mmbtu Floor Cap
---------- ---------- ---------------------
United States
Jan-01 - Mar-01................... 285,000 95,000 $ 2.75 $ 6.85
Apr-01 - Oct-01................... 600,000 85,714 $ 2.75 $ 4.98
Nov-01 - Mar-02................... 378,000 75,600 $ 2.75 $ 4.85
Apr-02 - Oct-02................... 466,000 66,571 $ 2.75 $ 3.80
CDN $ Alberta Spot-
AECO
Total Monthly ---------------------
gigajoules gigajoules Floor Cap
---------- ---------- ---------------------
Canada
Jan-01 - Sep-02................... 1,050,000 50,000 $ 4.05 $ 6.15
Based on analysis utilizing actual derivative contractual terms in Southern
Mineral's contracts, which are standard form contracts in the industry, at
December 31, 2000, a 10% change in oil and gas prices would not have a material
adverse effect on the financial position or results of operations of the
Company, related to the collars.
The fair value at December 31, 2000 of collars was a net unrealized loss of
$3.1 million.
Southern Mineral operates in Canada and Ecuador, as well as the United
States and, as a result, is exposed to some foreign exchange rate risk. Natural
gas prices in Canada and oil prices in Canada and Ecuador tend to respond to
changes in the value of the local currencies versus the U.S. dollar. The
Company believes the economic exposure to it from fluctuations in currency
exchange rates is not material to its financial condition, results from
operations or cash flows.
Southern Mineral has two primary sources of debt financing: its domestic
bank credit facility and its Canadian bank credit facility. In Canada, Southern
Mineral has utilized interest rate swaps as a means of fixing the interest rate
on its indebtedness. The following table presents Southern Mineral's
indebtedness at December 31, 2000 as it relates to interest rate type and
maturity. Given the amount of Southern Mineral's variable rate indebtedness at
December 31, 2000, and taking into account the interest rate swap currently in
place, a 10% change in interest rates would imply an annualized change in pre-
tax interest expense of approximately $32,000.
2001 2002 2003 Thereafter Total Fair Value
----- -------- ---------- ---------- ----------- -----------
Variable Rate
Domestic Bank Debt.... -- $ 14,282,512 -- $14,282,512 $14,282,512
Canadian Bank Debt.... -- -- 2,531,814 -- 2,531,814 2,531,814
----- -------- ---------- ----- ----------- -----------
-- $ 16,814,326 -- $16,814,326 $16,814,326
Average Rate........ 9.7% 9.70%
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In August 2000, Southern Mineral fixed the rate of interest on its
outstanding bank borrowings under its Canadian credit facility through interest
rate swaps. At December 31, 2000, the fair value of Southern Mineral's interest
rate swap was a loss of approximately $94,000.
Recent Accounting Pronouncements
Effective January 1, 2001, Southern Mineral adopted Statement of Financial
Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish accounting and reporting
standards requiring that derivative instruments, including certain derivative
instruments embedded in other contracts, be recorded on the balance sheet at
fair value as either assets or liabilities. The accounting for change in the
fair value of a derivative instrument depends on the intended use and
designation of the derivative at its inception. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results of the hedged item in the statement of operations, and requires
Southern Mineral to formally document, designate and assess the effectiveness
of the hedge transaction to receive hedge accounting. For derivatives
designated as cash flow hedges, changes in fair value, to the extent the hedge
is effective, are recognized in other comprehensive income until the hedged
item is recognized in earnings. Overall hedge effectiveness is measured at
least quarterly. Any changes in the fair value of the derivative instrument
resulting from hedge ineffectiveness, as defined by SFAS 133 and measured based
on the cumulative changes in the fair value of the derivative instrument and
the cumulative changes in the estimated future cash flows of the hedged item,
are recognized immediately in earnings. Southern Mineral has designated all of
its commodity hedges as cash flow hedges.
Adoption of SFAS 133, resulted in the recognition of $197,000 of derivative
assets and $3.4 million of derivative liabilities on the Company balance sheet
and $1.9 million, net of taxes, of hedging losses included in accumulated other
comprehensive income as the cumulative effect of a change in accounting
principle and $796,000, net of taxes, recorded as a cumulative effect of change
in accounting principle to net income. Amounts are determined as of January 1,
2001 based on market quotes and portfolio of derivative instruments.
PetroCorp
PetroCorp is an independent oil and gas company engaged in the acquisition,
exploration, and development of oil and gas properties in North America.
PetroCorp's activities are conducted principally in the states of Oklahoma,
Texas, Mississippi, Louisiana and Kansas, and in the province of Alberta,
Canada.
As of December 31, 2000, PetroCorp had estimated proved reserves of
approximately 75 billion cubic feet of natural gas and 4.2 million barrels of
oil. PetroCorp had an estimated pretax present value of future net revenues,
discounted at 10%, of $410 million as of December 31, 2000. On a thousand cubic
feet equivalent basis, approximately 75% of PetroCorp's proved reserves were
natural gas at such date. In addition, PetroCorp has unproved properties with a
net book value of $2 million, as well as interests in natural gas processing
and gathering facilities with a net book value of $3 million.
PetroCorp's business strategy is to acquire, explore and develop oil and
natural gas properties in North America. PetroCorp has grown, in large part,
through the acquisition of producing oil and gas properties. PetroCorp
generally focuses on acquisitions of long-lived natural gas reserves located
onshore in North America and prefers acquisitions that provide additional
potential through development or exploitation efforts, as well as exploratory
drilling opportunities. Exploration and development activities are also an
important component of PetroCorp's business strategy. Through its management
agreement with Kaiser-Francis, PetroCorp expects to be able to allocate a
greater portion of future cash flows to exploration and development activities.
PetroCorp was formed in July 1983 as a Delaware corporation and in December
1986 contributed its assets to a newly formed Texas general partnership. In
October 1992, PetroCorp changed its legal form from a
99
Texas general partnership to a Texas corporation. In August 1999, PetroCorp
signed a management agreement with its largest shareholder, Kaiser-Francis. At
that time, Gary Christopher was named president and chief executive officer of
PetroCorp. Mr. Christopher is an employee of Kaiser-Francis and has served on
PetroCorp's board since 1996.
PetroCorp's principal executive offices are located at 6733 South Yale
Avenue, Tulsa, Oklahoma 74136, with a mailing address of P.O. Box 21298, Tulsa,
Oklahoma 74121-1298, and its telephone number is (918) 491-4500.
Pursuant to SEC rules, PetroCorp, unlike Southern Mineral, may incorporate
certain documents by reference. In addition to the information provided below
you should also refer to the documents incorporated by reference by PetroCorp
described on page 101 "Where You Can Find More Information," as well as
PetroCorp's Amended 2000 Annual Report on Form 10-K, attached as Annex XI.
Financing the Transaction
PetroCorp plans to finance the merger through existing lines of credit.
Receipt of financing is not a condition to the merger.
PetroCorp's Management Agreement with Kaiser-Francis
In connection with the purchase by Kaiser-Francis of PetroCorp common stock
from two significant shareholders during 1996, Kaiser-Francis succeeded to
rights under a registration rights agreement previously entered into between
PetroCorp and those shareholders, which agreement is substantially similar to
another registration rights agreement previously entered into between PetroCorp
and two subsidiaries of St. Paul.
As part of a restructuring plan, on August 3, 1999, PetroCorp's board
entered into the Kaiser-Francis management agreement, under which Kaiser-
Francis provides management, technical, and administrative support services for
all of PetroCorp's operations in the United States and Canada. The shareholders
of PetroCorp approved the management agreement in October 1999 and it took
effect on November 1, 1999. A new slate of corporate officers was approved at
that time.
The management agreement provides that Kaiser-Francis will perform oil and
gas operations and administrative support functions with respect to PetroCorp's
properties in both the United States and Canada.
Oil and gas operations to be performed by Kaiser-Francis include, for
example:
. geological and geophysical functions, including prospect generation and
evaluation;
. identification and evaluation of potential property acquisitions and
divestitures;
. engineering;
. lease operations;
. marketing;
. contract negotiation and administration;
. regulatory compliance; and
. land functions.
In addition, Kaiser-Francis performs administrative functions on behalf of
PetroCorp, including, for example:
. land functions;
. accounting, tax and audit functions;
100
. insurance;
. investor relations; and
. retaining third party consultants, such as attorneys and accountants,
on behalf of PetroCorp.
Under the management agreement, Kaiser-Francis may not make material
decisions without the approval of Petrocorp's Board of Directors. Material
decisions include:
. expenditures in excess of $250,000;
. sales of PetroCorp assets valued in excess of $500,000;
. long term production sales agreements;
. placement of certain liens on the Company's assets; and
. initiation or settlement of material litigation.
PetroCorp's principal officers, who will be approved by PetroCorp's Board of
Directors, will be responsible for executing all contracts and other
instruments on behalf of the Company.
For properties not operated by PetroCorp, the services fee payable to
Kaiser-Francis is, in most cases, equal to $50.00 per month per well. As to
properties operated by PetroCorp, Kaiser-Francis receives as its services fee
the administrative and overhead fees charged under applicable operating
agreements.
In addition, PetroCorp pays Kaiser-Francis a monthly service fee of $12,500.
For services of a non-routine nature that are performed in-house by Kaiser-
Francis, Kaiser-Francis shall receive compensation at a mutually agreed rate
that is competitive with the generally available rate charged for such
services. PetroCorp also reimburses Kaiser-Francis for certain direct out-of-
pocket expenses identified in the management agreement that are incurred by
Kaiser-Francis in performing its obligations thereunder. PetroCorp estimates
that the aggregate services fee, including the operations of Southern Mineral,
will equal approximately $2,300,000 per year at the companies' respective
current levels of operation. For the year ended December 31, 2000, Kaiser-
Francis received $1,419,000 from PetroCorp for management fees under the
management agreement.
101
SOUTHERN MINERAL WARRANT HOLDERS
In accordance with the terms of Southern Mineral's warrants, PetroCorp will
assume all obligations under any Southern Mineral warrants outstanding after
the merger closes and each holder of any such warrants will have the right to
receive the per share merger consideration she would have received for each
share of Southern Mineral stock she would have owned if she had exercised such
warrant immediately before the merger. Accordingly, for each hypothetical share
of Southern Mineral underlying the warrants, such warrant holder will receive
the per share merger consideration in cash, without interest, upon exercise of
the warrant and payment of the warrant exercise amount.
Stock election forms will be mailed to warrant holders at the same time they
are mailed to shareholders. A holder of a warrant that
. receives a stock election form,
. exercises her warrant in accordance with the applicable warrant
agreement after receipt of a stock election form but prior to the
expiration of the stock election period, and
. otherwise delivers a stock election form with respect to the shares
issuable under her warrant,
will have made a valid stock election with respect to shares issuable under her
warrant only if the warrants are exercised on or prior to the expiration of the
stock election period so that she is the record holder of the shares at the
expiration of the stock election period.
Any Southern Mineral Series B Perpetual Warrant may be exercised in whole or
part, at any time or from time to time, by
. surrendering the warrant certificate to the warrant agent with a duly
executed subscription form from the warrant certificate, and
. paying in full the warrant price of $4.21 per full share of Southern
Mineral common stock and any applicable taxes, as provided in the
Southern Mineral Series B Perpetual Warrant Agreement, a copy of which
is attached as Annex X.
The warrant agent is America Stock Transfer & Trust Company, 6201 Fifteenth
Avenue New York, New York, 11219.
PetroCorp does not plan on maintaining a market for the Southern Mineral
warrants should the merger be consummated.
We encourage holders of Series B warrants to read the warrant agreement,
which is attached as Annex L, in its entirety.
SHAREHOLDER PROPOSALS
Although the deadline for submitting a proposal for PetroCorp's 2001 annual
meeting of shareholders has passed, any PetroCorp shareholder who intends to
present a proposal at PetroCorp's 2002 annual meeting of shareholders for
inclusion in the proxy statement and form of proxy relating to that meeting is
advised that the proposal must have been received by the Secretary of PetroCorp
at its principal executive offices not later than 120 days prior to the date of
the first anniversary of PetroCorp's 2001 annual meeting proxy statement.
PetroCorp will not be required to include in its proxy statement a form of
proxy or shareholder proposal received after that date or that otherwise fails
to meet the requirements for shareholder proposals established by regulations
of the SEC.
If the merger is consummated as currently contemplated, there will be no
2002 annual meeting of Southern Mineral shareholders. However, if it is not
consummated as intended, any Southern Mineral
102
shareholder who intends to present a proposal at Southern Mineral's 2002 annual
meeting of shareholders for inclusion in the proxy statement and form of proxy
relating to that meeting is advised that the proposal must be received by the
Secretary of Southern Mineral at its principal executive offices by December
31, 2001. Southern Mineral will not be required to include in its proxy
statement a form of proxy or shareholder proposal that is received after that
date or that otherwise fails to meet the requirements for shareholder proposals
established by regulations of the SEC.
103
WHERE YOU CAN FIND MORE INFORMATION
PetroCorp has filed with the SEC a registration statement on Form S-4 under
the Securities Act that registers the issuance of the shares of PetroCorp
common stock in the merger to Southern Mineral shareholders. The registration
statement, including the attached exhibits and schedules, contains additional
relevant information about PetroCorp and Southern Mineral. The rules and
regulations of the SEC allow us to omit certain information included in the
registration statement from this document. You can inspect and copy the
registration statement at the addresses below or you can review it on the SEC's
website as set forth below.
In addition, PetroCorp and Southern Mineral file reports, proxy statements
and other information with the SEC under the Exchange Act. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. You
may read and copy, at prescribed rates, this information at the following
locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
The SEC also maintains an Internet website that contains reports, proxy
statements and other information about issuers, like PetroCorp and Southern
Mineral, who file electronically with the SEC. The address of that website is
www.sec.gov. You can also inspect reports, proxy statements and other
information about PetroCorp at the offices of the AMEX at 86 Trinity Place, New
York, New York 10006.
The SEC allows PetroCorp to incorporate by reference certain information
into this document. This means that the companies can disclose important
information to you by referring you to another document filed separately with
the SEC and not included in, or delivered with, this document. The information
incorporated by reference is considered to be a part of this document, except
for any information that is superseded by information that is included directly
in this document.
This document incorporates by reference the documents listed below that
PetroCorp has previously filed with the SEC. They contain important information
about PetroCorp and its financial condition.
PETROCORP COMMISSION FILINGS
(File No. 001-14459) DESCRIPTION OR PERIOD
----------------------------- --------------------------------------
Amended Annual Report on Form 10-K filed
March 26, 2001............................ Year Ended December 31, 2000
Proxy Statement on Schedule 14A (other than
the compensation committee report and the
stock performance chart) filed April 17, For PetroCorp's 2000 annual meeting of
2000...................................... shareholders held on May 19, 2000
Current Report on Form 8-K filed on January
4, 2001................................... Press release, dated December 22,
2000, announcing merger agreement
between PetroCorp and Southern Mineral
In addition, PetroCorp is delivering to you, an annex to this document,
PetroCorp's Amended 2000 Annual Report on Form 10-K for the year ended December
31, 2000. PetroCorp incorporates by reference additional documents that it may
file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act between the date of this document and the date the stock election forms are
required to be submitted by Southern Mineral shareholders. These documents
include periodic reports, such as annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, as well as proxy
statements.
You can obtain any of the documents incorporated by reference in this
document through PetroCorp or from the SEC through the SEC's website at the
address described
104
above. Documents incorporated by reference are available from PetroCorp without
charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this document. You can
obtain documents incorporated by reference as an exhibit in this document by
requesting them in writing or by telephone from the appropriate company at the
following address:
For Petrocorp shareholders: For Southern Mineral shareholders:
6733 South Yale Avenue 1201 Louisiana Street, Suite 3350
Tulsa, Oklahoma 74136 Houston, Texas 77002
(918) 491-4500 (713) 658-9444
If you would like to request documents, please do so by April 20, 2001 to
receive them before the meetings. If you request any incorporated documents
from us, we will mail them to you by first class mail, or another equally
prompt means, within one business day after we receive your request.
We have not authorized anyone to give you any information or to make any
representation about the merger or our companies that differs from or adds to
the information contained in this document or in the documents our companies
have publicly filed with the SEC. Therefore, if anyone should give you any
different or additional information, you should not rely on it.
If you live in a jurisdiction in which it is unlawful to offer to exchange
or sell, or to ask for offers to exchange or buy, the securities offered by
this document, or to ask for proxies, or if you are a person to whom it is
unlawful to direct such activities, then the offer presented by this document
does not extend to you. The information contained in this document speaks only
as of the date indicated on the cover of this document unless the information
specifically indicates that another date applies.
LEGAL AND TAX MATTERS
The validity of the shares of PetroCorp common stock to be issued in the
merger will be passed upon for PetroCorp by Frederic Dorwart, Lawyers, counsel
to PetroCorp.
Akin, Gump, Strauss, Hauer & Feld, L.L.P. has acted as counsel to Southern
Mineral, and the discussion under the heading "U.S Federal Income Tax
Consequences of the Merger" constitutes its legal opinion as to the matters
discussed therein.
EXPERTS
The financial statements of PetroCorp incorporated as of December 31, 2000
and 1999 and for each of the three years in the period ended December 31, 2000
incorporated in this joint proxy statement prospectus by reference to the
Amended 2000 Annual Report on Form 10-K for the year ended December 31, 2000
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Certain estimates of PetroCorp's oil and gas reserves included in this proxy
statement/prospectus were based on reserve reports, dated December 31, 2000,
prepared by Huddleston & Co., Inc., independent petroleum engineers. These
estimates are included in reliance on the authority of each firm as experts in
such matters.
Certain estimates of Southern Mineral's oil and gas reserves included in
this proxy statement/prospectus were based on reserve reports, dated December
31, 2000, prepared by Gilbert Laustsen Jung Associates Ltd., Netherland, Sewell
& Associates, Inc., and Chapman Petroleum Engineering, Ltd., independent
petroleum engineers. These estimates are included in reliance on the authority
of each firm as experts in such matters.
The financial statements of Southern Mineral as of December 31, 2000 and
1999, and for each of the three years in the three-year period ended December
31, 2000 have been included herein and in the registration
105
statement in reliance upon the report of KPMG LLP, independent certified
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP, current independent certified
accountants of PetroCorp, expect to be present at the PetroCorp public meeting,
and KPMG LLP, current independent certified accountants of Southern Mineral,
expect to be present at the Southern Mineral public meeting and will be
available to respond to appropriate questions from PetroCorp and Southern
Mineral shareholders, in attendance. Although these representatives have stated
that they do not intend to make any statements at the PetroCorp or Southern
Mineral meetings, they will have the opportunity to do so.
OTHER MATTERS
Pursuant to the PetroCorp bylaws, the business that may be conducted at the
PetroCorp meeting is confined to the purposes described in the notice of
meeting of shareholders that accompanies this document.
Pursuant to Southern Mineral's bylaws, the business that may be conducted at
the Southern Mineral meeting is confined to the purposes described in the
notice of meeting of shareholders that accompanies this document.
106
INDEX TO FINANCIAL STATEMENTS
Page
----
PetroCorp (pro forma):
Unaudited Pro Forma Combined Balance Sheet as of December 31, 2000...... F-3
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 2000...................................................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-5
Southern Mineral (historical):
Independent Auditors' Report............................................ F-7
Consolidated Balance Sheets at December 31, 2000 and 1999............... F-8
Statements of Consolidated Operations for the Years Ended December 31,
2000, 1999 and 1998.................................................... F-9
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 2000, 1999 and 1998............ F-10
Statements of Consolidated Cash Flows for the Years Ended December 31,
2000,
1999 and 1998.......................................................... F-11
Notes to Consolidated Financial Statements for the Years Ended December
31, 2000,
1999 and 1998.......................................................... F-13
F-1
PETROCORP INCORPORATED
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following presents the unaudited pro forma combined financial statements
after giving effect to the acquisition by PetroCorp of Southern Mineral. The
unaudited pro forma balance sheet is based on the historical balance sheets of
PetroCorp incorporated by reference herein, and Southern Mineral appearing
elsewhere in this document and has been prepared to reflect the acquisition by
PetroCorp of Southern Mineral as if the acquisition had occurred on December
31, 2000. The unaudited pro forma statement of operations is based on the
historical statement of operations of PetroCorp incorporated by reference
herein, and the historical statement of operations of Southern Mineral
appearing elsewhere in this document, and reflects the results of operations of
PetroCorp and of Southern Mineral for the year ended December 31, 2000, as if
the acquisition occurred on January 1, 2000. These unaudited pro forma
statements should be read in conjunction with the historical financial
statements and notes thereto of PetroCorp and Southern Mineral included
elsewhere in this document.
The unaudited pro forma combined financial statements do not purport to be
indicative of the results of operations that would actually have occurred if
the transaction described had occurred as presented in such statements or that
may occur in the future. As described in "Risks Related to PetroCorp After the
Merger" on page 19, PetroCorp is managed by Kaiser-Francis under a Management
Agreement. The terms of the Management Agreement are described on pages 96 and
97. In addition, future results may vary significantly from the results
reflected in such statements due to general economic conditions, oil and gas
commodity prices, PetroCorp's ability to successfully integrate the operations
of Southern Mineral with its current business and several other factors, many
of which are beyond PetroCorp's control. See "Risk Factors" beginning on
page 23.
The Southern Mineral acquisition will be accounted for using the purchase
method. After the acquisition, the purchase cost will be allocated to the
PetroCorp assets and liabilities based on the respective fair values at the
date the merger was agreed to and announced. The final allocation of the actual
purchase price is subject to the final valuation of the acquired assets and
assumed liabilities, but that allocation is not expected to differ materially
from the preliminary allocation presented in these pro forma combined financial
statement. This final allocation is expected to occur as soon as all relevant
data for evaluating property values can be obtained. In no case will this
evaluation go beyond December 31, 2001.
As described in Note A to the Unaudited Pro Forma Combined Financial
Statements and elsewhere in this document, PetroCorp will issue from a minimum
of 3,000,000 to a maximum of 4,108,968 shares of PetroCorp stock, based on the
elections of Southern Mineral shareholders and warrant and option holders.
Southern Mineral shareholders and warrant and option holders who do not receive
stock will receive a right to receive cash of $4.71 per share, net of any
warrant or option exercise price, for each share, option or warrant held.
F-2
PETROCORP INCORPORATED
Unaudited Pro Forma Combined Balance Sheet
December 31, 2000
(Amounts in thousands)
Pro Forma Based on Pro Forma Based on
4,108,968 shares 3,000,000 shares
Southern Pro Forma issued issued
PetroCorp Mineral Adjustment -------------------- --------------------
ASSETS Incorporated Corporation Notes Adjustments Combined Adjustments Combined
------ ------------ ----------- ---------- ----------- -------- ----------- --------
Current assets:
Cash and cash
equivalents........... $ 21,946 $ 1,207 A $(18,603) $ 4,550 $(29,692) $ 3,461
B 0 10,000
Accounts receivable,
net................... 13,332 6,050 19,382 19,382
Other current assets... 609 500 A (444) 665 (444) 665
-------- ------- -------- --------
Total current
assets.............. 35,887 7,757 24,597 23,508
-------- ------- -------- --------
Property, plant and
equipment.............. 70,936 73,536 A 11,933 156,405 12,289 156,761
Deferred income taxes... 10,254 10,254 10,254
Other assets, net...... 242 603 A (160) 685 (160) 685
-------- ------- -------- -------- -------- --------
Total assets......... $117,319 $81,896 $ (7,274) $191,941 $ (8,007) $191,208
======== ======= ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Current liabilities:
Accounts payable....... $ 17,732 $ 3,362 $ $ 21,094 $ $ 21,094
Accrued liabilities.... 2,488 3,446 A 2,947 9,056 2,947 9,056
G 175 175
Income tax payable..... 5,444 5,444 5,444
Current portion of
long-term debt........ 1,194 1,194 1,194
-------- ------- -------- --------
Total current
liabilities......... 26,858 6,808 36,788 36,788
-------- ------- -------- --------
Long-term debt.......... 29,992 16,814 B 0 46,806 10,000 56,806
-------- ------- --------
Deferred income taxes... 6,192 6,490 A 1,501 14,183 1,580 14,262
-------- ------- --------
Shareholders' equity:
Common stock........... 87 122 A (81) 128 (92) 117
Additional paid-in
capital............... 71,614 61,794 A (21,773) 111,460 (32,574) 100,659
G (175) (175)
Accumulated deficit.... (11,712) (8,797) A 8,797 (11,712) 8,797 (11,712)
Accumulated other
comprehensive loss.... (5,712) (1,283) A 1,283 (5,712) 1,283 (5,712)
Treasury stock......... (52) A 52 52
-------- ------- -------- --------
Total shareholders'
equity.............. 54,277 51,784 94,164 83,352
-------- ------- -------- -------- -------- --------
Total liabilities and
shareholders'
equity.............. $117,319 $81,896 $ (7,274) $191,941 $ (8,007) $191,208
======== ======= ======== ======== ======== ========
See Notes to Unaudited Pro Forma Combined Financial Statements
F-3
PETROCORP INCORPORATED
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2000
(In thousands, except per share amounts)
Pro Forma Based on Pro Forma Based on
4,108,968 shares 3,000,000 shares
Pro Forma issued issued
PetroCorp Southern Mineral Adjustment -------------------- --------------------
Incorporated Corporation Notes Adjustments Combined Adjustments Combined
------------ ---------------- ---------- ----------- -------- ----------- --------
Revenues:
Oil and gas........... $42,264 $33,581 $ (572) $75,273 $ (572) $75,273
Plant processing...... 1,934 1,934 1,934
Other................. 375 572 947 572 947
------- ------- ------ ------- ------ -------
44,573 33,581 -- 78,154 -- 78,154
------- ------- ------ ------- ------ -------
Expenses:
Production costs...... 8,038 8,730 16,768 16,768
Exploration........... 511 C (511) (511)
Depreciation,
depletion and
amortization......... 9,471 8,306 D (672) 17,105 (637) 17,140
General and
administrative....... 1,529 3,248 4,777 4,777
Restructuring and
bankruptcy costs..... (445) 5,544 5,099 5,099
Other operating
expenses............. 309 309 309
------- ------- ------ ------- ------ -------
18,902 26,339 (1,183) 44,058 (1,148) 44,093
------- ------- ------ ------- ------ -------
Income (loss) from
operations 25,671 7,242 1,183 34,096 1,148 34,061
------- ------- ------ ------- ------ -------
Other income (expenses):
Investment income..... 584 239 823 823
Interest expense...... (3,381) (2,470) F (5,851) (790) (6,641)
Gain (loss) on sale of
properties and other
assets............... (1) C 1 0 1 0
Other income
(expenses)........... 295 295 295
------- ------- ------ ------- ------ -------
(2,502) (2,232) 1 (4,733) (789) (5,523)
------- ------- ------ ------- ------ -------
Income (loss) before
income taxes 23,169 5,010 1,184 29,363 359 28,538
Income tax expense
(benefit):
Current expense
(benefit)............ 5,497 (24) 5,473 5,473
Deferred expense
(benefit)............ 4,612 2,439 E 450 7,501 136 7,187
------- ------- ------ ------- ------ -------
10,109 2,415 450 12,974 136 12,660
------- ------- ------ ------- ------ -------
Income from continuing
operations $13,060 $ 2,595 $ 734 $16,389 $ 223 $15,878
======= ======= ====== ======= ====== =======
Income (loss) per share,
continuing operations
-- basic............. $ 1.50 $ 1.28 $ 1.36
======= ======= =======
-- diluted........... $ 1.49 $ 1.27 $ 1.35
======= ======= =======
Weighted average number
of common shares
-- basic............. 8,692 A 4,109 12,801 3,000 11,692
======= ======= =======
-- diluted........... 8,786 A 4,109 12,895 3,000 11,786
======= ======= =======
See Notes to Unaudited Pro Forma Combined Financial Statements
F-4
PETROCORP INCORPORATED
Notes to Unaudited Pro Forma Combined Financial Statements
A Record the purchase by PetroCorp of Southern Mineral for 4,108,968 shares of
PetroCorp stock and cash of $4.71 per Southern Mineral share not converted
to PetroCorp stock, net of cash anticipated to be received from the exercise
of Southern Mineral warrants and options. The fair value of PetroCorp common
stock used in the pro forma calculations is $9.75 per share, which reflects
the trading price three days prior and three days after the date on which
the merger was agreed to and announced. Warrant and option holders who do
not exercise prior to the consummation of the merger will receive a right to
cash equal to the net of $4.71 less the exercise price. For purposes of
these pro forma financial statements, it is assumed that all warrants and
options are exercised at December 31, 2000, and therefore the net purchase
consideration related to warrant and option holders reflected in the
purchase price allocation is $1,834,000 and $246,000, respectively.
The pro forma data based on 3,000,000 shares being issued show an additional
cash outlay of $11,089,000. This results in a purchase price that is
$277,000 higher (additional allocation to property, plant and equipment of
$356,000, less $79,000 of additional deferred income taxes) than the pro
forma data based on 4,108,968 shares being issued.
The purchase price allocation is (amounts in thousands):
Assuming Assuming
4,108,968 3,000,000
shares issued shares issued
------------- -------------
Issuance of common stock.................... $40,062 $29,250
Net cash to Southern Mineral
stockholders(1)............................ 18,603 29,692
Assumed liabilities and debt and liabilities
incurred................................... 34,560 34,639
------- -------
Total purchase consideration................ $93,225 $93,581
======= =======
(1) The net cash payable to Southern Mineral shareholders was determined
as follows:
Assuming Assuming
4,108,968 3,000,000
shares issued shares issued
------------- -------------
12,232,000 Southern Mineral shares at
$4.71...................................... $57,613 $57,613
81,000 stock options with various prices.... 246 246
3,667,000 warrants with net cash right of
$.50 per share............................. 1,834 1,834
------- -------
59,693 59,693
Reduced for dollar equivalent of PetroCorp
shares issued, assuming a $10 per share
amount..................................... 41,090 30,001
------- -------
Net cash.................................... $18,603 $29,692
======= =======
3,000,000 shares
4,108,968 shares issued issued
------------------------- ---------------------
Southern Mineral Estimated Fair Pro Forma Estimated Pro Forma
Book Value Value Adjustment Fair Value Adjustment
---------------- -------------- ---------- ---------- ----------
Current assets.......... $ 7,757 $ 7,313 $ (444) $ 7,313 $ (444)
Property, plant and
equipment.............. 73,536 85,469 11,933 85,825 12,289
Other assets............ 603 443 (160) 443 (160)
Current liabilities..... (6,808) (9,755) (2,947) (9,755) (2,947)
Debt assumed by
PetroCorp.............. (16,814) (16,814) -- (16,814) --
Deferred income taxes... (6,490) (7,991) (1,501) (8,070) (1,580)
-------- -------- ------- -------- -------
$ 51,784 $ 58,665 $ 6,881 $ 58,942 $ 7,158
======== ======== ======= ======== =======
F-5
PETROCORP INCORPORATED
Notes to Unaudited Pro Forma Combined Financial Statements--(Continued)
Note: The adjustments of current assets and other assets are to write off
the book basis of existing Southern Mineral bank loan cost which is not
expected to have ongoing value to PetroCorp. The fair value of current
liabilities includes the following estimated incremental costs to be borne
by Southern Mineral: $1,357,000 for severance and retention payments,
$1,240,000 for investment advisory fees and $350,000 for legal, accounting,
printing and filing costs related to the merger agreement, which will be
incurred by Southern Mineral. (These adjustments are not included in the
unaudited pro forma combined statement of operations, however they are
included in the combined balance sheet.)
B Record estimated drawdown of additional long-term debt to complete financing
of transaction. The pro forma data based on 3 million shares being issued
include additional borrowings of $10 million in order to complete the
transaction.
C Adjust Southern Mineral's exploration expense and gain (loss) of sale of
properties which are shown as current items of profit and loss under the
successful efforts method of accounting, but are adjustments to property,
plant and equipment under the full cost method of accounting for oil and gas
producing activities which is used by PetroCorp.
D Record depreciation, depletion and amortization expense of oil and gas
properties using a rate of $.82 per thousand cubic feet equivalent (Mcfe)
based on combined production of 19,011,000 Mcfe for the year ended December
31, 2000 and combined reserves of 198,774,000 Mcfe at January 1, 2000. This
combined rate reflects the impact of the allocation of purchase price to
Southern Mineral's proved oil and gas properties. Included in total
depreciation, depletion and amortization expense is $1,524,000 related to
non-oil and gas properties. For 2000, PetroCorp and Southern Mineral,
respectively, had composite oil and gas depreciation, depletion and
amortization rates of $.74 and $1.15 per Mcfe.
E Record deferred income tax effects of the pro forma adjustments at a
statutory rate of 38%.
F Record interest expense on net debt required to consummate the merger
transaction, based on interest rates currently in effect of 7.9%. Each 1/8
percent increase in interest rates would result in $12,500 of additional
interest expense.
G To record $175,000 for legal, accounting, printing and filing costs
associated with the registration of PetroCorp common stock.
H To reclassify sulfur revenue to conform to PetroCorp's presentation.
F-6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Mineral Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Mineral Corporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the three-
year period ended December 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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 Southern
Mineral Corporation and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Houston, Texas
March 1, 2001
F-7
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
------------------
ASSETS 2000 1999
------ -------- --------
Current Assets
Cash and cash equivalents................................ $ 1,207 $ 1,981
Receivables, net......................................... 6,050 4,923
Property held for sale................................... -- 8,914
Other.................................................... 500 606
-------- --------
Total current assets................................... 7,757 16,424
Property and equipment, at cost using successful efforts
method for oil and gas activities
Oil and gas producing properties......................... 115,705 120,932
Unproven properties...................................... 4,541 4,443
Office equipment......................................... 567 561
Accumulated depreciation, depletion and amortization..... (47,277) (47,971)
-------- --------
73,536 77,965
Other Assets............................................... 603 345
-------- --------
Total assets........................................... $ 81,896 $ 94,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities not subject to compromise:
Current liabilities
Accounts payable......................................... $ 3,362 $ 1,375
Accrued liabilities...................................... 3,446 2,950
Canadian bank loan....................................... -- 13,876
-------- --------
Total current liabilities.............................. 6,808 18,201
-------- --------
Long-term liabilities
Bank Debt................................................ 16,814 --
Deferred income taxes.................................... 6,490 4,240
-------- --------
Total liabilities not subject to compromise............ 30,112 22,441
-------- --------
Liabilities subject to compromise:
Accounts payable......................................... -- 1,981
Accrued liabilities...................................... -- 1,779
Notes payable banks...................................... -- 16,109
Subordinated debentures.................................. -- 41,400
-------- --------
Total liabilities subject to compromise................ -- 61,269
-------- --------
Stockholders' Equity
Preferred stock, par value $.01 per share; authorized
5,000,000 shares at December 31, 2000; none issued......
Common stock, par value $.01 per share; authorized
50,000,000 shares at December 31, 2000; issued
12,231,960 and 2,600,072 at December 31, 2000
and 1999, respectively; outstanding 12,213,715 and
2,581,827 shares at December 31, 2000 and 1999,
respectively............................................ 122 26
Additional paid-in capital............................... 61,794 30,989
Accumulated other comprehensive loss-foreign currency
translation adjustment.................................. (1,283) (288)
Retained deficit......................................... (8,797) (19,651)
Less: Treasury stock..................................... (52) (52)
-------- --------
Total stockholders' equity............................. 51,784 11,024
-------- --------
Total liabilities and stockholders' equity............. $ 81,896 $ 94,734
======== ========
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an integral part of these
statements.
F-8
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
For the Year's Ended
December 31,
--------------------------
2000 1999 1998
------- ------- --------
Revenue
Oil and gas....................................... $33,581 $25,865 $ 21,722
Gain (loss) on sales of properties and other
assets........................................... (1) 11,976 (250)
------- ------- --------
33,580 37,841 21,472
Expenses
Production........................................ 8,730 8,898 8,518
Exploration....................................... 511 2,501 3,635
Depreciation, depletion and amortization.......... 8,306 12,302 10,505
General and administrative........................ 3,248 3,926 3,622
Impairment on oil and gas properties.............. -- 8,686 9,344
Restructuring expenses............................ 754 1,372 --
Bankruptcy expenses............................... 4,790 3,016 --
------- ------- --------
26,339 40,701 35,624
------- ------- --------
Income (loss) from operations..................... 7,241 (2,860) (14,152)
Other income, expenses and deductions
Interest and other income....................... 239 456 330
Interest and debt expense....................... (2,470) (6,236) (5,362)
------- ------- --------
Income (loss) before income taxes................. 5,010 (8,640) (19,184)
Provision (benefit) for foreign, federal and state
income taxes
Current provision (benefit)..................... (24) 575 6
Deferred provision (benefit).................... 2,439 (3,457) (2,781)
------- ------- --------
2,415 (2,882) (2,775)
------- ------- --------
Income (loss) before extraordinary gain........... 2,595 (5,758) (16,409)
------- ------- --------
Extraordinary gain from extinguishment of debt,
net of tax....................................... 8,259 -- --
------- ------- --------
Net income (loss)................................. $10,854 $(5,758) $(16,409)
======= ======= ========
Income (loss) per share from continuing
operations--basic................................ $ 0.39 $ (2.25) $ (6.60)
======= ======= ========
Income (loss) per share from continuing
operations--diluted.............................. $ 0.39 $ (2.25) $ (6.60)
======= ======= ========
Income per share from extraordinary item--basic... $ 1.23 $ -- $ --
======= ======= ========
Income per share from extraordinary item--
diluted.......................................... $ 1.23 $ -- $ --
======= ======= ========
Net income (loss) per share--basic................ $ 1.62 $ (2.25) $ (6.60)
======= ======= ========
Net income (loss) per share--diluted.............. $ 1.61 $ (2.25) $ (6.60)
======= ======= ========
Weighted average number of shares outstanding--
basic............................................ 6,708 2,568 2,484
======= ======= ========
Weighted average number of shares outstanding--
diluted.......................................... 6,725 2,568 2,484
======= ======= ========
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an integral part of these
statements.
F-9
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Common Shares Additional Other Retained Total
------------- Paid-In Comprehensive Earning Treasury Stock Stockholders'
Shares Amount Capital Loss (Deficit) Shares Amount Equity
------ ------ ---------- ------------- --------- -------- ------ -------------
Balance at December
1997................... 1,826 $ 18 $14,225 $ (227) $ 2,516 (18) $(52) $ 16,480
Stock issued for
directors' fees........ 9 -- 139 -- -- -- -- 139
Stock issued for
directors' fees........ 2 -- 22 -- -- -- -- 22
Issuance of common stock
for property
acquisition............ 2 -- 50 -- -- -- -- 50
Issuance of common stock
for property in
corporate
acquisitions........... 738 8 16,514 -- -- -- -- 16,522
Comprehensive loss:
Net loss............... -- -- -- -- (16,409) -- -- (16,409)
Foreign currency
translation
adjustment............. -- -- -- (2,077) -- -- -- (2,077)
--------
Total comprehensive
loss, net of tax....... (18,486)
------ ---- ------- ------- -------- --- ---- --------
Balance at December
1998................... 2,577 $ 26 $30,950 $(2,304) $(13,893) (18) $(52) $ 14,727
Stock issued for
directors' fees........ 22 -- 36 -- -- -- -- 36
Stock issued for stock
purchase plan.......... 1 -- 3 -- -- -- -- 3
Comprehensive loss:
Net loss............... -- -- -- -- (5,758) -- -- (5,758)
Foreign currency
translation
adjustment............. -- -- -- 2,016 -- -- -- 2,016
--------
Total comprehensive
loss, net of tax....... (3,742)
------ ---- ------- ------- -------- --- ---- --------
Balance at December
1999................... 2,600 $ 26 $30,989 $ (288) $(19,651) (18) $(52) $ 11,024
Stock issued for
directors' fees........ 96 1 308 309
Stock issued in exchange
for debt............... 9,536 95 29,706 29,801
Warrants issued......... 791 791
Comprehensive income:
Net Income............. 10,854 10,854
Foreign currency
translation
adjustment............. (995) (995)
--------
Total comprehensive
income, net of tax..... 9,859
------ ---- ------- ------- -------- --- ---- --------
Balance at December
2000................... 12,232 $122 $61,794 $(1,283) $ (8,797) (18) $(52) $ 51,784
====== ==== ======= ======= ======== === ==== ========
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an integral part of these
statements.
F-10
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(in thousands)
For the Year's Ended
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Cash Flows from Operating Activities
Net (loss) income............................... $ 10,854 $ (5,758) $(16,409)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and other assets....... 8,306 12,302 10,505
Loss (gains) on sales of properties and other
assets........................................ 1 (11,976) 250
Impairment of proved oil and gas properties.... -- 8,686 9,344
Dry hole costs and impairment of exploration
properties.................................... 360 2,415 2,470
Decrease in deferred taxes..................... 2,439 (3,457) (2,781)
Non-cash portion of Bankruptcy costs........... -- 2,463 --
Warrant Fair Value Expense..................... 791 -- --
Extraordinary item............................. (8,259) -- --
Other........................................... 290 353 418
Change in assets and liabilities, net of effects
of acquisitions and dispositions
Decrease (Increase) in receivables............. (1,231) 869 2,205
(Increase) decrease in other current assets.... 92 55 (136)
Increase (Decrease) in payables................ 501 (2,556) 804
-------- -------- --------
Net cash provided by operating activities..... 14,144 3,396 6,670
Cash Flows from Investing Activities
Proceeds from sales of:
Proved properties.............................. 9,142 26,111 11,425
Properties held for sale and unproved
properties.................................... -- 8 83
Capital Expenditures:
Acquisition, exploration and development....... (6,046) (2,954) (17,103)
Properties held for sale....................... -- -- (1,083)
Acquisition of Amerac, net of cash............. -- -- (9,387)
Acquisition of Neutrino, net of cash........... -- -- (35,926)
-------- -------- --------
Net cash received (used) in investing
activities................................... 3,096 23,165 (51,991)
Cash Flows from Financing Activities
Proceeds from debentures offering, net.......... -- (7)
Debenture offering costs........................ -- (12)
Proceeds from revolving loan.................... 18,213 -- 50,813
Payments on revolving loan...................... -- (10,280)
Payments on note payable........................ (35,989) (25,763) (208)
Loan acquisition costs.......................... (263) (388) (259)
Proceeds from equity offering, net.............. -- -- --
Proceeds on Canadian subordinated debentures.... -- -- (3,270)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (18,039) (26,151) 36,777
Effect of Exchange Valuation on Cash............ 25 30 74
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (774) 440 (8,470)
Cash and cash equivalents at beginning of year.. 1,981 1,541 10,011
-------- -------- --------
Cash and cash equivalents at end of year........ $ 1,207 $ 1,981 $ 1,541
======== ======== ========
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an integral part of these
statements.
F-11
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS-(continued)
(in thousands)
For the Year's Ended
December 31,
----------------------
2000 1999 1998
------- ------ -------
Supplemental Disclosure of Cash Flow Information
Cash paid for taxes.................................... $ 449 $ 693 $ 159
Cash paid for interest................................. 3,894 5,295 3,753
Non-cash Transactions
Issuance of common stock for Amerac common stock....... -- -- 15,433
Issuance of common stock to key Neutrino employees..... -- -- 1,095
Issuance of common stock for property acquisition
services.............................................. -- -- 50
Issuance of common stock to debenture holders.......... 29,801 -- --
Change in deferred tax liability on property
acquisitions.......................................... -- -- 9,562
Directors' fees paid in stock.......................... 309 36 139
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an integral part of these
statements.
F-12
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Business--Southern Mineral Corporation, a Nevada corporation, with
its subsidiaries ("Southern Mineral" or the "Company"), is an independent oil
and gas company headquartered in Houston, Texas. The Company is engaged in the
acquisition, exploitation, exploration and operation of oil and gas properties,
primarily along the Gulf Coast of the United States, in Canada and in Ecuador.
The Company conducts its operations in Canada exclusively through its
subsidiary, Neutrino Resources Inc. ("Neutrino"). The Company's business
strategy is to increase reserves and shareholder value through a balanced
program of acquisitions, exploitation and exploration.
On October 29, 1999 ("Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc.
and SMC Production Company ("Debtor Subsidiaries"), filed voluntary petitions
for relief under Chapter 11, Title 11 of the United States Code ("Bankruptcy
Code"), in order to facilitate the restructuring of the Company's long-term
debt, revolving credit, trade debt and other obligations. The filings were made
in the U.S. Bankruptcy Court for the Southern District of Texas, Victoria
Division ("Bankruptcy Court"). The Company and its Debtor Subsidiaries emerged
from Bankruptcy on August 1, 2000 ("Effective Date"). The Company and its
Debtor Subsidiaries operated as debtors-in-possession subject to the Bankruptcy
Court's supervision and orders until the Effective Date. See Note 2 for further
information.
Note 1. Summary of Significant Accounting Policies
Basis of Presentation--Beginning in the fourth quarter of 1999, and for the
year ended December 31, 1999, the consolidated financial statements of the
Company and its subsidiaries are presented in accordance with Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" (SOP 90-7). SOP 90-7 provides guidance on financial reporting
by entities that have filed petitions with the bankruptcy court and expect to
reorganize as going concerns under Chapter 11 of title 11 of the United States
Code. SOP 90-7 generally requires the reclassification of the consolidated
balance sheet, statement of operations and cash flows to distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the Company. As discussed above, the Company
filed for reorganization under Chapter 11 of the United States Bankruptcy Code.
Subsequent to emergence from Chapter 11 in 2000, the Company has presented its
financial statements in accordance with generally accepted accounting
principles in a manner consistent with prior periods.
Principles of Consolidation--The consolidated financial statements include
the accounts of Southern Mineral Corporation and its wholly owned subsidiaries.
In consolidation, all significant intercompany transactions have been
eliminated. The Company accounts for its investment in oil and gas partnerships
and joint ventures using the proportional consolidation method.
Revenues--Natural gas revenues generally are recorded using the sales
method, whereby the Company recognizes natural gas revenue based on the amount
of gas sold to purchasers on its behalf. All other revenue is also recorded
using the sales method. The Company believes that imbalances related to the
sales of natural gas are insignificant.
Foreign Currency Translation--Translation adjustments result from the
process of translating foreign subsidiaries' financial statements into U.S.
dollars in circumstances where the subsidiaries functional currency is not the
U.S. dollar. The Canadian dollar is the functional currency for the Company's
Canadian subsidiaries as substantially all transactions are conducted in the
local currency. The U. S. dollar is considered the functional currency for the
Company's Ecuadorian operations, as predominately all transactions in these
operations are denominated in U. S. dollars. Balance sheet accounts are
translated at exchange rates in effect at the balance sheet date. Income
statement accounts are translated at average exchange rates during the year.
F-13
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Resulting translation adjustments are reported as a component of other
comprehensive income in stockholders' equity. Foreign currency transaction
gains and losses resulting from the effect of exchange rate fluctuations on
transactions in currencies other than the functional currency are included in
the determination of net earnings. The Company has no material foreign currency
transaction gains or losses for any of the periods presented in these financial
statements.
Property and Equipment--The Company uses the successful efforts method of
accounting for its oil and gas properties. Under this method of accounting, the
tangible and intangible development costs of productive wells and development
dry holes are capitalized, and dry hole costs on exploratory wells are charged
against income when the well is determined to be non-productive. Other
exploratory expenditures, including geological and geophysical costs and delay
rentals, are expensed as incurred. The cost of unevaluated leasehold
acquisitions and wells in progress are included in unproven properties pending
evaluation.
Depreciation and depletion of producing oil and gas properties are computed
separately on each individual property on the unit-of-production method based
on estimated proved reserves. Depreciation of other property and equipment is
computed on the straight-line method over the estimated useful lives of the
assets ranging from 3 to 7 years.
For U. S. onshore properties, the Company estimates that residual salvage
values of equipment approximate any future dismantlement, restoration and
abandonment costs. For Canadian onshore properties, the Company provides for
estimated dismantlement, restoration and abandonment on a unit of production
basis. For offshore properties, the Company has fully provided for estimated
dismantlement, restoration and abandonment costs.
Maintenance and repairs are charged to expense as incurred.
Long-Lived Assets--Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset based on Company's
engineering estimates of proved reserves and the Company's estimates of future
oil and natural gas prices. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which carrying amount
of the assets exceed the fair value of the assets.
Fair value is estimated to be the net present value of the future cash flows
based on year-end proved reserves and management's estimate of future prices.
There were no impairment charges in the year ended December 31, 2000. During
1999 the Company recorded pre-tax impairment charges of $8,686,000 related to
its oil and gas properties in the U.S. and Canada. Approximately $3,386,000 of
the impairment charge resulted from downward revisions of the Company's proved
undeveloped reserves. The year-end estimates as of December 31, 1999 were
negatively affected relative to amounts previously reported due to downward
revisions, totaling 492,816 BOE, related to the Company's properties in the
U.S. totaling 368,500 BOE and in Canada totaling 124,316 BOE. The U.S.
revisions resulted from differences in the interpretation between the current
and predecessor independent engineering firms. The Canadian revisions resulted
primarily from decreased production performance in 1999. These differences,
many of which relate to classification of reserves within the different oil and
gas reserve categories (i.e. proved, probable and possible) are due to the
numerous engineering, geological and operational assumptions that generally are
derived from limited data. In addition, approximately $5,300,000 of the 1999
impairment resulted from the pre-tax adjustments of Neutrino's cost basis to
the net realized value of the sale of Inverness and Swan Hills in March 2000.
During 1998, the Company recorded pre-tax impairment charges of $9,344,000 as a
result of its determination of future cash flows based on lower oil price
assumptions than previously applied.
F-14
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental Liabilities--Environmental related costs, if any, are
capitalized or expensed as appropriate. Environmental costs, if any, that
relate to past events and are not associated with future production are
expensed when incurred.
Income Taxes--The Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as part of the provision for income taxes in the period that
includes the enactment date.
Cash Equivalents--Management considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted counting
principles require 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.
Stock-Based Compensation--The Company accounts for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related Interpretation, and has provided pro forma disclosures of net earnings
and earnings per share in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the exercise price of the option.
Use of Commodity Derivatives--The Company may use derivative instruments,
such as futures, swaps and options, to manage its exposure to commodity price
risk and interest rate risk. Derivatives that qualify a hedges and held for
non-trading purposes are accounted for using the deferral method of accounting.
For a commodity derivative to qualify as a hedge, the price movements in the
commodity derivative must be highly correlated with the underlying hedged
commodity. Under this method of accounting, gains and losses are not recognized
until the underlying physical transaction occurs. Deferred gains and losses
related to such instruments are reported on the consolidated balance sheet as
assets or liabilities. The Company does not typically directly enter into
derivative contracts for the purposes of speculating on commodity price changes
or interest rate changes. Contracts held for trading purposes, or contracts
which do not qualify as hedges, are accounted for using the mark-to-market
method. Under this methodology, contracts are reported on the consolidated
balance sheet at fair value as assets or liabilities with the changes in fair
value recognized in current period income. The Company monitors open derivative
positions with a strict policy which limit its exposures to market risk and
require reporting to management of potential financial exposure.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish accounting and reporting
standards requiring that derivative instruments, including certain derivative
instruments embedded in other contracts, be recorded on the balance sheet at
fair value as either assets or liabilities. The accounting for changes in the
fair value of a derivative instrument depends on
F-15
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the intended use and designation of the derivative at its inception. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results of the hedged item in the statement of operations, and
requires the Company to formally document, designate and assess the
effectiveness of the hedge transaction to receive hedge accounting. For
derivatives designated as cash flow hedges, changes in fair value, to the
extent the hedge is effective, are recognized in other comprehensive income
until the hedged item is recognized in earnings. Overall hedge effectiveness is
measured at least quarterly. Any changes in the fair value of the derivative
instrument resulting from hedge ineffectiveness, as defined by SFAS 133 and
measured based on the cumulative changes in the fair value of the derivative
instrument and the cumulative changes in the estimated future cash flows of the
hedged item, are recognized immediately in earnings. The Company has designated
all of its commodity hedges as cash flow hedges.
Adoption of SFAS 133, at January 1, 2001, resulted in the recognition of
$197,000 of derivative assets and $3.3 million of derivative liabilities on the
Company's balance sheet and $1.9 million, net of taxes, of hedging losses
included in accumulated other comprehensive income as the cumulative effect of
a change in accounting principle and $796,000 million, net of taxes, recorded
as a cumulative effect of change in accounting principle to net income. Amounts
are determined as of January 1, 2001 based on market quotes and the Company's
portfolio of derivative instruments.
Earnings (loss) per Share--Basic earnings per share is based on the weighted
average shares outstanding without any dilutive effects considered. Diluted
earnings per share reflects dilution from all potential common shares,
including options and convertible debt.
On August 1, 2000, pursuant to the plan of reorganization of the Bankruptcy
Code, old shareholders of the Company's common stock received one share of the
Company's new common stock for each five shares of the Company's old common
stock. All share and per-share amounts have been restated to reflect the 1 for
5 August 1, 2000 reverse stock split. See Note 2 Bankruptcy Filing.
Earnings per share have been calculated on the restated weighted average
number of shares outstanding for the years ended December 31, 2000, 1999 and
1998, respectively. For the year ended December 31, 2000, 1999 and 1998,
respectively, the issuance or conversion of potential common shares of
4,087,437, 16,451 and 138,600 would have had an antidilutive effect on the
diluted earnings per share calculation and therefore were not considered in the
calculation of the diluted weighted average number of shares outstanding.
Reclassifications--Certain amounts in prior financial statements have been
reclassified to conform to the 2000 financial statement presentation.
Comprehensive Income--Comprehensive income includes all changes in a
company's equity except those resulting from investments by owners and
distributions to owners, including, among other things, foreign currency
translation adjustments. The Company's total comprehensive income (loss) for
the years ended December 31, 2000, 1999 and 1998 was as follows (in thousands):
Years Ended December
--------------------------
2000 1999 1998
------- ------- --------
Net income (loss)............................ $10,854 $(5,758) $(16,409)
Foreign currency translation adjustment...... (995) 2,016 (2,077)
------- ------- --------
Total comprehensive income (loss)............ $ 9,859 $(3,742) $(18,486)
======= ======= ========
F-16
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Bankruptcy Filing
On October 29, 1999, the Company and its Debtor Subsidiaries, which excluded
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code in
order to facilitate the restructuring of the Company's long-term debt,
revolving credit, trade debt and other obligations. The filings were made in
the U.S. Bankruptcy Court for the Southern District of Texas, Victoria
Division. The Company and its Debtor Subsidiaries emerged from bankruptcy on
August 1, 2000. All debts of the Company and its Debtor Subsidiaries as of the
Petition Date were stayed by the bankruptcy petitions and were subject to
compromise pursuant to such proceedings until the Effective Date. The Company
and its Debtor Subsidiaries operated as debtors-in-possession subject to the
Bankruptcy Court's supervision and orders. The proceedings of the Company and
its Debtor Subsidiaries were consolidated for administrative purposes.
The decision to seek protection was taken by the Company and its Debtor
Subsidiaries because the Company concluded that a restructuring of its
indebtedness could not be completed without the protection and assistance of
the Bankruptcy Court. Timing of the bankruptcy filing was imposed by several
factors, including the possible acceleration of the Company's $16.1 million of
indebtedness by its domestic bank creditors and the inability of the Company
and its debenture holders to reach a satisfactory compromise regarding the
consideration to be received in the previously proposed restructuring. The
bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt.
On February 25, 2000, the Company filed a Plan of Reorganization and
Disclosure Statement and on May 2, 2000 filed a Second Amended Plan ("Amended
Plan"). The Amended Plan set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. On May 2, 2000,
the Bankruptcy Court held a hearing and approved the Disclosure Statement and
the procedure for transmitting the Amended Plan and Disclosure Statement for
acceptance or rejection to all affected parties. The Bankruptcy Court set June
30, 2000 for the hearing on confirmation of the Amended Plan.
On July 5, 2000, the Company announced an agreement among all parties
contesting its Amended Plan to support modifications to its Plan ("Modified
Plan") to emerge from bankruptcy. The Bankruptcy Court set July 19, 2000 to
complete the confirmation hearing on the Modified Plan subject to certain
restrictions and on July 21, 2000 entered the order confirming the Company's
Modified Plan. The Modified Plan became effective on August 1, 2000. The
Modified Plan generally provided for the satisfaction of the Company and Debtor
Subsidiaries' claims including payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt was paid in full with interest and expenses
including default interest of 3.5% from the Petition Date with proceeds
from a new secured credit facility secured by the Company. Payment of
the domestic secured debt, interest and expenses was $16,882,511 and
occurred on August 23, 2000.
. All other creditors other than domestic secured debt and amounts owed
debenture holders are to be paid in cash over periods ranging from 1 to
14 months.
. Debenture holders were satisfied as follows:
. Cash payment of $5 million, which was made to the indenture trustee
on August 31, 2000.
. Issuance of common stock that when issued represented approximately
78% of the Company's outstanding common shares (9,536,422 shares).
. A new Board of Directors was appointed for a one year term as follows:
one by the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by
the creditors' committee and significant owners of debentures.
F-17
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. A 1:5 reverse stock split of the Company's outstanding common stock,
par value $0.01 per share, was effectuated on August 1, 2000, the
Effective Date. Subject to the effects of the reverse split, the
existing common stock, options and warrants remained outstanding with
no change in terms and conditions except that all options and warrants
expiring between the Petition Date and confirmation of the Modified
Plan were extended for a two year period.
. The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, received approximately 3,667,000 warrants
allowing them to increase their ownership from 22% to up to 40% of the
outstanding common stock. The new warrants are for a perpetual term
with an exercise price of $4.21 per share, subject to adjustment for
certain customary anti-dilution stock splits, stock dividends and other
recapitalization events. The exercise price must be paid in cash.
Pursuant to the provisions of SOP 90-7, the Company did not adopt fresh-
start reporting upon its emergence from Bankruptcy. Based on the closing price
of the Company's common stock on the Modified Plan confirmation date (July 21,
2000), the satisfaction of the $41.4 million debentures and accrued interest of
$1.6 million through the issuance of 9,536,422 shares of the Company's common
stock, par value $0.01, per share and cash of $5 million resulted in an
extraordinary gain of approximately $8.3 million, which is reflected in the
December 31, 2000 statement of operations. In addition, the $616,000 fair value
of the warrants issued was charged to bankruptcy expenses.
Note 3. Acquisitions and Divestitures
Neutrino
On June 23, 1998, the Company agreed to acquire 92.3% of the outstanding
common shares of Neutrino, which was effective as of June 30, 1998 and funded
on July 2, 1998. On July 3, 1998, the Company initiated a compulsory
acquisition of the remaining shares outstanding, which was effective as of June
30, 1998 and funded on July 21, 1998. The Company acquired Neutrino through a
cash tender offer for the common shares outstanding, and assumed Neutrino's
bank debt and working capital deficit. Neutrino is an independent oil and gas
company located in Calgary, Canada. The merger was accounted for as a purchase.
The total purchase price of approximately $57,198,000, consisted of the
following:
Cash consideration for common stock........................ $34,091,000
Fair value of 324,430 shares of common stock............... 1,095,000
Debt assumed and working capital deficit................... 20,307,000
Legal, accounting and transaction costs.................... 1,705,000
-----------
$57,198,000
===========
The allocation of the purchase price is summarized as
follows:
Oil and gas properties and other assets (net).............. $66,760,000
Deferred income taxes...................................... (9,562,000)
-----------
$57,198,000
===========
Following the acquisition of Neutrino, the purchase price was reduced to
reflect the proceeds from the sale of non-strategic assets in the amount of
$3,390,000.
The following is a reconciliation of the net cash paid in connection with
the acquisition of Neutrino:
Cash consideration for common stock.......................... $34,091,000
Cash paid for legal, accounting and transaction costs........ 1,705,000
Cash paid for other closing costs............................ 130,000
-----------
$35,926,000
===========
F-18
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amerac
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of the
Company. Pursuant to the merger agreement, the Company issued 3,333,333 shares
of its Common Stock to acquire the common stock of Amerac and assumed Amerac's
outstanding debt, which was approximately $8,700,000. The debt was retired upon
consummation of the acquisition. The merger was effective on January 28, 1998,
and was accounted for as a purchase. The total purchase price was approximately
$24,820,000 and consists of the following:
Issuance of Common Stock..................................... $15,433,000
Debt assumed and working capital............................. 8,714,000
Legal, accounting and transaction costs...................... 673,000
-----------
$24,820,000
===========
The following is a reconciliation of the net cash paid in connection with
the acquisition of Amerac:
Cash paid for assumed debt at consummation of acquisition... $8,714,000
Cash paid for legal, accounting and transaction costs....... 673,000
----------
$9,387,000
==========
Subsequent to the acquisition of Amerac, the purchase price was reduced by
$7,919,000 for the sale of non-strategic assets, including Amerac's Golden
Trend properties for $6,969,000 on June 30, 1998 and the Riffe Field for
$510,000 on July 1, 1998.
Big Escambia Creek
During 1997 and 1998, the Company acquired interests in the Big Escambia
Creek Field and surrounding area in a series of six transactions. The largest
acquisition was the purchase of the outstanding capital stock of BEC Energy,
Inc. on May 10, 1997, for $10,640,000. BEC's assets consisted of working
interests in fourteen oil and gas wells located in the Big Escambia Creek
Field, Escambia County, Alabama. Thereafter, the Company acquired additional
working interests in the area for $12.1 million. Each acquisition was accounted
for as a purchase.
Divestitures
On July 21, 1999 the Company agreed to sell properties consisting of certain
proven and unproven property interests in Texas to ANR Production Company. The
properties include all of the Company's interest in the Brushy Creek and Texan
Gardens Fields in Dewitt, Lavaca and Hidalgo counties of Texas. In July and
August of 1999, the sale of its interests in the Brushy Creek Field and Texan
Gardens Field were closed for $15.2 million and $0.8 million, respectively. The
sale of interests in Brushy Creek resulted in a gain of approximately $10.6
million and Texan Gardens Field a loss of approximately $3.4 million.
Neutrino sold in the fourth quarter of 1999 its interest in two non-core
properties in Alberta, Canada for approximately $3.7 million, resulting in a
loss of sale of approximately $207,000. In March 2000, Neutrino sold its
interest in Inverness and Swan Hills in Alberta, Canada, for $9.0 million.
These assets were classified as properties held for sale and are included in
current assets at December 31, 1999. The Company recorded as an impairment of
approximately $5.3 million in 1999 to adjust the cost basis of Inverness and
Swan Hills to their net realized value based on the estimated sales price
received in March 2000.
F-19
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma
The following table summarizes the pro forma (unaudited) results (stated in
thousands, except per share data), of the Company as though the dispositions of
Brushy Creek, Texan Gardens and Inverness/Swan Hills had occurred on January 1,
1999.
Years Ended
December 31,
---------------
2000 1999
------- -------
(unaudited)
in thousands,
except per
share data
Revenues................................................. $32,840 $26,617
Net income (loss)........................................ 10,621 (8,783)
Net income (loss) per share--basic....................... 1.58 (3.40)
Net income (loss) per share--diluted..................... 1.58 (3.40)
The preceding pro forma results are not necessarily indicative of those that
would have occurred had the acquisitions and divestitures taken place at the
beginning of 1999. During 1999, the Company made additional acquisitions, none
of which would have had a material effect on the historical results of
operations of the Company. During the first quarter of 1999, the Company sold
its mineral interests and substantially all of its royalty interests in Texas,
Mississippi and New Mexico for approximately $6,000,000. These divestitures
would not have had a material effect on the Company's historical results of
operations.
Note 4. Debt
Debt consisted of the following (in thousands):
December 31,
---------------
2000 1999
------- -------
Domestic Credit Facility................................. $14,282 $ --
Old domestic credit facility--in default................. -- 16,109
Canadian credit facility (U.S. Dollars).................. 2,532 --
Old Canadian credit facility (U.S. Dollars).............. -- 13,876
Convertible subordinated debentures--in default.......... -- 41,400
------- -------
Total indebtedness..................................... $16,814 $71,385
======= =======
As described in Note 2, because of the Company's filing of Chapter 11, all
amounts as of December 31, 1999 were subject to compromise, except for its
Canadian bank credit facility, which was reflected as a current liability not
subject to compromise on the Consolidated Balance Sheet.
On August 23, 2000, the Company entered into a new credit facility
("Domestic Credit Facility") with a domestic lender in the principal amount of
up to $30,000,000. At December 31, 2000, the Domestic Credit Facility provides
for a borrowing base of $17,625,000 and matures on August 23, 2003. Proceeds
from the Domestic Credit Facility were used to repay the prior domestic
facility as provided in the Modified Plan. The obligations under the Domestic
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries other than Neutrino. The Domestic Credit Facility
prohibits the payment of dividends and contains covenants relating to the
financial condition of the Company, including working capital, tangible net
worth and cash flow coverage covenants. At December 31, 2000, the outstanding
borrowing was $14,282,512. On March 7, 2001 outstanding borrowings under the
Domestic Credit Facility were $13,582,512 with borrowing availability of
$3,767,488. Outstanding principal under the Domestic Credit Facility bears
interest at
F-20
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Bank Index Rate plus 0.5% (10.0% at December 31, 2000) to the extent of the
borrowing base utilized. The borrowing base is redetermined semi-annually in
May and November at the sole discretion of the domestic lender. The Company may
request four additional borrowing base redeterminations during any calendar
year except that no more than one redetermination will be made each calendar
quarter.
On August 29, 2000, Neutrino repaid its prior Canadian credit facility and
entered into a new loan facility in the principal amount of up to US
$30,000,000 loan facility (the "Canadian Credit Facility") with a new Canadian
lender. At December 31, 2000 the borrowing base under the Canadian Credit
Facility is US $10,075,000 and is due August 29, 2003. At December 31, 2000,
outstanding borrowings under the Canadian Credit Facility were US $2,531,814.
The Canadian Credit Facility is secured by substantially all of Neutrino's
assets and guaranteed by the Company. On March 7, 2001, outstanding borrowings
under the Canadian Credit Facility were US $1,950,000 (Cdn $3,000,000) with a
borrowing availability of US $7,940,000 (Cdn $12,215,384). Outstanding
principal under the Canadian Credit Facility bears interest at the bank's prime
rate plus 0.5% (8.0% at December 31, 2000) to the extent of the borrowing base
utilized. The Canadian Credit Facility contains certain covenants relating to
the financial condition of Neutrino, including working capital, tangible net
worth and cash flow coverage covenants. The borrowing base under the Canadian
Credit Facility is subject to semi-annual redeterminations beginning November
2000. The borrowing base is redetermined semi-annually beginning November 2000
and will be made at the sole discretion of the Canadian lender. Neutrino may
request four additional borrowing base redeterminations during any calendar
year except that no more than one redetermination will be made each calendar
quarter.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures were convertible
into Common Stock of the Company at any time prior to maturity, at a conversion
price of $8.26 per share. Proceeds of the offering were used to reduce bank
debt and fund subsequent acquisitions. Pursuant to the debenture agreement, in
the event of a change of control of the Company, debenture holders had the
right to require the Company to repurchase the security at face value plus
accrued interest. Due to the bankruptcy filings on October 29, 1999, the
Company was not in compliance with certain provisions of the debenture
agreement at December 31, 1999. Pursuant to the Modified Plan, the debentures
were extinguished and converted in exchange for $5 million in cash and
approximately 78% of the common stock of the Company. Based on the closing
price of $3.125 of the Company's common stock on the Modified Plan confirmation
date, the exchange of the $41.4 million of debentures and accrued interest of
approximately $1.6 million for cash of $5 million and 9,536,422 shares of
common stock resulted in an extraordinary gain, net of tax, of $8,258,993. See
Note 2--Bankruptcy Filing.
Note 5. Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments based on
arms length transactions or quoted market values. The estimated fair values are
summarized below (in thousands):
Years Ended December 31,
--------------------------------------
2000 1999
------------------ ------------------
Book Fair Book Fair
Value Value Value Value
-------- -------- -------- --------
Assets/(Liabilities)
Debt............................ $(16,814) $(16,814) $(71,385) $(44,061)
Commodity hedges, net........... -- (3,136) -- --
Interest rate swap.............. (94) (94) -- 77
The estimated fair value of cash and equivalents, receivables and payables
approximates book value.
F-21
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Derivative Financial Instruments
During 1998 and 1999, the Company entered into natural gas and oil price
swaps and collars with third parties to hedge a portion of its production from
the effects of fluctuations in the market price of natural gas and oil. Due to
the bankruptcy filing, all third-party oil and gas hedges were cancelled by
the counter-parties to these contracts, resulting in the Company's recognition
of a loss of approximately $163,000 during 1999.
Subsequent to the Company's emergence from bankruptcy and as required by
the Company's Domestic and Canadian Credit Facilities, the Company has entered
into the following crude oil and natural gas costless collars in 2000.
Oil Hedges
U.S. $
NYMEX WTI
Monthly -------------
Period Total Bbl Bbl Floor Cap
------ ---------- ---------- ------ ------
United States
Jan-01--Dec-01........................... 132,400 11,033 $22.00 $32.20
Jan-02--Sep-02........................... 88,200 9,800 $22.00 $25.60
Canada
Jan-01--Dec-01........................... 111,100 9,258 $22.00 $33.30
Jan-02--Sep-02........................... 70,300 7,811 $22.00 $27.00
Gas Hedges
US $
Houston Ship
Period Channel
------ Total Monthly -------------
Mmbtu Mmbtu Floor Cap
---------- ---------- ------ ------
United States
Jan-01--Mar-01........................... 285,000 95,000 $ 2.75 $ 6.85
Apr-01--Oct-01........................... 600,000 85,714 $ 2.75 $ 4.98
Nov-01--Mar-02........................... 378,000 75,600 $ 2.75 $ 4.85
Apr-02--Oct-02........................... 466,000 66,571 $ 2.75 $ 3.80
CDN $ Alberta
Period Spot-AECO
------ Total Monthly -------------
Gigajoules Gigajoules Floor Cap
---------- ---------- ------ ------
Canada
Jan-01--Sep-02........................... 1,050,000 50,000 $ 4.05 $ 6.15
Based on analysis utilizing actual derivative contractual terms at December
31, 2000, a 10% change in oil and gas prices would not have a material adverse
effect on the financial position or results of operations of the Company
relating to collars.
The Company uses the deferral method of accounting for its natural gas and
oil price swaps and collars and, therefore, offsets any gain or loss on the
swap and collars contract with the realized prices for its production. While
the swaps and collars reduce the Company's exposure to declines in the market
price of natural gas and oil, this also limits the Company's gains from
increases in market price.
The fair value at December 31, 2000 of collars was a net unrealized loss of
approximately $3.1 million.
F-22
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the Company held an interest rate swap that was
originally intended to hedge the variability of interest expense associated
with the Company's variable rate Canadian debt. Under the swap agreement, the
Company receives a floating rate of the Canadian prime rate and pays a fixed
rate of 5.96% on a notional amount of Cdn $15 million. The interest rate swap
does not qualify for hedge accounting at December 31, 2000 and the Company has
recorded the swap's fair value loss of $94,000 as a liability and an expense
for the year ended December 31, 2000.
Note 7. Federal and State Income Taxes
United States and foreign income (loss) before income taxes are as follows
(in thousands):
Year Ended December 31,
------------------------
2000 1999 1998
------ ------- --------
United States................................... $ 769 $(1,924) $ (8,504)
Foreign......................................... 4,241 (6,716) (10,680)
------ ------- --------
Total........................................... $5,010 $(8,640) $(19,184)
====== ======= ========
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
Current Deferred Total
------- -------- -------
Year ended December 31, 2000:
U.S. Federal.................................. $(81) $ -- $ (81)
State and local............................... 29 -- 29
Foreign....................................... 28 2,439 2,467
---- ------- -------
$(24) $ 2,439 $ 2,415
==== ======= =======
Year ended December 31, 1999:
U.S. Federal.................................. $233 $ -- $ 233
State and local............................... 225 -- 225
Foreign....................................... 117 (3,457) (3,340)
---- ------- -------
$575 $(3,457) $(2,882)
==== ======= =======
Year ended December 31, 1998:
U.S. Federal.................................. $ -- $ -- $ --
State and local............................... (5) -- (5)
Foreign....................................... 11 (2,781) (2,770)
---- ------- -------
$ 6 $(2,781) $(2,775)
==== ======= =======
The Company allocated state taxes of approximately $250,000 to the purchase
price of Amerac as a result of the gain on sale of the Golden Trend properties
in the second quarter of 1998.
F-23
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between the effective tax rate and the statutory federal rate
are as follows:
For the Year Ended
December 31,
----------------------
2000 1999 1998
------ ----- -----
Expected statutory
rate................... 34.0 % (34.0)% (34.0)%
Changes in valuation
allowance.............. (100.5) 5.8 23.7
Foreign taxes, net of
federal benefit........ 20.5 (12.2) (4.2)
Non-deductible
Bankruptcy charges..... 93.0 6.4 --
Other................... 1.2 .6 --
------ ----- -----
Effective tax rate...... 48.2 % (33.4)% (14.5)%
====== ===== =====
Deferred taxes consist of the following (in thousands):
For the Year
Ended
December 31,
-----------------
2000 1999
------- --------
Deferred tax assets:
Oil and gas properties................................ $ -- $ 691
Net operating loss carryforward..................... 5,467 7,956
Accounts receivable................................. -- --
Accrued liabilities not currently deductible........ -- 34
Foreign tax credits................................. 187 187
Minimum tax credits................................. 170 214
Deferred financing costs............................ -- 837
Statutory depletion carryforward.................... 557 395
------- --------
6,381 10,314
Valuation allowance................................... (5,278) (10,314)
------- --------
Net deferred tax assets............................... 1,103 --
Deferred tax liabilities:
Oil and gas properties--U.S. and other.............. (1,103) --
Oil and gas properties--Canadian taxes.............. (6,490) (4,240)
------- --------
Deferred tax liability................................ (7,593) (4,240)
------- --------
Net deferred tax liability............................ $(6,490) $ (4,240)
======= ========
In 1998, the Company acquired Amerac, which had regular tax net operating
loss ("NOL") carryforwards of approximately $139,827,000 and alternative
minimum tax ("AMT") NOL carryforwards or $112,687,000, as of December 31, 1998.
During 1999, in connection with the Company's filing of its 1998 US
Consolidated Federal Income Tax Return, the Company elected under Internal
Revenue Code("IRC") Section 1502 to relinquish $114,234,000 of the regular tax
NOL carryforwards and $94,859,000 of the AMT NOL carryforwards related to
Amerac. The relinquishment had no effect on the Company's Consolidated
Statement of Operations as the deferred tax asset related to these NOL
carryforwards was fully offset by a valuation allowance for the year ended
December 31, 1998. The Company has a full valuation allowance related to the
remaining NOL carryforward to reduce the corresponding deferred asset, since it
is more likely than not that this NOL carryforward will not be realized. The
restructuring and emergence from bankruptcy will cause the Company's net
operating losses to be subject to certain limitations under IRC Section 382.
F-24
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The extraordinary item from extinguishment of debt includes no tax expense
or benefit.
The valuation allowance for deferred tax assets as of December 31, 2000 and
1999 was $5,278,000 and $10,314,000, respectively. The net change in the total
valuation allowance for the year ended December 31, 2000, 1999 and 1998 was
$5,036,000, ($42,924,000) and $52,509,000, respectively. Of the $42,924,000 net
change in the valuation allowance for the year ended December 31, 1999,
$38,840,000 was caused by the relinquishment of a portion of the Amerac NOL
carryforwards as discussed above and had no effect on the Company's
Consolidated Statement of Operations. In addition, the Company wrote off the
deferred tax asset and corresponding valuation allowance, totaling $4,588,000,
for the statutory depletion carryforwards received in the Amerac acquisition,
since these carryforwards will never be realized. The remaining change of
$504,000 is reflected in the rate reconciliation schedule. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to realize any of the deferred
tax asset, the Company will need to generate sufficient future taxable income
prior to the expiration of the net operating loss carryforwards in 2020. Based
upon the level of historical taxable income, the Section 382 limitations and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will be unable to fully utilize the benefits of these deductible
differences and has therefore established the valuation allowance set forth
above.
For federal tax purposes, the Company had a net operating loss carryforward
("NOL") of approximately $16,078,000 and $23,398,000 at December 31, 2000 and
1999. These NOLs are limited under Section 382 and must be utilized prior to
their expiration, which is between 2001 and 2020. The Company also has
statutory depletion carryforwards of $1,638,000 and $1,160,000 at December 31,
2000 and 1999, respectively.
Note 8. Related Party Transactions
In conjunction with the acquisition of Neutrino in July, 1998, 324,430
shares of Southern Mineral Common Stock, a value of approximately $1,095,000,
were issued to key Neutrino management personnel in consideration for retention
and other obligations.
In September 1995, the Company entered into the Southern Links Group Joint
Venture ("Southern Links"), to acquire, develop and market exploration
prospects. The Company's joint venture partner is The Links Group, Inc.
("Links"), a company that is controlled by Robert Hillery, a former director of
the Company. The Company agreed to fund the third party costs of Southern
Links. Any proceeds from the sale of prospects or oil and gas from such
prospects is distributed 100% to the Company until it receives an amount equal
to the return of its invested capital, after which time all such proceeds and
property interests, if any, are to be distributed 75% to the Company and 25% to
Links. In December 1998, the Company made the determination to discontinue
further evaluation of certain non-producing State of Texas offshore leases
which were held within the Southern Links Venture. Such leases were scheduled
to expire in January 1999 unless additional rental payments were made. Pursuant
to the Joint Venture agreement, the Company assigned six State of Texas leases
to Links for nominal cash consideration and retention of an overriding royalty
interest of 1% of the leases. As of December 31, 1999 and 2000 the Company had
no carrying costs subject to recovery related to Southern Links. The Company
received no proceeds from the sales of prospects associated with Southern Links
during 2000, 1999 or 1998.
F-25
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SMC Production Company, a wholly-owned subsidiary of the Company, owns an
18.906% interest in Diverse GP III ("Diverse") a general partnership. Two of
the Company's directors and a third is a former director and are managers of
Diverse and through various entities own the majority of the remaining interest
in Diverse. The carrying value of the Company's investment in Diverse as of
December 31, 2000 is approximately $2.3 million. The Company accounts for this
oil and gas partnership using the proportional consolidation method. The
Company received net distributions from Diverse of $497,000; $257,000 and
$301,000 during the years ended December 31, 2000, 1999 and 1998, respectively.
Note 9. Major Customers
The Company is engaged in a single industry segment: the exploration,
development and production of oil and gas reserves. Sales of oil and gas to
customers accounting for 10% or more of revenues were as follows (in
thousands):
% of % of % of
Oil & Gas Oil & Gas Oil & Gas
Customer 2000 Revenue 1999 Revenue 1998 Revenue
-------- ------ --------- ------ --------- ------ ---------
Damsco Distribution..... $7,298 21.7% $4,117 15.9% $3,747 17.2%
Global Petroleum
Marketing.............. -- -- 2,931 11.3% -- --
Canpet Energy Group,
Inc.................... 4,220 12.56% 2,793 10.8% -- --
Note 10. Stock Options and Common Stock
During 1997 and 1996, the Company granted options exercisable for 34,000 and
26,000 shares of common stock, respectively, under the Company's 1996 Stock
Option Plan ("1996 SOP"). Pursuant to the 1996 SOP, the Company may grant
options to purchase up to 60,000 shares (subject to customary anti-dilution
adjustments) of its common stock to key employees of the Company. The 1996 SOP
is administered by the Compensation Committee of the Company's Board of
Directors, which generally has authority to establish who receives options and
the terms and conditions thereof, including vesting and exercise price. The
exercise price of each option granted in 1996 is the market price for the
common stock on the date of grant, determined by reference to the most recent
closing price thereof reported on the Nasdaq System.
During 1999, 1998 and 1997, the Company granted options exercisable for
24,500, 71,840 and 27,000 shares of common stock, respectively, under the
Company's 1997 Stock Option Plan ("1997 SOP"). Pursuant to the 1997 SOP, the
Company may grant options to purchase up to 140,000 shares (subject to
customary anti-dilution adjustments) of its common stock to key employees of
the Company. The 1997 SOP is administered by the Compensation Committee of the
Company's Board of Directors, which generally has authority to establish who
receives options and the terms and conditions thereof, including vesting and
exercise price. The exercise price of each option granted in 1997 is the market
price for the common stock on the date of grant, determined by reference to the
most recent closing price reported on the Nasdaq Systems.
The 1996 and 1997 Stock Option Plans were amended on December 21, 1998 to
provide for the exchange and repricing of all the outstanding options held by
current Company employees, except the President and CEO, for new options
exercisable at a price lower than that of the cancelled options, bearing the
same exercise term. The exercise price for the repriced options equaled $5.00,
which was higher than the $3.125 per share closing price of the Company's
common stock on the date of grant, and thus there was no impact of the
repricing on the December 31, 1998 financial statements. In conjunction with
severance arrangements with certain officers and employees in 1999, the Company
repriced 61,000 shares at the current market price of $1.40, granted full
vesting and extending the expiration date to August 31, 2001. Because the
options were repriced to the market price at the date of grant, there was no
impact of these modifications on the December 31, 1999 financial statements.
F-26
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1998, and in conjunction with the acquisition of Neutrino, the
Company granted Non-Qualified Stock Options exercisable for 110,000 shares of
common stock under individual agreements with key members of Neutrino
management. The issuance of these Non-Qualified Stock options was administered
by the Compensation Committee of the Company's Board of Directors which
generally has authority to establish who receives options and the terms and
conditions thereof, including vesting and exercise price. The exercise price of
each non-qualified option granted in 1998 was at the market price for the
Company's Common Stock on the date of the grant. However, in conjunction with
repricing of options pursuant to the 1996 and 1997 SOP, as described above, the
option price of Non-Qualified options issued in 1998 were also repriced, to
$5.00, on December 21, 1998. There was no impact on the December 31, 1998
financial statements relating to the repricing of these options as the exercise
price exceeded the closing price of the Company's common stock on the date of
grant.
The Company granted to non-employee directors stock pursuant to a directors
compensation plan. During 2000, 1999 and 1998 the Company issued 96,000, 22,000
and 9,000 shares, respectively, to its directors.
During 2000, the Financial Accounting Standards Board issued an
Interpretation regarding APB 25 that requires that the cancellation of an
option and issuance of a new option with a lower exercise price be considered
in substance a modified option. Variable-plan accounting is required to be
applied to the modified option from the date of the modification until the date
of exercise. Consequently, the final measurement of compensation expense will
occur at the date of exercise. The FASB determined that some of the provisions
of the interpretation would be applied prospectively but would cover events
that occur after December 15, 1998. As the option repricings described above,
occurred after December 15, 1998, the new option grants qualify for variable-
plan accounting at each quarterly reporting date, beginning July 1, 2000 and
continuing until the options are exercised or cancelled. With the
implementation of FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, the Company recorded approximately
$175,000 of compensation expense in 2000.
During 1999 and 1998, the Company granted options exercisable for 1,137 and
1,042 shares of common stock, respectively, under the Company's 1996 Employee
Stock Purchase Plan ("SPP"). The SPP is intended to constitute an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. Pursuant to the SPP, the Company may grant options to
purchase up to 60,000 shares (subject to customary anti-dilution adjustments)
of its common stock to employees of the Company. Options may be granted on
January 1 and July 1 of each year to eligible employees who elect to
participate in the SPP. The term of each option is six months from the date of
grant. The number of options granted to each participant equals the quotient of
(i) the total payroll deductions authorized by the participant during the
applicable option period, divided by (ii) 85% of the fair market value of the
common stock as of the date of grant of such option. The exercise price of
options under SPP is 85% of the fair market value of the common stock as of the
date of grant or the date of exercise of such option, whichever is less,
determined by reference to the most recent closing price reported on the Nasdaq
Systems.
F-27
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards, consistent with the method of
prescribed in SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):
2000 1999 1998
------- ------- --------
Net income (loss)................. As reported $10,854 $(5,758) $(16,409)
Pro forma......................... 10,854 (5,789) (16,951)
Basic loss per share.............. As reported $ 1.62 $ (2.25) $ (6.60)
Pro forma......................... 1.62 (2.25) (6.80)
Diluted loss per share............ As reported $ 1.61 (2.25) (6.60)
Pro forma......................... 1.61 (2.25) (6.80)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions
used for the grants issued in 1999 and 1998. There were no compensatory stock
options granted during 2000.
1999 1998
-------------- -------------
Expected volatility.......................... 65.88% 65.63%
Risk free interest rate...................... 5.00% to 5.63% 4.48 to 5.47%
Expected life of options..................... 1 to 3 years 3 years
Expected dividend yield...................... 0% 0%
The Company's President holds a non-qualified option to purchase 90,000
shares of the Company's common stock at a price of $5.00 per share. The option
is non-assignable, and is exercisable until December, 2004. Payment for the
option can be made in cash, common stock of the Company, or a combination
thereof.
In consideration for initiating the transactions pursuant to which the
Company acquired Diverse Production Company ("DPC"), the Company granted a
former director of the Company an option to acquire 8,775 shares of the
Company's common stock at $5.00 per share exercisable through June 2002. The
Company accounted for the option grants to these directors under APB 25 and
related interpretations and because the exercise price was in excess of the
market price at the grant date, there was no financial statement impact at
issuance of these options.
In connection with the acquisition of DPC in 1995, the Company granted
options exercisable for 65,000 shares of its common stock at $6.25 a share
through July 2002. Each of the individuals that received the options became
directors of the Company in connection with the acquisition of DPC. The Company
accounted for the option grants to these directors under APB 25 and related
interpretations and because the exercise price was in excess of the market
price at the grant date, there was no financial statement impact at issuance of
these options.
In conjunction with the acquisition of Amerac in 1998, outstanding warrants
to purchase 95,471 shares of Amerac Common Stock were exchanged for warrants to
purchase 81,244 shares of Southern Mineral Common Stock at an average price of
$33.85 per share. The warrants expired November 18, 1999, but were reinstated
pursuant to the Modified Plan and expire in July 2002.
The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, were issued approximately 3,667,000 warrants in
connection with the Modified Plan (see Note 2). The warrants are for a
perpetual term with an exercise price of $4.21 per share, subject to adjustment
for certain customary anti-
F-28
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dilution stock splits, stock dividends and other recapitalization events. The
exercise price must be paid in cash. The Company also modified certain existing
options in connection with the Modified Plan, including the immediate vesting
of all options, extension of option terms and reinstatement of certain options.
As a result of these warrant issuances and modifications, the Company charged
the estimated fair value of $616,000 to bankruptcy expense during the year
ended December 31, 2000.
A summary of the Company's stock options and warrants as of December 31,
2000, 1999 and 1998, and changes during the years ending on those dates is
presented below:
2000 1999 1998
---------------- ---------------- ----------------
Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----- -------- ------ -------- ------
Outstanding at beginning
of year................ 455,515 $6.85 684,705 $13.55 393,157 $11.85
Granted................. 3,722,116 4.55 85,500 1.85 518,080 15.90
Exercised............... (26) 4.21 -- -- -- --
Forfeited............... (9,167) 5.00 (314,690) 17.60 (226,532) 20.00
--------- ----- -------- ------ -------- ------
Outstanding at end of
year................... 4,168,438 $4.80 455,515 $ 6.85 684,705 $13.55
========= ===== ======== ====== ======== ======
Options exercisable at
end of year............ 4,168,438 391,855 518,606
========= ======== ========
Certain options granted during 2000, 1999 and 1998 include the grant of
repriced options; options forfeited during 1999 and 1998 include the
cancellation of these higher priced options. The weighted-average fair value of
compensatory options granted during 1999 and 1998 were $1.85 and $4.20,
respectively, per option. The Company does not consider any of the options
issued in 2000 to be compensatory. The following table summarizes information
about options and warrants outstanding at December 31, 2000:
Options and Warrants Outstanding Options and Warrants Exercisable
---------------------------------------------- ---------------------------------------------
Weighted Avg.
Range of Number Remaining Weighted-Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Outstanding Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
$1.40 to 7.50 307,571 2.40 years $ 4.40 307,571 $ 4.40
10.00 to 15.00 128,822 0.12 years 10.34 128,822 10.34
22.50 to 33.85 64,216 1.36 years 29.04 64,216 29.04
4.21 3,667,829 Perpetual 4.21 3,667,829 4.21
---------- ----------
4,168,438 4,168,438
========== ==========
Note 11. Restructuring and Bankruptcy Costs
During the third quarter of 1999, the Board of Directors of the Company
concluded that the proposed restructuring plan as filed with the Securities and
Exchange Commission on July 21, 1999 could not be consummated on the terms
contemplated. Therefore, estimated costs of approximately $1,372,000 associated
with the restructuring were expensed during the third and fourth quarters of
1999. These costs are primarily legal, accounting, financial advisory and other
transaction costs related to the proposed restructuring. Since the Company's
filing for bankruptcy on October 29, 1999, it has incurred costs of
approximately $553,000 during the year-ended December 31, 1999 and $4,790,000
during the year-ended December 31, 2000, primarily related to legal, accounting
and financial advisory services rendered in connection with the bankruptcy. In
addition, $2,463,000 that was capitalized as other assets for fees and expenses
related to securing the old domestic bank debt and convertible subordinated
debentures were expensed during the fourth quarter of 1999 pursuant to SOP 90-
7.
F-29
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Commitments and Contingencies
The Company leases its headquarters office space and its Calgary, Canada
office space under a noncancellable operating leases expiring April 14, 2003.
The Company has sub-leased a portion of its headquarters office space through
the term of its lease. Lease commitments exclusive of the sublease at December
31, 2000 are:
2001 2002 2003 2004 Total
---- -------- ------- ---- --------
$277,011 $176,964 $45,577 $-- $499,552
Lease expenses in 2000, 1999 and 1998 were $251,601, $309,631 and $336,461,
respectively.
The Company is involved in several lawsuits arising in the ordinary course
of business, none of which presents the possibility of a material loss.
The Company is unaware of any material possible exposure from actual or
potential claims or lawsuits involving environmental matters. As such, no
liability has been accrued as of December 31, 2000 and 1999.
Note 13. Quarterly Financial Data (Unaudited)
Selected quarterly financial data of the Company are presented below for the
years ended December 31, 2000 and 1999 (in thousands, except per share
amounts):
Income Basic Diluted
(Loss) Net Income Income
from Income (Loss) (Loss)
Revenues Operations (Loss) Per Share Per Share
-------- ---------- ------- --------- ---------
2000 Quarter
March 31(4).................... $ 7,412 $ 1,850 $ 1,174 $ 0.45 $ 0.45
June 30(4)..................... 7,699 463 (1,432) (0.55) (0.55)
September 30(1)(4)............. 8,956 1,301 8,700 0.87 0.87
December 31(2)(4).............. 9,513 3,627 2,412 0.20 0.20
------- -------- -------
$33,580 $ 7,241 $10,854 $ 1.62 $ 1.61
======= ======== ======= ====== ======
1999 Quarter
March 31....................... $10,694 $ 4,445 $ 2,928 $ 1.15 $ 1.00
June 30........................ 6,203 (1,910) (3,614) (1.40) (1.40)
September 30(2)................ 13,695 6,464 4,910 1.90 1.50
December 31(2)................. 7,249 (11,859) (9,982) (3.90) (3.90)
------- -------- -------
$37,841 $ (2,860) $(5,758) $(2.25) $(2.25)
======= ======== ======= ====== ======
- --------
(1) Includes the extraordinary gain from extinguishment of debt of $8.3
million, net of taxes.
(2) Includes the charge for restructuring costs of $1.3 million and $720,000
for the quarter ended September 30, 1999 and December 31, 2000,
respectively.
(3) Includes an impairment related to the Company's unproved and proved oil and
gas properties of $8.5 million, bankruptcy costs of $553,000 and the write
off of debt issuance fees capitalized to other assets totaling $2,463,000.
(4) Includes $852,000, $2,492,000 and $1,844,000 in bankruptcy expenses for the
quarters ended March 31, 2000; June 30, 2000 and September 30, 2000,
respectively. Included in the fourth quarter ended December 31, 2000 is a
net reduction of approximately $398,000 to bankruptcy expense as a result
of the correction of previous accrued amounts to amounts actually paid
pursuant to the confirmation of the Modified Plan.
F-30
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15. Retirement Benefits
The Company terminated its 401(k) Retirement Plan in 1995, and adopted a
Simplified Employee Pension Plan ("SEP"). The SEP allows employees to defer
part of their salary. Employer contributions are optional, and the Company will
determine annually whether it will contribute and at what level. The maximum
amount that can be contributed annually per SEP plan participant, particularly
from a combination of salary deferrals plus Company optional contributions, is
$22,500. The Company's did not make contributions during 2000, 1999 or 1998.
Note 16. Geographic Segment Financial Data
The Company is an independent oil and gas Company engaged in the
acquisition, development and exploration of oil and natural gas properties.
Information about the Company's operations by geographic area for the year
ended December 31, 2000, 1999 and 1998 is as follows (in thousands):
U.S. Ecuador Canada Total
------- ------- ------- -------
Year ended December 31, 2000
Oil and gas sales(1).......................... $19,796 $1,152 $12,633 $33,581
Gains (losses) on sales of properties......... 21 -- (22) (1)
------- ------ ------- -------
19,817 1,152 12,611 33,580
------- ------ ------- -------
Expenses:
Production.................................. 5,517 496 2,717 8,730
Exploration................................. 59 -- 452 511
Depreciation, depletion and amortization.... 4,728 -- 3,578 8,306
General & administrative.................... 2,050 16 1,182 3,248
Restructuring and bankruptcy costs.......... 5,510 -- 34 5,544
------- ------ ------- -------
17,864 512 7,963 26,339
Interest & other income, net................ 144 -- 95 239
Interest expense............................ 1,968 -- 502 2,470
------- ------ ------- -------
Income before income taxes.................. 129 640 4,241 5,010
Income tax (expense) benefit ............... 52 -- (2,467) (2,415)
------- ------ ------- -------
Income before extraordinary gain............ 181 640 1,774 2,595
Extraordinary gain, net of tax.............. 8,259 -- -- 8,259
------- ------ ------- -------
Net income.................................. $ 8,440 $ 640 $ 1,774 $10,854
======= ====== ======= =======
Identifiable assets as of December 31, 2000
Net property and equipment.................... $39,204 $1,036 $33,296 $73,536
Corporate assets.............................. 8,360
-------
Total assets................................ $81,896
=======
F-31
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. Ecuador Canada Total
------- ------- ------- --------
Year ended December 31, 1999
Oil and gas sales (1)..................... $12,613 $ 624 $12,628 $ 25,865
Gain (Loss) on sales of properties........ 12,183 -- (207) 11,976
------- ------- ------- --------
24,796 624 12,421 37,841
Expenses:
Production.............................. 4,568 414 3,916 8,898
Exploration............................. 2,408 -- 93 2,501
Impairment of proved oil and gas
properties............................. 2,616 -- 6,070 8,686
Depreciation, depletion and
amortization........................... 5,602 3 6,697 12,302
General & administrative................ 2,459 53 1,414 3,926
Restructuring and bankruptcy cost....... 4,388 -- -- 4,388
------- ------- ------- --------
22,041 470 18,190 40,701
Interest & other income, net.............. 46 27 383 456
Interest expense.......................... 4,906 -- 1,330 6,236
------- ------- ------- --------
Net income (loss) before income taxes..... (2,105) 181 (6,716) (8,640)
Income tax (expense) benefit.............. (459) -- 3,341 2,882
------- ------- ------- --------
Net income (loss)......................... $(2,564) $ 181 $(3,375) $ (5,758)
======= ======= ======= ========
Identifiable assets as of December 31,
1999
Net property and equipment................ $40,135 $ 992 $36,838 $ 77,965
Corporate assets.......................... 16,769
--------
Total assets............................ $ 94,734
========
Year ended December 31, 1998
Oil and gas sales(1)...................... $14,647 $ 290 $ 6,785 $ 21,722
Loss on sales of properties............... (234) -- (16) (250)
------- ------- ------- --------
14,413 290 6,769 21,472
------- ------- ------- --------
Expenses:
Production.............................. 5,348 371 2,799 8,518
Exploration............................. 2,910 -- 725 3,635
Impairment of proved oil and gas
properties............................. 2,047 2,703 4,594 9,344
Depreciation, depletion and
amortization........................... 6,221 244 4,040 10,505
General & administrative................ 2,004 11 1,607 3,622
------- ------- ------- --------
18,530 3,329 13,765 35,624
------- ------- ------- --------
Interest & other income, net.............. 262 25 43 330
Interest expense.......................... (4,649) -- (713) (5,362)
------- ------- ------- --------
Net loss before income taxes.............. (8,504) (3,014) (7,666) (19,184)
Income tax benefit........................ (5) -- (2,770) (2,775)
------- ------- ------- --------
Net loss.................................. $(8,499) $(3,014) $(4,896) $(16,409)
======= ======= ======= ========
Identifiable assets as of December 31,
1998
Net property and equipment................ $55,073 $ 1,000 $58,114 $114,187
Corporate assets.......................... 14,103
--------
Total assets.............................. $128,290
========
- --------
(1) Includes sulfur revenues of $572,000, $779,000 and $700,000 in 2000, 1999
and 1998, respectively.
F-32
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17. Oil and Gas Producing Activities
The Company's capitalized costs of all oil and gas properties and related
allowances for depreciation and depletion are as follows at December 31 (in
thousands):
2000 1999
-------- --------
Proved properties................................... $115,705 $120,932
Unproved properties................................. 4,541 4,443
Less accumulated depreciation, depletion and
amortization...................................... (46,786) (47,587)
-------- --------
Total............................................. $ 73,460 $ 77,788
======== ========
The Company's depreciation, depletion and amortization costs per Mcfe in
2000, 1999 and 1998 were $0.99, $1.15 and $0.94, respectively. The Company's
share of oil and gas revenues produced from its royalty interests was $0,
$2,550,000 and $966,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Costs incurred in oil and gas property acquisition, exploration and
development activities were as follows (in thousands):
United States Ecuador Canada Total
------------- ------- ------- ---------
As of December 31, 2000
Property acquisition costs
Proved............................. $ 184 $ -- $ 389 $ 573
Unproved........................... 213 44 -- 257
Exploration costs.................... 59 -- 452 511
Development cost(a).................. 3,406 -- 1,805 5,211
------- ---- ------- ---------
Total costs incurred............. $ 3,862 $ 44 $ 2,646 $ 6,552
======= ==== =======
Less: Certain exploration expenses
and other items..................... (506)
---------
Total capital expenditures per
statement of cash flows............. $ 6,046
=========
As of December 31, 1999
Property acquisition costs
Proved............................. $ -- $ -- $ -- $ --
Unproved........................... 8 -- -- 8
Exploration costs.................... 50 -- 93 143
Development cost..................... 2,020 3 931 2,954
------- ---- ------- ---------
Total costs incurred............. $ 2,078 $ 3 $ 1,024 $ 3,105
======= ==== =======
Less: Certain exploration expenses
and other items..................... (151)
---------
Total capital expenditures per
statement of cash flows............. $ 2,954
=========
As of December 31, 1998
Property acquisition costs
Proved............................. $22,885 $ -- $50,452 $ 73,337
Unproved........................... 1,979 -- 3,812 5,791
Exploration costs.................... 4,150 -- 923 5,073
Development cost..................... 3,838 505 1,410 5,753
------- ---- ------- ---------
Total costs incurred............. $32,852 $505 $56,597 $ 89,954
======= ==== =======
Less: Certain exploration expenses,
non-cash consideration and other
items............................... (26,455)
---------
Total capital expenditures per
statement of cash flows............. $ 63,499
=========
- --------
(a) Includes approximately $1,017 of costs for development of costs for
development of properties previously classified as proved undeveloped
properties.
F-33
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standardized measure of discounted future net cash flows (unaudited)
The information that follows has been developed by the Company pursuant to
procedures prescribed by Statement of Financial Accounting Standards No. 69 of
the Financial Accounting Standards Board and utilizes reserve data estimated by
independent petroleum engineering firms and by the Company. The information may
be useful for certain comparison purposes, but should not be solely relied upon
in evaluating the Company or its performance. Moreover, the projections should
not be construed as realistic estimates of future cash flows, nor should the
standardized measure be viewed as representing current value.
The future cash flows are based on sales prices, costs and statutory income
tax rates in existence at the dates of the projections. Since future
projections are inherently imprecise, material revisions to reserve estimates
may occur in the future. Further, production of the oil and gas reserves may
not occur in the periods assumed, and actual prices realized and actual costs
incurred are expected to vary from those used. Management does not rely upon
the information that follows in making investment and operating decisions;
rather, those decisions are based upon a wide range of factors, including
estimates of proved and probable reserves, and price and cost assumptions
different from those reflected herein.
The following table sets forth the standardized measure of discounted future
net cash flows from projected production of the Company's proved oil and gas
reserves as of December 31 (in thousands):
United States Ecuador Canada Total
------------- ------- -------- ---------
At December 31, 2000
Future cash inflows............... $393,777 $ 7,249 $163,186 $ 564,212
Future production costs........... (76,260) (3,801) (29,023) (109,084)
Future development costs(a)....... (11,131) (27) (1,227) (12,385)
Future income taxes............... (87,097) (174) (54,122) (141,393)
-------- ------- -------- ---------
Future net cash flows........... 219,289 3,247 78,814 301,350
10% Annual discount............... (93,695) (804) (34,482) (128,981)
-------- ------- -------- ---------
Standardized measure of discounted
future net cash flows............ $125,594 $ 2,443 $ 44,332 $ 172,369
======== ======= ======== =========
At December 31, 1999
Future cash inflows............... $142,872 $ 8,015 $127,246 $ 278,133
Future production costs........... (46,156) (5,060) (41,415) (92,631)
Future development costs.......... (8,763) (31) (1,544) (10,338)
Future income taxes............... (8,806) -- (24,916) (33,722)
-------- ------- -------- ---------
Future net cash flows........... 79,147 2,924 59,371 141,442
10% Annual discount............... (34,506) (839) (24,842) (60,187)
-------- ------- -------- ---------
Standardized measure of discounted
future net cash flows............ $ 44,641 $ 2,085 $ 34,529 $ 81,255
======== ======= ======== =========
At December 31, 1998
Future cash inflows............... $142,303 $ -- $ 91,260 $ 233,563
Future production costs........... (42,945) -- (34,968) (77,913)
Future development costs.......... (7,597) -- (1,306) (8,903)
Future income taxes............... (13,061) -- (9,423) (22,484)
-------- ------- -------- ---------
Future net cash flows........... 78,700 -- 45,563 124,263
10% Annual discount............... (35,241) -- (18,312) (53,553)
-------- ------- -------- ---------
Standardized measure of discounted
future net cash flows............ $ 43,459 $ -- $ 27,251 $ 70,710
======== ======= ======== =========
- --------
(a) Includes $8,973 of development costs for proved undeveloped properties
for 2001 and does not include any such costs in 2002 and 2003.
F-34
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
U.S. Ecuador Canada Total
------- ------- ------- -------
At December 31, 2000
Standardized measure--beginning of year... 44,641 2,085 34,529 81,255
Sales net of production costs............. (13,705) (656) (9,916) (24,277)
Accretion of discount..................... 4,961 208 4,903 10,072
Sales of minerals in place................ -- -- (12,449) (12,449)
Net changes in prices, net of production
costs.................................... 125,580 1,243 75,475 202,298
Revision, to previous quantity,
estimates................................ 5,118 (406) (8,344) (3,631)
Extensions and discoveries ............... 2,379 -- 1,888 4,267
Net change in income taxes................ (44,916) (131) (15,953) (61,001)
Changes in estimated future development
costs.................................... (6,786) 3 (2,150) (8,933)
Development costs incurred during the
period................................... 3,406 -- 1,805 5,211
Changes of production rates and other..... 4,916 97 (25,455) (20,443)
------- ------ ------- -------
Standardized measure--end of year......... 125,594 2,443 44,331 172,368
======= ====== ======= =======
At December 31, 1999
Standardized measure--beginning of year .. 43,459 -- 27,251 70,710
Sales net of production costs............. (6,416) (211) (8,711) (15,338)
Accretion of discount..................... 4,944 2,725 7,669
Purchases and sales of minerals in place.. (15,066) -- (2,191) (17,257)
Net changes in prices, net of production
costs.................................... 27,264 -- 31,373 58,637
Revisions to previous quantity estimates.. 7,083 -- (1,593) 5,490
Extensions and discoveries................ 2,277 -- -- 2,277
Net change in income taxes................ 2,070 -- (9,263) (7,193)
Changes in estimated future development
costs.................................... (2,260) (24) (1,989) (4,272)
Development costs incurred during the
period................................... 1,516 3 1,435 2,954
Changes of production rates and other..... (20,231) 2,317 (4,508) (22,422)
------- ------ ------- -------
Standardized measure--end of year......... 44,641 2,085 34,529 81,255
======= ====== ======= =======
At December 31, 1998
Standardized measure--beginning of year... 39,310 2,381 6,281 47,972
Sales net of production costs............. (9,059) 81 (3,707) (12,685)
Accretion of discount..................... 4,024 183 663 4,870
Purchases and sales of minerals in place.. 10,500 24,130 34,630
Net changes in prices, net of production
costs.................................... (7,431) (3,298) (1,849) (12,578)
Revisions to previous quantity estimates.. (3,472) 1,161 (370) (2,681)
Extensions and discoveries................ 13,199 -- 1,377 14,576
Net change in income taxes................ (5,471) (547) (2,908) (8,926)
Changes in estimated future development
costs.................................... (2,002) (505) 162 (2,345)
Development costs incurred during the
period................................... 3,838 505 1,343 5,686
Changes of production rates and other..... 23 39 2,129 2,191
------- ------ ------- -------
Standardized measure--end of year......... 43,459 -- 27,251 70,710
======= ====== ======= =======
The Company's foreign reserves in 2000, 1999 and 1998 were 37%, 46% and 43%
of total reserves, respectively.
F-35
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Oil and Gas Reserve Information
The following table reflects the estimated proved reserves of the Company.
The Company's estimates of reserves filed with federal agencies, including the
Securities Exchange Commission, agree with the information set forth below. The
oil and gas reserves are principally onshore in the continental United States,
Canada and Ecuador. The Company's reserve information has been based on
estimates prepared by or audited by independent petroleum engineers.
Netherland, Sewell & Associates, Inc. ("NSA") prepared the domestic reserve
estimates as of December 31, 1998, 1999 and 2000. NSA prepared most of the
domestic reserve. The Company prepared the remaining reserve estimates. Chapman
Petroleum Engineering Ltd. prepared most of the Canadian reserve estimates as
of December 31, 1998 and 1999 and all of 2000. Gilbert Laustsen Jung Associates
Ltd. prepared the remaining Canadian reserve estimates as of December 31, 1998
and 1999. The year-end estimates as of December 31, 1999 were negatively
affected relative to amounts previously reported due to downward revisions of
previous estimates. The downward revisions, totaling 492,816 BOE, related to
the Company's properties in the U.S. totaling 368,500 BOE and in Canada
totaling 124,316 BOE. The U.S. revisions resulted from differences in
interpretation between the current and predecessor independent engineering
firms. The Canadian revisions resulted primarily from decreased production
performance in 1999. These differences, many of which relate to classification
of reserves within the different oil and gas reserve categories (i.e. proved,
probable and possible) are due to the numerous engineering, geological and
operational assumptions that generally are derived from limited data. As a
result of the decline in world oil prices, the Company's reserves in Ecuador
were not economic as of December 31, 1998 which resulted in the elimination of
all units. The Company's U.S. oil reserves (including, oil, condensate and
natural gas liquids) have been prepared using year-end oil prices received by
the Company of $25.52, $24.31 and $9.67 per barrel and gas reserves were
prepared using year-end prices received by the Company of $10.05, $2.12 and
$2.17 per Mcf, as of December 31, 2000, 1999 and 1998, respectively. The
Canadian reserves have been prepared using year-end oil prices received by the
Company of $26.42, $22.34 and $8.71 per barrel and natural gas prices of $9.38,
$2.02 and $1.72 per Mcf, as of December 31, 2000, 1999 and 1998, respectively.
Ecuador reserves were prepared using a year-end oil price of $28.53 and $24.16
per barrel as of December 31, 2000 and 1999, respectively.
U.S. Ecuador Canada Total
---------------------- --------------- ---------------------- -----------------------
Oil Gas Oil Gas Oil Gas Oil Gas
Proved Reserves (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
- --------------- --------- ----------- -------- ----- ---------- ---------- ---------- -----------
Balance, December 31,
1997................... 2,350,208 30,001,383 466,005 -- 525,200 4,582,300 3,341,413 34,583,683
Extensions, discoveries
and additions.......... 237,189 12,903,760 -- -- 170,912 -- 408,101 12,903,760
Revisions of previous
estimates.............. (192,935) (2,362,293) (437,413) -- -- -- (630,348) (2,362,293)
Purchase and sale of
minerals in place
(net).................. 1,004,373 12,066,855 -- -- 3,656,928 24,914,483 4,661,301 36,981,338
Production.............. (406,920) (4,219,528) (28,592) -- (321,040) (2,212,983) (756,552) (6,432,511)
--------- ----------- -------- --- ---------- ---------- ---------- -----------
Balance, December 31,
1998................... 2,991,915 48,390,177 -- -- 4,032,000 27,283,800 7,023,915 75,673,977
Extensions, discoveries
and additions.......... 131,397 1,110,740 -- -- -- -- 131,397 1,110,740
Revisions of previous
estimates.............. 339,573 5,186,006 367,202 -- 707,794 (5,654,126) 1,414,569 (468,120)
Purchase and sale of
minerals in place
(net).................. (175,573) (18,101,385) -- -- (293,444) (512,147) (469,017) (18,613,532)
Production.............. (326,584) (3,095,456) (35,473) -- (494,350) (2,299,527) (856,407) (5,394,983)
--------- ----------- -------- --- ---------- ---------- ---------- -----------
Balance, December 31,
1999................... 2,960,728 33,490,082 331,729 -- 3,952,000 18,818,000 7,244,457 52,308,082
Extensions, discoveries
and additions.......... 104,868 113,681 -- -- 6 202,000 104,874 315,681
Revisions of previous
estimates.............. 60,638 1,022,733 (41,933) -- (227,453) (1,814,245) (208,748) (791,512)
Purchases and sale of
minerals in place
(net).................. -- -- -- -- (1,430,800) (129,100) (1,430,800) (129,100)
Production.............. (351,839) (2,491,537) (35,716) -- (307,753) (1,554,655) (695,308) (4,046,192)
--------- ----------- -------- --- ---------- ---------- ---------- -----------
Balance, December 31,
2000................... 2,774,395 32,134,959 254,080 -- 1,986,000 15,522,000 5,014,475 47,656,959
========= =========== ======== === ========== ========== ========== ===========
Proved Developed
Reserves
- ----------------
Balance, December 31,
1998................... 2,731,986 40,605,557 -- -- 3,899,100 26,773,600 6,631,086 67,379,157
Balance, December 31,
1999................... 2,668,623 25,940,224 331,729 -- 3,559,476 18,552,200 6,559,828 44,492,424
Balance, December 31,
2000................... 2,518,217 22,816,013 254,080 -- 1,882,000 14,922,000 4,654,297 37,718,013
F-36
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17. Merger Agreement
On August 21, 2000, the Company announced the engagement of Petrie Parkman &
Co. LLP and FirstEnergy Capital Corporation of Canada to evaluate strategic
alternatives available to the Company in an effort to maximize shareholder
value. The Company and PetroCorp Incorporated announced on December 22, 2000
that they have executed a definitive agreement regarding the Company's merger
into PetroCorp. In the merger, shareholders of the Company will, at their
election, receive for each share of Southern Mineral stock $4.71 per share in
cash, PetroCorp common stock or a combination of cash and stock. For both
companies, the merger provides strategic and economic benefits. The operations
of the two companies are very complementary, with PetroCorp primarily operating
in the Gulf Coast and Mid-continent areas of the United States and the Company
primarily operating in the Gulf Coast of the United States. PetroCorp and the
Company both have significant oil and gas interests in the province of Alberta,
Canada. Additionally, the combined company will benefit by having a
substantially greater critical mass and cost savings resulting from the
consolidation of operations. In connection with the merger, PetroCorp will not
be obligated to issue more than four million or less than three million shares
of common stock. The merger is subject to customary conditions to closing,
including obtaining shareholder and regulatory approvals and the voting of
shareholders to elect to receive at least three million shares of PetroCorp
stock. The transaction is anticipated to close by May 31, 2001.
F-37
ANNEX I
AGREEMENT AND PLAN OF MERGER
AMONG
PETROCORP INCORPORATED,
PETROCORP ACQUISITION COMPANY
AND
SOUTHERN MINERAL CORPORATION
DATED AS OF DECEMBER 22, 2000
As modified by Amendment No. 1 to Agreement and Plan of Merger,
dated as of March 13, 2001
TABLE OF CONTENTS
Page
----
ARTICLE I THE MERGER.................................................... I-2
Section 1.1 The Merger............................................... I-2
Section 1.2 Effective Time........................................... I-2
Section 1.3 Effects of the Merger.................................... I-2
Section 1.4 Charter and Bylaws, Directors............................ I-2
Section 1.5 Conversion of Securities................................. I-2
Section 1.6 Company Common Stock Elections........................... I-5
Section 1.7 Parent to Make Cash and Certificates Available, Transfer
Taxes, Withholding...................................... I-6
Section 1.8 Dividends, Fractional Shares, etc. ...................... I-7
Section 1.9 Closing.................................................. I-8
Section 1.10 Transfer Taxes........................................... I-8
Section 1.11 Guarantee................................................ I-8
Section 1.12 Dissenting Shares........................................ I-8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT..................... I-9
Section 2.1 Organization and Qualification........................... I-9
Section 2.2 Capitalization........................................... I-9
Section 2.3 Subsidiaries............................................. I-10
Section 2.4 Authority Relative to this Agreement..................... I-10
Section 2.5 Reports and Financial Statements......................... I-11
Section 2.6 Absence of Certain Changes or Events..................... I-11
Section 2.7 Litigation............................................... I-11
Section 2.8 Compliance with All Applicable Laws...................... I-12
Section 2.9 Employee Benefit Plans................................... I-12
Section 2.10 Parent Board Action...................................... I-13
Section 2.11 Required Shareholder Vote or Consent..................... I-13
Section 2.12 Taxes.................................................... I-13
Section 2.13 No HSR Filing............................................ I-14
Section 2.14 Certain Agreements....................................... I-14
Section 2.15 Compliance with Environmental Laws....................... I-14
Section 2.16 Financial Advisor........................................ I-15
Section 2.17 Hedging.................................................. I-15
Section 2.18 No Distribution of Parent Rights......................... I-15
Section 2.19 Oil and Gas Operations................................... I-15
Section 2.20 Properties............................................... I-16
Section 2.21 Oil and Gas Reserves..................................... I-16
Section 2.22 Take-or-Pay Deliveries................................... I-17
Section 2.23 Representations and Warranties Regarding Merger Sub...... I-17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... I-17
Section 3.1 Organization and Qualification........................... I-18
Section 3.2 Capitalization........................................... I-18
Section 3.3 Subsidiaries............................................. I-18
Section 3.4 Authority Relative to this Agreement..................... I-19
Section 3.5 Reports and Financial Statements......................... I-19
Section 3.6 Absence of Certain Changes or Events..................... I-20
Section 3.7 Litigation............................................... I-20
Section 3.8 Compliance with Applicable Laws.......................... I-20
Section 3.9 Employee Benefit Plans................................... I-20
Section 3.10 Company Board Action..................................... I-22
I-i
Page
----
Section 3.11 Required Shareholder Vote or Consent..................... I-22
Section 3.12 Taxes.................................................... I-22
Section 3.13 Certain Agreements....................................... I-22
Section 3.14 Compliance with Environmental Laws....................... I-23
Section 3.15 Financial Advisor........................................ I-23
Section 3.16 Hedging.................................................. I-23
Section 3.17 Oil and Gas Operations................................... I-24
Section 3.18 Gas Imbalances........................................... I-24
Section 3.19 Royalties................................................ I-24
Section 3.20 Properties............................................... I-24
Section 3.21 Oil and Gas Reserves..................................... I-25
Section 3.22 Take-or-Pay Deliveries................................... I-25
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS.................... I-25
Section 4.1 Conduct of Business by Company Pending the Merger........ I-25
Section 4.2 Conduct of Business by Parent Pending the Merger......... I-28
ARTICLE V ADDITIONAL AGREEMENTS......................................... I-31
Section 5.1 Access and Information................................... I-31
Section 5.2 Registration Statement/Proxy Statement................... I-31
Section 5.3 Compliance with the Securities Act....................... I-32
Section 5.4 Stock Exchange Listing................................... I-32
Section 5.5 Employee Matters......................................... I-32
Section 5.6 Indemnification.......................................... I-33
Section 5.7 Additional Agreements.................................... I-33
Section 5.8 No Shop.................................................. I-34
Section 5.9 Advice of Changes, SEC Filings........................... I-35
Section 5.10 Confidentiality Agreement................................ I-35
Section 5.11 Special Meetings......................................... I-35
Section 5.12 State Takeover Statutes.................................. I-36
Section 5.13 Company Credit Agreements................................ I-36
Section 5.14 Expenses................................................. I-36
Section 5.15 St. Paul Shareholder Agreement........................... I-36
Section 5.16 Available Funds.......................................... I-36
ARTICLE VI CONDITIONS PRECEDENT......................................... I-36
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger.................................................. I-36
Section 6.2 Conditions to Obligation of Company to Effect the
Merger.................................................. I-37
Section 6.3 Conditions to Obligations of Parent to Effect the
Merger.................................................. I-37
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER........................... I-38
Section 7.1 Termination.............................................. I-38
Section 7.2 Effect of Termination.................................... I-39
Section 7.3 Amendment................................................ I-39
Section 7.4 Waiver................................................... I-40
Section 7.5 Exclusive Remedy for Inaccuracy or Breach of
Representation or Warranty.............................. I-40
ARTICLE VIII GENERAL PROVISIONS......................................... I-40
Section 8.1 Non-Survival of Representations and Warranties........... I-40
Section 8.2 Disclosure Schedules..................................... I-40
Section 8.3 Notices.................................................. I-40
Section 8.4 Interpretation........................................... I-41
Section 8.5 Counterparts............................................. I-41
A-ii
Page
----
Section 8.6 Entire Agreement, No Third-Party Beneficiaries............. I-41
Section 8.7 Governing Law.............................................. I-41
Section 8.8 Shareholder Agreements..................................... I-41
Section 8.9 Standstill................................................. I-41
Section 8.10 Assignment................................................. I-42
Section 8.11 Severability............................................... I-42
Section 8.12 Enforcement of this Agreement.............................. I-42
Exhibit A -- Merger Sub Certificate of Incorporation
Exhibit B -- Affiliate Letter
Exhibit C -- Form of St. Paul Shareholder Agreement
A-iii
INDEX OF DEFINED TERMS
Term Section
- ---- -----------
Affiliate........................................................... 5.3
Affiliate Letter.................................................... 5.3
Aggregate Merger Consideration...................................... 1.5(c)(ii)
Agreement........................................................... Preamble
Alternative Proposal................................................ 5.8
AMEX................................................................ 6.1(c)
Applicable Corporate Laws........................................... 1.1
Blue Sky............................................................ 5.2
Cap................................................................. 5.6(a)
Cash Consideration.................................................. 1.5(c)(i)
Cash-Out Option..................................................... 1.5(h)
Certificate......................................................... 1.5(f)
Certificates of Merger.............................................. 1.2
Closing............................................................. 1.9
Code................................................................ Recitals
Commission.......................................................... 2.5
Company............................................................. Preamble
Company Common Stock................................................ Recitals
Company Credit Agreements........................................... 4.1(e)
Company Director Nominees........................................... 1.4(b)
Company Disclosure Schedule......................................... Article III
Company ERISA Affiliate............................................. 3.9
Company Employee Benefit Plans...................................... 3.9(a)
Company Employee Payments........................................... 3.9(d)
Company Financial Advisor Fees...................................... 3.15
Company Good and Marketable Title................................... 3.20(b)
Company's Knowledge................................................. 3.7
Company Material Adverse Effect..................................... 3.1
Company Payout Balances............................................. 3.21
Company Permitted Encumbrances...................................... 4.1(e)
Company Permits..................................................... 3.8
Company Preferred Stock............................................. 3.2
Company Principal Shareholders...................................... Recitals
Company Proxy Statement............................................. 5.2
Company Related Party............................................... 3.13(b)
Company Reserve Report.............................................. 3.21
Company SEC Reports................................................. 3.5
Company Shareholder Agreements...................................... Recitals
Company Shareholder Approval........................................ 3.11
Company Special Meeting............................................. 5.11
Company Stock Plans................................................. 1.5(h)
Confidentiality Agreement........................................... 5.10
Control............................................................. 8.4
Delaware Certificate of Merger...................................... 1.2
DGCL................................................................ 1.1
Effective Time...................................................... 1.2
Stock Election Mailing Date......................................... 1.6(c)
Environmental Laws.................................................. 2.15(a)
I-iv
Term Section
- ---- ----------
ERISA................................................................ 2.9(a)
Exchange Act......................................................... 2.4
Exchange Agent....................................................... 1.6(b)
Exchange Fund........................................................ 1.7(a)
Exchange Ratio....................................................... 1.5(c)(ii)
Expenses Fee......................................................... 7.2(c)
Form of Stock Election............................................... 1.6(c)
Form S-4............................................................. 5.2
Fractional Share..................................................... 1.8(c)
Fundamental Change................................................... 4.2
GAAP................................................................. 4.1(e)
GCLN................................................................. 1.1
Governmental Entity.................................................. 2.4
Hydrocarbons......................................................... 2.1
Indemnified Parties.................................................. 5.6(a)
Liens................................................................ 2.20(a)
Maximum Stock Election Number........................................ 1.5(e)
Merger............................................................... Recitals
Merger Consideration................................................. 1.5(c)
Merger Sub........................................................... Preamble
Merger Sub Common Stock.............................................. 1.5(a)(ii)
Multiemployer Plan................................................... 2.9(b)
Nevada Certificate of Merger......................................... 1.2
Non-Electing Share................................................... 1.6(a)
Option............................................................... 1.5(h)
Parent............................................................... Preamble
Parent Common Stock.................................................. Recitals
Parent Credit Agreement.............................................. 4.2(e)
Parent Disclosure Schedule........................................... Article II
Parent ERISA Affiliate............................................... 2.9(f)
Parent Employee Benefit Plans........................................ 2.9(a)
Parent Good and Marketable Title..................................... 2.20(b)
Parent Information Statement......................................... 5.2
Parent's Knowledge................................................... 2.7
Parent Material Adverse Effect....................................... 2.1
Parent Payout Balances............................................... 2.21
Parent Permitted Encumbrances........................................ 4.2(e)
Parent Permits....................................................... 2.8
Parent Preferred Stock............................................... 2.2
Parent Principal Shareholders........................................ Recitals
Parent Prospectus.................................................... 5.12
Parent Related Party................................................. 2.14(b)
Parent Reserve Reports............................................... 2.21
Parent Rights........................................................ 2.2
Parent SEC Reports................................................... 2.5
Parent Shareholder Agreements........................................ Recitals
Parent Shareholder Approval.......................................... 2.11
Parent Special Meeting............................................... 5.11(b)
Parent Stock Options................................................. 2.2
Per Share Merger Consideration....................................... 1.5(c)(i)
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Term Section
- ---- ----------
Person............................................................... 2.12(c)
Joint Proxy Statement/Prospectus..................................... 5.2
Securities Act....................................................... 2.4
Shareholder Agreements............................................... Recitals
St. Paul............................................................. 5.15
St. Paul Shareholder Agreement....................................... 5.15
Stock Consideration.................................................. 1.5(c)(ii)
Stock Election....................................................... 1.6(a)
Stock Election Final Date............................................ 1.6(e)
Stock Election Percentage............................................ 1.5(e)
Stock Election Shareholders.......................................... 1.5(e)
Subsidiary........................................................... 8.4
Substitute Option.................................................... 1.5(h)
Superior Proposal.................................................... 5.8
Surviving Corporation................................................ 1.1
Tax.................................................................. 2.12
Tax Return........................................................... 2.12
TBCA................................................................. 1.1
Transaction Documents................................................ 2.4
Transfer Taxes....................................................... 1.10
Warrant.............................................................. 1.5(g)
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ANNEX I
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER dated as of December 22, 2000 (as amended
from time to time, this "Agreement") is entered into by PetroCorp Incorporated,
a Texas corporation ("Parent"), PetroCorp Acquisition Company, a Delaware
corporation ("Merger Sub"), and Southern Mineral Corporation, a Nevada
corporation ("Company").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
Company have approved the merger of Company with and into Merger Sub (the
"Merger") and the other transactions contemplated by this Agreement, upon the
terms and subject to the conditions set forth herein, whereby, among other
things, each issued and outstanding share of common stock, par value $0.01 per
share, of Company ("Company Common Stock"), not owned by Parent, Company or
their respective Subsidiaries (as defined in Section 8.4), will be converted
into the right to receive cash or, if properly elected by the holder of such
share, shares of common stock, par value $0.01 per share, of Parent ("Parent
Common Stock") or a combination of Parent Common Stock and cash;
WHEREAS, the respective Boards of Directors of each of Parent, Merger Sub
and Company have determined that the Merger is in furtherance of and consistent
with their respective long-term business strategies and is in the best interest
of their respective shareholders, and accordingly the Boards of Directors of
Parent, Merger Sub and Company have approved the Merger upon the terms and
subject to the conditions set forth herein;
WHEREAS, simultaneously with the execution and delivery of this Agreement
(except as described in Section 5.15), and as a condition and inducement to the
willingness of Company to enter into this Agreement, Company and holders
("Parent Principal Shareholders") of the number of shares of Parent Common
Stock necessary under applicable law to approve the Merger and the transactions
contemplated hereby have entered, or (in the case of the St. Paul Shareholder
Agreement (as defined in Section 5.15)) will enter, into shareholder agreements
(including the St. Paul Shareholder Agreement, the "Parent Shareholder
Agreements" and, together with the Company Shareholder Agreement, the
"Shareholder Agreements") pursuant to which they each agree to vote to adopt
and approve the Merger, this Agreement, and the transactions contemplated
hereby, and to take certain actions in furtherance of the Merger;
WHEREAS, simultaneously with the execution and delivery of this Agreement,
and as a condition and inducement to the willingness of Parent and Merger Sub
to enter into this Agreement, Parent and certain principal shareholders of
Company (the "Company Principal Shareholders") have entered into shareholder
agreements (the "Company Shareholder Agreements") pursuant to which the Company
Principal Shareholders will agree to vote to adopt and approve the Merger, this
Agreement, and the transactions contemplated hereby, and to take certain other
actions in furtherance of the Merger;
WHEREAS, prior to the execution and delivery of this Agreement, Parent, as
sole stockholder of Merger Sub, has executed a written consent adopting and
approving the Merger, this Agreement, and the transactions contemplated hereby,
and approving certain other actions in furtherance of the Merger; and
WHEREAS, among other things, two individuals selected by the Board of
Directors of Company will become directors of Parent in connection with the
transactions contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties agree as follows:
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ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with each of the Delaware General Corporation Law (the
"DGCL"), the General Corporation Law of Nevada (the "GCLN") and the Texas
Business Corporation Act (the "TBCA" and, together with the DGCL and the GCLN,
the "Applicable Corporate Laws"), Company will be merged with and into Merger
Sub at the Effective Time (as defined in Section 1.2). Following the Merger,
the separate corporate existence of Company will cease in accordance with the
GCLN, and Merger Sub will continue as the surviving corporation (the "Surviving
Corporation"), and will succeed to and assume all the rights and obligations of
Company in accordance with the DGCL.
Section 1.2 Effective Time. The Merger will become effective when a
Certificate of Merger (the "Delaware Certificate of Merger") executed in
accordance with the relevant provisions of the DGCL, is filed with the
Secretary of State of the State of Delaware, and a Certificate of Merger (the
"Nevada Certificate of Merger" and, together with the Delaware Certificate of
Merger, the "Certificates of Merger") executed in accordance with the GCLN is
filed with the Secretary of State of the State of Nevada, or such later time
which the parties hereto will have agreed upon and designated in the
Certificates of Merger as the effective time of the Merger. When used in this
Agreement, the term "Effective Time" will mean the first date and time at which
both Certificates of Merger have been duly filed, which the Parties agree will
be done simultaneously (as reasonably possible) for record or such later time
established by the Certificates of Merger. The filing of the Certificates of
Merger will be made on the date of the Closing (as defined in Section 1.9).
Section 1.3 Effects of the Merger. The Merger will have the effects set
forth in the applicable provisions of the Applicable Corporate Laws.
Section 1.4 Charter and Bylaws, Directors. (a) At the Effective Time, the
Certificate of Incorporation of Merger Sub, as in effect immediately prior to
the Effective Time in the form attached as Exhibit A, will be the Certificate
of Incorporation of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law. At the Effective Time, the
Bylaws of Merger Sub, as in effect immediately prior to the Effective Time,
will be the Bylaws of the Surviving Corporation until thereafter changed or
amended as provided therein or in the Certificate of Incorporation of Merger
Sub or by applicable law.
(b) The directors of Merger Sub at the Effective Time will be the
directors of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
(c) Prior to the date of this Agreement, Parent's Board of Directors has
approved (i) an amendment to its Bylaws to be effective at or prior to the
Effective Time (A) increasing the number of directors on Parent's Board of
Directors to nine or more, (B) creating two vacancies on Parent's Board of
Directors as of and subsequent to the Effective Time for a term lasting
until the second annual meeting of the shareholders following the Effective
Time, and (C) which cannot be amended or otherwise modified or repealed
except by a unanimous vote of Parent's Board of Directors, and (ii)
resolutions causing two individuals which Company will select prior to the
Effective Time (the "Company Director Nominees") to become directors of
Parent as of the Effective Time, filling such vacancies. If at any time
after Company's selection of the Company Director Nominees (including after
the Effective Time) any Company Director Nominee is unable to serve as a
director, the other, remaining Company Director Nominee will nominate and
elect a replacement director.
Section 1.5 Conversion of Securities. As of the Effective Time, by virtue of
the Merger and without any action on the part of Parent, Merger Sub, Company or
the holders of any securities of Merger Sub:
(a) (i) Each issued and outstanding share of Parent Common Stock will
remain outstanding and will represent one validly issued, fully paid and
nonassessable share of Parent Common Stock.
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(ii) Each issued and outstanding share of common stock, par value $0.01,
of Merger Sub ("Merger Sub Common Stock") will remain outstanding and will
represent one validly issued, fully paid and nonassessable share of Merger
Sub Common Stock.
(b) Each share of Company Common Stock held in the treasury of Company
and each share of Company Common Stock owned by Parent or any Subsidiary of
Parent will be canceled, and no cash, capital stock of Parent or Merger
Sub, or other consideration will be delivered in exchange therefor.
(c) Subject to Sections 1.5(b), 1.6, 1.7, 1.8 and 1.12, each issued and
outstanding share of Company Common Stock not cancelled pursuant to Section
1.5(b) will be converted into one of the following the "Merger
Consideration"):
(i) for each such share of Company Common Stock (other than shares
as to which a Stock Election (as defined in Section 1.6(a) has been
effectively made and not revoked or lost pursuant to Section 1.6), the
right to receive an amount in cash, without interest (collectively, the
"Cash Consideration"), equal to $4.71, (the "Per Share Merger
Consideration"); or
(ii) at the election of the holder thereof, for each such share of
Company Common Stock as to which a Stock Election has been effectively
made and not revoked or lost, the right to receive a number of shares
of Parent Common Stock equal to the Exchange Ratio (collectively, the
"Stock Consideration"; the aggregate Cash Consideration and Stock
Consideration issued to all of Company's shareholders in connection
with the Merger will be referred to as the "Aggregate Merger
Consideration"). The "Exchange Ratio" will equal the Per Share Merger
Consideration divided by 10.
(d) [OMITTED.]
(e) If, and only if, the aggregate number of shares of Company Common
Stock as to which a Stock Election has been effectively made pursuant to
Section 1.6 (the "Stock Election Shares") would represent (but for the
application of this Section 1.5(e)) the right to receive more than
4,000,000 shares of Parent Common Stock (the "Maximum Stock Election
Number"), then the Aggregate Merger Consideration will
I-3
be comprised of Stock Consideration equal to the Maximum Stock Election
Number and Cash Consideration in an amount equal to the balance of the
Aggregate Merger Consideration. In which case, the Stock Election Shares
will be converted into the right to receive the Cash Consideration or the
Stock Consideration in the following manner:
(i) the number of Stock Election Shares covered by each Stock
Election to be converted into Stock Consideration will be determined by
multiplying the number of Stock Election Shares covered by such Stock
Election by a fraction, (A) the numerator of which is the Maximum Stock
Election Number, and (B) the denominator of which is the aggregate
number of Stock Election Shares;
(ii) all Stock Election Shares not converted into Stock
Consideration in accordance with Section 1.5(e)(i) will be converted
into the right to receive the Cash Consideration; and
(iii) Fractional Shares resulting from the application of Section
1.5(e)(i) will be converted into Cash Consideration.
(f) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of Company Common Stock
will, pursuant to Section 1.5(c), cease to be outstanding and the
certificates representing such shares will be canceled and retired and will
cease to exist and each holder of such shares of Company Common Stock will
thereafter cease to have any rights with respect to such shares of Company
Common Stock, except the right to receive, without interest, the Merger
Consideration and cash for fractional shares of Parent Common Stock in
accordance with Section 1.5(c) upon the surrender of a certificate
representing such shares of Company Common Stock (a "Certificate").
(g) At the Effective Time, each warrant to purchase shares of Company
Common Stock that is outstanding immediately prior to the Effective Time (a
"Warrant") will remain outstanding and will become warrants to acquire Per
Share Merger Consideration on terms set forth in the Warrant. After the
Effective Time, each Warrant will represent the right to receive, upon
exercise of such Warrant, an amount of cash (without interest) equal to the
product of (i) the number of shares of Company Common Stock subject to such
Warrant as of the Effective Time, and (ii) (A) the Per Share Merger
Consideration, minus (B) the exercise price per share applicable under such
Warrant. All references to Company in Company's warrant agreements with
respect to Warrants will be deemed to refer to Parent and Merger Sub, and
Parent and Merger Sub will assume the obligations of the Company under such
warrant agreements. The other terms of each such Warrant and the applicable
Company warrant agreement under which it was issued will continue to apply.
(h) Each of Company's stock option plans listed in Section 1.5(h) of the
Company Disclosure Schedule (collectively, the "Company Stock Plans"), and
each outstanding stock option held by any current or former employee,
director or consultant (an "Option"), (A) will be assumed by Parent at the
Effective Time, and each Option will vest and become immediately
exercisable, and will be deemed to be converted into an option to purchase
a number of shares of Parent Common Stock (a "Substitute Option") equal to
the number of shares of Company Common Stock subject to such Option
multiplied by the Exchange Ratio (rounded to the nearest whole share, with
0.5 shares being rounded up) or (B) at the option of the holder of such
Option exercisable by written notice to Company prior to the Effective
Time, will be cancelled immediately prior to the Effective Time in exchange
for a payment in cash as provided below (a "Cash-out Option"). The per
share exercise price for each Substitute Option will be the current
exercise price per share of Company Common Stock set forth in the original
Option to which it relates divided by the Exchange Ratio (rounded up to the
nearest full cent), and each Substitute Option otherwise will be subject to
all of the other terms and conditions of the original Option to which it
relates. The cash payment for each Cash-out Option will be equal to the
product of (x) the number of shares of Company Common Stock subject to such
Option, and (y) the excess of the Per Share Merger Consideration over the
exercise price per share of Company Common Stock subject to such Option.
Parent will provide to Company at the Effective Time funds to make the
payments provided in the preceding sentence. Prior to the Effective Time,
Company will take such additional actions as are necessary under applicable
law and the applicable agreements and Company Stock Plans to effect the
transactions contemplated by this paragraph.
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Section 1.6 Company Common Stock Elections. Subject to Sections 1.5, 1.7 and
1.8, each holder of shares of Company Common Stock (other than holders of
shares to be canceled as set forth in Section 1.5(b)) will have the right to
submit a request specifying the number of shares of Company Common Stock which
such holder desires to have converted into the right to receive either Stock
Consideration or a combination of Stock Consideration and Cash Consideration in
accordance with the following procedures:
(a) Each holder of shares of Company Common Stock may specify in a
request made in accordance with the provisions of this Section 1.6 the
number of such shares which such holder desires to have converted into the
right to receive Stock Consideration in the Merger (a "Stock Election").
Each share of Company Common Stock as to which no Stock Election is in
effect at the Stock Election Final Date (as defined in Section 1.6(e)) or
for which a Stock Election has been made but has been revoked or withdrawn
or is otherwise no longer effective will be called a "Non-Electing Share."
Subject to Sections 1.7 and 1.8, the Non-Electing Shares of each holder of
shares of Company Common Stock will be treated for purposes of this
Agreement as if such shares were not covered by a Stock Election and,
accordingly, will be converted to the right to receive Cash Consideration
in accordance with Section 1.5(c)(i).
(b) Parent will authorize Parent's Transfer Agent or such other person
as will be reasonably acceptable to Company to receive Stock Elections, to
act as exchange agent hereunder and to make, subject to approval by Parent
and Company (provided such approval is not unreasonably withheld, delayed
or denied), any computations required to be made to give effect to this
Article I (the "Exchange Agent").
(c) Parent will prepare, for use by shareholders of Company in
surrendering Certificates, a form (the "Form of Stock Election") pursuant
to which each holder of Company Common Stock may make Stock Elections. As
of a date on which Parent and Company can mutually agree, which date is
expected to be as soon as practicable after the Company Shareholder
Approval is obtained (the "Stock Election Mailing Date"), the Form of Stock
Election will be mailed to shareholders of record of Company and record
holders of Warrants.
(d) Company and Parent will use all reasonable efforts to make the Form
of Stock Election available to all persons who become shareholders of
record of Company and Parent during the period between the Stock Election
Mailing Date and the Stock Election Final Date.
(e) A Stock Election will have been properly made only if the Exchange
Agent will have received, by 5:00 p.m., New York City time, on the
twentieth day (or a later date which may be determined prior to the Stock
Election Mailing Date by mutual agreement of Parent and Company) following
the date of mailing of the Form of Stock Election (such time on such day
being referred to herein as the "Stock Election Final Date"), a properly
completed and signed Form of Stock Election. A holder of Warrants that (i)
receives a Form of Stock Election, (ii) exercises Warrants in accordance
with the applicable warrant agreement after receipt of such Form of Stock
Election but prior to the Stock Election Final Date, and (iii) otherwise
delivers such Form of Stock Election in accordance with this Section 1.6(e)
with respect to the shares of Company Common Stock issuable under such
Warrant, will have made a Stock Election with respect to such shares of
Company Common Stock issuable under such Warrant if, and only if, such
shares are issued to such holder on or prior to the Stock Election Final
Date so that such holder is the record holder of such shares on the Stock
Election Final Date.
(f) Any holder of record of shares of Company Common Stock may at any
time prior to the Stock Election Final Date change such holder's Stock
Election by written notice received by the Exchange Agent at or prior to
the Stock Election Final Date, accompanied by a properly completed Form of
Stock Election.
(g) Any holder of record of shares of Company Common Stock may at any
time prior to the Stock Election Final Date revoke such holder's Stock
Election by written notice received by the Exchange Agent at or prior to
the Stock Election Final Date or by withdrawal prior to the Stock Election
Final Date of such holder's Certificates previously deposited with the
Exchange Agent. Any revocation of a Stock Election may be withdrawn by
notice of such withdrawal delivered at or prior to the Stock Election Final
Date. Any shareholder of Company who will have deposited Certificates with
the Exchange Agent will have the
I-5
right to withdraw such Certificates by written notice received by the
Exchange Agent at or prior to the Stock Election Final Date. Parent will
obtain from the Exchange Agent an agreement to return all Stock Elections
and accompanying Certificates to the shareholders submitting the same in
the event this Agreement will be terminated in accordance with its terms.
(h) Parent will have the right, subject to approval by Company (provided
such approval is not unreasonably withheld or delayed), to make rules, not
inconsistent with the terms of this Agreement, governing the validity of
Forms of Stock Election, the issuance and delivery of certificates for
Parent Common Stock into which shares of Company Common Stock are converted
in the Merger and the payment for shares of Company Common Stock converted
into the right to receive the Cash Consideration in the Merger.
Section 1.7 Parent to Make Cash and Certificates Available, Transfer Taxes,
Withholding.
(a) As soon as practicable after the Effective Time, Parent will deposit
with the Exchange Agent, in trust for the holders of shares of Company Common
Stock and holders of Warrants, certificates for shares of Parent Common Stock
and cash representing the Aggregate Merger Consideration payable pursuant to
Sections 1.5, 1.6, and 1.8 (such certificates and cash, together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund"). The Exchange Agent will invest any cash included in
the Exchange Fund as directed by Parent on a daily basis. Any interest or other
income resulting from such investments will be paid to Parent. As soon as
practicable after the Effective Time, the Exchange Agent will distribute to
each holder of shares of Company Common Stock converted into the right to
receive the Cash Consideration or the Stock Consideration pursuant to Sections
1.5, 1.6, and 1.8, upon surrender to the Exchange Agent (to the extent not
previously surrendered with a Form of Stock Election) of one or more
Certificates for cancellation, a check for the amount of cash to which such
holder is entitled under such sections and/or certificates representing the
shares of Parent Common Stock to which such holder is entitled under such
sections. As soon as practicable after the Effective Time, the Exchange Agent
will mail to each holder of record of a Certificate or Certificates whose
shares were converted pursuant to this Article I (other than any holder who
previously surrendered all its Certificates with a Stock Election or pursuant
to a guarantee of delivery delivered with a Stock Election) (A) a letter of
transmittal in form reasonably acceptable to Parent (which will specify that
delivery will be effected, and risk of loss and title to the Certificates will
pass, only upon actual delivery of the Certificates to the Exchange Agent) and
(B) instructions for use in effecting the surrender of the Certificates.
(b) Upon surrender for cancellation to the Exchange Agent of a Certificate,
together with such letter of transmittal, duly executed, the holder of such
Certificate will be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Parent Common Stock issuable and/or
the cash payable to such holder pursuant to Sections 1.5, 1.6 and 1.8 of this
Agreement. Each share of Parent Common Stock into which a share of Company
Common Stock will be converted will be deemed to have been issued at the
Effective Time. If any certificate representing shares of Parent Common Stock
or cash or other property is to be issued or delivered in a name other than
that in which the Certificate surrendered in exchange therefor is registered,
it will be a condition of such exchange that the Certificate so surrendered
will be properly endorsed and otherwise in proper form for transfer and that
the Person requesting such exchange will pay to the Exchange Agent any transfer
or other taxes required by reason of the issuance of certificates for such
shares of Parent Common Stock in a name other than that of the registered
holder of the Certificate surrendered or will establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable. Parent or
the Exchange Agent will be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Company Common Stock such amounts as Parent or the Exchange Agent is
required to deduct and withhold with respect to the making of such payment
under the Code, or under any provision of state, local or foreign tax law. To
the extent that amounts are so withheld by Parent or the Exchange Agent, such
withheld amounts will be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by Parent or the Exchange Agent.
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Section 1.8 Dividends, Fractional Shares, etc.
(a) Notwithstanding any other provisions of this Agreement, no dividends or
other distributions declared after the Effective Time on Parent Common Stock
will be paid with respect to any shares of Company Common Stock represented by
a Certificate, until such Certificate is surrendered for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of any
such Certificate, there will be paid to the holder of certificates of Parent
Common Stock issued in exchange for such Certificate, without interest, (i) at
the time of such surrender, the amount of dividends or other distributions with
a record date after the Effective Time theretofore payable with respect to such
whole shares of Parent Common Stock and not paid, less the amount of any
withholding taxes that may be required thereon, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent
to surrender payable with respect to such whole shares of Parent Common Stock,
less the amount of any withholding taxes that may be required thereon.
(b) At or after the Effective Time, there will be no transfer on the stock
transfer books of Company of the shares of Company Common Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing any such shares are presented to the Surviving
Corporation, they will be canceled and exchanged for the Merger Consideration,
if any, deliverable in respect thereof pursuant to this Agreement.
(c) No fractional shares of Parent Common Stock will be issued pursuant to
the Merger. In lieu of the issuance of any fractional share of Parent Common
Stock pursuant to the Merger, cash adjustments will be paid to holders in
respect of any fractional share of Parent Common Stock that could otherwise be
issuable (each, a "Fractional Share"), and the amount of such cash adjustment
will be equal to the product of such fractional amount and the Per Share Merger
Consideration.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Parent Common Stock) that remains
unclaimed by the former shareholders of Company six months after the Effective
Time or for such longer time as Parent will determine will be delivered to
Parent. Any former shareholder of Company who has not theretofore complied with
this Article I will thereafter look only to the Surviving Corporation and
Parent for payment of the applicable Merger Consideration, cash in lieu of
fractional shares and unpaid dividends and distributions on Parent Common Stock
deliverable in respect of each share of Company Common Stock such shareholder
holds as determined pursuant to this Agreement, in each case without any
interest thereon.
(e) To the fullest extent permitted by law, none of Parent, Company, the
Surviving Corporation, the Exchange Agent or any other Person will be liable to
any former holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable or unclaimed property,
escheat or similar laws.
(f) In the event that any Certificate will have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Parent the
posting by such person of a bond in such reasonable amount as Parent may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost stolen or
destroyed Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Parent
Common Stock, as provided in this Section 1.8, deliverable in respect thereof
pursuant to this Agreement.
(g) In the event of any change in the Parent Common Stock between the date
of this Agreement and the Effective Time by reason of any stock split, stock
dividend, subdivision, reclassification, combination, or exchange of Parent
Common Stock or the like, the Per Share Merger Consideration, the Exchange
Ratio and other terms set forth in this Agreement will be appropriately
adjusted.
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Section 1.9 Closing. The closing of the Merger (the "Closing") and all
actions contemplated by this Agreement to occur at the Closing will take place
at the offices of Parent, 6733 South Yale Avenue, Tulsa, Oklahoma 74136, at
10:00 a.m., local time, on a date to be specified by the parties, which
(subject to fulfillment or waiver of the conditions set forth in Article VI)
will be no later than the second business day following the day on which the
last of the conditions set forth in Article VI will have been fulfilled or
waived, or at such other time and place as Parent and Company will agree.
Section 1.10 Transfer Taxes. Parent and Company will cooperate in the
preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary
or other taxes and any other fees and similar taxes which become payable in
connection with the Merger other than transfer or other taxes described in
Section 1.7(b) (collectively, "Transfer Taxes"). From and after the Effective
Time, Parent will pay or cause to be paid, without deduction or withholding
from any amounts payable to the holders of Company Stock, all Transfer Taxes.
Section 1.11 Guarantee. Parent hereby absolutely, unconditionally and
irrevocably guarantees the performance by Merger Sub of all of its obligations
under this Agreement. The liability of Parent hereunder will be primary and not
as a surety, and will not be affected by:
(a) any amendment, modification of or supplement to this Agreement, any
other Transaction Document or any agreement or any other instrument or any
assignment or transfer of any rights or obligations thereunder;
(b) any release or waiver, by operation of law or otherwise, of the
performance or observance by Parent or Merger Sub or any Person of any
express or implied agreement, covenant, term, obligation or condition under
any of the Transaction Documents;
(c) any extension of the time for the payment of all or any portion of
any sums payable under any agreement or the extension of time for the
performance of any obligations under, arising out of or in connection with
any of the Transaction Documents;
(d) any failure, omission, delay or lack of diligence on the part of
Company, or any other Person, to enforce, assert or exercise, or any waiver
of, any right, privilege, power or remedy conferred on Company or any other
individual or entity by any of the Transaction Documents, or any action on
the part of Company or such other Person granting indulgence or extension
of any kind;
(e) any bankruptcy, insolvency, readjustment, composition, liquidation,
dissolution or similar proceeding with respect to Merger Sub;
(f) any merger, amalgamation or consolidation of Parent or of Merger Sub
into or with any other corporation or partnership or other entity or any
sale, lease or transfer of any or all of the assets of Parent or of Merger
Sub to any Person; or
(g) any failure on the part of Company for any reason to comply with or
perform any of the terms of the Transaction Documents.
Notwithstanding the foregoing, Parent will not be obligated to guarantee
Merger Sub's performance to the extent Parent has a defense to its performance
of its obligations hereunder if such defense (i) would arise if Merger Sub were
not a party to this Agreement and Company were merging into Parent, and (ii)
did not arise through any act or omission of Parent.
Parent hereby waives notice or demand of performance in the acceptance of
its obligations hereunder.
Section 1.12 Dissenting Shares. Company will give Parent prompt notice of
any demands received by Company for appraisal of any shares of Company Common
Stock in accordance with the GCLN, and Parent will have the right to control
all negotiations and proceedings with respect to such demands except as
required by applicable law. Company will not, except with the prior written
consent of Parent which may be withheld in
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its sole discretion without any obligation to provide an explanation for the
exercise of that discretion, make any payment with respect to, or settle or
offer to settle, any such demands. Any such demands will not be converted into
a right to receive the Merger Consideration, unless the shareholder making such
demand fails to perfect or withdraws or otherwise loses its right to appraisal
or it is determined that such holder does not have appraisal rights in
accordance with the GCLN. If after the Effective Time such shareholder fails to
perfect or withdraws or loses its right to appraisal, such shares of Company
Common Stock will be treated as if they had been converted as of the Effective
Time into a right to receive the Cash Consideration.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Company as follows (such representations
and warranties (as well as other provisions of this Agreement) are qualified by
the matters identified on a disclosure schedule (the "Parent Disclosure
Schedule") delivered by Parent to Company prior to execution of this
Agreement).
Section 2.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where
the failure to be so qualified has not had, and would not reasonably be
expected to have, alone or in the aggregate, a Parent Material Adverse Effect.
For the purposes of this Agreement, a "Parent Material Adverse Effect" means
any state of facts, event, change or effect which, individually or in the
aggregate, (a) has a material adverse effect on the business, properties,
assets, condition (financial or otherwise), liabilities or results of
operations of Parent and its Subsidiaries taken as a whole, or (b) would
prevent the consummation of the material transactions contemplated hereby;
provided that occurrences or events arising out of or resulting from the
following will in each case be excluded from consideration for purposes of the
effect of an occurrence or event on Parent and its Subsidiaries, taken as a
whole: (i) changes in general economic conditions, including general stock
market conditions and interest rate changes, (ii) changes in the energy
industry, including changes in the prices of crude oil, natural gas, natural
gas liquids and other hydrocarbons produced from crude oil or natural gas
("Hydrocarbons"), or (iii) the adverse determination of any pending litigation
disclosed in the Parent Disclosure Schedule. Complete and correct copies as of
the date of this Agreement of the Amended and Restated Articles of
Incorporation and Bylaws of Parent have been delivered to Company prior to the
date of this Agreement.
Section 2.2 Capitalization. The authorized capital stock of Parent consists
of 25,000,000 shares of Parent Common Stock, and 1,000,000 shares of preferred
stock, par value $.01 per share (the "Parent Preferred Stock"). As of the date
of this Agreement, (a) 8,703,719 shares of Parent Common Stock were validly
issued and outstanding, fully paid, and nonassessable, (b) no shares of Parent
Preferred Stock were issued and outstanding, (c) 1,515,157 shares of Parent
Common Stock were reserved for issuance pursuant to options ("Parent Stock
Options") to purchase Parent Common Stock, and (d) no shares of parent Common
Stock were reserved for issuance pursuant to warrants to purchase Parent Common
Stock. As of the date of this Agreement, there are no bonds, debentures, notes
or other indebtedness issued or outstanding having the right to vote with
Parent's shareholders, whether together or as a separate class, on any matters
on which Parent's shareholders may vote. As of the date of this Agreement,
except for Parent Stock Options and rights ("Parent Rights") issued pursuant to
the Shareholder Rights Agreement dated November 22, 1998, between Parent and
First Union National Bank, there are no options, warrants, calls, convertible
securities or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock, or
obligating Parent to grant, extend or enter into any such option, warrant, call
or other such right, agreement or commitment. All of the shares of Parent
Common Stock issuable in accordance with this Agreement in exchange for Company
Common Stock at the Effective Time in accordance with this Agreement
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will be, when so issued, duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and will be delivered free and
clear of all liens, claims, charges and encumbrances of any kind or nature
whatsoever.
Section 2.3 Subsidiaries. Each Subsidiary of Parent is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to
the business of such Subsidiary) and has the corporate or similar power to
carry on its business as it is now being conducted or currently proposed to be
conducted. Each Subsidiary of Parent is duly qualified to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified, when taken
together with all such failures, has not had, and would not reasonably be
expected to have, a Parent Material Adverse Effect. Section 2.3 of the Parent
Disclosure Schedule contains, with respect to each Subsidiary of Parent its
name and jurisdiction of organization and, with respect to each Subsidiary that
is not wholly owned, the percentage of outstanding capital stock or equity
capital owned by Parent or a Subsidiary. All the outstanding shares of capital
stock or equity capital of each Subsidiary of Parent are validly issued, fully
paid and nonassessable, and, to the extent owned by Parent or by a Subsidiary
of Parent, are owned free and clear of any liens, claims or encumbrances. There
are no existing options, warrants, calls, convertible securities or other
rights, agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of any of the Subsidiaries of Parent
(other than preemptive rights or similar rights held by Parent with respect to
certain of its Subsidiaries). Except as set forth in Parent's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, Parent does not directly
or indirectly own any interest in any other corporation, partnership, joint
venture or other business association or entity or have any obligation,
commitment or undertaking to acquire any such interest, other than business
associations customary in the oil and gas industry consisting of interests in
oil and gas property subject to a joint operating agreement.
Section 2.4 Authority Relative to this Agreement. Parent and each of its
Subsidiaries has the corporate power to enter into this Agreement and each
other agreement and document executed and delivered in connection with the
material transactions contemplated hereby (together with this Agreement, the
"Transaction Documents") to which Parent is a party and to carry out its
obligations hereunder and thereunder. The execution and delivery of this
Agreement and the other Transaction Documents to which Parent is a party and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by Parent's Board of Directors and the Parent Principal
Shareholders. Each Transaction Document to which Parent is a party constitutes
a valid and binding obligation of Parent enforceable against Parent in
accordance with its terms except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which
any proceeding therefor may be brought. No other corporate proceedings on the
part of Parent are necessary after the date of this Agreement to authorize
execution by Parent of the Transaction Documents to which Parent is a party.
Parent is not subject to or obligated under (a) any charter, bylaw, indenture
or other loan or credit document provision, or (b) any other contract, license,
franchise, permit, order, decree, concession, lease, instrument or judgment, or
any statute, law, ordinance, rule or regulation applicable to Parent or any of
its Subsidiaries, or their respective properties or assets, which would be
breached or violated, or under which there would be a default (with or without
notice or lapse of time, or both), or under which there would arise a right of
termination, cancellation, modification or acceleration of any obligation, or
any right to payment or compensation, or the loss of a material benefit, by its
executing and carrying out the Transaction Documents to which Parent is a party
other than, in the case of clause (b) only, (i) any breaches, violations,
defaults, terminations, cancellations, modifications, accelerations, rights to
payment or compensation, or losses which, either alone or in the aggregate,
have not had, and would not reasonably be expected to have, a Parent Material
Adverse Effect and (ii) the laws and regulations referred to in the next
sentence. Except as required by the Securities Act of 1933, as amended (the
"Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), Canadian Governmental Entities (including without limitation
Canadian Governmental Entities requiring filings under the Investment Canada
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Act) and the corporation, securities or blue sky laws or regulations of the
various states, no filing or registration with, or authorization, consent or
approval of, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (each, a
"Governmental Entity"), is necessary for the consummation by Parent of the
Merger or the other transactions contemplated by the Transaction Documents to
which Parent is a party, other than filings, registrations, authorizations,
consents or approvals the failure to make or obtain which has not had, and
would not reasonably be expected to have, a Parent Material Adverse Effect.
Section 2.5 Reports and Financial Statements. Parent has previously
furnished Company with, or there has been made available to Company, true and
complete copies of its (a) Annual Reports on Form 10-K for the fiscal years
ended December 31, 1998 and December 31, 1999, as filed with the Securities and
Exchange Commission (the "Commission"), (b) Quarterly Reports on Form 10-Q for
the quarters ended March 31, June 30 and September 30, 1999 and 2000, as filed
with the Commission, (c) proxy statements related to all meetings of its
shareholders (whether annual or special) since December 31, 1998, and (d) all
other reports or registration statements filed by Parent with the Commission
since December 31, 1998, except for preliminary material (in the case of
clauses (c) and (d) above) and except for registration statements on Form S-8
relating to employee benefit plans and annual reports on Form 11-K with respect
to such plans, which are all the documents that Parent was required to file
with the Commission since December 31, 1998 (the documents in clauses (a)
through (d) being referred to herein collectively as the "Parent SEC Reports").
All Parent SEC Reports were properly and timely filed with the Commission and
any applicable securities exchange or market and its self regulatory
organization. As of their respective dates, the Parent SEC Reports complied as
to form in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the
Commission thereunder applicable to the Parent SEC Reports. 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 light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements of
Parent included in the Parent SEC Reports comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto. The financial
statements included in the Parent SEC Reports (i) have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
(ii) present fairly, in all material respects, the financial position of Parent
and its Subsidiaries as of the dates thereof and the results of their
operations and cash flows for the periods then ended subject in the case of the
unaudited interim financial statements, to normal year-end adjustments, any
other adjustments described therein and the fact that certain information and
notes have been condensed or omitted in accordance with the Exchange Act and
the rules promulgated thereunder, and (iii) are in all material respects in
accordance with the books of account and records of Parent and its
Subsidiaries.
Section 2.6 Absence of Certain Changes or Events. Except as disclosed in the
Parent SEC Reports, from September 30, 2000 until the date of this Agreement,
there has not been any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) which, alone or in the aggregate, has had, or
would reasonably be expected to have, a Parent Material Adverse Effect.
Section 2.7 Litigation. Except as disclosed in the Parent SEC Reports and as
set forth in Section 2.7 of the Parent Disclosure Schedule, there is no suit,
action or proceeding to which Parent or any of its Subsidiaries is a party
pending or, to the actual knowledge of the individuals listed in Section 2.7 of
the Parent Disclosure Schedule ("Parent's Knowledge"), threatened against
Parent or any of its Subsidiaries which, alone or in the aggregate, has had or
would reasonably be expected to have, a Parent Material Adverse Effect, nor is
there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against Parent or any of its Subsidiaries
which, alone or in the aggregate, has had, or would reasonably be expected to
have, a Parent Material Adverse Effect.
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Section 2.8 Compliance with All Applicable Laws. Parent and each of its
Subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not reasonably be expected to have, a
Parent Material Adverse Effect (the "Parent Permits"). Parent and each of its
Subsidiaries is in compliance with the terms of the Parent Permits, except for
any failure to comply which, alone or in the aggregate, has not had, and would
not reasonably be expected to have, a Parent Material Adverse Effect. Except as
disclosed in the Parent SEC Reports filed and delivered to Company prior to the
date of this Agreement, the businesses of Parent and its Subsidiaries are not
being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which, alone or in the
aggregate, have not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect.
Section 2.9 Employee Benefit Plans. (a) Section 2.9(a) of the Parent
Disclosure Schedule hereto sets forth a list of all "employee benefit plans,"
as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and all other material employee benefit or
compensation arrangements, including, without limitation, any such arrangements
providing severance pay, sick leave, vacation pay, salary continuation for
disability, retirement benefits, deferred compensation, bonus pay, incentive
pay, stock options (including those held by directors, employees, and
consultants), hospitalization insurance, medical insurance, life insurance,
scholarships or tuition reimbursements, that are maintained by Parent, any
Subsidiary of Parent or any Parent ERISA Affiliate or to which Parent, any
Subsidiary of Parent or any Parent ERISA Affiliate is obligated to contribute
thereunder for current or former directors, employees, independent contractors,
consultants and leased employees of Parent, any Subsidiary of Parent or any
Parent ERISA Affiliate (the "Parent Employee Benefit Plans").
(b) None of the Parent Employee Benefit Plans is a "multiemployer plan," as
defined in Section 4001(a)(30 of ERISA (a "Multiemployer Plan") and neither
Parent nor any Parent ERISA Affiliate presently maintains or has maintained
such a plan.
(c) Except as provided in Part 6 of Subtitle B of Title I of ERISA, Parent
does not maintain or contribute to any plan or arrangement which provides or
has any liability to provide health or medical benefits to any employee or
former employee upon his retirement or termination of employment.
(d) Except as provided in the agreements and arrangements in Section 2.9(d)
of the Parent Disclosure Schedule, the execution of, and performance of the
transactions contemplated in, this Agreement and the other Transaction
Documents will not either alone or upon the occurrence of subsequent events,
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee. The only severance
agreements or severance policies applicable to Parent or its Subsidiaries in
the event of a change of control of Parent are the agreements and policies
specifically referred to in Section 2.9(d) of the Parent Disclosure Schedule.
Except as disclosed in Section 2.9(d) of the Parent Disclosure Schedule, no
payment or benefit which will or may be made by Parent, Company or any of their
Subsidiaries or affiliates with respect to any employee of Parent or any
Subsidiary of Parent will be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.
(e) Each Parent Employee Benefit Plan that is intended to qualify under
Section 401 of the Code, and each trust maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the IRS, and, to Parent's knowledge, nothing has occurred with respect
to the operation or organization of any such Parent Employee Benefit Plan that
would cause the loss of such qualification or exemption or the imposition of
any material liability, penalty or tax under ERISA or the Code. With respect to
any Parent Employee Benefit Plan which is a "defined benefit plan" within the
meaning of Section 3(35) of ERISA, (i) Parent has not incurred and is not
reasonably likely to incur any liability under Title IV of ERISA (other than
for the payment of premiums, all of which have been paid when due), (ii) Parent
has not incurred any accumulated funding deficiency within the meaning of
Section 412 of the Code and has
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not applied for or obtained a waiver of any minimum funding standard or an
extension of any amortization period under Section 412 of the Code, (iii) no
"reportable event" (as such term is defined in Section 4043 of ERISA but
excluding any event for which the provision for 30-day notice to the Pension
Benefit Guaranty Corporation has been waived by regulation) has occurred or is
expected to occur and (iv) since December 31, 1996, no material adverse change
in the financial condition of any such plan has occurred.
(f) (i) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under any of the
Parent Employee Benefit Plans to any funds or trusts established thereunder or
in connection therewith have been made by the due date thereof, (ii) Parent has
complied in all material respects with any notice, reporting and documentation
requirements of ERISA and the Code, (iii) there are no pending actions, claims
or lawsuits which have been asserted, instituted or, to Parent's knowledge,
threatened, in connection with the Parent Employee Benefit Plans, and (iv) the
Parent Employee Benefit Plans have been maintained, in all material respects,
in accordance with their terms and with all provisions of ERISA and the Code
(including rules and regulations thereunder) and other applicable federal and
state laws and regulations.
For purposes of this Agreement, "Parent ERISA Affiliate" means any business
or entity which is a member of the same "controlled group of corporations,"
under "common control" or in an "affiliated service group" with Parent within
the meanings of Sections 414(b), (c) or (m) of the Code, or required to be
aggregated with Parent under Section 414(o) of the Code, or a "Parent ERISA
Affiliate" under "common control" with Parent within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
Section 2.10 Parent Board Action. The Board of Directors of Parent (at a
meeting duly called and held) has by the requisite vote of directors present
(a) determined that the Merger is advisable and fair to and in the best
interests of Parent and its shareholders, and (b) approved the Merger, this
Agreement and the transactions contemplated by the Transaction Documents in
accordance with the TBCA, Parent's Amended and Restated Articles of
Incorporation, and Parent's Bylaws. The only corporate action necessary to
effect the election of Company Director Nominees to Parent's Board of Directors
for a term to last until the second annual meeting of shareholders after the
Effective Time pursuant to Section 1.4(c), is an amendment to Parent's Bylaws
which can be effected by a resolution of Parent's Board of Directors.
Section 2.11 Required Shareholder Vote or Consent. The only vote of the
holders of any class or series of the Parent's capital stock necessary to
consummate the Merger and the other Transaction Documents is the approval and
adoption of the Merger, this Agreement and the other Transaction Documents by
the holders of the Parent Common Stock (the "Parent Shareholder Approval") at a
shareholder meeting in person or by proxy.
Section 2.12 Taxes.
(a) The term "Tax" as used herein means any federal, state, local, or
foreign income, gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under Code (S) 59A), customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not. The term "Tax Return" as used herein means any return,
declaration, report, claim for refund, or information return or statement
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof. All citations to the Code, or the Treasury Regulations
promulgated thereunder, will include any amendments or any substitute or
successor provisions thereto.
(b) Each of Parent and its Subsidiaries has filed all material Tax Returns
required to be filed by any of them and has paid (or Company has paid on its
behalf), or has set up an adequate reserve for the payment of,
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all Taxes required to be paid in respect of the periods covered by such Tax
Returns. The information contained in such Tax returns is true, complete and
accurate in all material respects. Neither Parent nor any Subsidiary of Parent
is delinquent in the payment of any material Tax, assessment or governmental
charge. No material deficiencies for any Taxes have been proposed, asserted or
assessed against Parent or any of its Subsidiaries that have not been finally
settled or paid in full, and no requests for waivers of the time to assess any
such Tax are pending. None of Parent and its Subsidiaries is obligated, or is
reasonably expected to be obligated, to make any payments, or is a party to any
agreement that on account of the transactions contemplated by this Agreement
would obligate it, or reasonably be expected to obligate it to make any
payments that will not be deductible under Section 280G of the Code. Each of
Parent and its Subsidiaries has withheld and paid all material Taxes required
to be withheld and paid and has complied with all information and backup
withholding requirements, including maintaining all necessary records in
connection with amounts paid or owing to any employee, creditor, independent
contractor or other third party.
(c) Except as set forth in Section 2.12(c) of the Parent Disclosure
Schedule, none of Parent or its Subsidiaries has, since December 31, 1997, been
a member of an affiliated group, within the meaning of Code (S) 1504, filing a
consolidated income Tax Return other than a group the common parent of which is
Parent. None of Parent and its Subsidiaries has any material liability for the
Taxes of any Person other than Parent and its Subsidiaries (i) under Reg. (S)
1.1502-6 (or any similar provision of state, local, or foreign law), (ii) as a
transferee or successor, (iii) by contract, or (iv) otherwise. "Person" means
an individual, a partnership, a corporation, a limited liability company, an
association, a Joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity.
Section 2.13 No HSR Filing. No filing under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 is required in connection with the Merger or any other
transactions contemplated hereby or in the Transaction Documents.
Section 2.14 Certain Agreements. (a) Neither Parent nor any of its
Subsidiaries is in default (or would be in default with notice or lapse of
time, or both) under any indenture, note, credit agreement, loan document
lease, license, concession or other agreement including, but not limited to,
any Parent Employee Benefit Plan, whether or not such default has been waived,
which default alone or in the aggregate with other such defaults, has had, or
would reasonably be expected to have, a Parent Material Adverse Effect.
(b) Section 2.14(b) of the Parent Disclosure Schedule describes all
contracts, agreements and transactions, involving consideration of more than
$300,000 for any individual contract, agreement or transaction or series of
related contracts, agreements or transactions, between Parent or any of its
Subsidiaries, on the one hand, and any Parent Related Party (as defined below),
on the other hand, which are currently in effect or which were in effect or
were consummated at any time on or after January 1, 1998 and sets forth all
current balances payable to or receivable from such Parent Related Party
related thereto as of the date of this Agreement. For the purpose of this
Agreement, "Parent Related Party" means (i) any officer or director of Parent
or any of its Subsidiaries and (ii) any spouse, former spouse, child, parent,
parent of a spouse, sibling or grandchild of any of the persons listed in
clause (i), any Affiliate of any of the persons listed in clauses (i) and (ii)
(other than Parent or any Subsidiary of Parent).
Section 2.15 Compliance with Environmental Laws. (a) The properties, assets
and operations of Parent and its Subsidiaries and their predecessors are and
have been in compliance with all applicable federal, state, local, and foreign
laws, rules and regulations, orders, decrees, Common law, judgments, permits
and licenses relating to the protection, regulation and clean-up of the indoor
and outdoor environment and activities or conditions related thereto,
including, without limitation, those relating to the generation, handling,
disposal, transportation or release of hazardous or toxic materials,
substances, wastes, pollutants and contaminants including, without limitation,
asbestos, petroleum, radon and polychlorinated biphenyls (collectively,
"Environmental Laws"),
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except for any violations that individually or in the aggregate, have not had,
and would not reasonably be expected to have, a Parent Material Adverse Effect.
With respect to such properties, assets and operations, including any
previously owned, leased or operated properties, assets or operations, there
are no past, present or reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of Parent or
any of its Subsidiaries and their predecessors that may interfere with or
prevent compliance or continued compliance with applicable Environmental Laws,
other than any such interference or prevention that, individually or in the
aggregate, has not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect.
(b) Parent and its Subsidiaries and their predecessors have not caused or
permitted any property, asset, operation, including any previously owned
property, asset or operation, to use, generate, manufacture, refine, transport,
treat, store, handle, dispose, transfer or process hazardous or toxic
materials, substances, wastes, pollutants or contaminants, except in material
compliance with all Environmental Laws, other than any such activity that,
individually or in the aggregate, has not had, and would not reasonably be
expected to have, a Parent Material Adverse Effect. Parent and its Subsidiaries
have not reported to any Governmental Entity any material violation of an
Environmental Law or any release, discharge or emission of any hazardous or
toxic materials, substances, wastes, pollutants or contaminants, other than any
such violation, release, discharge or emission that, individually or in the
aggregate, has not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect. To Parent's Knowledge, there are no pending,
threatened or asserted claims or liabilities under CERCLA, 42 U.S.C. (S)9601 et
seq., RCRA, 42 U.S.C. (S)6901 et seq., or equivalent state law provisions and
no current or former property, asset or operation of Parent or any Subsidiary
of Parent is identified or currently proposed for the National Priorities List
at 40 CFR (S)300, Appendix B, or the CERCLIS or equivalent state lists or
hazardous substances release sites.
Section 2.16 Financial Advisor. No brokerage, lender's or other fee or
commission are due to any broker, finder or investment banker in connection
with the Merger or the transactions contemplated by Transaction Documents based
upon arrangements made by or on behalf of the Parent or any of its
Subsidiaries.
Section 2.17 Hedging.
(a) Parent does not, and each of its Subsidiaries does not, have any
outstanding obligations for the delivery of Hydrocarbons attributable to any of
the properties of Parent or any of its Subsidiaries in the future on account of
prepayment, advance payment, take-or-pay or similar obligations without then or
thereafter being entitled to receive full value therefor.
(b) Section 2.17(b) of the Parent Disclosure Schedule sets forth all
futures, hedge, swap, collar, put, call, floor, cap, option or other contracts
that are intended to benefit from, relate to or reduce or eliminate the risk of
fluctuations in the price of commodities, including Hydrocarbons or securities,
to which Parent or any of its Subsidiaries is bound.
Section 2.18 No Distribution of Parent Rights. Under the agreements
governing Parent Rights, the Merger and other transactions contemplated by the
Transaction Documents will not cause a distribution of Parent Rights or cause
any Parent Rights to become exercisable.
Section 2.19 Oil and Gas Operations. Except as set forth in Section 2.19 of
the Parent Disclosure Schedule:
(a) All wells included in the Parent Reserve Report (as defined in
Section 2.21) have been drilled and (if completed) completed, operated and
produced in accordance with generally accepted oil and gas field practices
and in compliance in all material respects with applicable oil and gas
leases and applicable laws, rules and regulations, except where any failure
or violation has not had, or would not be reasonably expected to have, a
Parent Material Adverse Effect; and
(b) Proceeds from the sale of Hydrocarbons produced from Parent's Oil
and Gas Interests are being received by Parent and its Subsidiaries in a
timely manner and are not being held in suspense for any reason (except in
the ordinary course of business).
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Section 2.20 Properties.
(a) Except for goods and other property sold, used or otherwise disposed of
since September 30, 2000 in the ordinary course of business, Parent and its
Subsidiaries have Parent Good and Marketable Title (as defined below), for oil
and gas purposes, in and to all oil and gas properties set forth in the Parent
Reserve Report as owned by Parent and its Subsidiaries, and defensible title
for oil and gas purposes to all other properties, interests in properties and
assets, real and personal, reflected on the balance sheet of Parent in its
Quarterly Report on Form 10-Q for the period ended September 30, 2000, as owned
by Parent and its Subsidiaries, free and clear of any liens, security
interests, charges, mortgages or other encumbrances of any kind (collectively
"Liens"), except: (i) Liens associated with obligations reflected in the Parent
SEC Reports or Section 2.20(a) of the Parent Disclosure Schedule; (ii) Liens
for current taxes not yet due and payable, (iii) materialman's, mechanic's,
repairman's, employee's, contractor's, operator's, and other similar liens,
charges or encumbrances arising in the ordinary course of business (A) if they
have not been perfected pursuant to law, (B) if perfected, they have not yet
become due and payable or payment is being withheld as provided by law, or (C)
if their validity is being contested in good faith by appropriate action, (iv)
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 and
gas leases or interests if they are customarily obtained subsequent to the sale
or conveyance, and (v) such imperfections of title, easements and Liens which,
to Parent's Knowledge, have not had, or would not reasonably be expected to
have, individually or in the aggregate, a Parent Material Adverse Effect. All
leases and other agreements pursuant to which Parent or any of its Subsidiaries
leases or otherwise acquires or obtains operating rights affecting any real or
personal property are in good standing, valid and effective and all royalties,
rentals and other payments due by Parent to any lessor of any such oil and gas
leases have been paid, except in each case, as has not had, and would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. To Parent's Knowledge, all major items of operating
equipment of Parent and its Subsidiaries are in good operating condition and in
a state of reasonable maintenance and repair, ordinary wear and tear excepted,
except as has not had, and would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect.
(b) The term "Parent Good and Marketable Title," for purposes of this
Section 2.20(b), with respect to Parent and its Subsidiaries, means such title
that: (1) is deducible of record (from the records of the applicable parish or
county or (A) in the case of federal leases, from the records of the applicable
office of the Minerals Management Service or Bureau of Land Management, (B) in
the case of Indian leases, from the applicable office of the Bureau of Indian
Affairs, (C) in the case of state leases, from the records of the applicable
state land office) or is assignable to Parent or its Subsidiaries out of an
interest of record (as so defined) by reason of the performance by Parent or
its Subsidiaries of all operations required to earn an enforceable right to
such assignment; (2) is free from reasonable doubt to the end that a prudent
purchaser engaged in the business of the ownership, development and operation
of producing oil and gas properties with knowledge of all of the facts and
their legal bearing would be willing to accept and pay full value for the same
and a prudent lender would be willing to lend against it as collateral without
discount for title matters; (3) entitles Parent or its Subsidiaries to receive
not less than the interest set forth in the Parent Reserve Report with respect
to each proved property evaluated therein under the caption "Net Revenue
Interest" or "NRI" without reduction during the life of such property except as
stated in the Parent Reserve Report; (4) obligates Parent or its Subsidiaries
to pay costs and expenses relating to each such proved property in an amount
not greater than the interest set forth under the caption "Working Interest" or
"WI" in the Parent Reserve Report with respect to such property without
increase over the life of such property except as shown on the Parent Reserve
Report; and (5) does not restrict the ability of Parent or its Subsidiaries to
utilize the properties as currently intended.
Section 2.21 Oil and Gas Reserves. Parent has furnished Company with
Parent's estimates of Parent's and its Subsidiaries' oil and gas reserves as of
January 1, 2000 in a report as described in Section 2.21 of the Parent
Disclosure Schedule (the "Parent Reserve Report"). Except as has not had, and
would not reasonably be expected to have, a Parent Material Adverse Effect, the
factual, non-interpretive data on which the Parent Reserve Report was based for
purposes of estimating the oil and gas reserves set forth in the Parent Reserve
Report and in any supplement thereto or update thereof furnished to Parent was,
to Parent's Knowledge,
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accurate. To Parent's Knowledge, and based on the information given to Company
by third-party operators for all wells not operated by Parent, the Parent
Payout Balances (as defined below) for each of the wells as used in the Parent
Reserve Report were accurate as of the dates to which Parent had calculated
them, except as has not had, and would not reasonably be expected to have a
Parent Material Adverse Effect. "Parent Payout Balances" means the status, as
of the dates of Parent's calculations, of the recovery by Parent or a third
party of a cost amount specified in the contract relating to a well out of the
revenue from such well where the net revenue interest of Parent therein will be
reduced or increased when such amount has been recovered.
Section 2.22 Take-or-Pay Deliveries. Except as has not had, and would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect, there are no calls (exclusive of market calls) on
Parent's oil or gas production and Parent has no obligation to deliver oil or
gas pursuant to any take-or-pay, prepayment or similar arrangement without
receiving full payment therefor. Section 2.22 of the Parent Disclosure Schedule
sets forth Parent's estimates of its imbalances in gas production as of
September 30, 2000. Parent does not have any other imbalances in gas production
that, individually or in the aggregate, have had or would be reasonably likely
to have a Parent Material Adverse Effect.
Section 2.23 Representations and Warranties Regarding Merger Sub. Parent and
Merger Sub jointly and severally represent and warrant to Company as follows:
(a) Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Merger Sub has not
engaged in any business since it was incorporated other than in connection
with its organization and the transactions contemplated by this Agreement.
(b) The authorized capital stock of Merger Sub consists of 1,000 shares
of common stock, par value $1.00 per share, all of which are validly issued
and outstanding, fully paid and nonassessable and are directly owned by
Parent, free and clear of all liens, claims and encumbrances.
(c) Merger Sub has the corporate power to enter into this Agreement and
to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and
by the Transaction Documents have been duly authorized by the Board of
Directors and by Parent as the sole shareholder of Merger Sub. This
Agreement constitutes a valid and binding obligation of Merger Sub
enforceable against Merger Sub in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor
may be brought. No other corporate proceedings on the part of Merger Sub
are necessary to authorize this Agreement and the transactions contemplated
hereby. Except as required by the Securities Act, the Exchange Act and the
corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization; consent or
approval of, any Governmental Entity is necessary for the consummation by
Merger Sub of the Merger or the transactions contemplated by the
Transaction Documents, other than filings, registrations, authorizations,
consents or approvals the failure to make or obtain which would not prevent
the consummation of the transactions contemplated by the Transaction
Documents.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Company represents and warrants to Parent as follows (such representations
and warranties (as well as other provisions of this Agreement) are qualified by
the matters identified on a disclosure schedule (the "Company Disclosure
Schedule") delivered by Company to Parent prior to execution of this Agreement)
as supplemented in accordance with Section 8.2:
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Section 3.1 Organization and Qualification. Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Company is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where
the failure to be so qualified has not had, and would not reasonably be
expected to have, alone or in the aggregate, a Company Material Adverse Effect.
For the purposes of this Agreement, a "Company Material Adverse Effect" means
any state of facts, event, change or effect which, individually or in the
aggregate, (a) has a material adverse effect on the business, properties,
assets, condition (financial or otherwise), liabilities or results of
operations of Company and its Subsidiaries taken as a whole, or (b) would
prevent the consummation of the material transactions contemplated hereby;
provided that occurrences or events arising out of or resulting from the
following will in each case be excluded from consideration for purposes of the
effect of an occurrence or event on Company and its Subsidiaries, taken as a
whole: (i) changes in general economic conditions, including general stock
market conditions and interest rate changes, (ii) changes in the energy
industry, including changes in the prices of Hydrocarbons, or (iii) the adverse
determination of any pending litigation disclosed in the Company Disclosure
Schedule. Complete and correct copies as of the date of this Agreement of the
Second Amended and Restated Articles of Incorporation and Amended and Restated
Bylaws of Company have been delivered to Parent prior to the date of this
Agreement.
Section 3.2 Capitalization. The authorized capital stock of Company consists
of 50,000,000 shares of Company Common Stock and 5,000,000 shares of preferred
stock, $.01 par value (the "Company Preferred Stock"). As of the date of this
Agreement, (a) 12,231,960 shares of Company Common Stock were validly issued
and outstanding, fully paid and nonassessable, (b) no shares of Company
Preferred Stock were issued and outstanding, (c) 330,393 shares of Company
Common Stock were reserved for issuance pursuant to Options, and (d) 3,838,071
shares were reserved for issuance pursuant to Warrants. As of the date of this
Agreement, there are no bonds, debentures, notes or other indebtedness issued
or outstanding having the right to vote with Company's shareholders, whether
together or as a separate class, on any matters on which Company's shareholders
may vote. As of the date of this Agreement, except for Options and Warrants,
there are no options, warrants, calls, convertible securities or other rights,
agreements or commitments presently outstanding obligating Company to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Company to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment. After the Effective Time, except for
obligations in respect of the Options and Warrants, the Surviving Corporation
will have no obligation to issue, transfer or sell any shares of stock of
Company or the Surviving Corporation pursuant to any Company Employee Benefit
Plan.
Section 3.3 Subsidiaries. Each Subsidiary of Company is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to
the business of such Subsidiary of Company) and has the corporate or similar
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each Subsidiary of Company is duly qualified to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary except where the failure to be so qualified, when
taken together with all such failures, has not had, and would not reasonably be
expected to have, a Company Material Adverse Effect. Section 3.3 of the Company
Disclosure Schedule contains, with respect to each Subsidiary of Company, its
name and jurisdiction of organization and, with respect to each Subsidiary of
Company that is not wholly owned, the number of issued and outstanding shares
of capital stock or equity capital and the number of shares of capital stock or
equity capital owned by Company or a Subsidiary of Company. Except as set forth
in Section 3.3 of the Company Disclosure Schedule, all the outstanding shares
of capital stock or equity capital of each Subsidiary of Company are validly
issued, fully paid and nonassessable, and those owned by Company or by a
Subsidiary of Company are owned free and clear of any liens, claims or
encumbrances. There are no existing options, warrants, calls, convertible
securities or other rights, agreements or commitments of any character relating
to the issued or unissued capital stock or other securities of any of the
Subsidiaries of
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Company (other than preemptive rights or similar rights held by Company with
respect to certain of such Subsidiaries). Except as set forth in Section 3.3 of
the Company Disclosure Schedule, Company does not directly or indirectly own
any interest in any other corporation, partnership, joint venture or other
business association or entity or have any obligation, commitment or
undertaking to acquire any such interest, other than business associations
customary in the oil and gas industry consisting of interests in oil and gas
property subject to a joint operating agreement.
Section 3.4 Authority Relative to this Agreement. Company and each of its
Subsidiaries has the corporate power to enter into this Agreement and each
other Transaction Document to which Company or any of its Subsidiaries is a
party and to carry out their obligations hereunder and thereunder. The
execution and delivery of the Transaction Documents to which Company or any of
its Subsidiaries is a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of Company. Each Transaction Document to which Company or any of its
Subsidiaries is a party constitutes a valid and binding obligation of Company
or such Subsidiary enforceable against Company or such Subsidiary in accordance
with its terms except as enforcement may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors' rights generally
and except that the liability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. No other corporate proceedings on the part
of Company or any of its Subsidiaries are necessary to authorize the
Transaction Documents to which Company or any of its Subsidiaries is a party
and, other than the Company Shareholder Approval, no other corporate
proceedings on the part of the Company are necessary, the transactions
contemplated hereby or thereby. Except as set forth in Section 3.4 of the
Company Disclosure Schedule, neither Company nor any of its Subsidiaries is
subject to or obligated under (a) any charter, bylaw, indenture or other loan
or credit document or (b) any other contract (other than Options and Warrants),
license, franchise, permit, order, decree, concession, lease, instrument or
judgment or any statute, law, ordinance, rule or regulation applicable to
Company or any of its Subsidiaries or their respective properties or assets
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation, modification or acceleration of any
obligation, or any right to payment or compensation, or the loss of a material
benefit, by its executing and carrying out the Transaction Documents to which
Company or any of its Subsidiaries is a party, other than, in the case of
clause (b) only, (i) any breaches, violations, defaults, terminations,
cancellations, modifications, accelerations, rights to payment or compensation,
or losses which, either alone or in the aggregate, have not had, and would not
reasonably be expected to have, a Company Material Adverse Effect and (ii) the
laws and regulations referred to in the next sentence. Except as required by
the Securities Act, the Exchange Act, Canadian Governmental Entities (including
without limitation Canadian Governmental Entities requiring filings under the
Investment Canada Act) and the corporation, securities or blue sky laws or
regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any Governmental Entity is necessary for
the consummation by Company and its Subsidiaries of the Merger or the other
transactions contemplated by the Transaction Documents to which Company or any
of its Subsidiaries is a party, other than filings, registrations,
authorizations, consents or approvals the failure to make or obtain which has
not had, and would not reasonably be expected to have, a Company Material
Adverse Effect.
Section 3.5 Reports and Financial Statements. Company has previously
furnished Parent with, or there has been made available to Parent, true and
complete copies of its (a) Annual Reports on Form 10-K for the fiscal years
ended December 31, 1998 and December 31, 1999 as filed with the Commission, (b)
Quarterly Report on Form 10-Q for the quarters ended March 31, June 30, and
September 30, 1999 and 2000, as filed with the Commission, (c) proxy statements
related to all meetings of its shareholders (whether annual or special) since
December 31, 1998 and (d) all other reports or registration statements filed by
Company with the Commission since December 31, 1998, except for preliminary
material (in the case of clauses (c) and (d) above) and except for registration
statements on Form S-8 relating to employee benefit plans and annual reports on
Form 11-K with respect to such plans, which are all the documents that Company
was required to file with the Commission since that date (the documents in
clauses (a) through (d) being referred to herein collectively as the "Company
SEC Reports"). As of their respective dates, the Company SEC Reports complied
as to form in all material
I-19
respects with the requirements of the Securities Act or the Exchange Act, as
the case may be, and the rules and regulations of the Commission thereunder
applicable to such Company SEC Reports. As of their respective dates, the
Company 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 light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of Company, included in the Company SEC
Reports comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission
with respect thereto. The financial statements included in the Company SEC
Reports (i) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except as may be indicated therein or
in the notes thereto), (ii) present fairly, in all material respects, the
financial position of Company, and its Subsidiaries, as the case may be, as of
the dates thereof and the results of their operations and cash flows for the
periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments and any other adjustments described
therein and the fact that certain information and notes have been condensed or
omitted in accordance with the Exchange Act and the rules promulgated
thereunder, and (iii) are in all material respects in accordance with the books
of account and records of Company and its Subsidiaries.
Section 3.6 Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Reports, from September 30, 2000 until the date of this Agreement,
there has not been any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) which, alone or in the aggregate, has had, or
would reasonably be expected to have, a Company Material Adverse Effect.
Section 3.7 Litigation. Except as disclosed in the Company SEC Reports and
as set forth in Section 3.7 of the Company Disclosure Schedule, there is no
suit, action or proceeding to which Company or any Subsidiary of Company is a
party pending or, to the actual knowledge of a director of Company ("Company's
Knowledge"), threatened against Company or any of its Subsidiaries which, alone
or in the aggregate, has had or would reasonably be expected to have, a Company
Material Adverse Effect, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Company or
any of its Subsidiaries which, alone or in the aggregate, has had, or would
reasonably be expected to have, any such Company Material Adverse Effect.
Section 3.8 Compliance with Applicable Laws. Company and each of its
Subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not reasonably be expected to have a
Company Material Adverse Effect (the "Company Permits"). Company and each of
its Subsidiaries is in compliance in all material respects with the terms of
Company Permits. Except as disclosed in Company SEC Reports filed and delivered
to Parent prior to the date of this Agreement the businesses of Company and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for possible violations which
alone or in the aggregate have not had, and would not reasonably be expected to
have, a Company Material Adverse Effect.
Section 3.9 Employee Benefit Plans. (a) Section 3.9(a) of the Company
Disclosure Schedule hereto sets forth a list of all "employee benefit plans,"
as defined in Section 3(3) of ERISA, and all other material employee benefit or
compensation arrangements, including, without limitation, any such arrangements
providing severance pay, sick leave, vacation pay, salary continuation for
disability, retirement benefits, deferred compensation, bonus pay, incentive
pay, stock options (including those held by directors, employees, and
consultants), hospitalization insurance, medical insurance, life insurance,
scholarships or tuition reimbursements, that are maintained by Company, any
Subsidiary of Company or any Company ERISA Affiliate or to which Company, any
Subsidiary of Company or any Company ERISA Affiliate is obligated to contribute
thereunder for current or former directors, employees, independent contractors,
consultants and leased employees of Company, any Subsidiary of Company or any
Company ERISA Affiliate (the "Company Employee Benefit Plans").
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(b) None of the Company Employee Benefit Plans is a Multiemployer Plan and
neither Company nor any Company ERISA Affiliate presently maintains or has
maintained such a plan.
(c) Except as provided in Part 6 of Subtitle B of Title I of ERISA, Company
does not maintain or contribute to any plan or arrangement which provides or
has any liability to provide health or medical benefits to any employee or
former employee upon his retirement or termination of employment.
(d) In a letter dated December 21, 2000, the Company set forth to Parent the
aggregate amount of (i) retention and severance benefits to be paid or payable
to all employees of Company and its Subsidiaries in connection with the Merger
and the transactions contemplated hereby and the other Transaction Documents,
which amount is $798,437, and (ii) the aggregate amount of sales bonus payments
to be paid or payable to all employees of Company and its Subsidiaries, which
amount is $558,687 (the "Company Employee Payments"), The execution of, and
performance of the transactions contemplated in, this Agreement and the other
Transaction Documents will not either alone or upon the occurrence of
subsequent events, result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
employee, other than Company Employee Payments and as provided in Options and
Warrants. The only severance agreements or severance policies applicable to
Company or its Subsidiaries in the event of a change of control of Company are
the agreements and policies specifically referred to in Section 3.9(d) of the
Company Disclosure Schedule or in the letter described in the first sentence of
this Section 3.9(d). Except as disclosed in Section 3.9(d) of the Company
Disclosure Schedule, no payment or benefit which will or may be made by
Company, Parent or any of their Subsidiaries or affiliates with respect to any
employee of Company or any Subsidiary of Company will be characterized as an
"excess parachute payment" within the meaning of Section 280G(b)(1) of the
Code.
(e) Each Company Employee Benefit Plan that is intended to qualify under
Section 401 of the Code, and each trust maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the IRS, and, to Company's knowledge, nothing has occurred with respect
to the operation or organization of any such Company Employee Benefit Plan that
would cause the loss of such qualification or exemption or the imposition of
any material liability, penalty or tax under ERISA or the Code. With respect to
any Company Employee Benefit Plan or other employee benefit plan which is a
"defined benefit plan" within the meaning of Section 3(35) of ERISA, (i)
Company has not incurred and is not reasonably likely to incur any liability
under Title IV of ERISA (other than for the payment of premiums, all of which
have been paid when due), (ii) Company has not incurred any accumulated funding
deficiency within the meaning of Section 412 of the Code and has not applied
for or obtained a waiver of any minimum funding standard or an extension of any
amortization period under Section 412 of the Code, (iii) no "reportable event"
(as such term is defined in Section 4043 of ERISA but excluding any event for
which the provision for 30-day notice to the Pension Benefit Guaranty
Corporation has been waived by regulation) has occurred or is expected to occur
and (iv) since December 31, 1996, no material adverse change in the financial
condition of any such plan has occurred.
(f) (i) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under any of the
Company Employee Benefit Plans to any funds or trusts established thereunder or
in connection therewith have been made by the due date thereof, (ii) Company
has complied in all material respects with any notice, reporting and
documentation requirements of ERISA and the Code, (iii) there are no pending
actions, claims or lawsuits which have been asserted, instituted or, to
Company's knowledge, threatened, in connection with the Company Employee
Benefit Plans, and (iv) the Company Employee Benefit Plans have been
maintained, in all material respects, in accordance with their terms and with
all provisions of ERISA and the Code (including rules and regulations
thereunder) and other applicable federal and state laws and regulations.
For purposes of this Agreement, "Company ERISA Affiliate" means any business
or entity which is a member of the same "controlled group of corporations,"
under "common control" or in an "affiliated service
I-21
group" with Company within the meanings of Sections 414(b), (c) or (m) of the
Code, or required to be aggregated with Company under Section 414(o) of the
Code, or a "Company ERISA Affiliate" under "common control" with Company within
the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or
proposed under any of the foregoing Sections.
Section 3.10 Company Board Action. The Board of Directors of Company (at a
meeting duly called and held) has by the requisite vote of directors present
(a) determined that the Merger is advisable and fair to and in the best
interests of Company and its shareholders and (b) approved the Merger, this
Agreement and the transactions contemplated by the Transaction Documents in
accordance with the GCLN, Company's Second Amended and Restated Articles of
Incorporation and Company's Amended and Restated Bylaws.
Section 3.11 Required Shareholder Vote or Consent. The only vote of the
holders of any class or series of the Company's capital stock necessary to
consummate the Merger and the other Transaction Documents is the approval and
adoption of the Merger, this Agreement and the other Transaction Documents by
the holders of a majority of the votes entitled to be cast by holders of the
Company Common Stock (the "Company Shareholder Approval").
Section 3.12 Taxes. (a) Each of Company and its Subsidiaries has filed all
material Tax Returns required to be filed by any of them and has paid (or
Company has paid on its behalf), or has set up an adequate reserve for the
payment of, all Taxes required to be paid in respect of the periods covered by
such Tax Returns. The information contained in such Tax returns is true,
complete and accurate in all material respects. Neither Company nor any
Subsidiary of Company is delinquent in the payment of any material Tax,
assessment or governmental charge. No material deficiencies for any Taxes have
been proposed, asserted or assessed against Company or any of its Subsidiaries
that have not been finally settled or paid in full, and no requests for waivers
of the time to assess any such Tax are pending. None of Company and its
Subsidiaries is obligated, or is reasonably expected to be obligated, to make
any payments, or is a party to any agreement that on account of the
transactions contemplated by this Agreement would obligate it, or reasonably be
expected to obligate it to make any payments that will not be deductible under
Section 280G of the Code. Each of Company and its Subsidiaries has withheld and
paid all material Taxes required to be withheld and paid and has complied with
all information and backup withholding requirements, including maintaining all
necessary records in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(b) Except as set forth in Section 3.12(b) of the Company Disclosure
Schedule, none of Company or its Subsidiaries has, since December 31, 1997,
been a member of an affiliated group, within the meaning of Code (S) 1504,
filing a consolidated income Tax Return other than a group the common parent of
which is Company. None of Company and its Subsidiaries has any material
liability for the Taxes of any Person other than Company and its Subsidiaries
(i) under Reg. (S) 1.1502-6 (or any similar provision of state, local, or
foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv)
otherwise.
Section 3.13 Certain Agreements. (a) Neither Company nor any of its
Subsidiaries is in default (or would be in default with notice or lapse of
time, or both) under any indenture, note, credit agreement, loan document
lease, license, concession or other agreement including, but not limited to,
any Company Employee Benefit Plan, whether or not such default has been waived,
which default alone or in the aggregate with other such defaults, has had, or
would reasonably be expected to have, a Company Material Adverse Effect.
(b) Section 3.13(b) of the Company Disclosure Schedule describes all
contracts, agreements and transactions, involving consideration of more than
$300,000 for any individual contract, agreement or transaction or series of
related contracts, agreements or transactions, between Company or any of its
Subsidiaries, on the one hand, and any Company Related Party (as defined
below), on the other hand, which are currently in effect or which were in
effect or were consummated at any time on or after January 1, 1998
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and sets forth all current balances payable to or receivable from such Company
Related Party related thereto as of the date of this Agreement. For the purpose
of this Agreement, "Company Related Party" means (i) any officer or director of
Company or any of its Subsidiaries and (ii) any spouse, former spouse, child,
parent, parent of a spouse, sibling or grandchild of any of the persons listed
in clause (i), any Affiliate of any of the persons listed in clauses (i) and
(ii) (other than Company or any Subsidiary of Company).
Section 3.14 Compliance with Environmental Laws. (a) The properties, assets
and operations of Company and its Subsidiaries and their predecessors are and
have been in compliance with all Environmental Laws, except for any violations
that individually or in the aggregate, have not had, and would not reasonably
be expected to have, a Company Material Adverse Effect. With respect to such
properties, assets and operations, including any previously owned, leased or
operated properties, assets or operations, there are no past, present or
reasonably anticipated future events, conditions, circumstances, activities,
practices, incidents, actions or plans of Company or any of its Subsidiaries
and their predecessors that may interfere with or prevent compliance or
continued compliance with applicable Environmental Laws, other than any such
interference or prevention that, individually or in the aggregate, has not had,
and would not reasonably be expected to have, a Company Material Adverse
Effect.
(b) Company and its Subsidiaries and their predecessors have not caused or
permitted any property, asset, operation, including any previously owned
property, asset or operation, to use, generate, manufacture, refine, transport,
treat, store, handle, dispose, transfer or process hazardous or toxic
materials, substances, wastes, pollutants or contaminants, except in material
compliance with all Environmental Laws, other than any such activity that,
individually or in the aggregate, has not had, and would not reasonably be
expected to have, a Company Material Adverse Effect. Company and its
Subsidiaries have not reported to any Governmental Entity any material
violation of an Environmental Law or any release, discharge or emission of any
hazardous or toxic materials, substances, wastes, pollutants or contaminants,
other than any such violation, release, discharge or emission that,
individually or in the aggregate, has not had, and would not reasonably be
expected to have, a Company Material Adverse Effect. To Company's Knowledge,
there are no pending, threatened or asserted claims or liabilities under
CERCLA, 42 U.S.C. (S)9601 et seq., RCRA, 42 U.S.C. (S)6901 et seq., or
equivalent state law provisions and no current or former property, asset or
operation of Company or any Subsidiary of Company is identified or currently
proposed for the National Priorities List at 40 CFR (S)300, Appendix B, or the
CERCLIS or equivalent state lists or hazardous substances release sites.
Section 3.15 Financial Advisor. On the date of this Agreement, Company's
Board of Directors received the written opinion of Petrie Parkman & Co. that,
as of the date of this Agreement and based upon and subject to the matters set
forth therein, the Merger Consideration was fair from a financial point of view
to the holders of Company Common Stock. Except for fees due to Petrie Parkman &
Co. and to FirstEnergy Capital Corporation in connection with the transactions
contemplated by the Transaction Documents (the "Company Financial Advisor
Fees"), no brokerage, lender's or other fee or commission are due to any
broker, finder or investment banker in connection with the Merger or the
transactions contemplated by Transaction Documents based upon arrangements made
by or on behalf of the Company or any of its Subsidiaries.
Section 3.16 Hedging.
(a) Company does not, and each of its Subsidiaries does not, have any
outstanding obligations for the delivery of Hydrocarbons attributable to any of
the properties of Company or any of its Subsidiaries in the future on account
of prepayment, advance payment, take-or-pay or similar obligations without then
or thereafter being entitled to receive full value therefor.
(b) Section 3.16(b) of the Company Disclosure Schedule sets forth all
futures, hedge, swap, collar, put, call, floor, cap, option or other contracts
that are intended to benefit from, relate to or reduce or eliminate the risk of
fluctuations in the price of commodities, including Hydrocarbons or securities,
to which Company or any of its Subsidiaries is bound.
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Section 3.17 Oil and Gas Operations. Except as set forth in Section 3.17 of
the Company Disclosure Schedule:
(a) All wells included in the Company Reserve Report have been drilled
and (if completed) completed, operated and produced in accordance with
generally accepted oil and gas field practices and in compliance in all
material respects with applicable oil and gas leases and applicable laws,
rules and regulations, except where any failure or violation has not had,
or would not reasonably be expected to have a Company Material Adverse
Effect; and
(b) Proceeds from the sale of Hydrocarbons produced from Company's Oil
and Gas Interests are being received by Company and its Subsidiaries in a
timely manner and are not being held in suspense for any reason (except in
the ordinary course of business).
Section 3.18 Gas Imbalances. Except as set forth in Section 3.18 of the
Company Disclosure Schedule, none of Company or its Subsidiaries has received
any material deficiency payment under any gas contract for which any Person has
a right to take deficiency gas from any of Company or its Subsidiaries, nor
have any of Company or its Subsidiaries received any material payment for
production which is subject to refund or recoupment out of future production.
Section 3.19 Royalties. To Company's Knowledge, as to wells not operated by
Company or its Subsidiaries, and without qualification as to knowledge, as to
all wells operated by Company or its Subsidiaries, all royalties, overriding
royalties, compensatory royalties and other payments due from or in respect of
production with respect to Company's Oil and Gas Interests, have been or will
be, prior to the Effective Time, properly and correctly paid or provided for in
all material respects, except for those for which Company or its Subsidiaries
has a valid right to suspend.
Section 3.20 Properties.
(a) Except for goods and other property sold, used or otherwise disposed of
since September 30, 2000 in the ordinary course of business, Company and its
Subsidiaries have Company Good and Marketable Title (as defined below), for oil
and gas purposes, in and to all oil and gas properties set forth in the Company
Reserve Report as owned by Company and its Subsidiaries, and defensible title
for oil and gas purposes to all other properties, interests in properties and
assets, real and personal, reflected on the balance sheet of the Company in its
Quarterly Report on Form 10-Q for the period ended September 30, 2000, as owned
by Company and its Subsidiaries, free and clear of any Liens, except: (i) Liens
associated with obligations reflected in the Company SEC Reports or Section
3.20(a) of the Company Disclosure Schedule; (ii) Liens for current taxes not
yet due and payable, (iii) materialman's, mechanic's, repairman's, employee's,
contractor's, operator's, and other similar liens, charges or encumbrances
arising in the ordinary course of business (A) if they have not been perfected
pursuant to law, (B) if perfected, they have not yet become due and payable or
payment is being withheld as provided by law, or (C) if their validity is being
contested in good faith by appropriate action, (iv) 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 and gas leases or interests if
they are customarily obtained subsequent to the sale or conveyance, and (v)
such imperfections of title, easements and Liens which, to Company's Knowledge,
have not had, or would not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect. All leases and other
agreements pursuant to which Company or any of its Subsidiaries leases or
otherwise acquires or obtains operating rights affecting any real or personal
property are in good standing, valid and effective and all royalties, rentals
and other payments due by Company to any lessor of any such oil and gas leases
have been paid, except in each case, as has not had, and would not reasonably
be expected to have, individually or in the aggregate, a Company Material
Adverse Effect. All major items of operating equipment of Company and its
Subsidiaries are in good operating condition and in a state of reasonable
maintenance and repair, ordinary wear and tear excepted, except as has not had,
and would not reasonably be expected to have, individually or in the aggregate,
a Company Material Adverse Effect.
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(b) The term "Company Good and Marketable Title" will, for purposes of this
Section 3.20(b), with respect to Company and its Subsidiaries, mean such title
that: (1) is deducible of record (from the records of the applicable parish or
county or (A) in the case of federal leases, from the records of the applicable
office of the Minerals Management Service or Bureau of Land Management, (B) in
the case of Indian leases, from the applicable office of the Bureau of Indian
Affairs, (C) in the case of state leases, from the records of the applicable
state land office) or is assignable to Company or its Subsidiaries out of an
interest of record (as so defined) by reason of the performance by Company or
its Subsidiaries of all operations required to earn an enforceable right to
such assignment; (2) is free from reasonable doubt to the end that a prudent
purchaser engaged in the business of the ownership, development and operation
of producing oil and gas properties with knowledge of all of the facts and
their legal bearing would be willing to accept and pay full value for the same
and a prudent lender would be willing to lend against it as collateral without
discount for title matters; (3) entitles Company or its Subsidiaries to receive
not less than the interest set forth in the Company Reserve Report with respect
to each proved property evaluated therein under the caption "Net Revenue
Interest" or "NRI" without reduction during the life of such property except as
stated in the Company Reserve Report; (4) obligates Company or its Subsidiaries
to pay costs and expenses relating to each such proved property in an amount
not greater than the interest set forth under the caption "Working Interest" or
"WI" in the Company Reserve Report with respect to such property without
increase over the life of such property except as shown on the Company Reserve
Report; and (5) does not restrict the ability of Company or its Subsidiaries to
utilize the properties as currently intended.
Section 3.21 Oil and Gas Reserves. Company has furnished Parent prior to the
date of this Agreement with Company's estimates of Company's and its
Subsidiaries' oil and gas reserves as of July 1, 2000 (the "Company Reserve
Report"). Except as have not had, and would not reasonably be expected to have
a Company Material Adverse Effect, the factual, non-interpretive data on which
the Company Reserve Report was based for purposes of estimating the oil and gas
reserves set forth in the Company Reserve Report and in any supplement thereto
or update thereof furnished to Company was, to Company's Knowledge, accurate.
To Company's Knowledge, and based on the information given to Company by third-
party operators for all wells not operated by Company, the Company Payout
Balances (as defined below) for each of the wells as used in the Company
Reserve Report were accurate as of the dates to which Company had calculated
them, except as would not reasonably be expected to have a Company Material
Adverse Effect. "Company Payout Balances" means the status, as of the dates of
Company's calculations, of the recovery by Company or a third party of a cost
amount specified in the contract relating to a well out of the revenue from
such well where the net revenue interest of Company therein will be reduced or
increased when such amount has been recovered.
Section 3.22 Take-or-Pay Deliveries. Except as would not, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse
Effect, there are no calls (exclusive of market calls) on Company's oil or gas
production and Company has no obligation to deliver oil or gas pursuant to any
take-or-pay, prepayment or similar arrangement without receiving full payment
therefor. Section 3.22 of the Company Disclosure Schedule sets forth Company's
estimates of its imbalances in gas production as of September 30, 2000. The
Company does not have any other imbalances in gas production that, individually
or in the aggregate, have had or would be reasonably likely to have a Company
Material Adverse Effect.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business by Company Pending the Merger. Except as
contemplated by the Company Disclosure Schedule, this Agreement and the other
Transaction Documents, during the period from the date of this Agreement to the
Effective Time, Company will, and will cause each of its Subsidiaries to, (i)
carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent therewith, use all reasonable efforts to keep available the services
of its current officers and employees and preserve its relationships with
customers, suppliers, licensors, lessors and
I-25
others having business dealings with it to the end that its goodwill and
ongoing business will be unimpaired at the Effective Time and (ii) prepare and
timely file all Tax Returns and amendments required to be filed by any of
Company and its Subsidiaries prior to the Effective Time, and pay all Taxes
relating to such Tax Returns before they will become delinquent. Except as
otherwise permitted or contemplated by this Agreement, the Transaction
Documents or the Company Disclosure Schedule, Company will not, and will not
permit any of its Subsidiaries to, without the prior consent (which will not be
unreasonably withheld, delayed or denied) of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its shareholders in their
capacity as such (other than dividends and other distributions by direct or
indirect wholly owned Subsidiaries), (ii) other than in the case of any
direct or indirect wholly owned Subsidiary of Company, split, combine or
reclassify any of its capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, or (iii) purchase, redeem or otherwise acquire
any shares of capital stock of Company or any of its Subsidiaries or any
other securities thereof or any rights, warrants or options to acquire any
such shares or other securities;
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber
(other than the pledges or other encumbrances described in Section 4.1(e))
any shares of its capital stock, any other voting securities or equity
equivalent (other than Options issued to employees of Company and its
Subsidiaries in the ordinary course of business) or any securities
convertible into, or any rights, warrants or options to acquire any such
shares, voting securities, equity equivalent or convertible securities,
other than the issuance of shares of Company Common Stock upon the exercise
of Options (whether or not presently exercisable) outstanding on the date
of this Agreement or upon the exercise of Warrants outstanding on the date
of this Agreement, in each case in accordance with their current terms;
(c) amend its Second Amended and Restated Articles of Incorporation or
Amended and Restated Bylaws or other comparable organizational documents;
(d) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the assets of or equity in, or by
any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or (ii) any assets
except in the ordinary course of business and except, in the case of
clauses (i) and (ii), for transactions not exceeding $100,000 individually
or $3,000,000 for all transactions pursuant to clauses (i) and (ii) in the
aggregate;
(e) except for Company Permitted Encumbrances, as required by contracts
and agreements set forth in exhibits to the Company SEC Reports, sell,
lease, license, mortgage otherwise encumber or subject to any lien, charge
or encumbrance or otherwise dispose of, or agree to sell, lease, license,
mortgage, or otherwise encumber or subject to any lien, charge or
encumbrance or otherwise dispose of, any of its assets, other than pursuant
to transactions that are in the ordinary course of business (including,
without limitation, any sale transfer or other disposition of interests in
oil and gas leaseholds (including, without limitation, by abandonment,
farm-ins, farm-outs, leases, swaps and subleases), hydrocarbons and other
mineral products in the ordinary course of business of the oil and gas
operations conducted by Company or its Subsidiaries) consistent with past
practice and not material to Company and its Subsidiaries taken as a whole.
When used in this Agreement, the term "Company Permitted Encumbrances" will
include any liens, title defects, preferential rights or other encumbrances
upon any of the relevant individual's or entities' property, assets or
revenues, whether now owned or hereafter acquired, that are (i) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like liens
arising in the ordinary course of business which are not overdue for a
period of more than 60 days or which are being contested in good faith by
appropriate proceeding, (ii) pledges or deposits in connection with
workers' compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance carriers under
insurance or self-insurance arrangements, (iii) for taxes not yet due or
which are being contested in good faith by appropriate proceedings,
provided that adequate reserves with respect thereto are maintained on the
books of Company or its Subsidiaries, as the case may be, in conformity
with
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United States generally accepted accounting principles in effect on the
date of this Agreement ("GAAP"), (iv) deposits to secure the performance of
bids, trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business,
(v) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are
not substantial in amount and which do not in any case materially detract
from the value of the property subject thereto or materially Interfere with
the ordinary conduct of the business of Company or such Subsidiary of
Company, (vi) created pursuant to construction, operating and maintenance
agreements, space lease agreements and other similar agreements, in each
case having ordinary and customary terms and entered into in the ordinary
course of business by Company and its Subsidiaries, (vii) created pursuant
to or arising under the Credit Agreement, dated August 23, 2000, between
Company, SMC Ecuador, Inc., SMC Production Co., BEC Energy, Inc. and Spruce
Hills Production Company, Inc. and Bank One, Texas National Association for
Reducing Revolving Line of Credit up to $30,000,000 and the documents
related thereto, and the Credit Agreement, dated August 29, 2000, between
Neutrino Resources, Inc. and Bank One Canada for U.S. $30,000,000 Revolving
Reducing Credit Facility, and the documents related thereto (collectively,
as amended, the "Company Credit Agreements"), (viii) the terms, conditions,
restrictions, exceptions, reservations, limitations and other matters
contained in the agreements, instruments and other documents (including,
without limitation, division orders) which create or reserve to Company (or
otherwise govern) its interest in any oil and gas assets, provided that the
same do not reduce the net revenue interest of Company in the oil and gas
asset affected thereby, (ix) royalties, overriding royalties, reversionary
interests, production payments, net profits interests and similar burdens
affecting any oil and gas asset if the net cumulative effect of such
burdens does not operate to reduce the net revenue interest in the oil and
gas asset affected thereby, (x) preferential rights to purchase and
required third party consents with respect to which any necessary waivers
or consents shall have been obtained or shall have been requested to be
obtained from the appropriate parties and the appropriate time period for
asserting such rights shall have expired without an exercise of such
rights, or preferential rights to purchase and required third party
consents which are not applicable to the transactions contemplated hereby,
(xi) liens for Taxes and assessments which are not yet delinquent or which
are being contested by Company in good faith, (xii) rights existing under
applicable law (including without limitation statutory liens) or operating
agreements or similar contracts to assert liens against the oil and gas
assets, but not including liens and other rights which have actually been
asserted, unless Company disputes in good faith the validity of such liens
or the amount claimed to be owed in connection therewith or such lien or
other right is not enforceable against the interest of Company, (xiii)
conventional rights of reassignment requiring less than thirty-two days
notice to the holder of such rights, (xiv) any of the following which do
not materially and adversely affect the oil and gas assets: easements,
rights-of-way, servitudes, permits, coal-mining leases, surface leases and
other rights in respect to surface operations, pipelines, logging, canals,
ditches, reservoirs or the like; conditions, covenants or other
restrictions; easements of streets, alleys, highways, pipelines, telephone
lines, power lines, railways and other easements or rights-of-way on, over
or with respect of the oil and gas assets, (xv) any obligations or duties
affecting an oil and gas asset to any municipality or public authority with
respect to any franchise, grant, license or permit and all applicable laws,
rules and order of any governmental authority, (xvi) all rights to consent
by, required notices to, filings with or other action by governmental
entities in connection with the sale or conveyance of oil and gas leases,
permits, or interests therein, if the same are customarily obtained
contemporaneously with or subsequent to such sale or conveyance, and which
would not be triggered by the transactions contemplated hereby, (xvii)
existing operating agreements, unit agreements, gas purchase contracts and
any and all other agreements which are normal and customary in the oil and
gas exploration, development, production or extraction business or in the
business of processing of gas and gas condensate or production for the
extraction of proper products therefrom, to the extent that the same do not
reduce the net revenue interest of Company in the oil and gas asset
affected thereby, (xviii) any other defect or imperfection in title which
would customarily be waived by a Person engaged in the exploration for oil
or gas and the operation of oil and/or gas properties in the regions where
the oil and gas assets are located, or which can be cured by the provision
of the forced
I-27
pooling statutes of applicable law which are applicable to the affected oil
and gas assets and (xix) the matters described in Section 4.1(e) of the
Company Disclosure Schedule;
(f) incur any indebtedness for borrowed money, guarantee any such
indebtedness, issue or sell any debt securities or warrants or other rights
to acquire any debt securities, guarantee any debt securities or make any
loans, advances or capital contributions to, or other investments in, any
other Person, or enter into any arrangement having the economic effect of
any of the foregoing, other than the Company Credit Agreements (the balance
outstanding under which shall not exceed $18,500,000 as of the Effective
Time) and indebtedness incurred in the ordinary course of business
consistent with past practice which is prepayable at any time without
premium or penalty;
(g) alter (through merger, liquidation, reorganization, restructuring or
in any other fashion) the corporate structure or ownership of Company or
any Subsidiary of Company (unless an alteration to the corporate structure
or ownership of a Subsidiary does not cause such Subsidiary not to be
wholly owned by Company) other than as contemplated by the Transaction
Documents;
(h) except as required under any collective bargaining agreement, enter
into or adopt any new, or amend any existing, severance plan, agreement or
arrangement or enter into any new or amend any existing Company Employee
Benefit Plan or employment or consulting agreement other than as required
by law;
(i) increase the compensation payable or to become payable to its
officers or employees, except for Company Employee Payments;
(j) grant or award any stock options, restricted stock, performance
shares, stock appreciation rights or other equity-based incentive awards
other than grants and awards to directors for service in such capacity;
(k) take any action with respect to accounting policies or procedures
for Tax or accounting purposes (other than actions required to be taken by
Tax laws or generally accepted accounting principles) or make or change any
election with respect to Taxes (except that Company can elect to forgo the
carryback of net operating losses);
(l) except as disclosed in the Company Disclosure Schedule or for
capital expenditures (including any asset acquisition or drilling
commitment) in the ordinary course of business consistent with past
practice or capital expenditures to repair or replace casualty losses, make
or agree to make any new capital expenditure or expenditures in excess of
$100,000 individually or $3,000,000 in the aggregate;
(m) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or contemplated in the notes
thereto) of Company included in the Company SEC Reports or incurred in the
ordinary course of business consistent with past practice or as required by
law;
(n) settle or compromise any material federal, state, local or foreign
Tax liability;
(o) enter into, amend, terminate or waive any provision of, any
agreement or arrangement with any Company Related Party or enter into any
transaction with any Company Related Party; or
(q) enter into any contract, agreement, commitment or arrangement to do
any of the foregoing.
Section 4.2 Conduct of Business by Parent Pending the Merger. Except as
contemplated by the Parent Disclosure Schedule, this Agreement and the other
Transaction Documents, during the period from the date of this Agreement to the
Effective Time, Parent will, and will cause each of its Subsidiaries to, carry
on its business in the usual, regular and ordinary course in substantially the
same manner as heretofore conducted
I-28
and, to the extent consistent therewith. Except as otherwise permitted or
contemplated by this Agreement, the Transaction Documents or the Parent
Disclosure Schedule, Parent will not, and will not permit any of its
Subsidiaries to, without the prior consent (which will not be unreasonably
withheld or delayed) of Company:
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its shareholders in their
capacity as such (other than dividends and other distributions by direct or
indirect wholly owned Subsidiaries), (ii) other than in the case of any
direct or indirect wholly owned Subsidiary of Parent, split, combine or
reclassify any of its capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, or (iii) purchase, redeem or otherwise acquire
any shares of capital stock of Parent or any of its Subsidiaries or any
other securities thereof or any rights, warrants or options to acquire any
such shares or other securities;
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber a
substantial portion of its capital stock, any other voting securities or
equity equivalent (other than options issued to employees of Parent and its
Subsidiaries in the ordinary course of business) or any securities
convertible into, or any rights, warrants or options to acquire any such
shares, voting securities, equity equivalent or convertible securities,
other than the issuance of shares of Parent Common Stock upon the exercise
of options (whether or not presently exercisable) outstanding on the date
of this Agreement or upon the exercise of warrants outstanding on the date
of this Agreement, in each case in accordance with their current terms;
(c) amend its Amended and Restated Articles of Incorporation or Bylaws
or other comparable organizational documents;
(d) subject to Company approval, make an acquisition of the assets of or
equity in (whether by purchase, merger or otherwise) any business or any
corporation, partnership, association or other business organization or
division thereof, which is material to Parent and its Subsidiaries, taken
as a whole;
(e) except for Parent Permitted Encumbrances, as required by contracts
and agreements set forth in exhibits to the Parent SEC Reports, or sell,
lease, license, mortgage, otherwise encumber or subject to any lien, charge
or encumbrance or otherwise dispose of, or agree to sell, lease, license,
mortgage or otherwise encumber or subject to any lien, charge or
encumbrance or otherwise dispose of, a significant portion of its assets,
other than pursuant to transactions that are in the ordinary course of
business (including, without limitation, any sale transfer or other
disposition of interests in oil and gas leaseholds (including, without
limitation, by abandonment, farm-ins, farm-outs, leases, swaps and
subleases), hydrocarbons and other mineral products in the ordinary course
of business of the oil and gas operations conducted by Parent or its
Subsidiaries) consistent with past practice and not material to Parent and
its Subsidiaries taken as a whole. When used in this Agreement, the term
"Parent Permitted Encumbrances" will include any liens, title defects,
preferential rights or other encumbrances upon any of the relevant
individual's or entities' property, assets or revenues, whether now owned
or hereafter acquired, that are (i) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like liens arising in the ordinary
course of business which are not overdue for a period of more than 60 days
or which are being contested in good faith by appropriate proceeding, (ii)
pledges or deposits in connection with workers' compensation, unemployment
insurance and other social security legislation and deposits securing
liability to insurance carriers under insurance or self-insurance
arrangements, (iii) for taxes not yet due or which are being contested in
good faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of Parent or its Subsidiaries,
as the case may be, in conformity with GAAP, (iv) deposits to secure the
performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds
and other obligations of a like nature incurred in the ordinary course of
business, (v) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially Interfere with the ordinary conduct of the business of Parent or
such Subsidiary of Parent, (vi) created pursuant to construction, operating
and maintenance agreements, space lease agreements and other
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similar agreements, in each case having ordinary and customary terms and
entered into in the ordinary course of business by Parent and its
Subsidiaries, (vii) the terms, conditions, restrictions, exceptions,
reservations, limitations and other matters contained in the agreements,
instruments and other documents (including, without limitation, division
orders) which create or reserve to Parent (or otherwise govern) its
interest in any oil and gas assets, provided that the same do not reduce
the net revenue interest of Parent in the oil and gas asset affected
thereby, (viii) royalties, overriding royalties, reversionary interests,
production payments, net profits interests and similar burdens affecting
any oil and gas asset if the net cumulative effect of such burdens does not
operate to reduce the net revenue interest in the oil and gas asset
affected thereby, (ix) preferential rights to purchase and required third
party consents with respect to which any necessary waivers or consents
shall have been obtained or shall have been requested to be obtained from
the appropriate parties and the appropriate time period for asserting such
rights shall have expired without an exercise of such rights, or
preferential rights to purchase and required third party consents which are
not applicable to the transactions contemplated hereby, (x) liens for Taxes
and assessments which are not yet delinquent or which are being contested
by Parent in good faith, (xi) rights existing under applicable law
(including without limitation statutory liens) or operating agreements or
similar contracts to assert liens against the oil and gas assets, but not
including liens and other rights which have actually been asserted, unless
Parent disputes in good faith the validity of such liens or the amount
claimed to be owed in connection therewith or such lien or other right is
not enforceable against the interest of Parent, (xii) conventional rights
of reassignment requiring less than thirty-two days notice to the holder of
such rights, (xiii) any of the following which do not materially and
adversely affect the oil and gas assets: easements, rights-of-way,
servitudes, permits, coal-mining leases, surface leases and other rights in
respect to surface operations, pipelines, logging, canals, ditches,
reservoirs or the like; conditions, covenants or other restrictions;
easements of streets, alleys, highways, pipelines, telephone lines, power
lines, railways and other easements or rights-of-way on, over or with
respect of the oil and gas assets, (xiv) any obligations or duties
affecting an oil and gas asset to any municipality or public authority with
respect to any franchise, grant, license or permit and all applicable laws,
rules and order of any governmental authority, (xv) all rights to consent
by, required notices to, filings with or other action by governmental
entities in connection with the sale or conveyance of oil and gas leases,
permits, or interests therein, if the same are customarily obtained
contemporaneously with or subsequent to such sale or conveyance, and which
would not be triggered by the transactions contemplated hereby, (xvi)
existing operating agreements, unit agreements, gas purchase contracts and
any and all other agreements which are normal and customary in the oil and
gas exploration, development, production or extraction business or in the
business of processing of gas and gas condensate or production for the
extraction of proper products therefrom, to the extent that the same do not
reduce the net revenue interest of Company in the oil and gas asset
affected thereby, (xvii) any other defect or imperfection in title which
would customarily be waived by a Person engaged in the exploration for oil
or gas and the operation of oil and/or gas properties in the regions where
the oil and gas assets are located, or which can be cured by the provision
of the forced pooling statutes of applicable Law which are applicable to
the affected oil and gas assets, (xviii) created pursuant to or arising
under the Credit Agreement dated September 28, 2000 among Parent, PCC
Energy Limited, PCC Energy Corp., Toronto Dominion (Texas), Inc., The
Toronto-Dominion Bank, TD Securities (USA), Inc. and various lenders
signatory thereto (collectively, as amended, the "Parent Credit
Agreement"), and (xix) the matters described in Section 4.2(e) of the
Parent Disclosure Schedule;
(f) except in connection with the transactions contemplated by the
Transaction Documents, incur any material indebtedness for borrowed money,
guarantee any such indebtedness, issue or sell any debt securities or
warrants or other rights to acquire any debt securities, guarantee any debt
securities or make any material loans, advances or capital contributions
to, or other investments in, any other Person, or enter into any
arrangement having the economic effect of any of the foregoing;
(g) alter (through merger, liquidation, reorganization, restructuring or
in any other fashion) the corporate structure or ownership of Parent or any
Subsidiary of Parent (unless an alteration to the corporate structure or
ownership of a Subsidiary does not cause such Subsidiary not to be wholly
owned by Parent) other than as contemplated by the Transaction Documents;
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(h) enter into, amend, terminate or waive any provision of, any
agreement or arrangement with any Parent Related Party or enter into any
transaction with any Parent Related Party;
(j) enter into any contract, agreement, commitment or arrangement to do
any of the foregoing.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Access and Information. (a) Company and the Subsidiaries of
Company will afford to Parent and to Parent's accountants, counsel and other
representatives, and (b) Parent and the Subsidiaries of Parent will afford to
Company and Company's accountants, counsel and other representatives,
reasonable access during normal business hours (and at such other times as the
parties may mutually agree) throughout the period prior to the Effective Time
to (i) all of its properties, books, contracts, commitments and records, and,
during such period, will furnish promptly to Parent and the Company,
respectively, a copy of each report, schedule and other document filed or
received by it pursuant to the requirements of federal or state securities
laws, and (ii) all other information concerning its business, properties and
personnel as Parent or Company may reasonably request.
Section 5.2 Registration Statement/Proxy Statement. Parent and Company will
cooperate and promptly prepare, and Parent will file with the Commission as
soon as practicable, a Registration Statement on Form S-4 (the "Form S-4")
under the Securities Act, with respect to the Parent Common Stock issuable in
the Merger (the "Parent Prospectus"), a portion of which Registration Statement
will also serve as the joint proxy statement of Parent and Company (the "Joint
Proxy Statement" and, together with the Parent Prospectus, the "Joint Proxy
Statement/Prospectus") with respect to the Merger. The respective parties will
cause the Joint Proxy Statement/Prospectus and the Form S-4 to comply as to
form in all material respects with the applicable provisions of the Securities
Act, the Exchange Act and the rules and regulations thereunder. Parent will use
all reasonable efforts, and Company will cooperate with Parent, to have the
Form S-4 declared effective by the Commission as promptly as practicable after
the filing thereof (including, without limitation, responding to any comments
received from the Commission with respect thereto) and to keep the Form S-4
effective as long as is necessary to consummate the Merger and the transactions
contemplated thereby. Each of Parent and Company will, as promptly as
practicable, provide to the other copies of any written comments received from
the Commission with respect to the Joint Proxy Statement/Prospectus or the Form
S-4 and advise the other of any oral comments with respect to the Joint Proxy
Statement/Prospectus or the Form S-4 received from the Commission. Parent will
use its best efforts to obtain, prior to the Effective Time of the Form S-4,
all necessary state securities law or "Blue Sky" permits or approvals required
to carry out the transactions contemplated by this Agreement and will pay all
expenses incident thereto. Parent agrees that none of the information supplied
or to be supplied by Parent for inclusion or incorporation by reference in the
Form S-4 or the Joint Proxy Statement/Prospectus (i) in the case of the Joint
Proxy Statement/Prospectus and each amendment or supplement thereto, at the
time of mailing thereof, or (ii) in the case of the Parent Prospectus and each
amendment or supplement thereto, at the time it is filed or becomes effective,
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Company agrees that none of the information supplied or to be supplied by
Company for inclusion or incorporation by reference in the Form S-4 or the
Joint Proxy Statement/Prospectus (i) in the case of the Joint Proxy Statement
and each amendment or supplement thereto, at the time of mailing thereof, or,
(ii) in the case of the Parent Prospectus or any amendment or supplement
thereto, at the time it is filed or becomes effective, will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. For purposes of the
foregoing, it is understood and agreed that information concerning or related
to Parent will be deemed to
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have been supplied by Parent and information concerning or related to Company
will be deemed to have been supplied by Company. No amendment or supplement to
the Joint Proxy Statement/Prospectus will be made by Parent or Company without
the approval (not to be unreasonably delayed, withheld or denied) of the other
party. Parent will advise Company, promptly after it receives notice thereof,
of the time when the Form S-4 has become effective or any supplement or
amendment has been filed, the issuance of any stop order, or the suspension of
the qualification of Parent Common Stock issuable in connection with the Merger
for offering or sale in any jurisdiction.
Section 5.3 Compliance with the Securities Act. At least 30 days prior to
the Effective Time, Company will deliver to Parent a list of names and
addresses of those persons who were, in Company's reasonable judgment, at the
date of this Agreement, "affiliates" (each such person, an "Affiliate") of
Company within the meaning of Rule 145 of the rules and regulations promulgated
under the Securities Act. Company will use commercially reasonable efforts to
deliver or cause to be delivered to Parent, prior to the Effective Time, from
each of the Affiliates of Company identified in the foregoing list, an
Affiliate Letter in the form attached hereto as Exhibit B (an "Affiliate
Letter"), and Parent will duly execute the acknowledgments to any Affiliate
Letters so delivered and return a copy of the acknowledged Affiliate Letter to
the delivering Affiliate. Parent will be entitled to place legends as specified
in such Affiliate Letters on the certificates evidencing any Parent Common
Stock to be received by such Affiliates pursuant to the terms of the Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the Parent Common Stock, consistent with the terms of such Affiliate Letters.
Section 5.4 Stock Exchange Listing. Parent will use its best efforts to list
on the AMEX, upon official notice of issuance, the Parent Common Stock to be
issued pursuant to the Merger.
Section 5.5 Employee Matters. As of the Effective Time, the employees of
Company and each Subsidiary of Company listed in Section 5.5 of the Company
Disclosure Schedule will continue employment with the Surviving Corporation and
its Subsidiaries, respectively, in the same positions and at the same level of
wages and/or salary and without having incurred a termination of employment or
separation from service; provided, however, except as may be specifically
required by applicable law or any contract, neither the Surviving Corporation
and its Subsidiaries, on the one hand, nor any employee, on the other hand,
will be obligated to continue any employment relationship or any specific terms
of employment for any specific period of time. As of the Effective Time, Parent
will assume and become the sponsor of Company Employee Benefit Plans sponsored
by Company immediately prior to the Effective Time, and Parent will and will
cause its Subsidiaries to satisfy all obligations and liabilities under such
Company Employee Benefit Plans; provided, however, that, except as hereafter
provided or in Section 5.5 of the Company Disclosure Schedule, nothing
contained in this Agreement will limit or restrict Parent's or its
Subsidiaries' right on or after the Effective Time to amend, modify or
terminate any of Company Employee Benefit Plans. To the extent any employee
benefit plan, program or policy of Parent or their affiliates is made available
to any person who is an employee of Company or any of its Subsidiaries
immediately prior to the Effective Time: (i) service with Company and its
Subsidiaries by any employee prior to the Effective Time will be credited for
eligibility and vesting purposes and for purposes of qualifying for any
additional benefits tied to periods of service (such as higher rates of
matching contributions and eligibility for early retirement) under such plan,
program or policy and (ii) with respect to any welfare benefit plans to which
such employees may become eligible, Parent will cause such plans to provide
credit for any co-payments or deductibles by such employees and waive all pre-
existing condition exclusions and waiting periods, other than limitations or
waiting periods that have not been satisfied under any welfare plans maintained
by the Company and its Subsidiaries for their employees prior to the Effective
Time. At the reasonable request of Parent, Company will amend, modify or
terminate any of Company Employee Benefit Plans at or immediately prior to the
Effective Time (whichever the Parent may request) and will take such other
steps as Parent may reasonably request to facilitate the administration after
the Effective Time of the compensation and benefit plans, programs and
arrangements of the Surviving Corporation.
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Section 5.6 Indemnification. (a) From and after the Effective Time, the
Surviving Corporation will indemnify, defend and hold harmless the officers,
directors and employees of Company and its Subsidiaries who were such at any
time prior to the Effective Time (the "Indemnified Parties") from and against
all losses, expenses, claims, damages or liabilities arising out of the
transactions contemplated by this Agreement to the fullest extent permitted or
required under applicable law, and the Indemnified Parties will be advanced
expenses subject to a customary reimbursement agreement. All rights to
indemnification existing in favor of the directors, officers or employees of
Company and its Subsidiaries as provided in Company's Second Amended and
Restated Articles of Incorporation or Amended and Restated Bylaws, as in effect
as of the date of this Agreement, with respect to matters occurring through the
Effective Time, will survive the Merger and will continue in full force and
effect thereafter. Parent will maintain in effect for not less than six years
after the Effective Time the current policies of directors' and officers'
liability insurance maintained by Company, and will cause the Surviving
Corporation to indemnify the Indemnified Parties, from and against all losses,
expenses, claims, damages or liabilities arising from or related to matters,
acts or omissions occurring on or prior to the Effective Time; provided,
however, that Parent may substitute therefor policies of at least the same
coverage (with carriers comparable to Company's existing carriers) containing
terms and conditions which are no less advantageous to the Indemnified Parties;
and provided, further, that Parent will not be required in order to maintain or
procure such coverage to pay an annual premium in excess of 200% of the current
annual premium paid by the Company for its existing coverage (the "Cap"); and
provided, further, that if equivalent coverage cannot be obtained, or can be
obtained only by paying an annual premium in excess of Cap, the Parent will
only be required to obtain as much coverage as can be obtained by paying an
annual premium equal to the Cap.
(b) In the event that any action, suit, proceeding or investigation relating
hereto or to the transactions contemplated by this Agreement is commenced,
whether before or after the Effective Time, the parties hereto agree to
cooperate and use their respective reasonable efforts to vigorously defend
against and respond thereto.
(c) Any Indemnified Party, upon learning of any claim, action, suit,
proceeding or investigation for which such party may seek indemnification under
this Section 5.6, will promptly notify Parent; provided that the failure to so
promptly notify will not impede, limit or prohibit an Indemnified Party from
recovering except to the extent a delay permanently prejudiced Parent's ability
to defend such claim, action, suit, proceeding or investigation. In case any
such action shall be brought against an Indemnified Party and it shall give
written notice to Parent of the commencement thereof, Parent shall be entitled
to participate therein and, to the extent that it may wish, to assume the
defense thereof with counsel reasonably satisfactory to such Indemnified Party.
If Parent elects to assume the defense of such action, the Indemnified Party
shall have the right to employ separate counsel at its own expense and to
participate in the defense thereof. If Parent elects not to assume (or fails to
assume) the defense of such action, the Indemnified Party shall be entitled to
assume the defense of such action with counsel of its own choice, at the
expense of Parent. If the action is asserted against both Parent and the
Indemnified Party and there is a conflict of interests which renders it
inappropriate for the same counsel to represent both Parent and the Indemnified
Party, Parent shall be responsible for paying for separate counsel for the
Indemnified Party; provided, however, that if there is more than one
Indemnified Party, Parent shall not be responsible for paying for more than one
separate firm of attorneys (and any local counsel) to represent the indemnified
parties, regardless of the number of indemnified parties. If Parent elects to
assume the defense of such action, (i) no compromise or settlement thereof may
be effected by Parent without the Indemnified Party's written consent (which
shall not be unreasonably withheld) and (ii) the Indemnified Party shall have
no liability with respect to any compromise or settlement thereof effected
without its written consent (which shall not be unreasonably withheld).
Section 5.7 Additional Agreements. (a) Subject to the terms and conditions
herein provided, each of the parties hereto agrees diligently to use their best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the other Transaction Documents as soon as reasonably
practical, including to (i) obtain all necessary waivers, consents and
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approvals, (ii) effect all necessary registrations and filings, (iii) lift any
injunction to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), and (iv) otherwise promptly satisfy the conditions
set forth in Article VI. In addition, Parent agrees to cooperate with Company
in obtaining a legal opinion from Akin, Gump, Strauss, Hauer & Feld, LLP,
counsel to Company, reasonably satisfactory to Company, to be delivered in
connection with the filing of the Form S-4 concerning tax matters. In
connection with each of such opinions of Akin, Gump, Strauss, Hauer & Feld,
LLP, Parent and Company shall each deliver a certificate executed by an
appropriate officer of Parent containing customary representations as to
current financial matters.
(b) Company will give prompt notice to Parent, and Parent or Merger Sub will
give prompt notice to Company, of:
(i) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(ii) any notice or other communication from any Governmental Entity in
connection with the transactions contemplated by the Transaction Documents;
and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to Company's or Parent's Knowledge, as applicable, threatened
against, relating to or involving or otherwise affecting it or any of its
Subsidiaries which, if pending on the date of this Agreement would have
been required to have been disclosed pursuant to Section 2.7, 2.8, 3.7 and
3.8 or which relate to the consummation of the transactions contemplated by
this Agreement.
(c) Parent and Merger Sub, on the one hand, and Company, on the other hand,
will consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any press release or other public
statements with respect to the transactions contemplated by this Agreement and
the other Transaction Documents, including the Merger, and will not issue any
such press release or make any such public statement prior to such
consultation.
(d) Parent agrees to cause its Board of Directors prior to the Effective
Time to approve in the form required by Rule 16b-3 under the Exchange Act
certain acquisitions of Parent Common Stock pursuant to the Merger, as directed
by Company and in form reasonably acceptable to Company.
(e) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement and the
other Transaction Documents, the proper officers and/or directors of Parent and
Company will use their reasonable best efforts to take all such necessary
action.
Section 5.8 No Shop. Company agrees (a) that neither it nor any of its
Subsidiaries or affiliates will, and it will direct and use commercially
reasonable efforts to cause its officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries or affiliates) not to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a
merger, acquisition, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or equity securities
covering all or any significant portion of the assets of, Company and its
Subsidiaries, taken as a whole (any such proposal or offer being hereinafter
referred to as an "Alternative Proposal"), or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Alternative Proposal, or release
any third party from any obligations under any existing standstill agreement or
arrangement, or enter into any agreement with respect to an Alternative
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Alternative Proposal; (b) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties with respect to any of the foregoing, and it will take the
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necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 5.9; and (c) that it will notify Parent
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it. Notwithstanding the foregoing,
prior to the Effective Time, Company may, directly or indirectly, furnish
information and access to, and may participate in discussions and negotiate
with, any Person, if (i) such person has submitted an unsolicited proposal to
the Board of Directors of Company relating to an Alternative Proposal, (ii) the
Board of Directors of Company believes that such Alternative Proposal is
superior from a financial point of view to the transactions contemplated by the
Transaction Documents, and (iii) the Board of Directors of Company determines
in its good faith judgment that it is required to take such action to comply
with the Board of Directors' fiduciary duty imposed by law (a "Superior
Proposal"). Such Board of Directors will provide a summary of any such proposal
to Parent immediately after receipt thereof and thereafter keep Parent promptly
advised of any development with respect thereto and any revision of the terms
of such Superior Proposal.
Section 5.9 Advice of Changes, SEC Filings. Company will confer on a regular
basis with Parent on operational matters. Parent and Company will promptly
advise each other of any change or event that has had, or could reasonably be
expected to have, a Company Material Adverse Effect or a Parent Material
Adverse Effect, as the case may be. Company and Parent will promptly provide
each other (or their respective counsel) copies of all filings made by such
party with the SEC or any other Governmental Entity in connection with this
Agreement and the transactions contemplated hereby and other Transaction
Documents and the transactions contemplated thereby.
Section 5.10 Confidentiality Agreement. Each party will keep all information
received pursuant to this Agreement confidential in accordance with the
confidentiality provisions of the offer letter dated December 8, 2000 between
Parent and Company, and the Confidentiality Agreement dated October 11, 1999
between Parent and Company (the "Confidentiality Agreement"). Notwithstanding
any other provision of this Agreement or the Confidentiality Agreement, the
Confidentiality Agreement remains in full force and effect, is not superseded
or modified by this Agreement, and will only terminate upon the Effective Time.
Section 5.11 Special Meetings.
(a) Company will, as promptly as reasonably practicable after the date of
this Agreement (i) take all steps reasonably necessary to call, give notice of,
convene and hold a special meeting of its shareholders (the "Company Special
Meeting") for the purpose of securing the Company Shareholder Approval, (ii)
distribute to its shareholders the Joint Proxy Statement/Prospectus in
accordance with applicable federal and state law and its articles of
incorporation and bylaws, which Joint Proxy Statement/Prospectus will contain
the recommendation of the Company Board of Directors that its shareholders
approve and adopt this Agreement and approve the Merger and other Transaction
Documents and transactions contemplated thereby, and (iii) subject to the
fiduciary duties of its directors, use all reasonable efforts to solicit from
its shareholders proxies in favor of, and to secure, the Company Shareholder
Approval, and (iv) cooperate and consult with Parent with respect to each of
the foregoing matters; provided, that this Section 5.11 will not prohibit the
Company Board of Directors from failing to make or from withdrawing or
modifying its recommendation to the Company shareholders hereunder if the Board
of Directors of Company determines in good faith that such action is necessary
for such Board of Directors to comply with its fiduciary duties to its
shareholders under applicable law and provided further that this Agreement will
not be required to be submitted to the shareholders of Company at the Company
Special Meeting if this Agreement has been terminated pursuant to Section 7.1
hereof.
(b) Parent will, as promptly as reasonably practicable after the date of
this Agreement (a) take all steps reasonably necessary to call, give notice of,
convene and hold a special meeting of its shareholders (the "Parent Special
Meeting") for the purpose of securing the Parent Shareholder Approval, (b)
distribute to its shareholders the Joint Proxy Statement/Prospectus in
accordance with applicable federal and state law and its
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articles of incorporation and bylaws, which Joint Proxy Statement/Prospectus
will contain the recommendation of the Parent Board of Directors that its
shareholders approve and adopt this Agreement and approve the Merger and other
Transaction Documents and transactions contemplated thereby, (c) use all
reasonable efforts to solicit from its shareholders proxies in favor of, and to
secure, the Parent Shareholder Approval, and (d) cooperate and consult with
Company with respect to each of the foregoing matters; provided, that this
Agreement will not be required to be submitted to the shareholders of Parent at
the Parent Special Meeting if this Agreement has been terminated pursuant to
Section 7.1 hereof.
Section 5.12 State Takeover Statutes. If any "fair price", "control share
acquisition", "moratorium" or other anti-takeover statute, or similar statute
or regulation will become applicable to the Merger, this Agreement, the other
Transaction Documents or any of the transactions contemplated hereby or
thereby, Company and Parent will use their commercially reasonable efforts to
ensure that the Merger and the other transactions contemplated hereby and by
the Transaction Documents, may be consummated as promptly as practicable on the
terms contemplated hereby and otherwise to minimize the effect of such statute
or regulation on the Merger and the other transactions contemplated hereby or
thereby.
Section 5.13 Company Credit Agreements. Parent agrees that at or immediately
subsequent to the Effective Time, it will, or will cause its Subsidiaries to
pay off the entire balance outstanding under the Company Credit Agreements.
Section 5.14 Expenses. Except as provided to the contrary in Article VII,
each party hereto will pay its own expenses incident to preparing for, entering
into and carrying out this Agreement and the consummation of the transactions
contemplated hereby, whether or not the Merger will be consummated, except that
the fee for filing the Joint Proxy Statement/Prospectus with the Commission and
the costs and expenses associated with printing and mailing the Joint Proxy
Statement/Prospectus and complying with any applicable state securities or
"blue sky" laws will be borne by Parent.
Section 5.15 St. Paul Shareholder Agreement. Parent will use its best
efforts to have St. Paul Fire and Marine Insurance Company ("St. Paul") execute
a shareholder agreement in the form of Exhibit C ("St. Paul Shareholder
Agreement") hereto as promptly as possible after the date of this Agreement.
Section 5.16 Available Funds. Parent covenants that it will have at the
Closing immediately available funds and authorized Parent Common Stock
available for issuance sufficient to enable it to make payment of the Aggregate
Merger Consideration and effect the transactions contemplated by this Agreement
and the other Transaction Documents without encumbrance or delay and without
causing Parent to become insolvent or to declare insolvency.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) The Form S-4 will have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the
effectiveness of the Form S-4 will have been issued by the Commission and
remain in effect and all necessary approvals under state securities laws
relating to the issuance or trading of the Parent Common Stock to be issued
to shareholders of Company in connection with the Merger will have been
obtained.
(b) No preliminary or permanent injunction or other order by any federal
or state court in the United States of competent jurisdiction which
prevents the consummation of the Merger will have been issued
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and remain in effect (each party agreeing to use all commercially
reasonable efforts to have any such injunction lifted).
(c) The Parent Common Stock to be issued to Company shareholders in
connection with the Merger will have been approved for listing on the
American Stock Exchange ("AMEX"), subject only to official notice of
issuance.
(d) [OMITTED.]
(e) Company Shareholder Approval. The holders of issued and outstanding
shares of Company Common Stock will have duly approved the Merger.
(f) Parent Shareholder Approval. The holders of issued and outstanding
shares of Parent Common Stock will have duly approved the Merger.
Section 6.2 Conditions to Obligation of Company to Effect the Merger. The
obligation of Company to effect the Merger will be subject to the fulfillment
(or waiver by Company) at or prior to the Effective Time of the following
additional conditions:
(a) Performance of Obligations, Representations and Warranties. (i) The
representations and warranties of Parent contained herein (other than in
Section 2.6) will be true and correct in all respects (but without regard
to any materiality qualifications or references to a Parent Material
Adverse Effect contained in any specific representation or warranty) as of
the Effective Time except (a) for changes specifically permitted by the
terms of this Agreement, (b) that the accuracy of representations and
warranties that by their terms speak as of the date of this Agreement or
some other date will be determined as of such date and (c) where any such
failure of the representations and warranties in the aggregate to be true
and correct in all respects would not have a Parent Material Adverse
Effect, and (ii) Parent will have performed in all material respects all
obligations and complied with all covenants required by this Agreement to
be performed or complied with by it prior to the Effective Time, in the
case of (i) and (ii) above except as contemplated or permitted by this
Agreement, and Company will have received certificates signed on behalf of
Parent by an executive officer of Parent to certifying as to both (i) and
(ii) above.
(b) Consents and Authorizations. All consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be made for the consummation of the transactions contemplated by this
Agreement will have been obtained and made by Parent and Merger Sub, except
for those consents, waivers, approvals, authorizations, orders and filings
the failure of which to obtain would not and would not reasonably be
expected to adversely affect the Closing or have a Parent Material Adverse
Effect.
(c) No Material Adverse Effect. From the date of this Agreement through
the Effective Time, there will not have occurred any change in the
financial condition, business or operations of Parent and its Subsidiaries,
that would constitute a Parent Material Adverse Effect.
(d) Stock Elections that would represent the right to receive no less
than 3,000,000 shares of PetroCorp Common Stock have been effectively made
pursuant to Section 1.6.
Section 6.3 Conditions to Obligations of Parent to Effect the Merger. The
obligations of Parent to effect the Merger will be subject to the fulfillment
(or waiver by Parent) at or prior to the Effective Time of the following
additional conditions:
(a) Performance of Obligations, Representations and Warranties. (i) The
representations and warranties of Company contained herein (other than in
Section 3.6) will be true and correct in all respects (but without regard
to any materiality qualifications or references to a Company Material
Adverse Effect
I-37
contained in any specific representation or warranty) as of the Effective
Time except (a) for changes specifically permitted by the terms of this
Agreement, (b) that the accuracy of representations and warranties that by
their terms speak as of the date of this Agreement or some other date will
be determined as of such date and (c) where any such failure of the
representations and warranties in the aggregate to be true and correct in
all respects would not have a Company Material Adverse Effect, and (ii)
Company will have performed in all material respects all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Effective Time, in each case except as
contemplated or permitted by this Agreement, and Parent will have received
certificates signed on behalf of Company by an executive officer of Company
to such effect.
(b) Consents and Authorizations. All consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be made for the consummation of the transactions contemplated by this
Agreement will have been obtained and made by Company, except for those
consents, waivers, approvals, authorizations, orders and filings (x)
relating to the Company Credit Agreements or the Parent Credit Agreement,
or (y) the failure of which to obtain would not and would not reasonably be
expected to adversely affect the Closing or have a Company Material Adverse
Effect.
(c) No Company Material Adverse Effect. From the date of this Agreement
through the Effective Time, there will not have occurred any change in the
financial condition, business or operations of Company and its
Subsidiaries, that would constitute a Company Material Adverse Effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of any matters
presented in connection with the Merger by the shareholders of Company:
(a) by mutual written consent of Parent and Company;
(b) by either Company or Parent if there has been an inaccuracy or
breach of the representations, warranties, covenants or agreements on the
part of the other set forth in this Agreement which breach would result in
the condition set forth in Section 6.2(a), in the case of a breach by
Parent or Merger Sub, or Section 6.3(a), in the case of a breach by
Company, not being satisfied, and such breach has not been cured within ten
business days following receipt by the breaching party of notice of such
breach from the non-breaching party;
(c) by either Parent or Company if the Merger will not have been
consummated on or before May 31, 2001, unless the failure to consummate the
Merger is the result of an inaccuracy or breach of the representations,
warranties, covenants or agreements contained in this Agreement by the
party seeking to terminate this Agreement which has not been cured within
ten business days following receipt by the breaching party of notice of
such inaccuracy or breach from the non-breaching party;
(d) by Company, prior to the Effective Time, if the Board of Directors
of Company has received a Superior Proposal which the Board of Directors
has resolved to accept. Upon such termination, Parent, Merger Sub and their
respective Subsidiaries will be deemed to have waived any and all claims
Parent and its Subsidiaries may have at law or in equity against Company,
its Subsidiaries or their respective officers, directors or employees
arising out of or relating to this Agreement or the other Transaction
Documents, except as contemplated by Section 7.2(a);
(e) by either Company or Parent if (i) a statute, rule, regulation or
executive order will have been enacted, entered or promulgated prohibiting
the consummation of the Merger substantially on the terms contemplated
hereby or (ii) an order, decree, ruling or injunction will have been
entered permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger substantially on the terms
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contemplated hereby and such order, decree, ruling or injunction will have
become final and non-appealable; provided, that the party seeking to
terminate this Agreement pursuant to this Section 7.1(e) will have used its
reasonable best efforts to remove such injunction, order or decree;
(f) by either Company or Parent if the Company Shareholder Approval will
not have been obtained by reason of the failure to obtain the required vote
at a duly held meeting of shareholders or of any adjournment thereof;
(g) by Company if the St. Paul Shareholder Agreement has not been
executed by St. Paul on or prior to January 5, 2000; or
(h) by Parent, prior to the Effective Time, if the Board of Directors of
Company has received a Superior Proposal which the Board of Directors has
failed to reject within 30 days of the date of receipt of such Superior
Proposal. Upon such termination, Parent, Merger Sub and their respective
Subsidiaries will be deemed to have waived any and all claims Parent and
its Subsidiaries may have at law or in equity against Company, its
Subsidiaries or their respective officers, directors or employees arising
out of or relating to this Agreement or the other Transaction Documents.
Section 7.2 Effect of Termination. (a) In the event of termination of this
Agreement by either Parent or Company as provided in Section 7.1, this
Agreement will forthwith become void and there will be no liability hereunder
on the part of Company, Parent or their respective officers or directors;
provided, however, that nothing contained in this Section 7.2 will relieve any
party hereto from any liability for any willful breach of a representation or
warranty contained in this Agreement, for the breach of any covenant or
agreement contained in this Agreement or under Section 7.1(d), this Section 7.2
and Article VIII.
(b) If Company terminates this Agreement pursuant to Section 7.1(d),
forthwith upon such termination Company will pay Parent $2,350,000 in
immediately available funds.
(c) If either Company or Parent has willfully breached a representation,
warranty, covenant or agreement set forth in this Agreement that results in the
other party terminating this Agreement pursuant to Section 7.1(b), then, in
addition to any other remedies available to the non-breaching party, the
breaching party will promptly reimburse the non-breaching party for all
substantiated out-of-pocket costs and expenses incurred by the non-breaching
party in connection with this Agreement and the transactions contemplated
hereby and the other Transaction Documents, including, without limitation,
costs and expenses of accountants, attorneys and financial advisors (the
"Expenses Fee"). Each of Parent and Company acknowledges that the agreements
contained in this Section 7.2(c) are an integral part of the transactions
contemplated in this Agreement, and that, without these agreements, Parent and
Company would not enter into this Agreement; accordingly, if the breaching
party falls to promptly pay the amount due pursuant to this Section 7.2(c),
and, in order to obtain such payment, the non-breaching party commences a suit
which results in a judgment for the Expenses Fee, the breaching party will pay
to the non-breaching party its costs and expenses (including attorney's fees)
in connection with such suit.
(d) If the Merger does not occur for any reason other than (i) a breach by
Company of its representations, warranties, covenants or agreements set forth
in this Agreement resulting in the condition set forth in Section 6.3(a) not
being satisfied, (ii) any of the conditions set forth in Sections 6.1(e),
6.2(c), 6.3(b) and 6.3(c) not being satisfied, or (iii) a termination of this
Agreement by Parent under Section 7.1(h), Parent will promptly pay $250,000 in
immediately available funds to Company, which amount is intended to reimburse
Company for its costs and expenses incurred in connection with this Agreement
and the transactions contemplated by the Transaction Documents.
Section 7.3 Amendment. This Agreement may be amended by the parties hereto,
by or pursuant to action taken by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the shareholders of Company, Parent and Merger Sub, but, after any
such approval no amendment will be made which by law requires further approval
by such shareholders without such further approval. This Agreement may not be
amended except by an instrument in writing duly executed by each of the parties
hereto.
I-39
Section 7.4 Waiver. At any time prior to the Effective Time, any party
hereto may waive any of its rights under this Agreement or any applicable law
that may be legally waived, including, without limitation, waiving (i) any
failure to timely perform any of the obligations or other acts of the other
parties hereto, (ii) any inaccuracies in or breaches of the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) 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 will be
valid only if set forth in an instrument in writing duly executed by such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise will not constitute a waiver of such rights.
Section 7.5 Exclusive Remedy for Inaccuracy or Breach of Representation or
Warranty. Except as expressly provided in Section 7.2(a), (b), (c) and (d)
hereof, a party's sole and exclusive remedy with respect to the non-willful
inaccuracy or breach of any representation or warranty provided by the other
party will be to (i) elect not to close the Merger and the other transactions
contemplated by this Agreement to the extent permitted by Article VI and (ii)
elect to terminate this Agreement to the extent permitted by Article VII.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties. Except to the
extent expressly set forth in Articles II and III, the parties hereto have not
made and expressly negate and waive any representations or warranties (express,
implied, statutory or otherwise) with respect to this Agreement or the title,
condition or quality of any rights or assets of Parent or Company or any
Subsidiary of Parent or Company or the accuracy or completeness of any
information provided or obtained. The representations and warranties in this
Agreement or in any instrument delivered pursuant to this Agreement will
terminate at the Effective Time or, if sooner, the termination of this
Agreement.
Section 8.2 Disclosure Schedules. Each disclosure identified in the Parent
Disclosure Schedule and the Company Disclosure Schedule or elsewhere in this
Agreement constitutes a disclosure by the disclosing party with respect to all
applicable Sections of this Agreement, regardless of any reference to a
particular Section or subsection. The Company agrees that it will provide
Parent, and Parent agrees that it will provide Company, with written
supplements to this Agreement disclosing any inaccuracies in representations
and warranties made by it in Article III.
Section 8.3 Notices. All notices and other communications' hereunder will be
in writing and will be deemed given when delivered personally, one day after
being delivered to a nationally recognized overnight courier or when telecopied
(with a confirmatory copy sent by such overnight courier) to the parties at the
following addresses (or at such other address for a party as will be specified
by like notice):
(a) if to Parent or Merger Sub, to
PetroCorp Incorporated
6733 South Yale Avenue
Tulsa, OK 74136
Attention: Chief Executive Officer
Facsimile No.: (918) 491-4584
with a copy (which will not constitute notice) to:
Frederic Dorwart
One City Hall
124 East Fourth Street
Tulsa, Oklahoma 74103-5010
Facsimile No.: (918) 583-8251
I-40
(b) if to Company, to
Southern Mineral Corporation
1201 Louisiana, Suite 3350
Houston, TX 77002-4609
Attention: Chief Executive Officer
Facsimile No.: 713-658-9447
with a copy (which will not constitute notice) to:
Akin, Gump, Strauss, Hauer & Feld, LLP
1900 Pennzoil Place--South Tower
711 Louisiana
Houston, Texas 77002
Attention: J. Vincent Kendrick
Facsimile No.: (713) 236-0822
Section 8.4 Interpretation. When a reference is made in this Agreement to a
Section or Article, such reference will be to a Section or Article of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and will not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they will be
deemed to be followed by the words, of without limitation. As used in this
Agreement the word "Subsidiary" when used with respect to any relevant
individual or entity, means any other individual or entity that directly or
indirectly is controlled by such relevant individual or entity in question. As
used herein, the term "control" (including its derivatives and similar terms)
means the power to, directly or indirectly, direct or cause the direction of
the management and policies of such relevant individual or entity.
Section 8.5 Counterparts. This Agreement may be executed in counterparts,
all of which will be considered one and the same agreement, and will become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 8.6 Entire Agreement, No Third-Party Beneficiaries. This Agreement
and the other written agreements executed by the parties in connection
herewith, including the Confidentiality Agreement, constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement and there are no promises, undertakings, representations or
warranties by Company or Parent relative to the subject matter of this
Agreement not expressly set forth or referred to herein. This Agreement, except
for the provisions of Sections 1.4(c), 5.5 and 5.6, is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
Section 8.7 Governing Law. EXCEPT TO THE EXTENT THE LAW OF ANOTHER
JURISDICTION IS REQUIRED TO BE APPLIED, THIS AGREEMENT WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS
OF LAWS THEREOF.
Section 8.8 Shareholder Agreements. The parties hereto acknowledge that,
except as contemplated by Section 5.15, the Shareholder Agreements have been
executed as of the date of this Agreement.
Section 8.9 Standstill. If (a) this Agreement is terminated by either Parent
or Company in accordance with the terms of Section 7.1 and (b) such termination
was not related to a material breach by Company of any of its representations,
warranties, covenants or agreements set forth herein resulting in a failure to
satisfy the requirements of Section 6.3(a), neither Parent, Merger Sub nor any
Subsidiary of either of them will for a period of two years following such
expiration (i) acquire, offer to acquire or agree to acquire directly or
I-41
indirectly by purchase or otherwise any voting securities of Company, (ii) make
or in any way participate directly or indirectly, in any "solicitation" of
"proxies" to vote (in such terms as used in the proxy rules of the Commission)
or seek to advise or influence any person or entity with respect to the voting
of any voting securities of Company, (iii) form, join or in any way participate
in a "group" within the meaning of Section 13(d)(iv) of the Exchange Act with
respect to any voting securities of Company or (iv) otherwise act alone or in
concert with others to seek to control or influence the management, Board of
Directors, or policies of Company.
Section 8.10 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder will be assigned, transferred, disposed of
or otherwise alienated by either of the parties hereto (whether voluntarily or
involuntarily, with or without consideration, by operation of law or otherwise)
without the prior written consent of the other party (which consent may be
granted or withheld in such party's sole discretion). An attempted assignment,
transfer, disposition or alienation in violation of this Agreement will be
null, void and ineffective. Subject to the two preceding sentences, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
Section 8.11 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties will negotiate in good faith to modify this Agreement so as' to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
Section 8.12 Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific wording or were
otherwise breached. It is accordingly agreed that the parties hereto will be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, such remedy being in addition
to any other remedy to which any party is entitled at law or in equity.
[Remainder of page intentionally left blank.]
I-42
IN WITNESS WHEREOF, Parent, Merger Sub and Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized
all as of the date first written in the preamble.
PETROCORP INCORPORATED
By: /s/ Gary R. Christopher
----------------------------------
Name: Gary R. Christopher
Title: President and Chief Executive
Officer
PETROCORP ACQUISITION COMPANY
By: /s/ Gary R. Christopher
----------------------------------
Name: Gary R. Christopher
Title: President and Chief Executive
Officer
SOUTHERN MINERAL CORPORATION
By: /s/ Steven H. Mikel
----------------------------------
Name: Steven H. Mikel
Title: President and Chief Executive
Officer
[Merger Agreement Signature Page]
I-43
ANNEX II
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement") dated as of December 22, 2000,
between Kaiser-Francis Oil Company, a Delaware corporation ("Shareholder"), and
Southern Mineral Corporation, a Nevada corporation ("Company").
RECITALS:
WHEREAS, Company, PetroCorp Incorporated, a Nevada corporation ("Parent"),
and PetroCorp Acquisition Company, a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), are entering into an Agreement and Plan of
Merger (the "Merger Agreement"; capitalized terms used but not defined herein
will have the meanings ascribed thereto in the Merger Agreement) on the date of
this Agreement pursuant to which Parent proposes to acquire the entire equity
interest in Company pursuant to the merger (the "Merger") of Company with and
into Merger Sub, on the terms and conditions set forth in the Merger Agreement.
WHEREAS, Shareholder owns the number of shares of Parent Common Stock (the
"Shares"), options to purchase shares of Parent Common Stock (the "Options")
and/or warrants to purchase shares of Parent Common Stock (the "Warrants" and,
collectively with the Shares and the Options, the "Equity Securities") listed
on Schedule 1.
WHEREAS, the Board of Directors of Parent has, prior to the execution of
this Agreement, approved and adopted the Merger Agreement;
WHEREAS, approval of the Merger Agreement by Parent's shareholders is a
condition to the consummation of the Merger; and
WHEREAS, as a condition to its entering into the Merger Agreement, Company
has required that Shareholder agree, and Shareholder has so agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in consideration of $1.00 and such other valuable
consideration the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Covenants of Shareholder and Company.
(a) During the term of this Agreement, except in accordance with the
express provisions of this Agreement, Shareholder agrees that (i) it will
not sell, transfer, assign or otherwise dispose of, or enter into any
contract, option or other agreement with respect to the sale, transfer,
assignment or other disposition of, any Equity Securities, whether now
owned or hereafter acquired, and (ii) it will cause the Management
Agreement dated August 3, 1999 between Parent and Shareholder to be amended
by deleting Sections 3.1B and 3.1C thereof, which contain backin and
override provisions in favor of Shareholder, in their entirety and
replacing such Sections with provisions to compensate Shareholder
thereunder that are no less favorable to Parent than those discussed at the
November 17, 2000 meeting of the Board of Directors of Shareholder.
(b) During the term of this Agreement, Company agrees to fully and
timely perform, in all material respects, its obligations under the Merger
Agreement.
2. Representations and Warranties of Shareholder. Shareholder represents and
warrants to Company as follows:
(a) (i) Shareholder is the record or beneficial owner of the Equity
Securities listed on Schedule 1, (ii) such securities are the only Equity
Securities owned of record or beneficially by Shareholder free and clear of
all liens and defects, and (iii) Shareholder does not have any option or
other right to acquire any other Equity Securities;
II-1
(b) (i) Shareholder has the right, power and authority to execute and
deliver this Agreement and to perform its obligations hereunder; (ii) the
execution, delivery and performance of this Agreement by such Shareholder
does not require the consent of any other Person and does not constitute a
violation of, conflict with or result in a material default under (1) any
contract or agreement to which such Shareholder is a party or by which such
Shareholder is bound, (2) any judgment, decree or order applicable to such
Shareholder, or (3) to Shareholder's actual knowledge, any law, rule or
regulation of any governmental body applicable to such Shareholder, in the
case of clauses (1) through (3), except for violations, conflicts or
defaults which would not, or would not reasonably be expected to,
materially affect Shareholder's ability to perform its obligations under
this Agreement; and (iii) this Agreement constitutes a valid and binding
agreement on the part of such Shareholder, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity;
(c) Shareholder is an accredited investor (as defined in Rule 501(a)
under the Securities Act), and has had an opportunity to review all such
documents and obtain all such information as Shareholder deems necessary in
connection with the approval and execution of this Agreement.
3. Representations and Warranties of Company. Company hereby represents and
warrants to Shareholder that:
(a) Company is a corporation validly existing and in good standing under
the laws of the State of Nevada;
(b) Company has all requisite right, power and authority to execute and
deliver this Agreement and perform all its obligations hereunder;
(c) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on Company's part and do not
constitute a violation of, conflict with or result in a material default
under (i) any contract or agreement to which Company is a party or by which
Company is bound, (ii) any judgment, decree or order applicable to Company
or (iii) to Company's actual knowledge, any law, rule or regulation of any
governmental body applicable to Company, including, without limitation, any
securities laws exemptions, in the case of clauses (i) through (iii),
except for violations, conflicts or defaults which would not, or would not
reasonably be expected to, materially affect Company's ability to perform
its obligations under this Agreement;
(d) this Agreement has been duly executed and delivered by Company; and
(e) this Agreement constitutes a valid and binding agreement on
Company's part, enforceable against Company in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
4. Voting of Equity Securities. Shareholder hereby agrees that, during the
term of this Agreement, at any meeting of the shareholders of Parent, however
called, and in any action by written consent of the shareholders of Parent, it
will (a) attend any such meeting, in person or by proxy, (b) vote all voting
Equity Securities, whether now owned or hereafter acquired, of Shareholder in
favor of the Merger; (c) not vote any voting Equity Securities, whether now
owned or hereafter acquired, in favor of any action or agreement which would
result in a breach in any material respect of any material covenant,
representation or warranty or any other obligation of Parent under the Merger
Agreement; and (d) vote all voting Equity Securities, whether now owned or
hereafter acquired, of such Shareholder against any action or agreement the
primary or a substantial purpose of which would be to materially impede,
interfere with or attempt to discourage the Merger or the transactions and
events contemplated thereby, including, but not limited to: (i) except as
expressly contemplated by the Transaction Documents, any change in the
management or board of directors of Parent, except to fill vacancies (as
contemplated by the Merger Agreement) occurring after the date of this
Agreement or as otherwise agreed to in writing by Company; (ii) except as
expressly contemplated by the Transaction
II-2
Documents, any material change in the present capitalization or dividend policy
of Parent; or (iii) except as expressly contemplated by the Transaction
Documents, any other material change in Parent's corporate structure or
business; (e) not vote any voting Equity Securities, whether now owned or
hereafter acquired, in favor of any action or attempt to amend Parent's
articles of incorporation or bylaws to effect the removal of the Company
Director Nominees (or any replacement director nominated and elected by a
Company Director Nominee as contemplated by Section 1.4(b) of the Merger
Agreement) prior to the second annual meeting of Parent's shareholders
following the Effective Time; and (f) vote all voting Equity Securities,
whether now owned or hereafter acquired, against any action or attempt to amend
Parent's articles of incorporation or bylaws to effect the removal of the
Company Director Nominees (or any replacement director nominated and elected by
a Company Director Nominee as contemplated by Section 1.4(b) of the Merger
Agreement) prior to the second annual meeting of Parent's shareholders
following the Effective Time.
5. Further Assurances. Each party hereto will perform such further acts and
execute such further documents as may reasonably be required to carry out the
provisions of this Agreement.
6. Remedies. The parties agree that legal remedies for breach of this
Agreement will be inadequate and that this Agreement may be enforced by either
party by injunctive or other equitable relief.
7. Notices. All notices or other communications required or permitted
hereunder will be in writing (except as otherwise provided herein) and will be
deemed duly given if delivered in person, by confirmed facsimile transmission
or by overnight courier service, addressed as follows:
To Company:
Southern Mineral Corporation
1201 Louisiana, Suite 3350
Houston, TX 77002-4609
Facsimile No.: 713-658-9447
To Shareholder:
At the address set forth beneath the name of such Shareholder on
Schedule 1
8. Interpretation. When a reference is made in this Agreement to a Section,
such reference will be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and will not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they will be deemed to be followed by the words "without
limitation." The phrase "the date hereof" in this Agreement means the date of
this Agreement.
9. Counterparts. This Agreement may be executed in counterparts, all of
which will be considered one and the same agreement, and will become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
10. Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder, except that the
shareholders of Company immediately prior to the Effective Time are expressed
third-party beneficiaries of this Agreement.
11. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of Texas without regard to its rules of
conflict of laws.
12. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written
II-3
consent of the other parties. This Agreement will be binding upon, inure to the
benefit of, and be enforceable by, the parties and their respective successors
and permitted assigns, and any Person succeeding to the ownership of (or power
to vote) the Equity Securities.
13. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties will negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
14. Enforcement of this Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific wording or were otherwise
breached. It is accordingly agreed that the parties hereto will be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, such remedy being in addition to any
other remedy to which any party is entitled at law or in equity.
15. Binding Effect. This Agreement will survive the death or incapacity of
Shareholder and will inure to the benefit of and will be binding upon the
parties hereto and their respective heirs, legal representatives and
successors.
16. Term. The term of this Agreement will begin on the date hereof and end
on the termination of the Merger Agreement. If the Merger is consummated, the
provisions of this Agreement will survive the Effective Time, except as
provided in Section 17.
17. Non-Survival of Representations and Warranties. Except to the extent
expressly set forth in Sections 2 and 3, the parties have not made and
expressly negate and waive any representations or warranties (express, implied,
statutory or otherwise) with respect to this Agreement or the transactions
contemplated herein. The representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement will terminate upon the
earlier of (a) the termination of the Merger Agreement, and (b) the Effective
Time.
Remainder of this page intentionally left blank.
II-4
IN WITNESS WHEREOF, Shareholder and Company have entered into this Agreement
as of the date first written above.
SOUTHERN MINERAL CORPORATION
By: /s/ Gary R. Christopher
-----------------------------------
Name: Gary R. Christopher
Title: President and Chief Executive
Officer
KAISER-FRANCIS OIL COMPANY
By: /s/ George B. Kaiser
-----------------------------------
Name: George B. Kaiser
Title: President
II-5
SCHEDULE 1
Number of
Name and Address of Shareholder Shares
- ------------------------------- ---------
Kaiser-Francis Oil Company ........................................... 4,327,457
6733 South Yale
Tulsa, Oklahoma 74136
II-6
ANNEX III
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement") dated as of January 5, 2001,
between St. Paul Fire and Marine Insurance Company, a corporation
("Shareholder"), and Southern Mineral Corporation, a Nevada corporation
("Company").
RECITALS:
WHEREAS, Company, PetroCorp Incorporated, a Nevada corporation ("Parent"),
and PetroCorp Acquisition Company, a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), are entering into an Agreement and Plan of
Merger (the "Merger Agreement"; capitalized terms used but not defined herein
will have the meanings ascribed thereto in the Merger Agreement) on the date of
this Agreement pursuant to which Parent proposes to acquire the entire equity
interest in Company pursuant to the merger (the "Merger") of Company with and
into Merger Sub, on the terms and conditions set forth in the Merger Agreement.
WHEREAS, Shareholder owns the number of shares of Parent Common Stock (the
"Shares"), options to purchase shares of Parent Common Stock (the "Options")
and/or warrants to purchase shares of Parent Common Stock (the "Warrants" and,
collectively with the Shares and the Options, the "Equity Securities") listed
on Schedule 1.
WHEREAS, the Board of Directors of Parent has, prior to the execution of
this Agreement, approved and adopted the Merger Agreement;
WHEREAS, approval of the Merger Agreement by Parent's shareholders is a
condition to the consummation of the Merger; and
WHEREAS, as a condition to its entering into the Merger Agreement, Company
has required that Shareholder agree, and Shareholder has so agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in consideration of $1.00 and such other valuable
consideration the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Covenants of Shareholder and Company.
(a) During the term of this Agreement, except in accordance with the
express provisions of this Agreement, Shareholder agrees that it will not
sell, transfer, assign or otherwise dispose of, or enter into any contract,
option or other agreement with respect to the sale, transfer, assignment or
other disposition of, any Equity Securities, whether now owned or hereafter
acquired.
(b) During the term of this Agreement, Company agrees to fully and
timely perform, in all material respects, its obligations under the Merger
Agreement.
2. Representations and Warranties of Shareholder. Shareholder represents and
warrants to Company as follows:
(a) (i) Shareholder is the record or beneficial owner of the Equity
Securities listed on Schedule 1, (ii) such securities are the only Equity
Securities owned of record or beneficially by Shareholder free and clear of
all liens and defects, and (iii) Shareholder does not have any option or
other right to acquire any other Equity Securities;
III-1
(b) (i) Shareholder has the right, power and authority to execute and
deliver this Agreement and to perform its obligations hereunder; (ii) the
execution, delivery and performance of this Agreement by such Shareholder
does not require the consent of any other Person and does not constitute a
violation of, conflict with or result in a material default under (1) any
contract or agreement to which such Shareholder is a party or by which such
Shareholder is bound, (2) any judgment, decree or order applicable to such
Shareholder, or (3) to Shareholder's actual knowledge, any law, rule or
regulation of any governmental body applicable to such Shareholder, in the
case of clauses (1) through (3), except for violations, conflicts or
defaults which would not, or would not reasonably be expected to,
materially affect Shareholder's ability to perform its obligations under
this Agreement; and (iii) this Agreement constitutes a valid and binding
agreement on the part of such Shareholder, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity;
(c) Shareholder is an accredited investor (as defined in Rule 501(a)
under the Securities Act), and has had an opportunity to review all such
documents and obtain all such information as Shareholder deems necessary in
connection with the approval and execution of this Agreement.
3. Representations and Warranties of Company. Company hereby represents and
warrants to Shareholder that:
(a) Company is a corporation validly existing and in good standing under
the laws of the State of Nevada;
(b) Company has all requisite right, power and authority to execute and
deliver this Agreement and perform all its obligations hereunder;
(c) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on Company's part and do not
constitute a violation of, conflict with or result in a material default
under (i) any contract or agreement to which Company is a party or by which
Company is bound, (ii) any judgment, decree or order applicable to Company
or (iii) to Company's actual knowledge, any law, rule or regulation of any
governmental body applicable to Company, including, without limitation, any
securities laws exemptions, in the case of clauses (i) through (iii),
except for violations, conflicts or defaults which would not, or would not
reasonably be expected to, materially affect Company's ability to perform
its obligations under this Agreement;
(d) this Agreement has been duly executed and delivered by Company; and
(e) this Agreement constitutes a valid and binding agreement on
Company's part, enforceable against Company in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
4. Voting of Equity Securities. Shareholder hereby agrees that, during the
term of this Agreement, at any meeting of the shareholders of Parent, however
called, and in any action by written consent of the shareholders of Parent, it
will (a) attend any such meeting, in person or by proxy, (b) vote all voting
Equity Securities, whether now owned or hereafter acquired, of Shareholder in
favor of the Merger; (c) not vote any voting Equity Securities, whether now
owned or hereafter acquired, in favor of any action or agreement which would
result in a breach in any material respect of any material covenant,
representation or warranty or any other obligation of Parent under the Merger
Agreement; (d) vote all voting Equity Securities, whether now owned or
hereafter acquired, of such Shareholder against any action or agreement the
primary or a substantial purpose of which would be to materially impede,
interfere with or attempt to discourage the Merger or the transactions and
events contemplated thereby, including, but not limited to: (i) except as
expressly contemplated by the Transaction Documents, any change in the
management or board of directors of Parent, except to fill vacancies (as
contemplated by the Merger Agreement) occurring after the date of this
Agreement or as otherwise agreed to in writing by Company; (ii) except as
expressly contemplated by the Transaction Documents, any material
III-2
change in the present capitalization or dividend policy of Parent; or (iii)
except as expressly contemplated by the Transaction Documents, any other
material change in Parent's corporate structure or business; (e) not vote any
voting Equity Securities, whether now owned or hereafter acquired, in favor of
any action or attempt to amend Parent's articles of incorporation or bylaws to
effect the removal of the Company Director Nominees (or any replacement
director nominated and elected by a Company Director Nominee as contemplated by
Section 1.4(b) of the Merger Agreement) prior to the second annual meeting of
Parent's shareholders following the Effective Time; and (f) vote all voting
Equity Securities, whether now owned or hereafter acquired, against any action
or attempt to amend Parent's articles of incorporation or bylaws to effect the
removal of the Company Director Nominees (or any replacement director nominated
and elected by a Company Director Nominee as contemplated by Section 1.4(b) of
the Merger Agreement) prior to the second annual meeting of Parent's
shareholders following the Effective Time.
5. Company Director Nominees. Company agrees that the Company Director
Nominees that it selects to serve on the Board of Directors of Parent after the
Effective Time pursuant to Section 1.4(c) will not have served as executive
officers of the Company.
6. Further Assurances. Each party hereto will perform such further acts and
execute such further documents as may reasonably be required to carry out the
provisions of this Agreement.
7. Remedies. The parties agree that legal remedies for breach of this
Agreement will be inadequate and that this Agreement may be enforced by either
party by injunctive or other equitable relief.
8. Notices. All notices or other communications required or permitted
hereunder will be in writing (except as otherwise provided herein) and will be
deemed duly given if delivered in person, by confirmed facsimile transmission
or by overnight courier service, addressed as follows:
To Company:
Southern Mineral Corporation
1201 Louisiana, Suite 3350
Houston, TX 77002-4609
Facsimile No.: 713-658-9447
To Shareholder:
At the address set forth beneath the name of such Shareholder on
Schedule 1
9. Interpretation. When a reference is made in this Agreement to a Section,
such reference will be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and will not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they will be deemed to be followed by the words "without
limitation." The phrase "the date hereof" in this Agreement means the date of
this Agreement.
10. Counterparts. This Agreement may be executed in counterparts, all of
which will be considered one and the same agreement, and will become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
11. Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder, except that the
shareholders of Company immediately prior to the Effective Time are expressed
third-party beneficiaries of this Agreement.
12. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of Texas without regard to its rules of
conflict of laws.
III-3
13. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. This Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and permitted
assigns, and any Person succeeding to the ownership of (or power to vote) the
Equity Securities.
14. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties will negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
15. Enforcement of this Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific wording or were otherwise
breached. It is accordingly agreed that the parties hereto will be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, such remedy being in addition to any
other remedy to which any party is entitled at law or in equity.
16. Binding Effect. This Agreement will survive the death or incapacity of
Shareholder and will inure to the benefit of and will be binding upon the
parties hereto and their respective heirs, legal representatives and
successors.
17. Term. The term of this Agreement will begin on the date hereof and end
on the termination of the Merger Agreement. If the Merger is consummated, the
provisions of this Agreement will survive the Effective Time, except as
provided in Section 18.
18. Non-Survival of Representations and Warranties. Except to the extent
expressly set forth in Sections 2 and 3, the parties have not made and
expressly negate and waive any representations or warranties (express, implied,
statutory or otherwise) with respect to this Agreement or the transactions
contemplated herein. The representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement will terminate upon the
earlier of (a) the termination of the Merger Agreement, and (b) the Effective
Time.
Remainder of this page intentionally left blank.
III-4
IN WITNESS WHEREOF, Shareholder and Company have entered into this Agreement
as of the date first written above.
SOUTHERN MINERAL CORPORATION
By: /s/ Steven H. Mikel
-----------------------------------
Name: Steven H. Mikel
Title: President
ST. PAUL FIRE AND MARINE INSURANCE
COMPANY
By: /s/ James C. Adams
-----------------------------------
Name: James C. Adams
Title: Vice President
III-5
SCHEDULE 1
Number of
Name and Address of Shareholder Shares
- ------------------------------- ---------
St. Paul Fire and Marine Insurance Company............................ 1,738,000
385 Washington Street
St. Paul, Minnesota 55102
III-6
ANNEX IV
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement") dated as of December 22, 2000,
among PetroCorp Incorporated, a Texas corporation ("Parent"); and Donald H.
Wiese, Jr. and DHW Energy, Inc. (collectively, the "Shareholders" and
individually, a "Shareholder").
RECITALS:
WHEREAS, Southern Mineral Corporation, a Nevada corporation ("Company"),
Parent and PetroCorp Acquisition Company, a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), are entering into an Agreement and
Plan of Merger (the "Merger Agreement"; capitalized terms used but not defined
herein will have the meanings ascribed thereto in the Merger Agreement) on the
date of this Agreement pursuant to which Parent proposes to acquire the entire
equity interest in Company pursuant to the merger (the "Merger") of Company
with and into Merger Sub, on the terms and conditions set forth in the Merger
Agreement;
WHEREAS, Shareholders own the number of shares of Company Common Stock (the
"Shares"), options to purchase shares of Company Common Stock (the "Options")
and/or warrants to purchase shares of Company Common Stock (the "Warrants" and,
collectively with the Shares and the Options, the "Equity Securities") listed
opposite their names on Schedule 1;
WHEREAS, the Board of Directors of Company has, prior to the execution of
this Agreement, approved and adopted the Merger Agreement;
WHEREAS, approval of the Merger Agreement by Company's shareholders is a
condition to the consummation of the Merger; and
WHEREAS, as a condition to its entering into the Merger Agreement, Parent
has required that each of the Shareholders agree, and each of the Shareholders
have so agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in consideration of $1.00 and such other valuable
consideration the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Covenants of Shareholders and Parent.
(a) During the term of this Agreement, except in accordance with the
express provisions of this Agreement, each Shareholder agrees that it
will not sell, transfer, assign or otherwise dispose of, or enter into
any contract, option or other agreement with respect to the sale,
transfer, assignment or other disposition of, any Equity Securities.
(b) During the term of this Agreement, Parent agrees to fully and
timely perform, in all material respects, its obligations under the
Merger Agreement.
2. Representations and Warranties of Shareholders. Each Shareholder
represents and warrants to Parent as follows:
(a) (i) Such Shareholder is the record or beneficial owner of the
Equity Securities listed opposite its name on Schedule 1, (ii) such
securities are the only Equity Securities owned of record or
beneficially by such Shareholder free and clear of all liens and
defects, and (iii) such Shareholder does not have any option or other
right to acquire any other Equity Securities;
IV-1
(b) (i) Such Shareholder has the right, power and authority to
execute and deliver this Agreement and to perform its obligations
hereunder; (ii) the execution, delivery and performance of this
Agreement by such Shareholder does not require the consent of any other
Person and does not constitute a violation of, conflict with or result
in a material default under (1) any contract or agreement to which such
Shareholder is a party or by which such Shareholder is bound, (2) any
judgment, decree or order applicable to such Shareholder, or (3) to
such Shareholder's actual knowledge, any law, rule or regulation of any
governmental body applicable to such Shareholder, in the case of
clauses (1) through (3), except for violations, conflicts or defaults
which would not, or would not reasonably be expected to, materially
affect such Shareholder's ability to perform its obligations under this
Agreement; and (iii) this Agreement constitutes a valid and binding
agreement on the part of such Shareholder, enforceable against it in
accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity;
(c) Such Shareholder is an accredited investor (as defined in Rule
501(a) under the Securities Act), and has had an opportunity to review
all such documents and obtain all such information as such Shareholder
deems necessary in connection with the approval and execution of this
Agreement.
3. Representations and Warranties of Parent. Parent hereby represents
and warrants to Shareholder that:
(a) Parent is a corporation validly existing and in good standing
under the laws of the State of Texas;
(b) Parent has all requisite right, power and authority to execute
and deliver this Agreement and perform all its obligations hereunder;
(c) the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on Parent's part and do
not constitute a violation of, conflict with or result in a material
default under (i) any contract or agreement to which Parent is a party
or by which Parent is bound, (ii) any judgment, decree or order
applicable to Parent or (iii) to Parent's actual knowledge, any law,
rule or regulation of any governmental body applicable to Parent,
including, without limitation, any securities laws exemptions, in the
case of clauses (i) through (iii), except for violations, conflicts or
defaults which would not, or would not reasonably be expected to,
materially affect Parent's ability to perform its obligations under
this Agreement;
(d) this Agreement has been duly executed and delivered by Parent;
and
(e) this Agreement constitutes a valid and binding agreement on
Parent's part, enforceable against Parent in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of
equity.
4. Voting of Equity Securities. Each Shareholder hereby agrees that,
during the term of this Agreement, at any meeting of the shareholders of
Company, however called, and in any action by written consent of the
shareholders of Company, it will (a) attend any such meeting, in person or
by proxy, (b) vote all voting Equity Securities, whether now owned or
hereafter acquired, of such Shareholder in favor of the Merger; (c) not
vote any voting Equity Securities, whether now owned or hereafter acquired,
in favor of any action or agreement which would result in a breach in any
material respect of any material covenant, representation or warranty or
any other obligation of Company under the Merger Agreement; and (d) vote
all voting Equity Securities, whether now owned or hereafter acquired, of
such Shareholder against any action or agreement the primary or a
substantial purpose of which would be to materially impede, interfere with
or attempt to discourage the Merger, including, but not limited to: (i) any
change in
IV-2
the management or board of directors of Company, except to fill vacancies
occurring after the date of this Agreement or as otherwise agreed to in
writing by Parent; (ii) except as expressly contemplated by the Transaction
Documents, any material change in the present capitalization or dividend
policy of Company; or (iii) except as expressly contemplated by the
Transaction Documents, any other material change in Company's corporate
structure or business.
5. Registration Rights. Parent will use reasonable efforts to prepare
and file a shelf registration statement (the "Registration Statement")
pursuant to Rule 415 under the Securities Act to permit the sale or other
disposition of any or all shares of Parent Common Stock received by each
Shareholder in the Merger, in accordance with the intended method of sale
or other disposition elected by such Shareholder, and Parent will use its
best efforts to qualify such shares of Parent Common Stock under any
applicable state securities laws. Parent will use all reasonable efforts
(i) to cause the Registration Statement to become effective on or before
the Effective Time, (ii) to obtain all consents or waivers of other parties
which are required therefor, and (iii) to keep the Registration Statement
continuously effective in order to permit the prospectus forming part
thereof to be usable by such Shareholder for a period ending two years from
the Effective Time, or for such shorter period that will terminate when all
shares of Parent Common Stock covered by the Registration Statement have
been sold pursuant to the Registration Statement or otherwise cease to be
outstanding. The offer and sale under the Registration Statement or the
obligation of Parent to file the Registration Statement and to maintain its
effectiveness may be suspended for one or more periods of time not
exceeding 90 calendar days in the aggregate with respect to such
Registration Statement if the Board of Directors of Parent will have
determined in good faith that the offering and sales under the Registration
Statement, the filing of such Registration Statement or the maintenance of
its effectiveness would require disclosure of or would interfere in any
material respect with any material financing, acquisition, merger or other
transaction involving Parent or any of its Subsidiaries or would otherwise
require disclosure of nonpublic information that would materially and
adversely affect Parent. The Registration Statement prepared and filed
under this Section, and any sale covered thereby, will be at Parent's
expense except for underwriting discounts or commissions, brokers' fees and
the fees and disbursements of each Shareholder's counsel related thereto.
Each Shareholder will provide all information reasonably requested by
Parent for inclusion in the Registration Statement to be filed hereunder.
In connection with the registration pursuant to this Section, each
Shareholder and Parent will provide each other and any underwriter of the
offering with customary representations, warranties, covenants, and rights
to indemnification and contribution.
6. Stock Elections. Each Shareholder agrees that unless it has
effectively made a Stock Election pursuant to Section 1.6 of the Merger
Agreement prior to the filing with the Commission by Company and Parent of
the Joint Proxy Statement/Prospectus, it will be deemed to have failed to
make, and will not be eligible to make, a Stock Election with respect to
the Shares or shares of Company Common Stock issuable upon the exercise of
the Options and Warrants under the Merger Agreement.
7. Additional Agreements. If a Shareholder makes a Stock Election and,
as a result of the application of Section 1.5(e) of the Merger Agreement, a
portion of such Shareholder's Stock Election Shares (the "Converted Stock
Election Shares") are converted into the right to receive the Cash
Consideration in the Merger, then immediately after the Effective Time,
such Shareholder agrees to buy, and Parent agrees to issue and deliver to
such Shareholder, the number for shares of PetroCorp Common Stock which is
equal to (a) the Cash Consideration which is payable pursuant to the Merger
with respect to the Converted Stock Election Shares, divided by (b) the Per
Share Merger Consideration.
8. Further Assurances. Each party hereto will perform such further acts
and execute such further documents as may reasonably be required to carry
out the provisions of this Agreement.
9. Remedies. The parties agree that legal remedies for breach of this
Agreement will be inadequate and that this Agreement may be enforced by
either party by injunctive or other equitable relief.
IV-3
10. Notices. All notices or other communications required or permitted
hereunder will be in writing (except as otherwise provided herein) and will
be deemed duly given if delivered in person, by confirmed facsimile
transmission or by overnight courier service, addressed as follows:
To Parent:
PetroCorp Incorporated
6733 South Yale Avenue
Tulsa, OK 74136
Facsimile No.: (918) 491-4584
With a copy (which will not constitute notice) to:
Frederic Dorwart
One City Hall
124 East Fourth Street
Tulsa, Oklahoma 74103-5010
Facsimile No.: (918) 583-8251
To the Shareholders:
At the address set forth beneath the name of such Shareholder on
Schedule 1
11. Interpretation. When a reference is made in this Agreement to a
Section, such reference will be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes"
or "including" are used in this Agreement, they will be deemed to be
followed by the words "without limitation." The phrase "the date hereof" in
this Agreement means the date of this Agreement.
12. Counterparts. This Agreement may be executed in counterparts, all of
which will be considered one and the same agreement, and will become
effective when one or more counterparts have been signed by each of the
parties and delivered to the other parties.
13. Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof. This Agreement is not intended to confer upon
any Person other than the parties hereto any rights or remedies hereunder.
14. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of Texas without regard to its rules
of conflict of laws.
15. Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder will be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior written
consent of the other parties. This Agreement will be binding upon, inure to
the benefit of, and be enforceable by, the parties and their respective
successors and permitted assigns, and any Person succeeding to the
ownership of (or power to vote) the Equity Securities.
16. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other terms, conditions and provisions of this Agreement
will nevertheless remain in full force and effect so long as the economic
and legal substance of the transactions contemplated hereby are not
affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties will negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
IV-4
17. Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific wording
or were otherwise breached. It is accordingly agreed that the parties
hereto will be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction,
such remedy being in addition to any other remedy to which any party is
entitled at law or in equity.
18. Binding Effect. This Agreement will survive the death or incapacity
of any of the Shareholders and will inure to the benefit of and will be
binding upon the parties hereto and their respective heirs, legal
representatives and successors.
19. Term. The term of this Agreement will begin on the date hereof and
end on the termination of the Merger Agreement. If the Merger is
consummated, the provisions of this Agreement will survive the Effective
Time, except as provided in Section 20.
20. Non-Survival of Representations and Warranties. Except to the extent
expressly set forth in Sections 2 and 3, the parties have not made and
expressly negate and waive any representations or warranties (express,
implied, statutory or otherwise) with respect to this Agreement or the
transactions contemplated herein. The representations and warranties in
this Agreement or in any instrument delivered pursuant to this Agreement
will terminate upon the earlier of (a) the termination of the Merger
Agreement, and (b) the Effective Time.
Remainder of this page intentionally left blank.
IV-5
IN WITNESS WHEREOF, Shareholder and Parent have entered into this Agreement
as of the date first written above.
Petrocorp Incorporated
/s/ Gary R. Christopher
By: _________________________________
Gary R. Christopher
Name: _______________________________
President and Chief Executive
Officer
Title: ______________________________
DHW Energy, Inc.
/s/ Donald H. Wiese, Jr.
By: _________________________________
Donald H. Wiese, Jr.
Name: _______________________________
President
Title: ______________________________
/s/ Donald H. Wiese, Jr.
By: _________________________________
Donald H. Wiese, Jr.
Name: _______________________________
IV-6
SCHEDULE 1
Name and Address of Number of
Shareholder Shares
------------------- ---------
DHW Energy, Inc................................................ 73,897
1111 Fannin, Suite 680
Houston, Texas 77002
Donald H. Wiese, Jr. .......................................... 28,444
1111 Fannin, Suite 680
Houston, Texas 77002
IV-7
ANNEX V
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement") dated as of December 22, 2000,
among PetroCorp Incorporated, a Texas corporation ("Parent"); and Thomas R.
Fuller; and Michmatt, Inc. (collectively, the "Shareholders" and individually,
a "Shareholder").
RECITALS:
WHEREAS, Southern Mineral Corporation, a Nevada corporation ("Company"),
Parent and PetroCorp Acquisition Company, a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), are entering into an Agreement and
Plan of Merger (the "Merger Agreement"; capitalized terms used but not defined
herein will have the meanings ascribed thereto in the Merger Agreement) on the
date of this Agreement pursuant to which Parent proposes to acquire the entire
equity interest in Company pursuant to the merger (the "Merger") of Company
with and into Merger Sub, on the terms and conditions set forth in the Merger
Agreement;
WHEREAS, Shareholders own the number of shares of Company Common Stock (the
"Shares"), options to purchase shares of Company Common Stock (the "Options")
and/or warrants to purchase shares of Company Common Stock (the "Warrants" and,
collectively with the Shares and the Options, the "Equity Securities") listed
opposite their names on Schedule 1;
WHEREAS, the Board of Directors of Company has, prior to the execution of
this Agreement, approved and adopted the Merger Agreement;
WHEREAS, approval of the Merger Agreement by Company's shareholders is a
condition to the consummation of the Merger; and
WHEREAS, as a condition to its entering into the Merger Agreement, Parent
has required that each of the Shareholders agree, and each of the Shareholders
have so agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in consideration of $1.00 and such other valuable
consideration the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Covenants of Shareholders and Parent.
(a) During the term of this Agreement, except in accordance with the
express provisions of this Agreement, each Shareholder agrees that it will
not sell, transfer, assign or otherwise dispose of, or enter into any
contract, option or other agreement with respect to the sale, transfer,
assignment or other disposition of, any Equity Securities.
(b) During the term of this Agreement, Parent agrees to fully and timely
perform, in all material respects, its obligations under the Merger
Agreement.
2. Representations and Warranties of Shareholders. Each Shareholder
represents and warrants to Parent as follows:
(a) (i) Such Shareholder is the record or beneficial owner of the Equity
Securities listed opposite its name on Schedule 1, (ii) such securities are
the only Equity Securities owned of record or beneficially by such
Shareholder free and clear of all liens and defects, and (iii) such
Shareholder does not have any option or other right to acquire any other
Equity Securities;
(b) (i) Such Shareholder has the right, power and authority to execute
and deliver this Agreement and to perform its obligations hereunder; (ii)
the execution, delivery and performance of this Agreement by such
Shareholder does not require the consent of any other Person and does not
constitute a violation of,
V-1
conflict with or result in a material default under (1) any contract or
agreement to which such Shareholder is a party or by which such Shareholder
is bound, (2) any judgment, decree or order applicable to such Shareholder,
or (3) to such Shareholder's actual knowledge, any law, rule or regulation
of any governmental body applicable to such Shareholder, in the case of
clauses (1) through (3), except for violations, conflicts or defaults which
would not, or would not reasonably be expected to, materially affect such
Shareholder's ability to perform its obligations under this Agreement; and
(iii) this Agreement constitutes a valid and binding agreement on the part
of such Shareholder, enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity;
(c) Such Shareholder is an accredited investor (as defined in Rule
501(a) under the Securities Act), and has had an opportunity to review all
such documents and obtain all such information as such Shareholder deems
necessary in connection with the approval and execution of this Agreement.
3. Representations and Warranties of Parent. Parent hereby represents and
warrants to Shareholder that:
(a) Parent is a corporation validly existing and in good standing under
the laws of the State of Texas;
(b) Parent has all requisite right, power and authority to execute and
deliver this Agreement and perform all its obligations hereunder;
(c) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on Parent's part and do not
constitute a violation of, conflict with or result in a material default
under (i) any contract or agreement to which Parent is a party or by which
Parent is bound, (ii) any judgment, decree or order applicable to Parent or
(iii) to Parent's actual knowledge, any law, rule or regulation of any
governmental body applicable to Parent, including, without limitation, any
securities laws exemptions, in the case of clauses (i) through (iii),
except for violations, conflicts or defaults which would not, or would not
reasonably be expected to, materially affect Parent's ability to perform
its obligations under this Agreement;
(d) this Agreement has been duly executed and delivered by Parent; and
(e) this Agreement constitutes a valid and binding agreement on Parent's
part, enforceable against Parent in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
4. Voting of Equity Securities. Each Shareholder hereby agrees that, during
the term of this Agreement, at any meeting of the shareholders of Company,
however called, and in any action by written consent of the shareholders of
Company, it will (a) attend any such meeting, in person or by proxy, (b) vote
all voting Equity Securities, whether now owned or hereafter acquired, of such
Shareholder in favor of the Merger; (c) not vote any voting Equity Securities,
whether now owned or hereafter acquired, in favor of any action or agreement
which would result in a breach in any material respect of any material
covenant, representation or warranty or any other obligation of Company under
the Merger Agreement; and (d) vote all voting Equity Securities, whether now
owned or hereafter acquired, of such Shareholder against any action or
agreement the primary or a substantial purpose of which would be to materially
impede, interfere with or attempt to discourage the Merger, including, but not
limited to: (i) any change in the management or board of directors of Company,
except to fill vacancies occurring after the date of this Agreement or as
otherwise agreed to in writing by Parent; (ii) except as expressly
contemplated by the Transaction Documents, any material change in the present
capitalization or dividend policy of Company; or (iii) except as expressly
contemplated by the Transaction Documents, any other material change in
Company's corporate structure or business.
5. Registration Rights. Parent will use reasonable efforts to prepare and
file a shelf registration statement (the "Registration Statement") pursuant to
Rule 415 under the Securities Act to permit the sale or other disposition of
any or all shares of Parent Common Stock received by each Shareholder in the
Merger, in
V-2
accordance with the intended method of sale or other disposition elected by
such Shareholder, and Parent will use its best efforts to qualify such shares
of Parent Common Stock under any applicable state securities laws. Parent will
use all reasonable efforts (i) to cause the Registration Statement to become
effective on or before the Effective Time, (ii) to obtain all consents or
waivers of other parties which are required therefor, and (iii) to keep the
Registration Statement continuously effective in order to permit the prospectus
forming part thereof to be usable by such Shareholder for a period ending two
years from the Effective Time, or for such shorter period that will terminate
when all shares of Parent Common Stock covered by the Registration Statement
have been sold pursuant to the Registration Statement or otherwise cease to be
outstanding. The offer and sale under the Registration Statement or the
obligation of Parent to file the Registration Statement and to maintain its
effectiveness may be suspended for one or more periods of time not exceeding 90
calendar days in the aggregate with respect to such Registration Statement if
the Board of Directors of Parent will have determined in good faith that the
offering and sales under the Registration Statement, the filing of such
Registration Statement or the maintenance of its effectiveness would require
disclosure of or would interfere in any material respect with any material
financing, acquisition, merger or other transaction involving Parent or any of
its Subsidiaries or would otherwise require disclosure of nonpublic information
that would materially and adversely affect Parent. The Registration Statement
prepared and filed under this Section, and any sale covered thereby, will be at
Parent's expense except for underwriting discounts or commissions, brokers'
fees and the fees and disbursements of each Shareholder's counsel related
thereto. Each Shareholder will provide all information reasonably requested by
Parent for inclusion in the Registration Statement to be filed hereunder. In
connection with the registration pursuant to this Section, each Shareholder and
Parent will provide each other and any underwriter of the offering with
customary representations, warranties, covenants, and rights to indemnification
and contribution.
6. Stock Elections. Each Shareholder agrees that unless it has effectively
made a Stock Election pursuant to Section 1.6 of the Merger Agreement prior to
the filing with the Commission by Company and Parent of the Joint Proxy
Statement/Prospectus, it will be deemed to have failed to make, and will not be
eligible to make, a Stock Election with respect to the Shares or shares of
Company Common Stock issuable upon the exercise of the Options and Warrants
under the Merger Agreement.
7. Additional Agreements. If a Shareholder makes a Stock Election and, as a
result of the application of Section 1.5(e) of the Merger Agreement, a portion
of such Shareholder's Stock Election Shares (the "Converted Stock Election
Shares") are converted into the right to receive the Cash Consideration in the
Merger, then immediately after the Effective Time, such Shareholder agrees to
buy, and Parent agrees to issue and deliver to such Shareholder, the number for
shares of PetroCorp Common Stock which is equal to (a) the Cash Consideration
which is payable pursuant to the Merger with respect to the Converted Stock
Election Shares, divided by (b) the Per Share Merger Consideration.
8. Further Assurances. Each party hereto will perform such further acts and
execute such further documents as may reasonably be required to carry out the
provisions of this Agreement.
9. Remedies. The parties agree that legal remedies for breach of this
Agreement will be inadequate and that this Agreement may be enforced by either
party by injunctive or other equitable relief.
10. Notices. All notices or other communications required or permitted
hereunder will be in writing (except as otherwise provided herein) and will be
deemed duly given if delivered in person, by confirmed facsimile transmission
or by overnight courier service, addressed as follows:
To Parent:
PetroCorp Incorporated
6733 South Yale Avenue
Tulsa, OK 74136
Facsimile No.: (918) 491-4584
V-3
With a copy (which will not constitute notice) to:
Frederic Dorwart
One City Hall
124 East Fourth Street
Tulsa, Oklahoma 74103-5010
Facsimile No.: (918) 583-8251
To the Shareholders:
At the address set forth beneath the name of such Shareholder on
Schedule 1
11. Interpretation. When a reference is made in this Agreement to a Section,
such reference will be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and will not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they will be deemed to be followed by the words "without
limitation." The phrase "the date hereof" in this Agreement means the date of
this Agreement.
12. Counterparts. This Agreement may be executed in counterparts, all of
which will be considered one and the same agreement, and will become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
13. Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder.
14. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of Texas without regard to its rules of
conflict of laws.
15. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. This Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and permitted
assigns, and any Person succeeding to the ownership of (or power to vote) the
Equity Securities.
16. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties will negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
17. Enforcement of this Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific wording or were otherwise
breached. It is accordingly agreed that the parties hereto will be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, such remedy being in addition to any
other remedy to which any party is entitled at law or in equity.
18. Binding Effect. This Agreement will survive the death or incapacity of
any of the Shareholders and will inure to the benefit of and will be binding
upon the parties hereto and their respective heirs, legal representatives and
successors.
V-4
19. Term. The term of this Agreement will begin on the date hereof and end
on the termination of the Merger Agreement. If the Merger is consummated, the
provisions of this Agreement will survive the Effective Time, except as
provided in Section 20.
20. Non-Survival of Representations and Warranties. Except to the extent
expressly set forth in Sections 2 and 3, the parties have not made and
expressly negate and waive any representations or warranties (express, implied,
statutory or otherwise) with respect to this Agreement or the transactions
contemplated herein. The representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement will terminate upon the
earlier of (a) the termination of the Merger Agreement, and (b) the Effective
Time.
Remainder of this page intentionally left blank.
V-5
IN WITNESS WHEREOF, Shareholder and Parent have entered into this Agreement
as of the date first written above.
PETROCORP INCORPORATED
By: /s/ Gary R. Christopher
-----------------------------------
Name: Gary R. Christopher
Title: President and Chief Executive
Officer
MICHMATT, INC.
By: /s/ Thomas R. Fuller
-----------------------------------
Name: Thomas R. Fuller
Title: President
By: /s/ Thomas R. Fuller
-----------------------------------
Name: Thomas R. Fuller
V-6
SCHEDULE 1
Number of
Name and Address of Shareholder Shares
- ------------------------------- ---------
Michmatt, Inc......................................................... 75,397
1111 Fannin, Suite 680
Houston, Texas 77002
Thomas R. Fuller...................................................... 29,464
1111 Fannin, Suite 680
Houston, Texas 77002
V-7
ANNEX VI
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement") dated as of December 22, 2000,
among PetroCorp Incorporated, a Texas corporation ("Parent"); and CoMac
Partners, L.P., a Delaware limited partnership; CoMac Endowment Fund, L.P., a
Delaware limited partnership; CoMac International N.V., a Netherlands Antilles
corporation; CoMac Opportunities Fund, L.P., a Delaware limited partnership;
and Carol Ann Coughlin (collectively, the "Shareholders" and individually, a
"Shareholder").
RECITALS:
WHEREAS, Southern Mineral Corporation, a Nevada corporation ("Company"),
Parent and PetroCorp Acquisition Company, a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), are entering into an Agreement and
Plan of Merger (the "Merger Agreement"; capitalized terms used but not defined
herein will have the meanings ascribed thereto in the Merger Agreement) on the
date of this Agreement pursuant to which Parent proposes to acquire the entire
equity interest in Company pursuant to the merger (the "Merger") of Company
with and into Merger Sub, on the terms and conditions set forth in the Merger
Agreement;
WHEREAS, Shareholders own the number of shares of Company Common Stock (the
"Shares"), options to purchase shares of Company Common Stock (the "Options")
and/or warrants to purchase shares of Company Common Stock (the "Warrants" and,
collectively with the Shares and the Options, the "Equity Securities") listed
opposite their names on Schedule 1;
WHEREAS, the Board of Directors of Company has, prior to the execution of
this Agreement, approved and adopted the Merger Agreement;
WHEREAS, approval of the Merger Agreement by Company's shareholders is a
condition to the consummation of the Merger; and
WHEREAS, as a condition to its entering into the Merger Agreement, Parent
has required that each of the Shareholders agree, and each of the Shareholders
have so agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in consideration of $1.00 and such other valuable
consideration the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Covenants of Shareholders and Parent.
(a) During the term of this Agreement, except in accordance with the
express provisions of this Agreement, each Shareholder agrees that it will
not sell, transfer, assign or otherwise dispose of, or enter into any
contract, option or other agreement with respect to the sale, transfer,
assignment or other disposition of, any Equity Securities.
(b) During the term of this Agreement, Parent agrees to fully and timely
perform, in all material respects, its obligations under the Merger
Agreement.
2. Representations and Warranties of Shareholders. Each Shareholder
represents and warrants to Parent as follows:
(a) (i) Such Shareholder is the record or beneficial owner of the Equity
Securities listed opposite its name on Schedule 1, (ii) such securities are
the only Equity Securities owned of record or beneficially by such
Shareholder free and clear of all liens and defects, and (iii) such
Shareholder does not have any option or other right to acquire any other
Equity Securities;
VI-1
(b) (i) Such Shareholder has the right, power and authority to execute
and deliver this Agreement and to perform its obligations hereunder; (ii)
the execution, delivery and performance of this Agreement by such
Shareholder does not require the consent of any other Person and does not
constitute a violation of, conflict with or result in a material default
under (1) any contract or agreement to which such Shareholder is a party or
by which such Shareholder is bound, (2) any judgment, decree or order
applicable to such Shareholder, or (3) to such Shareholder's actual
knowledge, any law, rule or regulation of any governmental body applicable
to such Shareholder, in the case of clauses (1) through (3), except for
violations, conflicts or defaults which would not, or would not reasonably
be expected to, materially affect such Shareholder's ability to perform its
obligations under this Agreement; and (iii) this Agreement constitutes a
valid and binding agreement on the part of such Shareholder, enforceable
against it in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights
and general principles of equity;
(c) Such Shareholder is an accredited investor (as defined in Rule
501(a) under the Securities Act), and has had an opportunity to review all
such documents and obtain all such information as such Shareholder deems
necessary in connection with the approval and execution of this Agreement.
3. Representations and Warranties of Parent. Parent hereby represents and
warrants to Shareholder that:
(a) Parent is a corporation validly existing and in good standing under
the laws of the State of Texas;
(b) Parent has all requisite right, power and authority to execute and
deliver this Agreement and perform all its obligations hereunder;
(c) the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on Parent's part and do not
constitute a violation of, conflict with or result in a material default
under (i) any contract or agreement to which Parent is a party or by which
Parent is bound, (ii) any judgment, decree or order applicable to Parent or
(iii) to Parent's actual knowledge, any law, rule or regulation of any
governmental body applicable to Parent, including, without limitation, any
securities laws exemptions, in the case of clauses (i) through (iii),
except for violations, conflicts or defaults which would not, or would not
reasonably be expected to, materially affect Parent's ability to perform
its obligations under this Agreement;
(d) this Agreement has been duly executed and delivered by Parent; and
(e) this Agreement constitutes a valid and binding agreement on Parent's
part, enforceable against Parent in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
4. Voting of Equity Securities. Each Shareholder hereby agrees that, during
the term of this Agreement, at any meeting of the shareholders of Company,
however called, and in any action by written consent of the shareholders of
Company, it will (a) attend any such meeting, in person or by proxy, (b) vote
all voting Equity Securities, whether now owned or hereafter acquired, of such
Shareholder in favor of the Merger; (c) not vote any voting Equity Securities,
whether now owned or hereafter acquired, in favor of any action or agreement
which would result in a breach in any material respect of any material
covenant, representation or warranty or any other obligation of Company under
the Merger Agreement; and (d) vote all voting Equity Securities, whether now
owned or hereafter acquired, of such Shareholder against any action or
agreement the primary or a substantial purpose of which would be to materially
impede, interfere with or attempt to discourage the Merger, including, but not
limited to: (i) any change in the management or board of directors of Company,
except to fill vacancies occurring after the date of this Agreement or as
otherwise agreed to in writing by Parent; (ii) except as expressly
contemplated by the Transaction Documents, any material change in the present
capitalization or dividend policy of Company; or (iii) except as expressly
contemplated by the Transaction Documents, any other material change in
Company's corporate structure or business.
VI-2
5. Registration Rights. Parent will use reasonable efforts to prepare and
file a shelf registration statement (the "Registration Statement") pursuant to
Rule 415 under the Securities Act to permit the sale or other disposition of
any or all shares of Parent Common Stock received by each Shareholder in the
Merger, in accordance with the intended method of sale or other disposition
elected by such Shareholder, and Parent will use its best efforts to qualify
such shares of Parent Common Stock under any applicable state securities laws.
Parent will use all reasonable efforts (i) to cause the Registration Statement
to become effective on or before the Effective Time, (ii) to obtain all
consents or waivers of other parties which are required therefor, and (iii) to
keep the Registration Statement continuously effective in order to permit the
prospectus forming part thereof to be usable by such Shareholder for a period
ending two years from the Effective Time, or for such shorter period that will
terminate when all shares of Parent Common Stock covered by the Registration
Statement have been sold pursuant to the Registration Statement or otherwise
cease to be outstanding. The offer and sale under the Registration Statement or
the obligation of Parent to file the Registration Statement and to maintain its
effectiveness may be suspended for one or more periods of time not exceeding 90
calendar days in the aggregate with respect to such Registration Statement if
the Board of Directors of Parent will have determined in good faith that the
offering and sales under the Registration Statement, the filing of such
Registration Statement or the maintenance of its effectiveness would require
disclosure of or would interfere in any material respect with any material
financing, acquisition, merger or other transaction involving Parent or any of
its Subsidiaries or would otherwise require disclosure of nonpublic information
that would materially and adversely affect Parent. The Registration Statement
prepared and filed under this Section, and any sale covered thereby, will be at
Parent's expense except for underwriting discounts or commissions, brokers'
fees and the fees and disbursements of each Shareholder's counsel related
thereto. Each Shareholder will provide all information reasonably requested by
Parent for inclusion in the Registration Statement to be filed hereunder. In
connection with the registration pursuant to this Section, each Shareholder and
Parent will provide each other and any underwriter of the offering with
customary representations, warranties, covenants, and rights to indemnification
and contribution.
6. Stock Elections. Each Shareholder agrees that unless it has effectively
made a Stock Election pursuant to Section 1.6 of the Merger Agreement prior to
the filing with the Commission by Company and Parent of the Joint Proxy
Statement/Prospectus, it will be deemed to have failed to make, and will not be
eligible to make, a Stock Election with respect to the Shares or shares of
Company Common Stock issuable upon the exercise of the Options and Warrants
under the Merger Agreement.
7. Further Assurances. Each party hereto will perform such further acts and
execute such further documents as may reasonably be required to carry out the
provisions of this Agreement.
8. Remedies. The parties agree that legal remedies for breach of this
Agreement will be inadequate and that this Agreement may be enforced by either
party by injunctive or other equitable relief.
9. Notices. All notices or other communications required or permitted
hereunder will be in writing (except as otherwise provided herein) and will be
deemed duly given if delivered in person, by confirmed facsimile transmission
or by overnight courier service, addressed as follows:
To Parent:
PetroCorp Incorporated
6733 South Yale Avenue
Tulsa, OK 74136
Facsimile No.: (918) 491-4584
With a copy (which will not constitute notice) to:
Frederic Dorwart
One City Hall
124 East Fourth Street
Tulsa, Oklahoma 74103-5010
Facsimile No.: (918) 583-8251
VI-3
To the Shareholders:
At the address set forth beneath the name of such Shareholder on
Schedule 1
10. Interpretation. When a reference is made in this Agreement to a Section,
such reference will be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and will not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they will be deemed to be followed by the words "without
limitation." The phrase "the date hereof" in this Agreement means the date of
this Agreement.
11. Counterparts. This Agreement may be executed in counterparts, all of
which will be considered one and the same agreement, and will become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
12. Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. This Agreement is not intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder.
13. Governing Law. This Agreement will be governed by and construed in
accordance with the law of the State of Texas without regard to its rules of
conflict of laws.
14. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. This Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and permitted
assigns, and any Person succeeding to the ownership of (or power to vote) the
Equity Securities.
15. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties will negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
16. Enforcement of this Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific wording or were otherwise
breached. It is accordingly agreed that the parties hereto will be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, such remedy being in addition to any
other remedy to which any party is entitled at law or in equity.
17. Binding Effect. This Agreement will survive the death or incapacity of
any of the Shareholders and will inure to the benefit of and will be binding
upon the parties hereto and their respective heirs, legal representatives and
successors.
18. Term. The term of this Agreement will begin on the date hereof and end
on the termination of the Merger Agreement. If the Merger is consummated, the
provisions of this Agreement will survive the Effective Time, except as
provided in Section 19.
VI-4
19. Non-Survival of Representations and Warranties. Except to the extent
expressly set forth in Sections 2 and 3, the parties have not made and
expressly negate and waive any representations or warranties (express, implied,
statutory or otherwise) with respect to this Agreement or the transactions
contemplated herein. The representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement will terminate upon the
earlier of (a) the termination of the Merger Agreement, and (b) the Effective
Time.
Remainder of this page intentionally left blank.
VI-5
IN WITNESS WHEREOF, Shareholder and Parent have entered into this Agreement
as of the date first written above.
PETROCORP INCORPORATED
By: /s/ Gary R. Christopher
-----------------------------------
Name: Gary R. Christopher
Title: President and Chief Executive
Officer
COMAC PARTNERS, L.P.
By: /s/ Paul Coughlin
-----------------------------------
Name: Paul Coughlin
Title: General Partner
COMAC ENDOWMENT FUND, L.P.
By: /s/ Paul Coughlin
-----------------------------------
Name: Paul Coughlin
Title: General Partner
COMAC INTERNATIONAL N.V.
By: /s/ Paul Coughlin
-----------------------------------
Name: Paul Coughlin
Title: Director
COMAC OPPORTUNITIES FUND, L.P.
By: /s/ Paul Coughlin
-----------------------------------
Name: Paul Coughlin
Title: General Partner
By: /s/ Carol Ann Coughlin
-----------------------------------
Name: Carol Ann Coughlin
VI-6
SCHEDULE 1
Number of
Name and Address of Shareholder Shares
- ------------------------------- ---------
CoMac Partners, L.P................................................... 661,017
1 Greenwich Office Park, 3rd Floor,
Greenwich, CT 06831
CoMac Endowment....................................................... 885,043
1 Greenwich Office Park, 3rd Floor,
Greenwich, CT 06831
CoMac International................................................... 105,329
1 Greenwich Office Park, 3rd Floor,
Greenwich, CT 06831
CoMac Opportunities................................................... 1,844
1 Greenwich Office Park, 3rd Floor,
Greenwich, CT 06831
Carol Ann Coughlin.................................................... 69,144
1 Greenwich Office Park, 3rd Floor,
Greenwich, CT 06831
VI-7
ANNEX VII
FORM OF AFFILIATE LETTER
December [ ], 2000
Ladies and Gentlemen:
The undersigned, a holder of shares of capital stock, par value $0.01 per
share (the "Company Common Stock"), of Southern Mineral Corporation, a Nevada
corporation ("Company"), has been advised that as of the date hereof, the
undersigned may be deemed to be an "affiliate" of Company, as the term
"affiliate" is defined for purposes of paragraph (c) and (d) of Rule 145 of the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act").
The undersigned has been further advised that pursuant to the terms of the
Agreement and Plan of Merger dated as of December 22, 2000 (the "Merger
Agreement") among Company, PetroCorp Acquisition Company, a Delaware
corporation ("Merger Sub"), and PetroCorp Incorporated, a Texas corporation
("Parent"), Company will be merged with and into Merger Sub (the "Merger") and
that as a result of the Merger, the undersigned may receive shares of Parent
Common Stock in exchange for shares of Company Common Stock owned by the
undersigned. Capitalized terms used but not defined herein will have the
meanings given them in the Merger Agreement.
1. The undersigned represents, warrants and covenants to Parent that in the
event the undersigned receives any Parent Common Stock pursuant to the Merger
(the "Parent Merger Shares"), the undersigned:
A. Shall not make any sale, transfer or other disposition of the Parent
Merger Shares in violation of the Act or the Rules and Regulations.
B. Has read carefully this letter and discussed applicable limitations
upon the ability of the undersigned to sell, transfer or otherwise dispose
of Parent Merger Shares to the extent the undersigned believed necessary
with counsel of the undersigned or counsel for Company.
C. Unless the undersigned has executed a Company Shareholder Agreement
and the Commission objects to registration of the Parent Merger Shares, has
been advised that the issuance of the Parent Merger Shares to the
undersigned will be registered with the Commission under the Act on a
Registration Statement on Form S-4. However, the undersigned has also been
advised that, since at the time of the approval of the Merger by written
consent of the stockholders of Parent, the undersigned may be deemed to
have been an affiliate of Company and the distribution by the undersigned
of the Parent Merger Shares has not been registered under the Act, the
undersigned may be prohibited from selling, transferring or otherwise
disposing of the Parent Merger Shares unless (i) such sale, transfer or
other disposition has been registered under the Act, (ii) such sale,
transfer or other disposition is made in conformity with the volume and
other limitations of Rule 145 promulgated by the Commission under the Act,
or (iii) in the opinion of counsel reasonably acceptable to Parent, such
sale, transfer or other disposition is otherwise exempt from registration
under the Act.
D. Understands that, except as provided in paragraph 2 below, Parent is
under no obligation to register the sale, transfer or other disposition of
the Parent Merger Shares by the undersigned or on behalf of the undersigned
under the Act or (except as forth in paragraph 2 below) to take any other
action necessary in order to make compliance with an exemption from such
registration available.
E. Also understands that, unless a registration statement permitting the
sale or other disposition of any or all of the Parent Merger Shares is
effective, Parent may give stop transfer instructions to Parent's transfer
agent with respect to the Parent Merger Shares and that Parent reserves the
right to place on the certificates for the Parent Merger Shares, or any
substitutions therefor, a legend stating in substance:
VII-1
"The securities represented by this certificate have been issued in
a transaction to which Rule 145 promulgated under the Securities Act of
1933 applies and may only be sold or otherwise transferred in
compliance with the requirements of Rule 145 or pursuant to a
registration statement under said Act or an exemption from such
registration."
F. Also understands that unless the transfer by the undersigned of the
Parent Merger Shares has been registered under the Act or is a sale made in
conformity with the provisions of Rule 145, Parent reserves the right to
put the following legend on the certificates issued to transferees of the
undersigned:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired from a
person who received such shares in a transaction to which Rule 145
promulgated under the Securities Act of 1933 applies. The securities
have been acquired by the holder not with a view to, or for resale in
connection with, any distribution thereof within the meaning of
Securities Act of 1933 and may not be sold, pledged or otherwise
transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933."
G. Execution of this letter should not be considered an admission on the
part of the undersigned that the undersigned is an affiliate of Company as
described in the first paragraph of this letter, nor as a waiver of any
rights the undersigned may have to object to any claim that the undersigned
is such an affiliate on or after the date of this letter.
2. By Parent's acceptance of this letter, Parent hereby agrees with the
undersigned as follows:
A. For so long as and to the extent necessary to permit the undersigned
to sell the Parent Merger Shares pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Act, Parent shall (a) use its reasonable
best efforts to (i) file, on a timely basis, all reports and data required
to be filed with the Commission by it pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii)
furnish to the undersigned upon request a written statement as to whether
Parent has complied with such reporting requirements during the 12 months
preceding any proposed sale of the Parent Merger Shares by the undersigned
under Rule 145, and (b) otherwise use its reasonable efforts to permit such
sales pursuant to Rule 145 and Rule 144. Parent has filed all reports
required to be filed with the Commission under Section 13 of the Exchange
Act during the preceding 12 months.
B. It is understood and agreed that certificates with any legends set
forth in paragraphs E and F above will be substituted by delivery of
certificates without such legend if (i) one year shall have elapsed from
the date the undersigned acquired the Parent Merger Shares and the
provisions of Rule 145(d)(2) are then available to the undersigned, (ii)
two years shall have elapsed from the date the undersigned acquired the
Parent Merger Shares and the provisions of Rule 145(d)(3) are then
applicable to the undersigned, or (iii) Parent has received either an
opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to Parent, or a "no-action" letter obtained by the undersigned
from the staff of the Commission, to the effect that the restrictions
imposed by Rule 144 and Rule 145 under the Act no longer apply to the
undersigned.
C. Parent will use reasonable efforts to prepare and file a shelf
registration statement (the "Registration Statement") pursuant to Rule 415
under the Act to permit the sale or other disposition of any or all of the
Parent Merger Shares in accordance with the intended method of sale or
other disposition elected by the undersigned, and Parent will use its best
efforts to qualify such shares of Parent Merger Shares under any applicable
state securities laws. Parent will use all reasonable efforts (i) to cause
the Registration Statement to become effective on or before the Effective
Time, (ii) to obtain all consents or waivers of other parties which are
required therefor, and (iii) to keep the Registration Statement
continuously effective in order to permit the prospectus forming part
thereof to be usable by the undersigned for a period ending two years from
the Effective Time, or for such shorter period that will terminate when all
shares of Parent Merger Shares covered by the Registration Statement have
been sold pursuant to the Registration Statement or otherwise cease to be
outstanding. The offer and sale under the Registration Statement or the
obligation of Parent to file the Registration Statement and to maintain its
VII-2
effectiveness may be suspended for one or more periods of time not
exceeding 90 calendar days in the aggregate with respect to such
Registration Statement if the Board of Directors of Parent will have
determined in good faith that the offering and sales under the Registration
Statement, the filing of such Registration Statement or the maintenance of
its effectiveness would require disclosure of or would interfere in any
material respect with any material financing, acquisition, merger or other
transaction involving Parent or any of its Subsidiaries or would otherwise
require disclosure of nonpublic information that would materially and
adversely affect Parent. The Registration Statement prepared and filed
under this paragraph 2.C., and any sale covered thereby, will be at
Parent's expense except for underwriting discounts or commissions, brokers'
fees and the fees and disbursements of the undersigned's counsel related
thereto. The undersigned will provide all information reasonably requested
by Parent for inclusion in the Registration Statement to be filed
hereunder. In connection with the registration pursuant to this paragraph
2.C., the undersigned and Parent will provide each other and any
underwriter of the offering with customary representations, warranties,
covenants, and rights to indemnification and contribution.
[Remainder of page intentionally left blank.]
VII-3
Very truly yours,
-------------------------------------
Signature
-------------------------------------
Print Name
ACCEPTED:
PETROCORP INCORPORATED
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
Dated:
-------------------------------------
VII-4
ANNEX VIII
March 9, 2001
The Board of Directors
Southern Mineral Corporation
1201 Louisiana, Ste. 3350
Houston, TX 77002
Members of the Board:
Southern Mineral Corporation, a Nevada corporation ("Southern Mineral"),
proposes to enter into a First Amendment (the "Amendment") to the Agreement and
Plan of Merger, dated as of December 22, 2000 (as amended by the Amendment, the
"Merger Agreement"), among Southern Mineral, PetroCorp Incorporated, a Texas
corporation ("PetroCorp"), and PetroCorp Acquisition Company, a Delaware
corporation and a wholly-owned subsidiary of PetroCorp ("PetroCorp Sub"). The
Merger Agreement provides for, among other things, the merger of Southern
Mineral with and into PetroCorp Sub (the "Merger"). Upon consummation of the
Merger, each outstanding share of common stock, par value $.01 per share, of
Southern Mineral (the "Southern Mineral Common Stock") (other than Southern
Mineral Common Stock held by Southern Mineral as treasury stock or owned by
PetroCorp or any subsidiary of PetroCorp or as to which dissenters' rights have
been perfected) will be converted into the right to receive (i) $4.71 per share
in cash subject to adjustment as described in the Merger Agreement or (ii) at
the election of each holder of Southern Mineral Common Stock in accordance with
the Merger Agreement, a number of shares of common stock, par value $.01 per
share, of PetroCorp (the "PetroCorp Common Stock") equal to the Exchange Ratio
(as defined in the Merger Agreement) (subject to limitation on such election
set forth in the Merger Agreement if holders of Southern Mineral Common Stock
elect to receive more than an aggregate of 4,000,000 shares of PetroCorp Common
Stock) (the "Transaction Consideration").
You have requested our opinion as to whether the Transaction Consideration
is fair from a financial point of view to the holders of Southern Mineral
Common Stock.
In arriving at our opinion, we have, among other things:
1. reviewed certain publicly available business and financial
information relating to PetroCorp and Southern Mineral, including
(a) Annual Reports on Form 10-K and related audited financial
statements for the fiscal years ended December 31, 1998 and December
31, 1999, and (b) the Quarterly Reports on Form 10-Q and related
unaudited financial statements for the fiscal quarters ended March
31, 2000, June 30, 2000 and September 30, 2000;
2. reviewed a draft, dated March 6, 2001, of the Annual Report on Form
10-K for the fiscal year ended December 31, 2000 of Southern Mineral
and a draft, dated March 6, 2001, of the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 of PetroCorp;
3. reviewed certain estimates of Southern Mineral's reserves, including
(a) estimates of proved and probable oil and gas reserves prepared
by Netherland, Sewell & Associates, Inc. (as to United States and
Ecuador reserves only) as of December 31, 2000 and (b) estimates of
proved and probable oil and gas reserves prepared by Chapman
Petroleum Engineering Ltd. (as to Canadian reserves only) as of
December 31, 2000;
4. reviewed certain estimates of PetroCorp's reserves, including
estimates of proved and probable oil and gas reserves prepared by
Huddleston & Co., Inc. as of December 31, 2000;
5. analyzed certain historical and projected financial and operating
data (i) of PetroCorp prepared by the management and staff of
PetroCorp and (ii) of Southern Mineral prepared in conjunction with,
and approved by, the management and staff of Southern Mineral;
VIII-1
6. discussed the current and projected operations and prospects of
PetroCorp and Southern Mineral with the management and staff of
PetroCorp and Southern Mineral, respectively;
7. reviewed the trading history of PetroCorp Common Stock and Southern
Mineral Common Stock;
8. compared recent stock market capitalization indicators for
PetroCorp and Southern Mineral with recent stock market
capitalization indicators for certain other publicly-traded
independent energy companies;
9. compared the financial terms of the Merger with the financial terms
of certain other transactions that we deemed to be relevant;
10. participated in certain discussions and negotiations among the
representatives of Southern Mineral, PetroCorp and their financial
and legal advisors;
11. reviewed the Merger Agreement;
12. reviewed a draft dated March 7, 2001 of the Amendment; and
13. reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters
as we have deemed necessary or appropriate.
In preparing our opinion, we have assumed and relied upon, without assuming
any responsibility for, or independently verifying, the accuracy and
completeness of any information supplied or otherwise made available to us by
Southern Mineral and PetroCorp. We have further relied upon the assurances of
the management of Southern Mineral and PetroCorp 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 projected financial and operating
data, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements and staff of Southern Mineral and PetroCorp, respectively, relating
to the future financial and operational performance of each company. 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 of the managements and staff of Southern Mineral or PetroCorp or
their respective engineering consultants relating to the oil and gas properties
of Southern Mineral and PetroCorp, respectively. We have not made an
independent evaluation or appraisal of the assets or liabilities of Southern
Mineral or PetroCorp nor, except for the estimates of oil and gas reserves
referred to above, have we been furnished with such an evaluation or appraisal.
In addition, we have not assumed any obligation to conduct, nor have we
conducted, any physical inspection of the properties or facilities of Southern
Mineral or PetroCorp. We have assumed, based on discussions with the management
and staff of Southern Mineral, that no adjustment to the Transaction
Consideration will be required under the Merger Agreement on the basis of the
transaction costs incurred by Southern Mineral. We have also assumed that the
final form of the Amendment will be substantially similar to the last draft of
the Amendment reviewed by us.
Our opinion relates solely to the fairness, from a financial point of view,
of the Transaction Consideration to the holders of Southern Mineral Common
Stock. This opinion is for the use and benefit of the Board of Directors of
Southern Mineral and does not constitute a recommendation to any holder of
Southern Mineral Common Stock as to how such stockholder should vote on the
Merger. We have not been asked to consider, and this opinion does not address,
the after-tax consequences of the Merger to any particular stockholder of
Southern Mineral or the price at which PetroCorp Common Stock will actually
trade following the announcement or consummation of the Merger. As you are
aware, we have acted as financial advisor to Southern Mineral and we will
receive a fee from Southern Mineral for such services, which is contingent upon
the consummation of the Merger. In addition, Southern Mineral has agreed to
indemnify us for certain liabilities arising out of our engagement. We have, in
the past, provided financial advisory services to Southern Mineral and have
received customary fees for such services. In addition, in the ordinary course
of business, we or our affiliates may trade in the debt or equity securities of
Southern Mineral or PetroCorp for the accounts of our customers or for our own
account and, accordingly, may at any time hold a long or short position in such
securities.
VIII-2
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 PetroCorp and Southern Mineral 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, it is our opinion that, as of the
date hereof, the Transaction Consideration is fair from a financial point of
view to the holders of Southern Mineral Common Stock.
Very truly yours,
/s/ Petrie Parkman & Co.
_____________________________________
PETRIE PARKMAN & CO., INC.
VIII-3
ANNEX IX
NEVADA REVISED STATUTES
TITLE 7. BUSINESS ASSOCIATIONS; SECURITIES; COMMODITIES
CHAPTER 92A. MERGERS AND EXCHANGES OF INTEREST
RIGHTS OF DISSENTING OWNERS
NRS 92A.300 Definitions.
As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise
requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive,
have the meanings ascribed to them in those sections.
NRS 92A.305 "Beneficial stockholder" defined.
"Beneficial stockholder" means a person who is a beneficial owner of shares
held in a voting trust or by a nominee as the stockholder of record.
NRS 92A.310 "Corporate action" defined.
"Corporate action" means the action of a domestic corporation.
NRS 92A.315 "Dissenter" defined.
"Dissenter" means a stockholder who is entitled to dissent from a domestic
corporation's action under NRS 92A.380 and who exercises that right when and in
the manner required by NRS 92A.400 to 92A.480, inclusive.
NRS 92A.320 "Fair value" defined.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which he
objects, excluding any appreciation or depreciation in anticipation of the
corporate action unless exclusion would be inequitable.
NRS 92A.325 "Stockholder" defined.
"Stockholder" means a stockholder of record or a beneficial stockholder of a
domestic corporation.
NRS 92A.330 "Stockholder of record" defined.
"Stockholder of record" means the person in whose name shares are registered in
the records of a domestic corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee's certificate on file with the
domestic corporation.
NRS 92A.335 "Subject corporation" defined.
"Subject corporation" means the domestic corporation which is the issuer of the
shares held by a dissenter before the corporate action creating the dissenter's
rights becomes effective or the surviving or acquiring entity of that issuer
after the corporate action becomes effective.
NRS 92A.340 Computation of interest.
Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be
computed from the effective date of the action until the date of payment, at
the average rate currently paid by the entity on its principal bank loans or,
if it has no bank loans, at a rate that is fair and equitable under all of the
circumstances.
IX-1
NRS 92A.380 Right of stockholder to dissent from certain corporate actions and
to obtain payment for shares.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, a stockholder is
entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation is a
party:
(1) If approval by the stockholders is required for the merger by NRS
92A.120 to 92A.160, inclusive, or the articles of incorporation and he is
entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with its
parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic corporation is
a party as the corporation whose subject owner's interests will be acquired,
if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders to
the event that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are entitled
to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to
him or the domestic corporation.
NRS 92A.390 Limitations on right of dissent: Stockholders of certain classes
or series; action of stockholders not required for plan of merger.
1. There is no right of dissent with respect to a plan of merger or exchange
in favor of stockholders of any class or series which, at the record date
fixed to determine the stockholders entitled to receive notice of and to vote
at the meeting at which the plan of merger or exchange is to be acted on, were
either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the shares
provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu of
fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan of
merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc., or held of record by a least
2,000 holders of owner's interests of record; or
(2) A combination of cash and owner's interests of the kind described in
sub- subparagraphs (I) and (II) of subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the surviving
domestic corporation if the plan of merger does not require action of the
stockholders of the surviving domestic corporation under NRS 92A.130.
NRS 92A.400 Limitations on right of dissent: Assertion as to portions only to
shares registered to stockholder; assertion by beneficial stockholder.
1. A stockholder of record may assert dissenter's rights as to fewer than all
of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject
corporation in writing of the name and address of each person on whose behalf
he asserts dissenter's rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his
other shares were registered in the names of different stockholders.
IX-2
2. A beneficial stockholder may assert dissenter's rights as to shares held on
his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the beneficial
stockholder or over which he has power to direct the vote.
NRS 92A.410 Notification of stockholders regarding right of dissent.
1. If a proposed corporate action creating dissenters' rights is submitted to a
vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430.
NRS 92A.420 Prerequisites to demand for payment for shares.
1. If a proposed corporate action creating dissenters' rights is submitted to a
vote at a stockholders' meeting, a stockholder who wishes to assert dissenter's
rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 and NRS
92A.400 is not entitled to payment for his shares under this chapter.
NRS 92A.430 Dissenter's notice: Delivery to stockholders entitled to assert
rights; contents.
1. If a proposed corporate action creating dissenters' rights is authorized at
a stockholders' meeting, the subject corporation shall deliver a written
dissenter's notice to all stockholders who satisfied the requirements to assert
those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to what
extent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement to the news media or to the stockholders of the terms of the
proposed action and requires that the person asserting dissenter's rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) Set a date by which the subject corporation must receive the demand for
payment, which may not be less than 30 nor more than 60 days after the date the
notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
IX-3
NRS 92A.440 Demand for payment and deposit of certificates; retention of rights
of stockholder.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares before
the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of the
notice.
2. The stockholder who demands payment and deposits his certificates, if any,
before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.
NRS 92A.450 Uncertificated shares: Authority to restrict transfer after demand
for payment; retention of rights of stockholder.
1. The subject corporation may restrict the transfer of shares not represented
by a certificate from the date the demand for their payment is received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
NRS 92A.460 Payment for shares: General requirements.
1. Except as otherwise provided in NRS 92A.470, within 30 days after receipt of
a demand for payment, the subject corporation shall pay each dissenter who
complied with NRS 92A.440 the amount the subject corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
subject corporation under this subsection may be enforced by the district
court:
(a) Of the county where the corporation's registered office is located; or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, a statement of
income for that year, a statement of changes in the stockholders' equity for
that year and the latest available interim financial statements, if any;
(b) A statement of the subject corporation's estimate of the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
IX-4
NRS 92A.470 Payment for shares: Shares acquired on or after date of dissenter's
notice.
1. A subject corporation may elect to withhold payment from a dissenter unless
he was the beneficial owner of the shares before the date set forth in the
dissenter's notice as the date of the first announcement to the news media or
to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares,
plus accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A.480.
NRS 92A.480 Dissenter's estimate of fair value: Notification of subject
corporation; demand for payment of estimate.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value
of his shares and interest due, if he believes that the amount paid pursuant to
NRS 92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
NRS 92A.490 Legal proceeding to determine fair value: Duties of subject
corporation; powers of court; rights of dissenter.
1. If a demand for payment remains unsettled, the subject corporation shall
commence a proceeding within 60 days after receiving the demand and petition
the court to determine the fair value of the shares and accrued interest. If
the subject corporation does not commence the proceeding within the 60-day
period, it shall pay each dissenter whose demand remains unsettled the amount
demanded.
2. A subject corporation shall commence the proceeding in the district court of
the county where its registered office is located. If the subject corporation
is a foreign entity without a resident agent in the state, it shall commence
the proceeding in the county where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign entity was
located.
3. The subject corporation shall make all dissenters, whether or not residents
of Nevada, whose demands remain unsettled, parties to the proceeding as in an
action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced under
subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the subject corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired shares
for which the subject corporation elected to withhold payment pursuant to NRS
92A.470.
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NRS 92A.500 Legal proceeding to determine fair value: Assessment of costs and
fees.
1. The court in a proceeding to determine fair value shall determine all of the
costs of the proceeding, including the reasonable compensation and expenses of
any appraisers appointed by the court. The court shall assess the costs against
the subject corporation, except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously or not in good faith
in demanding payment.
2. The court may also assess the fees and expenses of the counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if the
court finds the subject corporation did not substantially comply with the
requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters who are parties to the proceeding, in
amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced pursuant
to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68 or NRS
17.115.
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ANNEX X
SERIES B PERPETUAL WARRANT AGREEMENT
This Series B Perpetual Warrant Agreement (as amended, restated or otherwise
modified from time to time, this "AGREEMENT") is made as of September 29, 2000,
between Southern Mineral Corporation, a Nevada corporation (including its
successors and permitted assigns, the "COMPANY"), and American Stock Transfer &
Trust Company, a New York corporation (including its successors and permitted
assigns, the "WARRANT AGENT").
WHEREAS, the Company has determined to issue and deliver Series B Perpetual
Warrant Certificates ("WARRANT CERTIFICATES") initially in the form of Exhibit
A, representing Series B Perpetual Warrants ("WARRANTS"), to the persons and in
the amounts listed on Exhibit B;
WHEREAS, each Warrant represented on a Warrant Certificate entitles the
holder thereof to purchase one share (as adjusted) of common stock, par value
$0.01 per share ("COMMON STOCK"), of the Company for each such Warrant
exercised;
WHEREAS, the Company desires to provide for the form and provisions of the
Warrant Certificates, the terms upon which they shall be issued and exercised,
and the respective rights, limitation of rights, and immunities of the Company,
the Warrant Agent, and the bearers of the Warrants Certificates; and
WHEREAS, all acts and things necessary to make the Warrant Certificates when
executed on behalf of the Company and countersigned by or on behalf of the
Warrant Agent, as provided in this agreement, the valid, binding, and legal
obligations of the Company, and to authorize the execution and delivery of this
Agreement, have been done and performed.
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
ARTICLE I
EXECUTION AND COUNTERSIGNATURE OF WARRANT CERTIFICATES
Section 1.1. Execution and countersignature of Warrant Certificates.
(a) Each Warrant Certificate, whenever issued, shall be dated August 1,
2000, shall be substantially in the form of Exhibit A and may have such legends
and endorsements typed, stamped, printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation pursuant thereto or with any rule or regulation of
any securities exchange on which the Warrant Certificates may be listed, or to
conform to customary usage. Each Warrant Certificate shall be signed by, or
bear the facsimile signature of, the President or a Vice President of the
Company and shall bear a facsimile of the Company's seal. In case any officer
whose facsimile signature has been placed upon any Warrant Certificate shall
have ceased to hold such office before such Warrant Certificate is issued, such
Warrant Certificate may be issued with the same effect as if such officer had
held such office at the date of issuance. No Warrant Certificate may be
exercised until it has been countersigned by the Warrant Agent as provided in
Section 1.1(b).
(b) The Warrant Agent shall countersign a Warrant Certificate only:
(i) if the Warrant Certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant Certificates,
as hereinafter provided, or
(ii) if the Company instructs the Warrant Agent to do so.
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(c) Unless and until countersigned by the Warrant Agent pursuant to this
Agreement, a Warrant Certificate shall be invalid and of no effect.
ARTICLE II
WARRANT PRICE, DURATION AND EXERCISE OF WARRANT CERTIFICATES
Section 2.1. Warrant Price. Each Warrant shall, when the Warrant Certificate
by which such Warrant is represented is countersigned by the Warrant Agent,
entitle the holder thereof, subject to the provisions thereof and of this
Agreement, to purchase from the Company one share of Common Stock at the price
of $4.21 per share, subject to adjustment as provided in Article III. The term
"WARRANT PRICE" as used in this Agreement refers to the price per share at
which Common Stock may be purchased at the time a Warrant is exercised.
Section 2.2. Perpetual Duration of Warrants. The Warrants are perpetual;
that is, the Warrants will not expire.
Section 2.3. Exercise of Warrants.
(a) A Warrant, when the Warrant Certificate by which such Warrant is
represented is countersigned by the Warrant Agent, may be exercised in whole or
part, at any time of from time to time, by surrendering such Warrant
Certificate at the corporate trust office of the Warrant Agent in New York,
with the subscription form set forth in the Warrant Certificate duly executed,
and by paying in full, in lawful money of the United States, the Warrant Price
for each full share of Common Stock as to which such Warrant is exercised and
any applicable taxes.
(b) As soon as practicable after the exercise of any Warrant, the Company
shall issue to or to the order of the holder of such Warrant a certificate or
certificates for the number of whole shares of Common Stock to which such
holder is entitled, registered in such name or names as may be directed by such
holder, and, if such Warrant shall not have been exercised in full (except with
respect to a remaining fraction of a share), a new countersigned Warrant
Certificate for the number of Warrants represented by such holder's previous
Warrant Certificate which shall not have been exercised. In the event that the
holder of one or more Warrants exercising his purchase rights thereunder has
pursuant to such exercise the right to purchase a fraction of a share of Common
Stock, the Company shall, in lieu of issuing to such holder a fractional share,
pay such holder cash in an amount equal to: (i) (x) the fraction to which such
holder is entitled multiplied by (y) the closing market price of a share of
Common Stock on the business day immediately following the day of exercise
minus (ii) (x) the same fraction multiplied by (y) the Warrant Price on such
day. If no sale takes place on such day, the closing market price for such day
shall be deemed to be (i) the average of the closing bid and asked prices on
such day, as officially quoted, as reported in the principal reporting system
with respect to securities listed on the principal national securities exchange
or market on which the Common Stock is listed or admitted to trading or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or market, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported
by NASDAQ or such other system then in use or, if on any such date the Common
Stock is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Common Stock selected by the Board of Directors of the Company or, if on
such day no such market maker is making a market in the Common Stock, the fair
value of the Common Stock on such date as determined in good faith by the Board
of Directors of the Company.
(c) All shares of Common Stock issued upon the exercise of a Warrant shall
be validly issued, and the Company shall pay all taxes in respect of the issue
thereof. The Company shall not be required, however, to pay any tax imposed in
connection with any transfer involved in the issue of a certificate for shares
of Common Stock in any name other than that of the holder of the Warrant
Certificate surrendered in connection with the
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purchase thereof; and in such case the Company shall not be required to issue
or deliver any stock certificate until such tax shall have been paid.
(d) Each person (or entity) in whose name any such certificate for shares of
Common Stock is issued shall for all purposes be deemed to have become the
holder of record of such shares on the date on which the Warrant Certificate
was surrendered and payment of the Warrant Price and any applicable taxes was
made, irrespective of the date of delivery of such certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are closed, such person shall be deemed to have become the
holder of such shares at the close of business on the next succeeding date on
which the Company's stock transfer books are open.
(e) The Warrant Agent shall cancel any Warrant Certificate surrendered for
exchange, substitution, transfer or exercise in whole or in part.
ARTICLE III
ADJUSTMENTS
Section 3.1. Stock Dividends and Splits. If after the date hereof, and
subject to the provisions of Section 3.6, the number of outstanding shares of
Common Stock is increased by a stock dividend payable in shares of Common Stock
or by a split of shares of Common Stock, then, on the date fixed for the
determination of holders of Common Stock entitled to receive such stock
dividend or for the effectiveness of such split, the number of shares of Common
Stock issuable on exercise of each Warrant shall be adjusted in proportion to
such adjustment in outstanding shares and the then applicable Warrant Price
shall be correspondingly adjusted.
Section 3.2. Aggregation of Shares. If after the date hereof, and subject to
the provisions of Section 3.6, the number of outstanding shares of Common Stock
is adjusted by a combination or reclassification (excluding any such
reclassification in connection with a merger, consolidation, share exchange or
similar transaction in which the Company is the continuing entity) of shares of
Common Stock, then, upon the effective date of such combination or
reclassification, the number of shares of Common Stock issuable on exercise of
each Warrant shall be adjusted in proportion to such adjustment in outstanding
shares and the then applicable Warrant Price shall be correspondingly adjusted.
Section 3.3. Reorganization, Merger and Asset Sales. If after the date
hereof any capital reorganization or reclassification of the Common Stock of
the Company, or any consolidation, merger, share exchange or similar
transaction involving the Company, or the sale of all or substantially all of
the Company's assets shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, share exchange,
similar transaction or asset sale, lawful and fair provision shall be made
whereby the Warrant Certificate holders shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in the Warrant Certificates and in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the Warrants represented thereby, such shares of stock, securities, or assets
as may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the Warrants had such reorganization, reclassification, consolidation, merger,
share exchange, similar transaction or asset sale not taken place, and in any
such case appropriate provision shall be made with respect to the rights and
interests of the Warrant Certificate holders to the end that the provisions
hereof (including, without limitation, provisions for adjustments of the
Warrant Price and of the number of shares purchasable upon the exercise of the
Warrants) shall thereafter be applicable, as nearly as may be in relation to
any share of stock, securities, or assets thereafter deliverable upon the
exercise hereof. The Company shall not effect any such consolidation, merger,
share exchange, similar transaction or sale unless prior to the consummation
thereof the successor entity (if other than the Company) resulting from such
transaction, or the entity purchasing such assets, shall assume by written
instrument executed and
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delivered to the Warrant Agent the obligation to deliver to the Warrant
Certificate holders such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, such holders may be entitled to
purchase.
Section 3.4. Notice of Changes in Warrants. Upon any adjustment of the
Warrant Price or the number of shares issuable on exercise of a Warrant, then
and in each such case the Company shall promptly give written notice thereof to
the Warrant Agent, which notice shall state the Warrant Price resulting from
any such adjustment and the increase or decrease, if any, in the number of
shares purchasable at such price upon the exercise of a Warrant, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based.
The Company shall also mail such notice to the addresses of the Warrant
Certificate holders reflected in the records of the Warrant Agent. Failure to
give or publish such notice, or any defect therein, shall not affect the
legality or validity of the subject adjustments.
Section 3.5. Other Notices. If at any time:
(a) the Company shall pay any dividends payable in stock upon its Common
Stock or make any distribution (other than regular cash dividends) to the
holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(c) there shall be any capital reorganization, or reclassification of the
capital stock of the Company, or consolidation, merger, share exchange or
similar transaction of the Company with, or sale of all or substantially all of
the Company's assets to, another entity; and
(d) there shall be a voluntary or involuntary dissolution, liquidation, or
winding up of the Company;
then, in any one or more of such cases, the Company shall give written notice
and publish the same in the manner set forth in Section 3.4, of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution, or subscription rights, or (ii) such transaction
shall take place, as the case may be. Such notice shall also specify the date
as of which the holders of record of Common Stock shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding up, as the case may be. Such notice shall
be given and published at least 20 days prior to the action in question and not
less than 20 days prior to the record date or the date on which the Company's
transfer books are closed in respect thereto. Failure to give or publish such
notice, or any defect therein, shall not affect the legality or validity of any
of the matters set forth in the foregoing clauses (a) to (d), both inclusive.
Section 3.6. Limitation on Fractions. Notwithstanding anything to the
contrary in Section 3.1 or 3.2, upon exercise of any Warrant, cumulative
adjustments in the number of shares issuable upon exercise of Warrants shall be
made only to the nearest multiple of one-tenth of a share, i.e., fractions of
less than five-hundredths of a share shall be disregarded and fractions of
five- hundredths of a share or more shall be treated as being one-tenth of a
share.
Section 3.7. Form of Warrant Certificate. The form of Warrant Certificate
need not be changed because of any change pursuant to this Article III, and
Warrant Certificates issued after such change may state the same Warrant Price
and the same number of shares as is stated in the Warrant Certificates
initially issued pursuant to this Agreement. The Company may at any time in its
sole discretion (which shall be conclusive) make any change in the form of
Warrant Certificate that the Company may deem appropriate and that does not
affect the substance thereof; and any Warrant Certificate thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
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ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANT CERTIFICATES
Section 4.1. No Rights as Shareholder Conferred by Warrant Certificates. No
Warrant Certificate holder, as such, shall be entitled to vote or to receive
dividends or shall otherwise be deemed to be the holder of shares of Common
Stock for any purpose, nor shall anything contained herein or in any Warrant
Certificate be construed to confer upon any Warrant Certificate holder, as
such, any of the rights of a stockholder of the Company or any right to vote
upon or withhold consent to any action of the Company (whether upon any
reorganization, issuance of securities, reclassification or conversion of
Common Stock, consolidation, merger, share exchange or similar transaction,
sale, lease, conveyance or otherwise), receive notice of meetings or other
action affecting stockholders (except for notices expressly provided for in
this Agreement) or receive dividends or subscription rights.
Section 4.2. Lost, Stolen, Mutilated, or Destroyed Warrant Certificates. If
any Warrant Certificate is lost, stolen, mutilated, or destroyed, the Company
and the Warrant Agent may, on such terms as to indemnity or otherwise as they
may in their discretion impose (which shall, in the case of a mutilated Warrant
Certificate, include the surrender thereof), issue a new Warrant Certificate of
like denomination, tenor, and date as the Warrant Certificate so lost, stolen,
mutilated, or destroyed. Any such new Warrant Certificate shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed Warrant Certificate shall be at any time
enforceable by anyone.
Section 4.3. Reservation of Common Stock. The Company shall at all times
reserve and keep available a number of its authorized but unissued shares of
Common Stock that will be sufficient to permit the exercise in full of all
outstanding Warrants.
ARTICLE V
TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES
Section 5.1. Negotiability and Ownership of Warrant Certificates. Warrant
Certificates issued hereunder shall be transferable of record only by the
Warrant Agent.
Section 5.2. Exchange of Warrant Certificates. After countersignature by the
Warrant Agent in accordance without the provisions of this Agreement, one or
more Warrant Certificates may be surrendered to the Warrant Agent for exchange
and, upon cancellation thereof, the Warrant Agent shall countersign and deliver
in exchange therefor one or more new Warrant Certificates, as requested by the
bearer of the canceled Warrant Certificate or Warrant Certificates, for the
same aggregate number of Warrants as were evidenced by the Warrant Certificate
or Warrant Certificates so canceled.
ARTICLE VI
CONCERNING THE WARRANT AGENT AND OTHER MATTERS
Section 6.1. Payment of Taxes. The Company will from time to time promptly
pay all taxes and charges that may be imposed upon the Company or the Warrant
Agent in respect of the issuance or delivery of shares of Common Stock upon the
exercise of Warrants, but the Company shall not be obligated to pay any
transfer taxes in respect of the Warrants or such shares.
Section 6.2. Resignation, Consolidation, Merger, Share Exchange or Similar
Transaction of Warrant Agent.
(a) The Warrant Agent, or any successor to it hereafter appointed, may
resign its duties and be discharged from all further duties and liabilities
hereunder after giving one month's notice in writing to the Company,
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except that shorter notice may be given if the Company, in writing, accepts
such (in its sole discretion) as sufficient. If the office of the Warrant Agent
becomes vacant by resignation or incapacity to act or otherwise, the Company
shall appoint in writing a successor Warrant Agent in place of the Warrant
Agent. If the Company shall fail to make such appointment within a period of 30
days after it has been notified in writing of such resignation or incapacity by
the resigning or incapacitated Warrant Agent or by the holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company),
then the holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a successor Warrant Agent. After
appointment, any successor Warrant Agent shall be vested with all the
authority, powers, rights, immunities, duties, and obligations of its
predecessor Warrant Agent with like effect as if originally named as Warrant
Agent hereunder, without any further act or deed; but if for any reason it
becomes necessary or appropriate, the predecessor Warrant Agent shall execute
and deliver, at the expense of the Company, an instrument transferring to such
successor Warrant Agent all the authority, powers, and rights of such
predecessor Warrant Agent hereunder; and upon request of any successor Warrant
Agent the Company shall make, execute, acknowledge, and deliver any and all
instruments in writing for more fully and effectual vesting in and confirming
to such successor Warrant Agent all such authority. powers, rights, immunities,
duties, and obligations. Not later than the effective date of any such
appointment the Company shall give notice thereof to the predecessor Warrant
Agent and each transfer agent for the Common Stock. Failure to give such
notice, or any defect therein, shall not affect the validity of the appointment
of the successor Warrant Agent.
(b) Any entity into which the Warrant Agent may be merged or with which it
may be consolidated or any entity resulting from any merger, consolidation
share exchange or similar transaction to which the Warrant Agent shall be a
party shall be the successor Warrant Agent under this Agreement without any
further act.
Section 6.3. Fees and Expenses of Warrant Agent. The Company shall:
(a) pay the Warrant Agent reasonable remuneration for its services as
Warrant Agent hereunder and reimburse the Warrant Agent upon demand for all out
of pocket expenditures that the Warrant Agent may reasonably incur in the
execution of its duties hereunder;
(b) perform, execute, acknowledge, and deliver or cause to be performed,
executed, acknowledged, and delivered all such further and other acts,
instruments, and assurances as may reasonably be required by the Warrant Agent
for the carrying out or performing of the provisions of this Agreement; and
(c) indemnify and hold harmless the Warrant Agent against any loss,
liability or expense (including reasonable attorney's fees) incurred without
negligence, willful misconduct or bad faith on the part of the Warrant Agent
arising out of or in connection with the acceptance or administration of its
duties under the Warrant Agreement, including the costs and expenses of
defending against any such claim.
Section 6.4. Additional Provisions.
(a) The Warrant Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Warrant Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion. The
Warrant Agent may execute any of the powers hereof and perform the duties
required of it hereunder by or through attorneys, agents, receivers or
employees and shall be entitled to advice of counsel concerning all matters of
agency and its duty hereunder.
(b) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a statement signed by the President or a Vice President or the
Treasurer or the Controller or the Secretary of the Company and delivered to
the Warrant Agent; and such statement shall be full warrant to the Warrant
Agent for any action taken or
X-6
suffered in good faith by it under the provisions of this agreement in reliance
upon such statement; but in its discretion the Warrant Agent may in lieu
thereof accept other evidence of such fact or matter or may require such
further or additional evidence as to it may seem reasonable.
(c) The Warrant Agent shall be liable hereunder only for its own negligence
or willful misconduct.
(d) The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except by
it) or in respect of the validity or execution of any Warrant Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Warrant Certificate; nor shall it be responsible for the making of
any adjustments required under the provisions of Article III or responsible for
the manner, method, or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment; nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued
pursuant to this agreement or any Warrant Certificate or as to whether any
shares of Common Stock will when issued be validly issued and fully paid and
nonassessable.
Section 6.5. Acceptance of Agency.
(a) The Warrant Agent hereby accepts the agency established by this
Agreement and agrees to perform the same upon the terms and conditions herein
set forth and, among other things, shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent through the exercise of any Warrant.
(b) The Warrant Agent shall not be required to give any bond or surety in
respect of the execution of such agency, powers, duties or otherwise.
Section 6.6. Modification of Agreement. The Warrant Agent may, without the
consent or concurrence of the holders of the Warrant Certificates, by
supplemental agreement or otherwise concur with the Company in making any
changes or corrections in this Agreement that it shall have been advised by
counsel (who may be counsel for the Company) are required to cure any ambiguity
or to correct any defective or inconsistent provision or clerical omission or
mistake or manifest error herein contained.
Section 6.7. Right to Inspect. At any reasonable time, the Warrant Agent,
the Company and each of their respective duly authorized representatives shall
have the right to fully inspect any and all books, papers and records of the
Company pertaining to the Warrants and Warrant Certificates and to make
memoranda therefrom.
Section 6.8. Obligation to Take Action. The permissive authority of the
Warrant Agent to act pursuant to this Agreement shall not be construed as a
duty to exercise such authority.
Section 6.9. Reliance on Documents.
(a) The Warrant Agent shall incur no liability in acting or proceeding in
good faith upon any resolution, telegram, request, consent, waiver,
certificate, statement, affidavit, voucher, bond, requisition or other paper or
document prepared and furnished pursuant to this Agreement or any of the
Warrant Certificates that it in good faith believes to be genuine.
(b) The Warrant Agent may accept and rely upon such materials as conclusive
evidence of the truth and accuracy of such statements and shall not be required
to investigate any matters contained in any such documents.
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(c) The Warrant Agent is not bound to recognize any person or entity as the
holder of any Warrant Certificate or to take any action at the request of any
such person or entity unless such Warrant Certificate is deposited with the
Warrant Agent or evidence satisfactory to the Warrant Agent of the ownership of
such Warrant Certificate is furnished to the Warrant Agent.
(d) No provision of this Agreement shall require the Warrant Agent to expend
or risk its own funds or otherwise incur financial liability in the performance
of its duties hereunder or in the exercise of any of its rights or powers if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Section 6.10. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent or the holders of the
Warrant Certificates shall bind and inure to the benefit of their respective
successors and assigns hereunder.
Section 6.11. Notices and Demands to Company and Warrant Agent. Any notice
or demand authorized by this Agreement to be given or made by the Warrant Agent
or by the holder of any Warrant Certificate to or on the Company shall be
sufficiently given or made if sent by mail first-class or registered, postage
prepaid, addressed (until another address is filed in writing by the Company
with the Warrant Agent), as follows:
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002
Any notice or demand authorized by this Agreement to be given or made by the
holder of any Warrant or by the Company to the Warrant Agent shall be
sufficiently given or made if sent by mail first-class or registered, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company), as follows:
America Stock Transfer & Trust Company
6201 Fifteenth Avenue
New York, New York, 11219
Section 6.12. Applicable Law. EXCEPT TO THE EXTENT THAT CHAPTER 78 OF THE
REVISED NEVADA STATUTES IS REQUIRED TO BE APPLIED WITH RESPECT TO THE RIGHTS,
PRIVILEGES AND OBLIGATIONS OF AND TO HOLDERS OF WARRANTS ISSUED BY A NEVADA
CORPORATION, THE VALIDITY, INTERPRETATION, AND PERFORMANCE OF THIS AGREEMENT
AND OF THE WARRANTS SHALL BE GOVERNED BY THE LAW OF THE STATE OF TEXAS.
Section 6.13. Persons Having Rights Under this Agreement. Nothing in this
Agreement expressed and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed, to confer upon, or give to, any
person or corporation other than the parties hereto and the holders of the
Warrant Certificates any right, remedy, or claim under or by reason of this
Agreement or of any covenant, condition, stipulation, promise, or agreement
hereof, and all covenants, conditions, stipulations, promises, and agreements
in this Agreement contained shall be for the sole and exclusive benefit of the
parties hereto and their successors and the holders of the Warrant
Certificates.
Section 6.14. Effect of Headings. The Article and Section headings herein
are for convenience only and are not part of this agreement and shall not
affect the interpretation thereof.
[The remainder of this page is intentionally left blank.]
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SMC WARRANT AGREEMENT SIGNATURE PAGE
In witness whereof, this Agreement has been duly executed by the parties
hereto under their respective corporate seals as of the day and year first
above written.
SOUTHERN MINERAL CORPORATION
By:__________________________________
Name:
Title:
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By:__________________________________
Name:
Title:
Exhibit A: Form of Warrant Certificate
Exhibit B: List of Holders of Warrant Certificates
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EXHIBIT A
FORM OF WARRANT CERTIFICATE
SOUTHERN MINERAL CORPORATION
Series B Perpetual Warrant Certificate
Representing Warrants to Purchase Shares of Common Stock,
Par Value $0.01 Per Share
This Warrant Certificate certifies that, [ ] (including
its successors, the "HOLDER"), is the holder of [ ] Series B Perpetual
Warrants ("WARRANTS"), each of which entitles such Holder to purchase, at any
time, one share (as adjusted) of common stock, par value $0.01 per share
("COMMON STOCK"), of Southern Mineral Corporation, a Nevada corporation (the
"COMPANY"), as such stock is constituted at the date of this warrant, at the
price of $4.21 per share (as adjusted, the "WARRANT PRICE"), but such number of
shares and the Warrant Price may be adjusted from time to time upon the
occurrence of certain events as provided in the Warrant Agreement (hereinafter
defined), by the surrender of this Warrant Certificate, with the subscription
form on the reverse side hereof duly executed, at the office of American Stock
Transfer & Trust Company, a New York corporation (the "WARRANT AGENT"), whose
address is 6201 Fifteenth Avenue, New York, New York, 11219, and the payment
of, in lawful money of the United States, the Warrant Price for the number of
whole shares of Common Stock as to which Warrants represented by this Warrant
Certificate are exercised, subject to the conditions set forth herein.
Upon exercise of less than the full number of Warrants represented by this
Warrant Certificate, there shall be countersigned and issued to or upon the
order of the Holder a new Warrant Certificate in respect of the Warrants as to
which this Warrant Certificate shall not have been exercised.
This Warrant Certificate may be exchanged either separately or in
combination with one or more other countersigned Warrant Certificates for one
or more new countersigned Warrant Certificates representing the same aggregate
number of Warrants represented by the Warrant Certificate or Warrant
Certificates exchanged.
No fractional shares of Common Stock will be issued upon the exercise of
rights to purchase hereunder; rather, a cash payment in respect thereof will be
made by the Company in lieu of the issuance of a fractional share as provided
in the Warrant Agreement.
No holder of this Warrant Certificate or of any Warrant shall be deemed to
be the holder of Common Stock or any other securities of the Company that may
at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained in the Warrant Agreement or herein be construed to confer
upon any holder of this Warrant Certificate or of any Warrant, as such, any of
the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any reorganization, issuance of securities, reclassification or
conversion of Common Stock, consolidation, merger, sale, lease, conveyance or
otherwise), receive notice of meetings or other action affecting stockholders
(except for notices expressly provided for in the Warrant Agreement) or receive
dividends or subscription rights or otherwise.
This Warrant Certificate is issued under and in accordance with the Series B
Perpetual Warrant Agreement dated as of [ ], 2000 (the "WARRANT
AGREEMENT"), between the Company and the Warrant Agent and is subject to the
terms and provisions contained in such Warrant Agreement, to all of which terms
and provisions the Holder consents by acceptance hereof.
This Warrant Certificate and all rights hereunder are transferable by the
registered holder hereof, in whole or in part, on the register of the Company,
upon surrender of this Warrant Certificate for registration of transfer
X-10
at the office of the Warrant Agent maintained for such purpose, duly endorsed
by, or accompanied by a written instrument of transfer in form satisfactory to
the Company and the Warrant Agent duly executed by, the holder hereof or his
attorney duly authorized in writing, with signature guaranteed as specified in
the attached Form of Assignment. Upon any partial transfer, the Company will
issue and deliver to such holder a new Warrant Certificate or Warrant
Certificates with respect to any portion not so transferred. No service charge
shall be made for any registration of transfer or exchange of this Warrant
Certificate, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection herewith.
Each taker and holder of this Warrant Certificate, by taking or holding the
same, consents and agrees that this Warrant Certificate, when duly endorsed in
blank, shall be deemed negotiable and that when this Warrant Certificate shall
have been so endorsed, the holder hereof may be treated by the Company, the
Warrant Agent and all other persons and entities dealing with this Warrant
Certificate as the absolute owner hereof for any purpose and as the person
entitled to exercise the rights represented hereby, or to the transfer hereof
on the register of the Company maintained by the Warrant Agent, notwithstanding
any notice to the contrary, but until such transfer on such register, the
Company and the Warrant Agent may treat the registered holder hereof as the
owner hereof for all purposes.
This Warrant Certificate and the Warrant Agreement are subject to amendment
as provided in the Warrant Agreement.
[The remainder of this page is intentionally left blank.]
X-11
This Warrant Certificate shall not be valid for any purpose until it shall
have been countersigned by the Warrant Agent.
SOUTHERN MINERAL CORPORATION
By: _________________________________
Name:
Title:
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By: _________________________________
Name:
Title:
Dated ___________________
[FORM OF REVERSE OF WARRANT CERTIFICATE]
EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant Certificate)
To: Southern Mineral Corporation
The undersigned irrevocably exercises Warrants represented by
this Warrant Certificate for the acquisition of shares of common
stock, par value $0.01 per share, of Southern Mineral Corporation on the terms
and conditions specified in the within Warrant Certificate and the Warrant
Agreement therein referred to, surrenders this Warrant Certificate and all
right, title and interest herein to Southern Mineral Corporation, and directs
that the shares of common stock deliverable upon the exercise of this Warrant
Certificate be registered or placed in the name and at the address specified
below and delivered thereto.
Dated: __________________
__________________________________(1)
(Signature of Owner)
_____________________________________
(Street Address)
_____________________________________
(City) (State) (ZIP Code)
Signature Guaranteed by:
-------------------------------------
- --------
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, and must be guaranteed by an eligible
guarantor institution pursuant to SEC Rule 17Ad-15.
X-12
Shares of Common Stock to be issued to:
Please insert Social Security or identifying number:
Name:
Street Address:
City, State and ZIP Code:
Any Warrants represented by this Warrant Certificate which are exercisable but
unexercised to be issued to:
Please insert Social Security or identifying number:
Name:
Street Address:
City, State and ZIP Code:
[FORM OF ASSIGNMENT]
FOR VALUE RECEIVED, the undersigned registered holder of the within Warrant
Certificate hereby sells, assigns and transfers unto the assignee(s) named
below (including the undersigned with respect to any shares of common stock for
which the Warrants represented by the within Warrant Certificate are
exercisable but the right to exercise for which is not being assigned hereby)
all of the right of the undersigned under the within Warrant Certificate, with
respect to the number of Warrants as are set forth below:
Social Security Number
or other of
Name(s) identifying Warrants
of number of being
Assignees Address Assignee(s) assigned
--------- ------- --------------- --------
and does hereby irrevocably constitute and appoint the
undersigned's attorney to make such transfer on the books of Southern Mineral
Corporation maintained for that purpose with full power of substitution in the
premises.
Dated: __________________
__________________________________(1)
(Signature of Owner)
_____________________________________
(Street Address)
_____________________________________
(City) (State) (ZIP Code)
Signature Guaranteed by:
-------------------------------------
- --------
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, and must be guaranteed by an eligible
guarantor institution pursuant to SEC Rule 17Ad-15.
X-13
EXHIBIT B
TO ANNEX X
SOUTHERN MINERAL CORPORATION
Series B Perpetual Warrant Certificate
Representing Warrants to Purchase Shares of Common Stock,
Par Value $0.01 Per Share
This Warrant Certificate certifies that, [ ] (including its
successors, the "HOLDER"), is the holder of [ ] Series B Perpetual
Warrants ("WARRANTS"), each of which entitles such Holder to purchase, at any
time, one share (as adjusted) of common stock, par value $0.01 per share
("COMMON STOCK"), of Southern Mineral Corporation, a Nevada corporation (the
"COMPANY"), as such stock is constituted at the date of this warrant, at the
price of $4.21 per share (as adjusted, the "WARRANT PRICE"), but such number of
shares and the Warrant Price may be adjusted from time to time upon the
occurrence of certain events as provided in the Warrant Agreement (hereinafter
defined), by the surrender of this Warrant Certificate, with the subscription
form on the reverse side hereof duly executed, at the office of American Stock
Transfer & Trust Company, a New York corporation (the "WARRANT AGENT"), whose
address is 6201 Fifteenth Avenue, New York, New York, 11219, and the payment
of, in lawful money of the United States, the Warrant Price for the number of
whole shares of Common Stock as to which Warrants represented by this Warrant
Certificate are exercised, subject to the conditions set forth herein.
Upon exercise of less than the full number of Warrants represented by this
Warrant Certificate, there shall be countersigned and issued to or upon the
order of the Holder a new Warrant Certificate in respect of the Warrants as to
which this Warrant Certificate shall not have been exercised.
This Warrant Certificate may be exchanged either separately or in
combination with one or more other countersigned Warrant Certificates for one
or more new countersigned Warrant Certificates representing the same aggregate
number of Warrants represented by the Warrant Certificate or Warrant
Certificates exchanged.
No fractional shares of Common Stock will be issued upon the exercise of
rights to purchase hereunder; rather, a cash payment in respect thereof will be
made by the Company in lieu of the issuance of a fractional share as provided
in the Warrant Agreement.
No holder of this Warrant Certificate or of any Warrant shall be deemed to
be the holder of Common Stock or any other securities of the Company that may
at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained in the Warrant Agreement or herein be construed to confer
upon any holder of this Warrant Certificate or of any Warrant, as such, any of
the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any reorganization, issuance of securities, reclassification or
conversion of Common Stock, consolidation, merger, sale, lease, conveyance or
otherwise), receive notice of meetings or other action affecting stockholders
(except for notices expressly provided for in the Warrant Agreement) or receive
dividends or subscription rights or otherwise.
This Warrant Certificate is issued under and in accordance with the Series B
Perpetual Warrant Agreement dated as of [ ], 2000 (the "WARRANT
AGREEMENT"), between the Company and the Warrant Agent and is subject to the
terms and provisions contained in such Warrant Agreement, to all of which terms
and provisions the Holder consents by acceptance hereof.
This Warrant Certificate and all rights hereunder are transferable by the
registered holder hereof, in whole or in part, on the register of the Company,
upon surrender of this Warrant Certificate for registration of transfer at the
office of the Warrant Agent maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Warrant Agent duly executed by, the holder hereof or his
attorney duly authorized in writing, with signature guaranteed as specified in
the attached Form of Assignment. Upon any partial transfer, the Company will
issue and deliver to such holder a new Warrant
X-14
Certificate or Warrant Certificates with respect to any portion not so
transferred. No service charge shall be made for any registration of transfer
or exchange of this Warrant Certificate, but the Company may require payment of
a sum sufficient to cover any tax or other governmental charge payable in
connection herewith.
Each taker and holder of this Warrant Certificate, by taking or holding the
same, consents and agrees that this Warrant Certificate, when duly endorsed in
blank, shall be deemed negotiable and that when this Warrant Certificate shall
have been so endorsed, the holder hereof may be treated by the Company, the
Warrant Agent and all other persons and entities dealing with this Warrant
Certificate as the absolute owner hereof for any purpose and as the person
entitled to exercise the rights represented hereby, or to the transfer hereof
on the register of the Company maintained by the Warrant Agent, notwithstanding
any notice to the contrary, but until such transfer on such register, the
Company and the Warrant Agent may treat the registered holder hereof as the
owner hereof for all purposes.
This Warrant Certificate and the Warrant Agreement are subject to amendment
as provided in the Warrant Agreement.
[The remainder of this page is intentionally left blank.]
X-15
This Warrant Certificate shall not be valid for any purpose until it shall
have been countersigned by the Warrant Agent.
SOUTHERN MINERAL CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Warrant Agent
By: _____________________________
Name: ___________________________
Title: __________________________
Dated ___________________________
X-16
[FORM OF REVERSE OF WARRANT CERTIFICATE]
EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant Certificate)
To: Southern Mineral Corporation
The undersigned irrevocably exercises Warrants represented by this
Warrant Certificate for the acquisition of shares of common stock, par
value $0.01 per share, of Southern Mineral Corporation on the terms and
conditions specified in the within Warrant Certificate and the Warrant
Agreement therein referred to, surrenders this Warrant Certificate and all
right, title and interest herein to Southern Mineral Corporation, and directs
that the shares of common stock deliverable upon the exercise of this Warrant
Certificate be registered or placed in the name and at the address specified
below and delivered thereto.
Dated:___________________________
__________________________________(1)
(Signature of Owner)
-------------------------------------
(Street Address)
-------------------------------------
(City) (State) (ZIP Code)
Signature Guaranteed by:
-------------------------------------
- --------
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, and must be guaranteed by an eligible
guarantor institution pursuant to SEC Rule 17Ad-15.
Shares of Common Stock to be issued to:
Please insert Social Security or identifying number:
Name:
Street Address:
City, State and ZIP Code:
Any Warrants represented by this Warrant Certificate which are exercisable
but unexercised to be issued to:
Please insert Social Security or identifying number:
Name:
Street Address:
City, State and ZIP Code:
X-17
[FORM OF ASSIGNMENT]
FOR VALUE RECEIVED, the undersigned registered holder of the within Warrant
Certificate hereby sells, assigns and transfers unto the assignee(s) named
below (including the undersigned with respect to any shares of common stock for
which the Warrants represented by the within Warrant Certificate are
exercisable but the right to exercise for which is not being assigned hereby)
all of the right of the undersigned under the within Warrant Certificate, with
respect to the number of Warrants as are set forth below:
Social Security
or other
identifying Number of
Name(s) of number of Warrants
Assignees Address Assignee(s) being assigned
---------- ------- --------------- --------------
and does hereby irrevocably constitute and appoint the undersigned's
attorney to make such transfer on the books of Southern Mineral Corporation
maintained for that purpose with full power of substitution in the premises.
Dated:___________________________
__________________________________(1)
(Signature of Owner)
-------------------------------------
(Street Address)
-------------------------------------
(City) (State) (ZIP Code)
Signature Guaranteed by:
-------------------------------------
- --------
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, and must be guaranteed by an eligible
guarantor institution pursuant to SEC Rule 17Ad-15.
X-18
ANNEX XI
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K/A
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------
Commission file number 0-22650
----------------
PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
6733 South Yale Avenue 74136
Tulsa, Oklahoma (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (918) 491-4500
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)(S)229.045 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 2001 was $40,127,890. Indicate the number of
shares outstanding of each of the registrant's classes of common stock, as of
February 28, 2001:
Common Stock, par value $.01 per share: 8,720,619
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the registrant's Annual Meeting of Shareholders to be
held in 2001 (to be filed within 120 days of the close of registrant's fiscal
year) is incorporated by reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Item Title Page
---- ----- ----
PART I
1 Business........................................................ 1
2 Properties...................................................... 6
3 Legal Proceedings............................................... 14
4 Submission of Matters to a Vote of Securities Holders........... 14
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 15
6 Selected Financial Data......................................... 16
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 17
7A Quantitative and Qualitative Disclosure about Market Risk....... 21
8 Financial Statements and Supplementary Data..................... 21
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 21
PART III
10-13 (Items 10-13 incorporated by reference to Proxy Statement)...... 22
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K............................................................ 22
As used in this report, "Bbl" means barrel, "MBbls" means thousand barrels,
"MMBbls" means million barrels, "Mcf" means thousand cubic feet, "MMcf" means
million cubic feet, "Bcf" means billion cubic feet, "BOPD" means barrel of oil
per day, "Mcf/D" means thousand cubic feet per day, "MMcf/D" means million
cubic feet per day, "Mcfe" means natural gas stated on an MCF basis and crude
oil converted to a thousand cubic feet of natural gas equivalent by using the
ratio of one Bbl of crude oil to six Mcf of natural gas, "MMcfe" means million
cubic feet of natural gas equivalents, "Bcfe" means one billion cubic feet of
natural gas equivalents, "Tcf" means one trillion cubic feet, "PV-10" means
estimated pretax present value of future net revenues discounted at 10% using
SEC rules, "gross" wells or acres are the wells or acres in which the Company
has a working interest, and "net" wells or acres are determined by multiplying
gross wells or acres by the Company's working interest in such wells or acres.
XI-i
PART I
Item 1. Business.
General
PetroCorp Incorporated is an independent energy company engaged in the
acquisition, exploration and development of oil and gas properties, and in the
production of oil, natural gas liquids and natural gas in North America. The
Company's activities are conducted principally in the states of Oklahoma,
Texas, Mississippi, Louisiana and Kansas, and in the province of Alberta,
Canada.
At December 31, 2000, the Company's proved reserves totaled 4.2 MMBbls of
oil and 75.3 Bcf of natural gas and had an estimated pretax present value of
future net revenues (PV-10) of $410.3 million. On a Mcfe basis, approximately
75% of the Company's proved reserves were natural gas at such date. In
addition, the Company has unproved interest holdings with a net book value of
$2.0 million, as well as interests in natural gas processing and gathering
facilities with a net book value of $2.5 million.
The Company was formed in July 1983 as a Delaware corporation and in
December 1986 contributed its assets to a newly formed Texas general
partnership. In October 1992, the Company changed its legal form from a Texas
general partnership to a Texas corporation. In August 1999, the Company signed
a Management Agreement with its largest shareholder, Kaiser-Francis Oil Company
(Kaiser-Francis), under which Kaiser-Francis will provide management, technical
and administrative support for all of the Company's operations in the United
States and Canada. At that time, Gary R. Christopher was named President and
CEO of the Company. Mr. Christopher is an employee of Kaiser-Francis Oil
Company and has served on PetroCorp's Board of Directors since 1996. This
Management Agreement was approved by the shareholders of the Company in October
1999 and took effect on November 1, 1999. A new slate of corporate officers was
approved at that time. PetroCorp's principal executive offices are located at
6733 South Yale Avenue, Tulsa, Oklahoma 74136, with a mailing address of P.O.
Box 21298, Tulsa, Oklahoma 74121-1298, and its telephone number is (918) 491-
4500. Unless the context otherwise requires, the terms the "Company" and
"PetroCorp" refer to and include PetroCorp Incorporated, its predecessor
entities (including the original Delaware corporation and the subsequent Texas
general partnership) and all subsidiaries in which PetroCorp owns a 50% or
greater interest.
Business Strategy
PetroCorp and its wholly-owned Canadian subsidiaries acquire, explore and
develop oil and natural gas properties in North America.
Acquisition Strategy. The Company has grown, in large part, through the
acquisition of producing oil and gas properties. The Company generally focuses
on acquisitions of long-lived natural gas reserves, located onshore in North
America, and prefers acquisitions that provide additional potential through
development or exploitation efforts, as well as exploratory drilling
opportunities.
Exploration and Development Strategy. Exploration and development activities
are an important component of PetroCorp's business strategy. Through its
Management Agreement with Kaiser-Francis, the Company will be able to allocate
a greater portion of future cash flows to exploration and development
activities.
Exploration and Development Activities
Pending Merger. On December 22, 2000, PetroCorp and Southern Mineral
Corporation (Southern Mineral) executed a definitive agreement whereby Southern
Mineral would be merged into PetroCorp. In the merger, shareholders of Southern
Mineral will receive consideration of $4.71 per share in cash or, at their
election, PetroCorp common stock or a combination of cash and stock, subject to
certain adjustments. For both companies, the merger provides strategic and
economic benefits. The operations of the two companies are very complementary,
with PetroCorp primarily operating in the onshore Gulf Coast and Mid-continent
areas of the United States and Southern Mineral primarily operating in the
onshore Gulf Coast area of the United States.
XI-1
PetroCorp and Southern Mineral both have significant oil and gas interests in
the province of Alberta, Canada. Additionally, the combined company will
benefit by having a substantially greater critical mass and the cost savings
resulting from the consolidation of operations. PetroCorp will continue to
operate under the Management Agreement with Kaiser-Francis Oil Company.
PetroCorp and Southern Mineral have filed a preliminary joint
proxy/registration statement with the Securities and Exchange Commission and,
subject to receiving regulatory and shareholder approvals, anticipate a second
quarter 2001 closing.
United States. During 2000, the Company participated in three new
discoveries in the Cement Field area, located in Caddo County, Oklahoma,
increasing proved reserves by 317 MMcfe. In South Louisiana, PetroCorp
participated in the successful Martin Heirs well in the Scott field area,
adding 637 MMcfe of proved reserves.
At year-end 2000, PetroCorp was participating in three deep prospects in
the Mississippi Salt Basin in an area where several new field discoveries have
recently been made. The North Smithtown Prospect was drilling toward a
Smackover/Norphlet target at approximately 19,000 feet. The Northwest Clara
Prospect seeks the same objectives at approximately 17,000 feet. The Company
owns 7.5% and 10% working interests, respectively, in the two prospects. A
third prospect in the same area is anticipated to spud after the completion of
the Northwest Clara well. In South Texas, the Company plans to drill two
prospect ideas as part of its Duval County joint venture with industry
partners. Target objectives are Wilcox intervals between 10,000 and 16,000
feet. PetroCorp owns 17.5% working interest in this project.
PetroCorp's most significant domestic project is the SW Oklahoma City Unit,
which is showing positive response to water injection efforts. This is
consistent with both the Company's initial estimates and offset field response
in similar waterflood projects in the same region. Since the last half of
1999, the unit's production has more than doubled to over 400 barrels per day.
Additional infill drilling is anticipated during 2001, which should lead to a
projected peak waterflood response of between 800 and 1000 barrels per day by
2003.
Canada. Recent activity in the Hanlan-Robb area has focused on the
development of the Shaw, Basing and Redcap areas through the drilling of five
new horizontal wells. Three of these wells have begun production and the other
two are expected to be tied in to the Hanlan-Robb plant in the first quarter
of 2001. Gross production increase, which is prior to royalty payments, from
the addition of the three wells has added 34.5 MMcf/D and increased production
from this area by 300% verses 1999 levels. Drilling is expected to continue in
this area with up to 4 additional wells anticipated to be drilled in 2001. In
the Banshee/Medicine Lodge area, PetroCorp completed a suspended well in an
uphole zone which is currently producing 2 MMcf/D.
At the Hanlan Swan Hills Gas Unit #1 additional compression was added in
the south pool to protect the unit from a competing well outside the unit.
Early in 2000, PetroCorp acquired the interest of a small owner in the unit to
increase the Company's working interest to 7.6% of the unit.
In the Minehead exploratory prospect, located ten miles east of the Hanlan-
Robb Gas Plant, PetroCorp participated for a 4.7% working interest in a well
targeting the Swan Hills formation. Although the well was unsuccessful in the
Swan Hills, several up hole zones continue to be evaluated. PetroCorp has
working interest varying from 2.4% to 32.5% in the surrounding 12,800 leased
acres.
XI-2
Production and Sales
The following table presents certain information with respect to oil and gas
production attributable to the Company's properties, average sales price
received and average production costs during the three years ended December 31,
2000, 1999, and 1998. The average oil sales price and average gas sales price
have been reduced, respectively, by $1,035,000 ($2.56 per Bbl) and $62,000
($0.01 per Mcf) for hedging losses during 2000. See Note 9 to the Consolidated
Financial Statements of the Company and "Supplemental Information to the
Consolidated Financial Statements" in the Notes thereto included elsewhere in
this report for additional financial information regarding the Company's
foreign and domestic operations.
Year Ended December
31,
--------------------
2000 1999 1998
------ ------ ------
Net oil produced (MBbls):
United States....................................... 294 324 422
Canada.............................................. 110 138 143
------ ------ ------
Total............................................. 404 462 565
Average oil sales price (per Bbl):
United States....................................... $26.38 $17.33 $12.55
Canada.............................................. 25.49 16.48 11.59
Weighted average.................................... 26.14 17.08 12.31
Net gas produced (MMcf):
United States....................................... 3,850 4,421 4,932
Canada.............................................. 4,519 4,660 4,579
------ ------ ------
Total............................................. 8,369 9,081 9,511
Average gas sales price (per Mcf):
United States....................................... $ 4.08 $ 2.24 $ 2.15
Canada.............................................. 3.54 1.58 1.32
Weighted average.................................... 3.79 1.90 1.75
Gas equivalents produced (MMcfe):
United States....................................... 5,614 6,365 7,464
Canada.............................................. 5,179 5,488 5,437
------ ------ ------
Total............................................. 10,793 11,853 12,901
Average sales price (per Mcfe):
United States....................................... $ 4.18 $ 2.44 $ 2.13
Canada.............................................. 3.63 1.76 1.42
Weighted average.................................... 3.92 2.13 1.83
Production costs (per Mcfe):
United States....................................... $ 1.04 $ 0.72 $ 0.69
Canada.............................................. 0.43 0.40 0.40
Weighted average.................................... 0.74 0.57 0.57
Marketing
PetroCorp's United States gas production is sold to a variety of pipelines,
marketing companies and utility end users at prices based on the spot market.
This gas is typically sold under short-term contracts ranging in length from
one month to one year. In Canada during 2000, nearly one-half of the Company's
gas was dedicated under long-term contracts to Pan-Alberta Gas Ltd. (Pan-
Alberta), a major Canadian gas aggregator and marketer. Under these contracts,
approximately 75% of the gas was resold into the United States, predominantly
to markets in the upper Midwest region. PetroCorp received a price, per Mcf,
from Pan-Alberta equal to Pan-Alberta's resale price less certain costs. Most
of the Company's remaining Canadian gas was sold to Engage Energy at spot
prices on either a daily or a monthly basis.
PetroCorp's domestic crude oil and condensate production is sold to a
variety of purchasers typically on a monthly contract basis at posted field
prices or NYMEX prices, as determined by major buyers. In particular
XI-3
areas, where production volumes are significant or the location is desirable
for a particular purchaser, or both, the Company has successfully negotiated
bonuses over the purchaser's general field postings for its production.
During the year ended December 31, 2000, Engage Energy and Pan-Alberta
accounted for 27% and 19% of the Company's total sales, respectively. The
Company does not believe the loss of any purchaser would have a material
adverse effect on its financial position since the Company believes
alternative sales arrangements could be made on relatively comparable terms.
In general, prices of oil and gas are dependent on numerous factors beyond
the control of the Company, such as competition, international events and
circumstances (including actions taken by the Organization of Petroleum
Exporting Countries (OPEC)), and certain economic, political and regulatory
developments. Since demand for natural gas is generally highest during winter
months, prices received for the Company's natural gas are subject to seasonal
variations.
Hedging Activities
Prior to 1997, the Company utilized hedging transactions to manage its
exposure to price fluctuations in crude oil and natural gas. The Company has
reviewed this strategy and has begun hedging activities again, effective April
2000. No contracts were outstanding as of December 31, 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
the impact of hedging transactions on financial results.
Competition
The oil and gas industry is highly competitive. The Company competes in
acquisitions and in the exploration, development, production and marketing of
oil and gas with major oil companies, larger independent oil and gas concerns
and individual producers and operators. Many of these competitors have
substantially greater financial and other resources than the Company.
Regulation
United States
General. The Company's business is affected by numerous governmental laws
and regulations, including energy, environmental, conservation and tax laws.
For example, state and federal agencies have issued rules and regulations that
require permits for the drilling of wells, regulate the spacing of wells,
prevent the waste of reserves through proration, and regulate oilfield and
pipeline environmental and safety matters. Changes in any of these laws could
have a material adverse effect on the Company's business, and the Company
cannot predict the overall effects of such laws and regulations on its future
operations. Although these regulations have an impact on the Company and
others in the oil and gas industry, the Company does not believe that it is
affected in a significantly different manner by these regulations than are its
competitors in the oil and gas industry.
The following discussion contains summaries of certain laws and regulations
and is qualified in its entirety by the foregoing.
Regulation of Transportation and Sale of Natural Gas and Oil. Various
aspects of the Company's oil and gas operations are regulated by agencies of
the federal government. The transportation of natural gas in interstate
commerce is generally regulated by the Federal Energy Regulatory Commission
(FERC) pursuant to the Natural Gas Act of 1938 (the NGA) and the Natural Gas
Policy Act of 1978 (NGPA). The intrastate transportation and gathering of
natural gas (and operational and safety matters related thereto) may be
subject to regulation by state and local governments.
In the past, the federal government regulated the prices at which the
Company's produced oil and gas could be sold. Currently, "first sales" of
natural gas by producers and marketers, and all sales of crude oil, condensate
XI-4
and natural gas liquids, can be made at uncontrolled market prices, but
Congress could reenact price controls at any time.
Within the past decade, the FERC has issued numerous orders and policy
statements designed to create a more competitive environment in the national
natural gas marketplace, including orders promoting "open-access"
transportation on natural gas pipelines subject to the FERC's NGA and NGPA
jurisdiction. The FERC's "Order 636" was issued in April 1992 and was designed
to restructure the interstate natural gas transportation and marketing system
and to promote competition within all phases of the natural gas industry. Among
other things, Order 636 required interstate pipelines to separate the
transportation of gas from the sale of gas, to change the manner in which
pipeline rates were designed and to implement other changes intended to promote
the growth of market centers. Subsequent FERC initiatives have attempted to
standardize interstate pipeline business practices and to allow pipelines to
implement market-based, negotiated and incentive rates. The restructured
services implemented by Order 636 and successor orders have now been in effect
for a number of winter heating seasons and have significantly affected the
manner in which natural gas (both domestic and foreign) is transported and sold
to consumers.
Order 636 has generally been upheld in judicial appeals to date. However,
FERC routinely evaluates whether its approach to regulation of the natural gas
industry should be changed and whether further refinements or changes to
existing policies should be made in view of developments in the natural gas
industry since Order 636 was originally issued. Although FERC has indicated
that it remains committed to Order 636's "fundamental goal" of "improving the
competitive structure of the natural gas industry in order to maximize the
benefits of wellhead decontrol," the future regulatory goals and priorities of
FERC may change, and it is not possible to predict the effect, if any, of
future restructuring orders or policies on the Company's operations. FERC's
policies may also be impacted by the ongoing restructuring of the electric
power industry pursuant to FERC Order No. 888.
While Order 636 and related orders do not directly regulate either the
production or sale of gas that may be produced from the Company's properties,
the increased competition and changes in business practices within the natural
gas industry resulting from such orders have affected the terms and conditions
under which the Company markets and transports its available gas supplies. To
date, the FERC's pro-competition policies have not materially affected the
Company's business or operations. On a prospective basis, however, such orders
may substantially increase the burden on producers and transporters to
accurately nominate and deliver on a daily basis specified volumes of natural
gas, or to bear penalties or increased costs in the event scheduled deliveries
are not made.
Environmental Regulation. Various federal, state and local laws and
regulations governing the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may affect the
Company's operations and costs. In particular, the Company's exploration,
exploitation and production operations, its activities in connection with
storage and transportation of crude oil and other liquid hydrocarbons and its
use of facilities for treating, processing or otherwise handling hydrocarbons
and wastes therefrom are subject to stringent environmental regulation.
Although compliance with these regulations increases the cost of Company
operations, such compliance has not in the past had a material effect on the
Company's capital expenditures, earnings or competitive position. Environmental
regulations have historically been subject to frequent change by regulatory
authorities. The trend toward stricter standards in environmental legislation
and regulation is likely to continue. For instance, legislation has been
proposed in Congress from time to time that would reclassify certain oil and
gas exploration and production wastes as "hazardous wastes," which would make
the reclassified wastes subject to much more stringent handling, disposal and
cleanup requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the Company, as well as the oil
and gas industry in general. Also at the federal level, the U.S. Oil Pollution
Act requires owners and operators of facilities that could be the source of an
oil spill into "waters of the United States" (a term defined to include rivers,
creeks, wetlands and coastal waters) to demonstrate that they have at least $35
million in financial resources to pay for the costs of cleaning up an oil spill
and compensating any parties damaged by an oil spill. Such financial assurances
may be increased to as much as $150 million if a formal assessment indicates
XI-5
such an increase is warranted. These financial responsibility requirements
could have a significant adverse impact on small oil and gas companies like
PetroCorp. State initiatives to further regulate the disposal of oil and gas
wastes are also pending in certain states, and these various initiatives could
have a similar impact on the Company. The Company is unable to predict the
ongoing cost to it of complying with these laws and regulations or the future
impact of such regulations on its operation. Management believes that the
Company is in substantial compliance with current applicable environmental
laws and regulations and that continued compliance with existing requirements
will not have a material adverse impact on the Company. A catastrophic
discharge of hydrocarbons into the environment could, to the extent such event
is not insured, subject the Company to substantial expense.
Canada
In Canada, the petroleum industry operates under federal, provincial and
municipal legislation and regulations governing taxes, land tenure, royalties,
production rates, environmental protection, exports and other matters. Prices
of oil and natural gas in Canada have been deregulated and are determined by
market conditions and negotiations between buyers and sellers, although oil
production volumes are regulated. Various matters relating to the
transportation and distribution of natural gas are the subject of hearings
before various regulatory tribunals. In addition, although the price of
natural gas exported from Canada is subject to negotiation between buyers and
sellers, the National Energy Board, which regulates exports of natural gas,
requires that natural gas export contracts meet certain criteria as a
condition of approving such contracts. These criteria, including price
considerations, are designed to demonstrate that the export is in the Canadian
public interest. Several provincial governments have introduced a number of
programs to encourage and assist the oil and natural gas industry, including
incentive payments, royalty holidays and royalty tax credits. Canadian
governmental regulations may have a material effect on the economic parameters
for engaging in oil and gas activities in Canada and may have a material
effect on the advisability of investments in Canadian oil and gas drilling
activities.
Employees
At December 31, 2000, PetroCorp had 2 full-time employees. (See
"Restructuring" included in Item 7--Management's Discussion and Analysis of
Financial Condition and Result of Operations.)
Item 2. Properties.
Principal Properties
The Company's proved oil and gas properties are relatively concentrated.
Approximately 76% of the PV-10 from the Company's proved reserves at December
31, 2000 was attributable to four principal areas.
The following table presents data regarding the estimated quantities of
proved oil and gas reserves and the PV-10 attributable to the Company's
principal properties as of December 31, 2000, all of which are taken from
reports prepared by Huddleston & Co., Inc. in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC).
December 31, 2000
-------------------------------------
Estimated Proved
Reserves
----------------------
Oil Gas
Property/Area (MBbls) (MMcf) MMcfe PV-10
------------- ------- ------ ------- --------------
(in thousands)
Hanlan-Robb (Canada)................... 109 45,263 45,917 $215,558
Oklahoma City Area..................... 2,329 2,761 16,735 38,971
South Louisiana Area................... 75 3,638 4,088 35,021
McLeod Field (Canada).................. 233 4,391 5,789 20,382
----- ------ ------- --------
Subtotal............................. 2,746 56,053 72,529 309,932
----- ------ ------- --------
Others................................. 1,464 19,206 27,990 100,323
----- ------ ------- --------
Total................................ 4,210 75,259 100,519 $410,255
===== ====== ======= ========
XI-6
Hanlan-Robb. PetroCorp's largest single producing area is the Hanlan-Robb
natural gas production complex located in the foothills region of western
Alberta, Canada, which accounted for approximately 42% of the Company's 2000
net daily gas production. The Company owns an interest in eleven producing
fields in this area, covering 46,000 developed acres, with current combined
production of 240 MMcf/D. PetroCorp has additional interests in 80,000
undeveloped acres in this area. The key field is the Hanlan Swan Hills Gas Unit
#1, with a current gross production of 134 MMcf/D. PetroCorp's ownership is
part of a joint venture managed by the Company with institutional investors
that collectively own 21.7% of the field. PetroCorp's working interest in this
field is 35% of the joint venture, or 7.6%. Petro-Canada (not an affiliate of
PetroCorp) is the largest interest owner in the area and operates the Hanlan-
Robb area fields and the related gathering system and processing plant. Other
PetroCorp fields in this area include Shaw/Basing, Minehead, Columbia, Red Cap,
Lambert, Banshee and Medicine Lodge.
Oklahoma City Area. Includes the Southwest Oklahoma City Field located
within the metropolitan Oklahoma City area in Oklahoma and the Edmond Prospect
located just north of Oklahoma City. In the Southwest Oklahoma City Field area,
PetroCorp operates 61 wells and has a working interest in two additional wells.
The Company also owns a 4% working interest in the adjacent Will Rogers Unit,
operated by Marathon. The key property is the PetroCorp operated SW Oklahoma
City Unit, a field-wide waterflood unit targeting the Prue formation at 6,500
feet. Current unit production is approximately 400 BOPD and 2,200 Mcf/D. The
Company owns an 86.4% working interest in the unit.
South Louisiana Area. Includes ownership in the East Riceville Field in
Vermillion Parish and the Scott Field in Lafayette Parish. East Riceville is a
two-well gas field producing 16 MMcf/D from a Miogyp reservoir at approximately
17,000 feet. PetroCorp owns a 13.8% working interest in this field, which is
operated by Murphy Exploration and Production Company.
McLeod Field. As part of an acquisition in late 1996, the Company acquired
one shut-in oil well in this field in west central Alberta, Canada. Since then,
PetroCorp has drilled seven successful wells and acquired an interest in two
producing wells. A gas conservation project is expected to be completed in
early 2001 to capture flared solution gas from the oil wells. The Company's
working interests vary from 12% to 100% in 9.8 sections (approximately 6,240
acres).
Other Properties. Other significant U.S. properties include the Glick Field
located in south-central Kansas, the Hunter Misener Unit located in Alfalfa
County, Oklahoma, the Maynor Creek Field in Wayne County, Mississippi, the
Harris Field in Live Oak County, Texas, and the Paradox Basin area of southwest
Colorado. Other significant Canadian properties include the Trochu Prospect in
south-central Alberta and the Worsley Triassic A Pool located on the north
flank of the Peace River Arch in Alberta.
Title to Properties
United States. Except for the Company-owned mineral fee, royalty and
overriding royalty interests shown in the "Acreage and Wells" table below,
substantially all of the Company's United States property interests are held
pursuant to leases from third parties. The Company believes that it has
satisfactory title to its properties in accordance with standards generally
accepted in the oil and gas industry. In numerous instances, the Company has
acquired legal title to producing properties and has carved out of the
properties so acquired net profits royalty interests in favor of institutional
investors who supplied a substantial portion of the funds for the acquisition
of such properties. The producing property reserves of the Company are stated
after giving effect to the reduction in cash flow attributable to such net
profits royalty interests. In addition, the Company's properties are subject to
customary royalty interests, liens for current taxes and other burdens that the
Company believes do not materially interfere with the use of or affect the
value of such properties.
Canada. Canadian property interests are held primarily under leases from the
Crown. A small percentage are from freehold owners. Prior to drilling on a non-
Crown lease or acquiring a non-Crown producing lease, the Company generally
obtains a title opinion covering the "historical" (freehold) title. The Company
generally
XI-7
relies on a title certificate under Canada's Torrens title registration system
to verify "current" (leasehold) ownership. Except for these differences, title
matters in Canada are similar to those in the United States.
Oil and Gas Reserves
All information herein regarding estimates of the Company's proved reserves,
related future net revenues and PV-10 is taken from reports prepared by
Huddleston & Co., Inc. (the Independent Engineers) in accordance with the rules
and regulations of the SEC. The Independent Engineers' estimates were based
upon a review of production histories and other geologic, economic, ownership
and engineering data provided by the Company.
The following table sets forth summary information with respect to the
estimates made by the Independent Engineers of the Company's proved oil and gas
reserves as of December 31, 2000. The PV-10 values shown in the table are not
intended to represent the current market value of the estimated oil and gas
reserves owned by the Company. The average prices used in determining future
cash inflows for natural gas and oil as of December 31, 2000, were $9.19 per
Mcf and $27.16 per barrel, respectively. These prices were based on the
adjusted cash spot price for natural gas and oil at December 31, 2000. These
prices are significantly higher than the average natural gas and oil price
received by PetroCorp during December 2000, and the prices PetroCorp expects to
receive during 2001 and ensuing years.
December 31, 2000
--------------------------
United
States Canada Total
-------- -------- --------
Proved reserves:
Oil (MBbls).................................... 3,109 1,101 4,210
Gas (MMcf)..................................... 22,709 52,550 75,259
Gas equivalents (MMcfe)........................ 41,363 59,156 100,519
Future net revenues ($000s)...................... $255,686 $467,251 $722,937
Present value of future net revenues ($000s)..... $152,123 $258,132 $410,255
Proved developed reserves:
Oil (MBbls).................................... 2,888 1,068 3,956
Gas (MMcf)..................................... 20,551 46,624 67,175
Gas equivalents (MMcfe)........................ 37,879 53,032 90,911
Future net revenues ($000s)...................... $228,084 $417,264 $645,348
Present value of future net revenues ($000s)..... $130,596 $228,797 $359,393
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and future amounts and
timing of development expenditures, including many factors beyond the control
of the Company. Reserve engineering is a subjective process of estimating
underground accumulations of crude oil and natural gas that cannot be measured
in an exact manner, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Estimates of proved undeveloped reserves are inherently less
certain than estimates of proved developed reserves. The quantities of oil and
gas that are ultimately recovered, production and operating costs, the amount
and timing of future development expenditures, geologic success and future oil
and gas sales prices may all differ from those assumed in these estimates. In
addition, the Company's reserves may be subject to downward or upward revision
based upon production history, purchases or sales of properties, results of
future development, prevailing oil and gas prices and other factors. Therefore,
the present value shown above should not be construed as the current market
value of the estimated oil and gas reserves attributable to the Company's
properties.
In accordance with SEC guidelines, the Independent Engineers' estimates of
future net revenues from the Company's proved reserves and the present value
thereof are made using oil and gas sales prices in effect as of the dates of
such estimates and are held constant throughout the life of the properties
except where such guidelines permit alternate treatment, including, in the case
of gas contracts, the use of fixed and determinable
XI-8
contractual price escalations. See "Marketing" under Item 1 of this report,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this report and "Supplemental Information to
Consolidated Financial Statements" in the Notes to the Consolidated Financial
Statements of the Company. Estimates of the Company's proved oil and gas
reserves were not filed with or included in reports to any other federal
authority or agency other than the SEC during the fiscal year ended December
31, 2000.
Acreage and Wells
The following table sets forth certain information with respect to the
Company's developed and undeveloped leased acreage as of December 31, 2000.
Developed Undeveloped
Acres Acres(1)
-------------- --------------
Gross Net Gross Net
------- ------ ------- ------
United States:
Colorado..................................... 10,186 7,958 -- --
Kansas....................................... 5,360 667 10 1
Louisiana.................................... 2,091 202 661 71
Mississippi.................................. 640 405 10,735 6,257
Oklahoma..................................... 39,629 9,708 12,783 5,092
Texas........................................ 34,020 3,386 50,030 3,590
Other........................................ 1,807 343 5,109 480
Canada:
Alberta...................................... 59,920 10,130 107,520 13,808
------- ------ ------- ------
Total...................................... 153,653 32,799 186,848 29,299
======= ====== ======= ======
- --------
(1) Approximately 16% of net undeveloped acres are covered by leases that
expire during 2001, unless drilling or production otherwise extends lease
terms.
As of December 31, 2000, the Company had working interests in 233 gross (75
net) producing oil wells and 197 gross (35 net) producing gas wells. Of these
wells, 20 gross (18 net) oil wells and 56 gross (11 net) gas wells were in
Canada, and the remainder of the oil and gas wells were in the United States.
XI-9
Drilling Activities
All of PetroCorp's drilling activities are conducted through arrangements
with independent contractors, and it owns no drilling equipment. Certain
information with regard to the Company's drilling activities completed during
the years ended December 31, 2000, 1999 and 1998 is set forth below:
Year Ended December 31,
----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Net Net Net
Working Working Working
Type of Well Gross Interest Gross Interest Gross Interest
------------ ----- -------- ----- -------- ----- --------
United States
Development:
Oil........................... 4 .2 4 .2 -- --
Gas........................... 5 .3 1 .0(1) 9 1.3
Nonproductive................. 1 .2 1 .2 -- --
--- --- --- --- --- ---
Total....................... 10 .7 6 .4 9 1.3
--- --- --- --- --- ---
Exploratory:
Oil........................... -- -- -- -- -- --
Gas........................... -- -- -- -- 2 .3
Nonproductive................. 1 .0(1) 1 .2 8 2.6
--- --- --- --- --- ---
Total....................... 1 .0 1 .2 10 2.9
--- --- --- --- --- ---
Canada
Development:
Oil........................... 1 1 1 1 -- --
Gas........................... 6 1.1 2 .2 2 .1
Nonproductive................. -- -- 2 .0(1) -- --
--- --- --- --- --- ---
Total....................... 7 2.1 5 1.2 2 .1
--- --- --- --- --- ---
Exploratory:
Oil........................... -- -- -- -- -- --
Gas........................... 3 .4 4 .2 2 1.1
Nonproductive................. -- -- 3 .1 2 1.2
--- --- --- --- --- ---
Total....................... 3 .4 7 .3 4 2.3
--- --- --- --- --- ---
Total........................... 21 3.2 19 2.1 25 6.6
=== === === === === ===
- --------
(1) The Company has a net working interest less than 0.05% in these wells.
At December 31, 2000, the Company was participating in the drilling of 3
gross (.3 net) wells. Of these, 1 gross (.1 net) was in the United States and 2
gross (.2 net) were in Canada.
Hanlan-Robb Natural Gas Processing Plant and Gas Gathering Systems
PetroCorp owns interests in a centrally located gas processing plant and in
a gas gathering system that connects all of the Company's currently producing
Hanlan-Robb fields to the Hanlan-Robb plant. Commissioned in 1983, the
estimated replacement value is approximately $340 ($C500) million. The original
design capacity of 300 MMcf/D has been expanded to 380 MMcf/D and two new major
pipeline systems began delivering third-party gas to the plant for processing
in September 1998. This third-party gas, for which processing fees are
received, plus gas from additional drilling in the area, has increased plant
throughput from 220 MMcf/D to approximately 340 MMcf/D at year-end 2000.
PetroCorp owns a 24.5% working interest in the plant and varying working
interests in the gathering systems, dehydration and compression facilities that
deliver gas to the plant.
XI-10
Previously a wholly-owned subsidiary of the Company, Fidelity Gas Systems,
Inc. ("FGS"), owned and operated the Anasazi Gas Gathering System, which
gathers gas produced from the Company-operated lease in the Paradox Basin area
of southwest Colorado. In December 1997, FGS was merged into the Company. The
working interest owners have entered into contracts with the Company pursuant
to which the Company purchases all of the gas produced from the area. This gas
is then resold by the Company to a purchaser at a redelivery point on the
national transmission pipeline system. Proceeds payable by the Company are
based upon the Company's resale price less a contractually agreed-upon fee.
Amounts received by the Company are distributed to all working interest and
royalty owners in the producing area in accordance with their ownership
interests. Because it is a gas gathering system, the Anasazi Gas Gathering
System has been deemed nonjurisdictional with respect to existing FERC rules
and regulations.
Other Facilities
In 2000, the Company found a replacement lessee for approximately 31,600
square feet in Houston, Texas where its primary office was previously located.
The Company leases, and subleases to others, approximately 8,200 square feet in
Oklahoma City, Oklahoma and approximately 4,000 square feet in Calgary, Alberta
where divisional offices were previously located. The obligation under these
leases will end in 2001 for the Oklahoma City lease and 2002 for the Calgary
lease. Additionally, the Company owns an 18,400 square-foot building and
surface pads covering approximately 42 acres related to its Southwest Oklahoma
City Field operations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Current and prospective stockholders should carefully consider the following
risk factors in evaluating an investment in PetroCorp. The information
discussed herein includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical facts
included herein regarding planned capital expenditures, increases in oil and
gas production, the number of anticipated wells to be drilled after the date
hereof, the Company's financial position, business strategy and other plans and
objectives for future operations, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, they do involve certain assumptions, risks and
uncertainties, and the Company can give no assurance that such expectations
will prove to have been correct. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by such factors.
Volatile Nature of Oil and Gas Markets; Fluctuations in Prices
The Company's future financial condition and results of operations are
highly dependent on the demand and prices received for oil and gas production
and on the costs of acquiring, developing and producing reserves. Oil and gas
prices have historically been volatile and are expected by the Company to
continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuation in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond the Company's control. These factors include political
conditions in the Middle East and elsewhere, domestic and foreign supply of oil
and gas, the level of consumer demand, weather conditions, domestic and foreign
government regulations and taxes, the price and availability of alternative
fuels and overall economic conditions. A decline in oil or gas prices may
adversely affect the Company's cash flow, liquidity and profitability. Lower
oil or gas prices also may reduce the amount of the Company's oil and gas that
can be produced economically.
XI-11
Dependence on Acquiring and Finding Additional Reserves
The Company's prospects for future growth and profitability will depend
predominantly on its ability to replace present reserves through acquisitions
and exploratory drilling, as well as on its ability to successfully develop
additional reserves. There can be no assurance that the Company's acquisition
and exploration activities or planned development projects will result in
significant additional reserves or that the Company will have continuing
success at drilling economically productive wells.
Substantial Capital Requirements
The Company has made substantial capital expenditures in connection with the
acquisition, exploration and development of oil and gas properties. Future cash
flows and the availability of credit are subject to a number of variables, such
as the level of production from existing wells, prices of oil and gas and the
Company's success in locating and producing new reserves. If revenues were to
decrease as a result of lower oil and gas prices, decreased production or
otherwise, and the Company had no available credit, the Company could be
limited in its ability to replace its reserves or to maintain production at
current levels, resulting in a decrease in production and revenue over time. If
the Company's cash flow from operations and available credit are not sufficient
to satisfy its capital expenditure requirements, there can be no assurance that
additional debt or equity financing will be available to meet these
requirements.
Reliance on Estimates of Reserves and Future Net Cash Flows
There are numerous uncertainties inherent in estimating quantities of proved
oil and gas reserves, including many factors beyond the Company's control.
Petroleum engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of future net
cash flow 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 regulation by governmental agencies,
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 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 significantly. Actual production, revenues and
expenditures with respect to the Company's reserves likely will vary from
estimates, and such variances may be material. In addition, the Company's
reserves and future cash flows may be subject to revisions based upon
production history, results of future development, oil and gas prices,
performance of counterparties under agreements to which the Company is a party,
operating and development costs and other factors.
The PV-10 values referred to herein should not be construed as the current
market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements of the SEC,
the PV-10 values are generally based on prices and costs as of the date of the
estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by factors such as
the amount and timing of actual production, supply and demand for oil and gas,
curtailments or increases in consumption by natural gas purchasers and changes
in governmental regulations or taxation. The timing of actual future net cash
flows from proved reserves, and thus 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 10% discount factor (which is required by the SEC to be used to
calculate PV-10 for reporting purposes), is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with the Company and its properties or the oil and gas
industry in general.
XI-12
Exploration Risks
Exploratory drilling activities are subject to many risks, including the
risk that no commercially productive reservoirs will be encountered, and there
can be no assurance that new wells drilled by the Company will be productive or
that the Company will recover all or any portion of its investment. Drilling
for oil and gas may involve unprofitable efforts, not only from non-productive
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs. The cost
of drilling, completing and operating wells is often uncertain. The Company's
drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond the Company's control, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment and services.
Marketing Risks
The Company's ability to market its oil and gas production at commercially
acceptable prices is dependent on, among other factors, the availability and
capacity of gathering systems and pipelines, federal and state regulation of
production and transportation, general economic conditions, and changes in
supply and in demand.
Acquisition Risks
Acquisitions of oil and gas businesses and properties and volumetric
production payments have been an important element of the Company's success,
and the Company will continue to seek acquisitions in the future. Even though
the Company performs a review (including a limited review of title and other
records) of the major properties it seeks to acquire that it believes is
consistent with industry practices, such reviews are inherently incomplete and
it is generally not feasible for the Company to review in-depth every property
and all records. Even an in-depth review may not reveal existing or potential
problems or permit the Company to become familiar enough with the properties to
assess fully their deficiencies and capabilities, and the Company often assumes
environmental and other liabilities in connection with acquired businesses and
properties.
Operating Risks
The Company's operations are subject to numerous risks inherent in the oil
and gas industry, including the risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental accidents such as
oil spills, natural gas leaks, ruptures or discharges of toxic gases, the
occurrence of any of which could result in substantial losses to the Company
due to injury or loss of life, severe damage to or destruction of property,
natural resources and equipment, pollution or other environmental damage,
clean-up responsibilities, regulatory investigation and penalties and
suspension of operations. The Company's operations may be materially curtailed,
delayed or canceled as a result of numerous factors, including the presence of
unanticipated pressure or irregularities in formations, accidents, title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. In accordance with customary
industry practice, the Company maintains insurance against some, but not all,
of the risks described above. There can be no assurance that the levels of
insurance maintained by the Company will be adequate to cover any losses or
liabilities.
Competitive Industry
The oil and gas industry is highly competitive. The Company competes for
corporate and property acquisitions and the exploration, development,
production, transportation and marketing of oil and gas, as well as contracting
for equipment and securing personnel, with major oil and gas companies, other
independent oil and gas concerns and individual producers and operators. Many
of these competitors have financial and other resources which substantially
exceed those available to the Company.
XI-13
Risks That Might Arise from the Management Agreement
Potential operational inefficiencies may occur during a transition period.
Although a change is not currently anticipated, the Management Agreement with
Kaiser-Francis provides for termination by either party after a six-month
notice. In that unlikely event, some operational inefficiencies may occur as
replacement personnel become familiar with the Company's properties and
operations.
Government Regulation
The Company's business is subject to certain federal, state and local laws
and regulations relating to the drilling for and production, transportation and
marketing of oil and gas, as well as environmental and safety matters. Such
laws and regulations have generally become more stringent in recent years,
often imposing greater liability on an increasing number of parties. Because
the requirements imposed by such laws and regulations are frequently changed,
the Company is unable to predict the effect or cost of compliance with such
requirements or their effects on oil and gas use or prices. In addition,
legislative proposals are frequently introduced in Congress and state
legislatures which, if enacted, might significantly affect the oil and gas
industry. In view of the many uncertainties which exist with respect to any
legislative proposals, the effect on the Company of any legislation which might
be enacted cannot be predicted.
Item 3. Legal Proceedings.
The Company is a party to various lawsuits and governmental proceedings, all
arising in the ordinary course of business. Although the outcome of these
lawsuits cannot be predicted with certainty, the Company does not expect such
matters to have a material adverse effect, either singly or in the aggregate,
on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
XI-14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is currently listed on the American Stock
Exchange (the "AMEX") and trades under the symbol PEX. The Company's Common
Stock has been listed with the AMEX since September 17, 1998. Prior to that
time, the Company's Common Stock had been listed on The Nasdaq Stock Market
since October 28, 1993. The following table presents the high and low closing
prices for the Company's Common Stock for each quarter during 1999 and 2000,
and for a portion of the Company's current quarter, as reported by the AMEX.
1999 2000 2001
------------------------------- ------------------------------- -------------------------
First Quarter
First Second Third Fourth First Second Third Fourth (through
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter February 28)
------- ------- ------- ------- ------- ------- ------- ------- -------------
High.................... $5.88 $6.13 $7.50 $6.88 $6.75 $7.25 $9.88 $10.19 $10.63
Low..................... 5.19 4.38 5.50 5.75 5.25 5.50 7.00 8.63 9.69
As of February 28, 2001, the closing price for the Company's Common Stock
was $9.75 per share. As of February 28, 2001, there were approximately 500
holders of record of the Common Stock.
The Company has not declared or paid any cash dividends on its Common Stock
to date. The Board of Directors of the Company does not intend to declare cash
dividends on its Common Stock in the foreseeable future. The Company intends
instead to retain its earnings to support the growth of the Company's business.
Any future cash dividends would depend on future earnings, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Company's Board of Directors. The terms of the Company's credit
facility prohibits the declaration or payment of any dividends.
XI-15
Item 6. Selected Financial Data.
The following table summarizes consolidated financial data of the Company
and should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company, including the Notes thereto, included
elsewhere in this report.
For the Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income Statement Data:
Revenues:
Oil and gas................ $ 42,264 $ 25,162 $ 23,621 $ 33,502 $ 29,718
Plant processing........... 1,934 1,785 1,550 1,420 1,658
Other...................... 375 179 36 172 170
-------- -------- -------- -------- --------
44,573 27,126 25,207 35,094 31,546
-------- -------- -------- -------- --------
Expenses:
Production costs........... 8,038 6,733 7,344 7,793 6,660
Depreciation, depletion and
amortization.............. 9,471 9,906 16,568 17,065 12,433
Oil and gas property
valuation adjustment...... -- -- 33,600 -- --
General and
administrative............ 1,529 4,311 4,482 4,846 4,542
Restructuring costs........ (445) 3,643 -- -- --
Other operating expenses... 309 281 265 367 333
-------- -------- -------- -------- --------
18,902 24,874 62,259 30,071 23,968
-------- -------- -------- -------- --------
Income (loss) from
operations.................. 25,671 2,252 (37,052) 5,023 7,578
-------- -------- -------- -------- --------
Other income (expenses):
Investment income.......... 584 585 1,151 558 1,910
Interest expense........... (3,381) (3,865) (3,622) (3,528) (3,391)
Other income (expenses).... 295 (132) 14 (47) (46)
-------- -------- -------- -------- --------
(2,502) (3,412) (2,457) (3,017) (1,527)
-------- -------- -------- -------- --------
Income (loss) before income
taxes....................... 23,169 (1,160) (39,509) 2,006 6,051
-------- -------- -------- -------- --------
Income tax provision
(benefit):
Current.................... 5,497 -- -- -- --
Deferred................... 4,612 (954) (15,114) 136 1,807
-------- -------- -------- -------- --------
10,109 (954) (15,114) 136 1,807
-------- -------- -------- -------- --------
Net income (loss) before
extraordinary item.......... 13,060 (206) (24,395) 1,870 4,244
Extraordinary loss--
extinguishment of debt (less
applicable tax benefit of
$143,000)................... 242 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 12,818 $ (206) $(24,395) $ 1,870 $ 4,244
======== ======== ======== ======== ========
Net income (loss) per share--
basic(A).................... $ 1.47 $ (0.02) $ (2.82) $ 0.22 $ 0.49
======== ======== ======== ======== ========
Net income (loss) per share--
diluted(A).................. $ 1.46 $ (0.02) $ (2.82) $ 0.22 $ 0.49
======== ======== ======== ======== ========
Weighted average number of
common shares--basic........ 8,692 8,658 8,637 8,586 8,585
======== ======== ======== ======== ========
Weighted average number of
common shares--diluted...... 8,786 8,658 8,637 8,688 8,669
======== ======== ======== ======== ========
Balance Sheet Data (at
December 31):
Working capital............ $ 9,029 $ 3,642 $ 2,080 $ 2,638 $ 1,946
Total assets............... 117,319 105,395 103,992 130,924 122,864
Long-term debt............. 29,992 43,410 47,305 42,192 33,462
Shareholders equity........ 54,277 42,363 40,744 66,557 65,665
- --------
(A) Basic and diluted net income per share before extraordinary loss for the
year ended December 31, 2000 was $1.50 and $1.49, respectively.
XI-16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company's principal line of business is the production and sale of its
oil and natural gas reserves located in North America. Results of operations
are dependent upon the quantity of production and the price obtained for such
production. Prices received by the Company for the sale of its oil and natural
gas have fluctuated significantly from period to period. Such fluctuations
affect the Company's ability to maintain or increase its production from
existing oil and gas properties and to explore, develop or acquire new
properties.
The following table reflects certain operating data for the periods
presented:
For the Year Ended
December 31,
-----------------------
2000 1999 1998
------- ------- -------
Production:
United States:
Oil (Mbbls)..................................... 294 324 422
Gas (MMcf)...................................... 3,850 4,421 4,932
Gas equivalents (MMcfe)......................... 5,614 6,365 7,464
Canada:
Oil (Mbbls)..................................... 110 138 143
Gas (MMcf)...................................... 4,519 4,660 4,579
Gas equivalents (MMcfe)......................... 5,179 5,488 5,437
Total:
Oil (Mbbls)..................................... 404 462 565
Gas (MMcf)...................................... 8,369 9,081 9,511
Gas equivalents (MMcfe)......................... 10,793 11,853 12,901
Average sales prices:
United States:
Oil (per Bbl)................................... $ 26.38 $ 17.33 $ 12.55
Gas (per Mcf)................................... 4.08 2.24 2.15
Canada:
Oil (per Bbl)................................... 25.49 16.48 11.59
Gas (per Mcf)................................... 3.54 1.58 1.32
Weighted average:
Oil (per Bbl)................................... 26.14 17.08 12.31
Gas (per Mcf)................................... 3.79 1.90 1.75
Selected data per Mcfe:
Average sales price.............................. $ 3.92 $ 2.13 $ 1.83
Production costs................................. 0.74 0.57 0.57
General and administrative expenses.............. 0.14 0.36 0.35
Oil and gas depreciation, depletion and
amortization.................................... 0.74 0.69 1.16
Restructuring
As part of a restructuring plan, on August 3, 1999, PetroCorp's Board of
Directors entered into a Management Agreement with its largest shareholder,
Kaiser-Francis, under which Kaiser-Francis provides management, technical, and
administrative support services for all PetroCorp operations in the United
States and Canada.
Under the terms of the Management Agreement, as amended, Kaiser-Francis is
compensated through a service fee equal to administrative and overhead fees
charged under applicable operating agreements plus fixed
XI-17
fees of no more than $50 per well for non-operated properties. Fees for 2000
and 1999, respectively, were $1,419,000 and $218,000.
The Company recorded restructuring costs of $3,643,000 during 1999.
Included in the costs are employee termination costs of $2,371,000, $807,000
in nonrefundable office lease discontinuance, $363,000 in investment banking
and legal costs, and $102,000 in other related costs. As of December 31, 1999,
$2,161,000 of the restructuring costs are included in accrued liabilities.
As a result of the restructuring, fifty-two employees were terminated in
1999 with one employee terminated in 2000. Several employees elected to defer
receipt of their termination benefits until 2000. The Houston, Oklahoma City
and Calgary offices were closed but the Company was still liable under the
lease agreements. In the second quarter of 2000, the Company was able to find
a replacement lessee for some of the idle office space earlier than
anticipated. The following table shows the change in accrued restructuring
costs during 2000:
Balance at Expenditures Balance at
December 31, charged Changes December 31,
1999 against accrual in estimates 2000
------------ --------------- ------------ ------------
Employee termination
costs.................. $1,341,000 $1,341,000 $ -- $ --
Office lease
discontinuance and
other related costs.... 820,000 305,000 (445,000) 70,000
---------- ---------- --------- -------
$2,161,000 $1,646,000 $(445,000) $70,000
========== ========== ========= =======
Results of Operations
2000 Compared to 1999
Overview. The Company recorded net income of $12,818,000 or $1.47 per share
in 2000, compared to a loss of $206,000, or $0.02 per share, for the
corresponding period of 1999. This improvement results from higher oil and gas
prices and lower general and administrative, restructuring costs and
depreciation, depletion, and amortization expenses.
Revenues. Total revenues increased 64% to $44.6 million in 2000 compared to
$27.1 million in 1999. Oil production decreased 13% to 404 MBbls from 462
MBbls. Natural gas production decreased 8% to 8,369 MMcf from 9,081 MMcf,
resulting in overall production decreasing 9% to 10,793 MMcfe from 11,853
MMcfe. Production decreases are due to normal production declines.
The Company's average U.S. natural gas price increased 82% to $4.08 per Mcf
in 2000 from $2.24 per Mcf in 1999, while the average Canadian natural gas
price increased 124% to $3.54 from $1.58. The Company's composite average oil
price increased 53% to $26.14 per barrel in 2000 from $17.08 per barrel in
1999. Primarily as a result of price increases, oil and gas revenues increased
68% to $42.3 million in 2000 from $25.2 million in 1999. Plant processing
revenues increased 8% to $1.9 million from $1.8 million primarily as a result
of new third party processing in the Canadian Hanlan-Robb gas processing
plant.
Production Costs. Production costs increased 19% to $8.0 million in 2000
compared to $6.7 million in 1999 as a result of workover operations for
repairs and production enhancements and production tax increases related to
higher commodity prices. Production costs per Mcfe were $0.74 for 2000 and
$0.57 for 1999. Approximately $0.18 per Mcfe of increased costs are due to
workover operations and increased production taxes.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 4% to
$9.5 million in 2000 from $9.9 million in 1999. The increase in the oil and
gas DD&A rate per Mcfe to $0.74 in 2000 from $0.69 in 1999 reflects the impact
of previously unevaluated properties evaluated in 2000 and moved into the full
cost pool.
General and Administrative Expenses. General and administrative expenses
decreased 65% to $1.5 million in 2000 from $4.3 million in 1999 as a result of
the Company's restructuring efforts and the Management Agreement with Kaiser-
Francis.
XI-18
Investment Income. Investment income decreased less than 1% to $584,000 in
2000 from $585,000 in 1999.
Interest Expense. Interest expense decreased 13% to $3.4 million in 2000
from $3.9 million in 1999, reflecting the impact of reduced debt levels,
partially offset by an increase in interest rates.
Income Taxes. The Company recorded a $10.1 million income tax expense on
pre-tax income of $23.2 million with an effective tax rate of 44% in 2000
compared to an income tax benefit of $954,000 on a pre-tax loss of $1.2 million
with an effective tax rate of 82% in 1999. During 2000, the Company recorded an
income tax provision for its Canadian operations with an effective tax rate of
47% and tax provision for its U.S. operations with an effective tax rate of
39%, resulting in an overall effective tax rate of 44%. Effective tax rates in
excess of statutory rates are primarily due to adjustments of approximately
$1.2 million resulting from audits by Canadian tax authorities.
1999 Compared to 1998
Overview. Net loss decreased 99% to a loss of $.2 million, or $0.02 per
share, compared to a loss of $24.4 million, or $2.82 per share, for the
corresponding period. Net income in 1998 was significantly impacted by a $33.6
million oil and gas property valuation adjustment while 1999 net income was
impacted by $3,643,000 of restructuring costs.
Revenues. Total revenues increased 7% to $27.1 million in 1999 compared to
$25.2 million in 1998. Oil production decreased 18% to 462 MBbls from 565
MBbls. Natural gas production decreased 5% to 9,081 MMcf from 9,511 MMcf,
resulting in overall production decreasing 8% to 11,853 MMcfe from 12,901
MMcfe.
The Company's average U.S. natural gas price increased 4% to $2.24 per Mcf
in 1999 from $2.15 per Mcf in 1998, while the average Canadian natural gas
price increased 20% to $1.58 from $1.32. The Company's composite average oil
price increased 39% to $17.08 per barrel in 1999 from $12.31 per barrel in
1998. Primarily as a result of price increases, oil and gas revenues increased
7% to $25.2 million in 1999 from $23.6 million in 1998. Plant processing
revenues increased 15% to $1.8 million from $1.6 million primarily as a result
of new third party processing in the Canadian Hanlan-Robb gas processing plant.
Production Costs. Production costs decreased 8% to $6.7 million in 1999
compared to $7.3 million in 1998 primarily as a result of the 8% decrease in
production volumes. Production costs per Mcfe were $0.57 for both 1999 and
1998.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 40% to
$9.9 million in 1999 from $16.6 million in 1998. The decrease in the oil and
gas DD&A rate per Mcfe to $0.69 in 1999 from $1.16 in 1998 reflects the impact
of the year-end 1999 increase in proved reserves and the impact of the 1998 oil
and gas property valuation adjustment.
General and Administrative Expenses. General and administrative expenses
decreased 4% to $4.3 million in 1999 from $4.5 million in 1998. The overall
decrease is primarily due to cost reduction efforts, including reductions in
personnel. This decrease was partially offset by $805,000 of incentives paid to
now-terminated employees to induce them to stay through the close down of
existing offices.
Investment Income. Investment and other income decreased 49% to $585,000 in
1999 from $1.2 million in 1998, primarily as a result of gas contract
settlements received in 1998.
Interest Expense. Interest expense increased 7% to $3.9 million in 1999 from
$3.6 million in 1998, reflecting the impact of increased debt associated with a
producing property acquisition completed in June 1998.
Income Taxes. The Company recorded a $954,000 income tax benefit on pre-tax
loss of $1.2 million with an effective tax rate of 82% in 1999 compared to an
income tax benefit of $15.1 million on pre-tax loss of $39.5 million with an
effective tax rate of 38% in 1998. During 1999, the Company recorded an income
tax provision for its Canadian operations with an effective tax rate of 7%
which was offset by an income tax benefit for its U.S. operations with an
effective tax rate of 28%, resulting in an overall effective tax rate of 82%.
XI-19
Liquidity and Capital Resources
As of December 31, 2000, the Company had working capital of $9.0 million as
compared to $3.6 million at December 31, 1999. Cash provided by operating
activities was $33.2 million, $10.6 million and $10.7 million in 2000, 1999 and
1998, respectively.
The Company's total capital expenditures were $8.2 million, $3.3 million and
$19.4 million for 2000, 1999 and 1998, respectively. In 2000, the Company spent
$7.1 million related to exploration and development and $579,000 related to
acquisitions of oil and gas properties. During 1999, the Company spent $2.6
million related to exploration and development and $.4 million related to
acquisitions. In 1998, the Company spent $11.6 million related to exploration
and development and $4.8 million related to acquisitions.
Sales of oil and gas properties totaled $.2 million, nil, and $2.8 million
in 2000, 1999 and 1998, respectively.
In June 1997, the Company entered into a $50 million five-year revolving
credit agreement with the Toronto-Dominion Bank, the agent, and the Bank of
Nova Scotia. On June 30, 1997, the Company was advanced $13.0 million to fund
an acquisition of producing properties completed in early July 1997 and to fund
certain debt repayments. During 1998, the Company borrowed $12.0 million to
fund additional acquisitions and other debt repayments. At December 31, 1999,
the Company had a total of $27.0 million outstanding under the revolver and
$3,850,000 available based on the current borrowing base, as defined, subject
to certain limitations. The facility was amended in June 1998 to extend the
initial five-year term an additional year to July 1, 2003 with quarterly
borrowing base amortization beginning September 30, 2001. The borrowings can be
funded by either Eurodollar loans or Prime loans. The interest rate on the
borrowings is equal to an interest rate spread plus either the Eurodollar rate
or the Prime rate. The interest spread is determined from a sliding scale based
on the Company's borrowing base percentage utilization in effect from time to
time. The spread ranges from 1-3/8% to 2% on Eurodollar loans and 3/8% to 1% on
Prime loans. The Company's average interest rate under this facility was
approximately 8.4% through July 21, 2000, which was the date this facility was
terminated.
In June 2000, the revolving credit agreement was amended to increase the
current borrowing base to $40 million and change the termination date to July
31, 2000, pending a new loan agreement between Toronto-Dominion, as agent, and
the Company. The new loan agreement was successfully completed in July 2000
(see next paragraph). Also in June 2000, the Company paid off the Series B
fixed rate notes, using available capital and borrowings under the revolving
credit agreement. Early termination payments required by the Series B agreement
and remaining unamortized debt costs were expensed and are reflected in the
financial statements as an extraordinary item of $385,000, less applicable
taxes of $143,000.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time.
The spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base
Rate loans. At December 31, 2000, the Company had a total of $28,500,000
outstanding under the revolver and $29,500,000 available based on the current
borrowing base, as defined, subject to certain limitations. From July 21, 2000,
the date of inception of this facility, through December 31, 2000, the weighted
average interest rate under this facility was approximately 8.3%.
The Company's Canadian subsidiary redeemed its redeemable preferred stock on
August 9, 1994 for $7.0 million and simultaneously issued $7.0 million in
nonrecourse long-term notes payable (Nonrecourse Notes Payable) with similar
financial terms. At December 31, 2000, the nonrecourse long-term notes payable
balance was $2.7 million, of which $1,194,000 was classified as "current."
The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity
capital and participation by institutional investors. If the Company
XI-20
increases its capital expenditure level in the future or operating cash flow
is not as expected, capital expenditures may require additional funding,
obtained through borrowings from commercial banks and other institutional
sources or by public or private offerings of equity or debt securities.
Possible Merger with Southern Mineral
As indicated in Note 11 to the financial statements and Part I, Item 1,
"Exploration and Development Activity", PetroCorp has entered into an
agreement to merge with Southern Mineral Corporation. Funds needed to complete
this transaction will be provided by cash on hand and borrowings under
existing lines of credit.
Subsequent to the signing of the merger agreement, PetroCorp purchased
shares of Southern Mineral common stock via open-market and negotiated
transactions. As of March 31, 2001, PetroCorp had acquired 738,836 shares of
Southern Mineral stock at an average price of $4.21 per share. As a result,
PetroCorp currently owns 6% of the outstanding shares of Southern Mineral
stock.
Year 2000 Issues
PetroCorp had no Year 2000 computer problems. Minimal costs were expended
in this area.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company's primary sources of market risk are from fluctuations in
commodity prices, interest rates and exchange rates.
Commodity Price Risk
The Company produces and sells natural gas, crude oil, condensate, natural
gas liquids and sulfur. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response
to changing market forces. The Company has previously utilized hedging
transactions to manage its exposure to price fluctuations on its sales of oil
and natural gas. In 2000, the Company entered into swap transactions in an
effort to lock in a portion of higher oil and gas prices. The impact of
hedging transactions on 2000 financial results was a net reduction of revenues
by $1,097,000. No contracts were outstanding as of December 31, 2000. No hedge
transactions were in place during 1999 and 1998.
Interest Rate Risk
Total debt at December 31, 2000, included no fixed-rate debt. The Company
has elected to use only variable rate financing, therefore the Company has
limited control over interest rate changes, which may adversely affect the
Company's results of operations and cash flows. See Note 5 to the Consolidated
Financial Statements for information regarding future maturities of the
Company's debt.
Foreign Currency Exchange Rate Risk
The Company conducts a significant portion of its business in the Canadian
dollar and is therefore subject to foreign currency exchange rate risk on cash
flows related to sales, expenses, financing and investing transactions.
Exposure from market rate fluctuations related to activities in Canada, where
the Company's functional currency is the Canadian dollar, is not material at
this time.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears on pages 26 through 52 of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There is no matter required to be disclosed in response to this item.
XI-21
PART III
In accordance with paragraph (3) of General Instruction G to Form 10-K, Part
III of this Report is omitted because the Company will file with the Securities
and Exchange Commission not later than 120 days after the end of the fiscal
year ended December 31, 2000 a definitive proxy statement pursuant to
Regulation 14A involving the election of directors, which proxy statement is
incorporated herein by reference (with the exception of certain portions noted
therein that are not so incorporated by reference).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements
Page
of
this
Report
------
Report of Independent Accountants...................................... 25
Consolidated Balance Sheets as of December 31, 2000 and December 31,
1999.................................................................. 26
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998................................................... 27
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998...................................... 28
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998................................................... 29
Notes to Consolidated Financial Statements............................. 30
2. Financial Statement Schedules
Not Applicable.
3. Exhibits
2.1* Plan of Merger and Combination Agreement, dated September 18, 1991, by
and among Park Avenue Exploration Corporation, PetroCorp, L.S. Holding
Company, PetroCorp Incorporated, PetroPartners Limited Partnership,
PetroCorp Acquisition Corporation and Management Shareholders, as amended
by the First Amendment, dated October 1, 1992, and by the Simplification
Agreement described in Exhibit 2.2 hereto. Incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-36972) initially filed with the Securities and
Exchange Commission (SEC) on August 26, 1993 (Registration Statement).
2.2* Simplification Agreement, dated August 24, 1993, by and among Park Avenue
Exploration Corporation, L.S. Holding Company, PetroCorp, PetroCorp
Incorporated, PetroPartners Limited Partnership, PetroCorp Employees
Partnership, L.P., Lealon L. Sargent, W. Neil McBean, Don A. Turkleson,
Michael L. Lord, Antonio F. Pelletier, David G. Campbell, Fletcher S.
Hicks, Craig K. Townsend, Clifford G. Zwahlen, Charles L. Zorio, Rodney
Rother, Mark Meyer and Carl Campbell (Simplification Agreement).
Incorporated by reference to Exhibit 2.2 to the Registration Statement.
3.1* Amended and Restated Articles of Incorporation of PetroCorp Incorporated.
Incorporated by reference to Exhibit 3.2 to the Registration Statement.
3.2* Amended and Restated Bylaws of PetroCorp Incorporated. Incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
3.3* Statement of Designations, Preferences, Limitations and Relative Rights
of Its Series A Junior Participating Preferred Stock. Incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K, dated November 20,
1998.
XI-22
4.1* Rights Agreement dated as of November 12, 1998, between PetroCorp
Incorporated and First Union National Bank, as Rights Agent.
Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K,
dated November 20, 1998.
4.2* Form of Right Certificate. Incorporated by reference to Exhibit 4.2 to
the Company's Form 8-K, dated November 20, 1998.
4.3* Specimen certificate for shares of Common Stock. Incorporated by
reference to Exhibit 4.1 to the Registration Statement.
4.4* Note Purchase Agreement, dated July 29, 1993, among PetroCorp
Incorporated, United States Fidelity and Guaranty Company, Connecticut
General Life Insurance Company, Indiana Insurance Company, Security Life
of Denver Insurance Company, Southland Life Insurance Company, Life
Insurance Company of Georgia and Life Insurance Company of North
America. Incorporated by reference to Exhibit 4.2 to the Registration
Statement.
9.1* Voting Agreement, dated January 18, 1994, by and among USF&G
Corporation, Park Avenue Exploration Corporation, United States Fidelity
and Guaranty Company, CIGNA Corporation, L.S. Holding Company, American
Oil & Gas Investors, AmGO II, First Reserve Fund V, Limited Partnership,
First Reserve Fund V-2, Limited Partnership, First Reserve Fund VI,
Limited Partnership and First Reserve Corporation. Incorporated by
reference to Exhibit 9.2 to the Form 8-K.
10.1* Amended and Restated 1992 PetroCorp Stock Option Plan. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1996.
10.2* Hanlan-Robb Area Agreement of Purchase and Sale, effective August 1,
1991, between Gulf Canada Resources Limited and Petro-Canada and PCC
Energy Inc. Incorporated by reference to Exhibit 10.3 to the
Registration Statement.
10.3* Registration Rights Agreement, dated August 24, 1993, between L.S.
Holding Company (assigned to Kaiser-Francis Oil Company) and PetroCorp
Incorporated. Incorporated by reference to Exhibit 10.5 to the
Registration Statement.
10.4* Registration Rights Agreement, dated August 24, 1993, between Park
Avenue Exploration Corporation and PetroCorp Incorporated. Incorporated
by reference to Exhibit 10.6 to the Registration Statement.
10.5* Registration Rights Agreement, dated January 18, 1994, between PetroCorp
Incorporated and American Oil & Gas Investors, AmGO II, First Reserve
Fund V, Limited Partnership, First Reserve Fund V-2, Limited
Partnership, First Reserve Fund VI, Limited Partnership and First
Reserve Corporation (assigned to Kaiser-Francis Oil Company).
Incorporated by reference to Exhibit 10.1 to the Form 8-K.
10.6* Piggyback Registration Rights Agreement, dated October 27, 1993, between
Lealon L. Sargent and PetroCorp Incorporated. Incorporated by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993. This is a management contract or
compensatory plan or arrangement required to be filed as an exhibit.
10.7* Separation Benefits Agreement, dated September 27, 1993, between Lealon
L. Sargent and PetroCorp Incorporated. Incorporated by reference to
Exhibit 10.8 to the Registration Statement. This is a management
contract or compensatory plan or arrangement required to be filed as an
exhibit.
10.8* Executive Management Annual Incentive Compensation Plan, effective
January 1, 1994. Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994 (1994 Form 10-K). This is a management contract or compensatory
plan or arrangement required to be filed as an exhibit.
10.9* Share Purchase Agreement, dated December 13, 1996, between 702056
Alberta Ltd. and shareholders of Millarville Oil & Gas Ltd. Incorporated
by reference to Exhibit 2 to the Company's Current Report on Form 8-K,
dated December 23, 1996.
XI-23
10.10* Agreement for Purchase and Sale, dated June 5, 1997, between PetroCorp
Incorporated and Great River Oil and Gas Corporation. Incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated July 1, 1997.
10.11* First Amendment to Agreement for Purchase and Sale, dated June 30,
1997, between PetroCorp Incorporated and Great River Oil and Gas
Corporation. Incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K dated July 1, 1997.
10.12* Credit Agreement, dated June 26, 1997, among PetroCorp Incorporated,
PCC Energy Limited, PCC Energy Corp, and Toronto-Dominion (Texas), Inc.
and Toronto-Dominion Bank. Incorporated by reference to Exhibit 10 to
the Company's current report on Form 8-K dated July 1, 1997.
10.13* 1997 Non-Employee Director Stock Option Plan. Incorporated by reference
to Appendix A to the Company's Proxy Statement for the Annual Meeting
of Shareholders held on May 16, 1997.
10.14* Management Agreement, dated August 3, 1999, between PetroCorp
Incorporated and Kaiser-Francis Oil Company. Incorporated by reference
to Annex A of the Company's Proxy Statement dated September 30, 1999.
10.15* Credit Agreement dated July 21, 2000 among Petrocorp Incorporated, PC
Energy Limited, PCC Corp., Toronto Dominion (Texas), Inc., The Toronto-
Dominion Bank, TD Securities (USA), Inc. and various lenders signature
thereto. Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly report on Form 10-Q dated August 11, 2000.
10.16* PetroCorp Incorporated 2000 Stock Option Plan. Incorporated by
reference to exhibit 4.0 of the company's registration of such plan on
form S-8 filed on December 12, 2000.
21 List of material subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Huddleston & Co., Inc.
99.1* Agreement to furnish document relating to subsidiary. Incorporated by
reference to Exhibit 99.1 to the 1994 Form 10-K.
- --------
* Incorporated by reference.
(b) Reports on Form 8-K
Report dated December 22, 2000 regarding merger agreement with Southern
Mineral Corporation.
XI-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
PetroCorp Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of PetroCorp
Incorporated and its subsidiaries (the "Company") at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
March 9, 2001
XI-25
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(in thousands, except share amounts)
2000 1999
ASSETS -------- --------
Current assets:
Cash and cash equivalents................................ $ 21,946 $ 12,899
Accounts receivable, net................................. 13,332 4,605
Other current assets..................................... 609 162
-------- --------
Total current assets................................... 35,887 17,666
-------- --------
Property, plant and equipment:
Proved oil and gas properties, at cost, full cost method,
net of accumulated depreciation, depletion and
amortization............................................ 66,400 63,998
Unproved oil and gas properties, not subject to
depletion............................................... 2,032 6,154
Plant and related facilities............................. 2,451 3,151
Other, net............................................... 53 403
-------- --------
70,936 73,706
-------- --------
Deferred income taxes...................................... 10,254 13,916
Other assets, net.......................................... 242 107
-------- --------
Total assets........................................... $117,319 $105,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 17,732 $ 6,138
Accrued liabilities...................................... 2,488 3,609
Income tax payable....................................... 5,444 --
Current portion of long-term debt........................ 1,194 4,277
-------- --------
Total current liabilities.............................. 26,858 14,024
-------- --------
Long-term debt............................................. 29,992 43,410
-------- --------
Deferred income taxes...................................... 6,192 5,598
-------- --------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued................................. -- --
Common stock, $0.01 par value, 25,000,000 shares
authorized, (8,703,719 shares and 8,683,019 shares
outstanding at December 31, 2000 and 1999,
respectively)........................................... 87 87
Additional paid-in capital............................... 71,614 71,380
Retained earnings (accumulated deficit).................. (11,712) (24,530)
Accumulated other comprehensive loss..................... (5,712) (4,574)
-------- --------
Total shareholders' equity............................. 54,277 42,363
-------- --------
Total liabilities and shareholders' equity............. $117,319 $105,395
======== ========
The accompanying notes are an integral part of these financial statements.
XI-26
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
(in thousands, except share amounts)
2000 1999 1998
------- ------- --------
Revenues:
Oil and gas..................................... $42,264 $25,162 $ 23,621
Plant processing................................ 1,934 1,785 1,550
Other........................................... 375 179 36
------- ------- --------
44,573 27,126 25,207
------- ------- --------
Expenses:
Production costs................................ 8,038 6,733 7,344
Depreciation, depletion and amortization........ 9,471 9,906 16,568
Oil and gas property valuation adjustment....... -- -- 33,600
General and administrative...................... 1,529 4,311 4,482
Restructuring costs............................. (445) 3,643 --
Other operating expenses........................ 309 281 265
------- ------- --------
18,902 24,874 62,259
------- ------- --------
Income (loss) from operations..................... 25,671 2,252 (37,052)
------- ------- --------
Other income (expenses):
Investment income............................... 584 585 1,151
Interest expense................................ (3,381) (3,865) (3,622)
Other income (expenses)......................... 295 (132) 14
------- ------- --------
(2,502) (3,412) (2,457)
------- ------- --------
Income (loss) before income taxes................. 23,169 (1,160) (39,509)
------- ------- --------
Income tax provision (benefit):
Current......................................... 5,497 -- --
Deferred........................................ 4,612 (954) (15,114)
------- ------- --------
10,109 (954) (15,114)
------- ------- --------
Net income (loss) before extraordinary item....... 13,060 (206) (24,395)
Extraordinary loss--extinguishment of debt (less
applicable tax benefit of $143,000).............. 242 -- --
------- ------- --------
Net income (loss)................................. $12,818 $ (206) $(24,395)
======= ======= ========
Net income (loss) per common share--basic:
Income (loss) before extraordinary item......... $ 1.50 $ (0.02) $ (2.82)
Extraordinary item.............................. (0.03) -- --
------- ------- --------
Net income (loss)............................... $ 1.47 $ (0.02) $ (2.82)
======= ======= ========
Net income (loss) per common share--diluted:
Income (loss) before extraordinary item......... $ 1.49 $ (0.02) $ (2.82)
Extraordinary item.............................. (0.03) -- --
------- ------- --------
Net income (loss)............................... $ 1.46 $ (0.02) $ (2.82)
======= ======= ========
Weighted average number of common shares--basic... 8,692 8,658 8,637
======= ======= ========
Weighted average number of common shares--
diluted.......................................... 8,786 8,658 8,637
======= ======= ========
The accompanying notes are an integral part of these financial statements.
XI-27
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Retained
Common Stock earnings Accumulated
------------- Additional (accumu- other
Shares paid-in lated comprehensive Treasury
issued Amount capital deficit) loss stock Total
------ ------ ---------- -------- ------------- -------- -------
Balance, December 31,
1997................... 8,616 $86 $71,143 $ 71 $(4,496) $(247) $66,557
Net loss.............. -- -- -- (24,395) -- -- (24,395)
Additional paid-in
capital.............. 40 1 102 -- -- -- 103
Accumulated other
comprehensive loss... -- -- -- -- (1,768) -- (1,768)
Treasury stock (24,697
shares).............. -- -- -- -- -- 247 247
----- --- ------- -------- ------- ----- -------
Balance, December 31,
1998................... 8,656 87 71,245 (24,324) (6,264) -- 40,744
Net loss.............. -- -- -- (206) -- -- (206)
Exercise of stock
options.............. 27 -- 135 -- -- -- 135
Accumulated other
comprehensive
income............... -- -- -- -- 1,690 -- 1,690
Treasury stock........ -- -- -- -- -- -- --
----- --- ------- -------- ------- ----- -------
Balance, December 31,
1999................... 8,683 87 71,380 (24,530) (4,574) -- 42,363
Net income............ -- -- -- 12,818 -- -- 12,818
Exercise of stock
options.............. 21 -- 234 -- -- -- 234
Accumulated other
comprehensive loss... -- -- -- -- (1,138) -- (1,138)
----- --- ------- -------- ------- ----- -------
Balance, December 31,
2000................... 8,704 $87 $71,614 $(11,712) $(5,712) $ -- $54,277
===== === ======= ======== ======= ===== =======
The accompanying notes are an integral part of these financial statements.
XI-28
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
-------- ------- --------
Cash flows from operating activities:
Net income (loss)............................... $ 12,818 $ (206) $(24,395)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary loss............................ 242 -- --
Depreciation, depletion and amortization...... 9,471 9,906 16,568
Deferred income tax expense (benefit)......... 4,612 (954) (15,114)
Oil and gas property valuation adjustment..... -- -- 33,600
Other......................................... 107 (112) (437)
Changes in operating assets and liabilities:
Accounts receivable........................... (8,727) (36) 2,039
Other current assets.......................... (447) 164 11
Accounts payable.............................. 11,594 1,714 (1,743)
Accrued liabilities........................... (1,923) 142 122
Income taxes payable.......................... 5,444 -- --
-------- ------- --------
Net cash provided by operating activities... 33,191 10,618 10,651
-------- ------- --------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties.... 210 -- 2,812
Additions to oil and gas properties............. (6,862) (3,089) (18,260)
Additions to plant and related facilities....... (525) (166) (919)
Additions to other property, plant and
equipment...................................... -- -- (71)
Additions to other assets....................... (16) -- (144)
-------- ------- --------
Net cash used in investing activities......... (7,193) (3,255) (16,582)
-------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt.................... 30,030 2,238 14,845
Repayment of long-term debt..................... (46,714) (4,566) (10,876)
Other........................................... (142) 135 350
-------- ------- --------
Net cash provided by (used in) financing
activities................................... (16,826) (2,193) 4,319
-------- ------- --------
Effect of exchange rate changes on cash........... (125) (57) 7
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 9,047 5,113 (1,605)
Cash and cash equivalents at beginning of year.... 12,899 7,786 9,391
-------- ------- --------
Cash and cash equivalents at end of year.......... $ 21,946 $12,899 $ 7,786
======== ======= ========
Supplemental disclosure:
Interest paid................................... $ 3,423 $ 3,150 $ 3,573
======== ======= ========
Income taxes paid............................... $ -- $ -- $ --
======== ======= ========
The accompanying notes are an integral part of these financial statements.
XI-29
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. Summary of Accounting Policies
General
PetroCorp Incorporated, a Texas corporation, is engaged in the acquisition,
exploration, development, and the production and sale of crude oil and natural
gas in North America. The terms "PetroCorp" and "Company" refer to PetroCorp
Incorporated and its subsidiaries. PetroCorp operates in Canada through its
wholly-owned Canadian subsidiaries as follows: PCC Energy Inc. (PCC Inc.), PCC
Energy Limited and PCC Energy Corp.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Petrocorp Incorporated and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results may differ from such estimates. In
addition, the oil and gas reserve data and the deferred tax asset include
significant estimates which, in the near term, could materially differ from the
amounts ultimately realized.
Property, Plant and Equipment
The Company follows the full cost method of accounting for oil and gas
properties whereby all productive and nonproductive exploration and development
costs incurred for the purpose of finding oil and gas reserves are capitalized.
Such capitalized costs include lease acquisition, geological and geophysical
work, delay rentals, drilling, completing and equipping oil and gas wells,
together with internal costs directly attributable to property acquisition,
exploration and development activities. No gains or losses are recognized upon
the sale or other disposition of oil and gas properties, except in unusually
significant transactions.
The costs of the Company's oil and gas properties, including estimated
future development and dismantlement costs, are depreciated on a country-by-
country basis using a composite unit-of-production rate. An additional
valuation adjustment is made on a country-by-country basis if net capitalized
costs of the Company's oil and gas properties exceed the capitalization
ceiling, which is calculated on a quarterly basis as the sum of (1) the present
value (10%) of future net revenues from estimated production of proved oil and
gas reserves plus (2) the lower of cost or estimated fair value of the unproved
properties, less (3) the related income tax effects. At December 31, 1998, the
Company's net capitalized costs of its U.S. oil and gas properties exceeded the
capitalization ceiling by $21,168,000 resulting in a pre-tax valuation
adjustment of $33,600,000. Such valuation adjustment is reflected in the
Company's results of operations for the year ended December 31, 1998. There was
no valuation adjustment for the years ended December 31, 2000 and 1999.
Plant and related facilities, consisting principally of a gas processing
plant in Alberta, Canada, are being depreciated on a straight-line basis over
the remaining estimated useful life. Other property and equipment are
depreciated by the straight-line method at rates based on the estimated useful
lives of the assets ranging from five to ten years.
Revenue Recognition
Revenues from the sale of petroleum produced are recognized upon the passage
of title, net of royalties and net profits royalty interests.
XI-30
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Revenues from natural gas production are recorded using the sales method,
net of royalties and net profits interests, which may result in more or less
than the Company's share of pro-rata production from certain wells. The Company
estimates its balancing position to be approximately $277,000 (173,000 mcf) on
underproduced properties and approximately $326,000 (204,000 mcf) on
overproduced properties. When sales volumes exceed the Company's entitled share
and the overproduced balance exceeds the Company's share of the remaining
estimated proved natural gas reserves for a given property, the Company records
a liability. At December 31, 2000 and 1999, the Company included $53,000
(33,000 mcf) and $40,000 (26,000 mcf) respectively, in accrued liabilities with
respect to overproduced imbalances. The Company's policy is to expense the pro-
rata share of lease operating costs from all wells as incurred. Such expenses
relating to the balancing position on wells in which the Company has imbalances
are not significant.
Revenues from plant processing are recognized at the time associated natural
gas is processed. Other revenues include fees associated with the Company's
U.S. gathering system and from the sale of sulfur in Canada.
Accounts Receivable
Accounts receivable relate primarily to sales of oil and gas and amounts due
from joint-interest partners for expenditures made by the Company on behalf of
such partners. The Company reviews the financial condition of potential
purchasers and partners prior to signing sales or joint-interest agreements. At
December 31, 2000 and 1999, the Company's allowance for doubtful accounts
receivable was not significant.
Income Taxes
The Company utilizes the asset and liability method under which deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Foreign Currency Translation
The "functional currency" for translating the Company's Canadian accounts is
the Canadian dollar. Assets and liabilities are translated into the reporting
currency at the rate of exchange in effect at the balance sheet date while
revenues, expenses, gains and losses are translated at the average exchange
rate for the period. The resulting translation adjustments are accumulated in
the other comprehensive loss component of shareholders' equity. Foreign
currency transaction gains and losses are recognized currently. For the years
ended December 31, 2000, 1999 and 1998, the Company recognized foreign currency
transaction losses of $98,000, $22,000 and $2,000, respectively.
Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity date of
three months or less at the date of purchase to be cash equivalents. Cash and
cash equivalents are not insured above FDIC limits, which subjects the Company
to credit risk.
Hedging Activities
To reduce the impact of fluctuations in the market prices of oil and natural
gas, the Company periodically utilized hedging strategies such as futures
transactions or swaps to hedge the price of a portion of its future oil
XI-31
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
and natural gas production. Results of these hedging transactions are
reflected in oil and natural gas sales in the month of hedged production. At
December 31, 2000, 1999 and 1998, the Company had no such hedging or
derivative contracts. In 2000, the impact of hedging transactions was a net
reduction of revenues by $1,097,000. No hedging transactions occurred in 1999
or 1998.
Other
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133, as amended, is effective
January 1, 2001 for the Company. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives will be recorded each period in current earnings
or other comprehensive income (only certain types of hedge transactions are
reported as a component of other comprehensive income). Additionally, for all
hedge transactions the nature and type of hedge will be disclosed. Based on
the types of hedging transactions historically employed, the Company does not
anticipate that the adoption of SFAS 133 will have a significant effect on the
results of operations or financial position.
2. Restructuring
As part of a restructuring plan, on August 3, 1999, PetroCorp's Board of
Directors entered into a Management Agreement with its largest shareholder,
Kaiser-Francis Oil Company ("Kaiser-Francis"), under which Kaiser-Francis
provides management, technical, and administrative support services for all
PetroCorp operations in the United States and Canada.
As a result of the restructuring, fifty-two employees were terminated in
1999 with one employee terminated in 2000. Several employees elected to defer
receipt of their termination benefits until 2000. The Houston, Oklahoma City
and Calgary offices were closed but the Company was still liable under the
lease agreements. In the second quarter of 2000, the Company was able to find
a replacement lessee for some of the idle office space earlier than
anticipated.
The company recorded restructuring costs of $3,643,000 during 1999.
Included in the costs are employee termination costs of $2,371,000, $807,000
in nonrefundable office lease discontinuance, $363,000 in investment banking
and legal costs, and $102,000 in other related costs. As of December 31, 1999,
$2,161,000 of the restructuring costs are included in accrued liabilities.
The following table shows the change in accrued restructuring costs during
2000:
Expenditures
Balance at charged Changes Balance at
December 31, against in December 31,
1999 accrual estimates 2000
------------ ------------ --------- ------------
Employee termination costs... $1,341,000 $1,341,000 $ -- $ --
Office lease discontinuance
and other
related costs............... 820,000 305,000 (445,000) 70,000
---------- ---------- --------- -------
$2,161,000 $1,646,000 $(445,000) $70,000
========== ========== ========= =======
XI-32
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
3. Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes requirements for reporting comprehensive income and its
components which includes the Company's foreign currency translation
adjustment. The Company's comprehensive income (loss) for the years ended
December 31, 2000, 1999 and 1998 are as follows (amounts in thousands):
Years ended December
31,
-------------------------
2000 1999 1998
------- ------ --------
Net income (loss)............................. $12,818 $ (206) $(24,395)
Foreign currency translation.................. (1,138) 1,690 (1,768)
------- ------ --------
Comprehensive income (loss)................... $11,680 $1,484 $(26,163)
======= ====== ========
4. Property, Plant and Equipment
Investments in property, plant and equipment were as follows at December 31,
2000 and 1999 (amounts in thousands):
2000 1999
--------- ---------
Oil and gas properties:
Proved.......................................... $ 226,813 $ 216,991
Unproved........................................ 2,032 6,154
--------- ---------
228,845 223,145
Plant and related facilities...................... 9,969 9,806
Gas gathering facilities.......................... 1,698 1,698
Furniture, fixtures and equipment................. -- 29
--------- ---------
240,512 234,678
Less--accumulated depreciation, depletion and
amortization..................................... (169,576) (160,972)
--------- ---------
$ 70,936 $ 73,706
========= =========
Depreciation, depletion and amortization for all property, plant and
equipment for the years ended December 31, 2000, 1999 and 1998 was $9,471,000,
$9,906,000 and $16,406,000, respectively. Oil and gas property depreciation,
depletion and amortization for the years ended December 31, 2000, 1999 and 1998
was $7,947,000, $8,138,000 and $14,961,000 , respectively. Depreciation,
depletion and amortization per equivalent Mcf (using a Mcf-to-barrel conversion
factor of 6 to 1) for the years ended December 31, 2000, 1999 and 1998 was
$0.85, $0.85 and $1.62, respectively, for U.S. operations and $0.61, $0.50 and
$0.53, respectively, for Canadian operations. The total composite rates were
$0.74, $0.69 and $1.16 for the years ended December 31, 2000, 1999 and 1998,
respectively.
5. Long-Term Debt
The Company's total long-term debt is as follows (amounts in thousands):
2000 1999
------- -------
Series A & B Senior Notes............................... $ -- $17,350
TD Bank Credit Agreement................................ 28,500 27,000
Nonrecourse Note Payable................................ 2,686 3,337
Less: Current portion of long-term debt................. (1,194) (4,277)
------- -------
Total long-term debt.................................... $29,992 $43,410
======= =======
XI-33
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Debt maturing subsequent to December 31, 2000 is as follows: $1,194,000 in
2001, $1,194,000 in 2002, and $28,798,000 in 2003.
Series A and Series B Senior Notes
On July 29, 1993, the Company entered into the Note Purchase Agreement with
subsidiaries of CIGNA Corporation and USF&G Corporation together with certain
other insurance companies to refinance existing notes. The final payment of
$875,000 on the Series A Note was made in June 1999 to an affiliate. During
2000, the Series B Notes were paid off prior to their maturity date. The loss
from extinguishment of the Series B Notes is shown as an extraordinary item.
Bank Debt
On June 26, 1997, the Company entered into a $50 million, five-year
revolving credit agreement with the Toronto-Dominion Bank (TD Bank), the agent,
and the Bank of Nova Scotia. The facility was amended in June 1998 and July
1999 to extend the initial five-year term an additional year to July 1, 2003
with quarterly borrowing base amortization beginning September 30, 2001. The
borrowings can be funded by either Eurodollar loans or Prime loans. The
interest rate on the borrowings is equal to an interest rate spread plus either
the Eurodollar rate or the Prime rate. The interest spread is determined from a
sliding scale based on the Company's borrowing base percentage utilization in
effect from time to time. The spread ranged from 1 3/8% to 2% on Eurodollar
loans and 3/8% to 1% on Prime loans.
In June 2000, the revolving credit agreement was amended to increase the
current borrowing base to $40 million and change the termination date to July
31, 2000, pending a new loan agreement between Toronto-Dominion, as agent, and
the Company. The new loan agreement was successfully completed in July, 2000
(see next paragraph). Also in June 2000, the Company paid off the Series B
fixed rate notes, using available capital and borrowings under the revolving
credit agreement. Early termination payments required by the Series B agreement
and remaining unamortized debt costs were expensed and are reflected in the
financial statements as an extraordinary item of $385,000, less applicable
taxes of $143,000.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time.
The spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base
Rate loans. At December 31, 2000, the weighted average interest rate under this
facility was approximately 9.4%.
The $75 million revolving credit agreement prohibits the declaration and
payment of dividends on the common stock of the Company. Also, the debt
agreement requires the Company to maintain a minimum current ratio, a minimum
tangible net worth, and a minimum interest coverage ratio.
Nonrecourse Notes Payable
On December 12, 1991, the Company (through its Canadian subsidiary, PCC
Inc.) acquired an interest in certain oil and gas properties and related gas
processing facilities located in the Hanlan-Robb area in western Alberta,
Canada. The Company used the proceeds from the issuance of redeemable preferred
stock of PCC Inc. to partially fund the acquisition. The holders of the
preferred stock also separately and concurrently acquired an interest in the
same oil and gas properties as the Company.
XI-34
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
On August 9, 1994, PCC Inc. entered into agreements whereby PCC Inc.
redeemed the remaining shares of its redeemable preferred stock for $7,034,000.
Simultaneously, PCC Inc. issued $7,034,000 in nonrecourse long-term notes
payable (the Nonrecourse Notes Payable) to the previous holders of the
preferred stock with financial terms similar to the redeemable preferred stock.
Consistent with the redeemable preferred stock, the Nonrecourse Notes Payable
are denominated in Canadian dollars.
In 2000, 1999 and 1998, the Company issued $525,000, $238,000 and $846,000
of additional notes, respectively, as provided under the provisions of the
agreements to finance the company's portion of plant capital additions.
Interest accrues and is payable on a quarterly basis at a rate of 15% per
annum. In addition, redemptions are required to be made quarterly, based on a
fixed schedule through December 31, 2002. Interest and redemption payments are
made only to the extent there are sufficient cash proceeds from production and
sale of oil and gas reserves related to the interest in the Hanlan-Robb assets
acquired by the holders of the Nonrecourse Notes Payable. To the extent
interest and redemptions exceed such cash proceeds, the excess amount is
carried forward to the next quarter. At December 31, 2000 and 1999, unpaid
interest and redemptions totaled $503,000 and $449,000, respectively.
6. Income Taxes
The components of income (loss) before income taxes for the years ended
December 31, 2000, 1999 and 1998 consisted of the following (amounts in
thousands):
2000 1999 1998
------- ------- --------
United States operations................... $ 9,834 $(4,191) $(40,630)
Canadian operations........................ 13,335 3,031 1,121
------- ------- --------
$23,169(A) $(1,160) $(39,509)
======= ======= ========
The provision (benefit) for income taxes consists of the following (amounts
in thousands):
2000 1999 1998
------- ------- --------
Deferred:
Federal................................... $ 3,488 $(1,090) $(14,348)
State..................................... 317 (65) (820)
Canadian.................................. 807 201 54
------- ------- --------
4,612 (954) (15,114)
Current:
Canadian.................................. 5,497 -- --
------- ------- --------
$10,109(A) $ (954) $(15,114)
======= ======= ========
- --------
(A) Excludes extraordinary loss of $385,000 and related taxes of $143,000.
XI-35
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
A reconciliation of the Company's United States income tax provision
(benefit) computed by applying the statutory United States federal income tax
rate to the Company's income (loss) before income taxes and extraordinary loss
for the years ended December 31, 2000, 1999 and 1998 is presented in the
following table (amounts in thousands):
2000 1999 1998
------- ------- --------
United States federal income taxes
(benefit) at statutory rate of 35%........ $ 8,109 $ (406) $(13,828)
Increases (reductions) resulting from:
Canadian earnings not subject to United
States taxes............................ (4,667) (1,061) (392)
Canadian income taxes.................... 6,304 201 54
State income taxes....................... 206 (65) (820)
Other.................................... 157 377 (128)
------- ------- --------
$10,109 $ (954) $(15,114)
======= ======= ========
Deferred tax assets and liabilities consist of the following at December 31,
2000 and 1999 (amounts in thousands):
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforward--U.S............... $ 15,404 $ 17,786
Net operating loss carryforward--Canada............ 633 1,708
-------- --------
Gross deferred tax asset............................. 16,037 19,494
Deferred tax liabilities:
Excess of basis in oil and gas properties for
financial reporting purposes over the tax basis--
U.S............................................... (5,150) (3,870)
Excess of basis in oil and gas properties for
financial reporting purposes over the tax basis--
Canada............................................ (6,825) (7,306)
-------- --------
Gross deferred tax liability......................... (11,975) (11,176)
-------- --------
$ 4,062 $ 8,318
======== ========
As of December 31, 2000, the Company has U.S. net operating loss (NOL)
carryforwards of $41,631,000 and $39,973,000 for regular tax and alternative
minimum tax purposes, respectively. Regular tax NOL carryforwards and
alternative minimum tax NOL carryforwards begin to expire in 2009.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of loss carryforwards. Although realization
is not assured, management believes it is more likely than not that the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
Additionally, certain future changes in the Company's shareholders may impose
restrictions under Section 382 of the Internal Revenue Code on the annual
utilization of its net operating loss carryforwards.
XI-36
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The provision for Canadian income taxes differs from the amount of income
tax determined by applying the Canadian statutory income tax rate to pretax
Canadian income as a result of the following (amounts in thousands):
Years ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
Tax computed at statutory rate of 44.62%..... $ 5,950 $ 1,352 $ 500
Nondeductible crown royalties, net of royalty
credits..................................... 4,411 1,515 896
Resource allowance........................... (5,299) (2,666) (1,342)
Revenue Canada audit adjustments............. 1,242 -- --
------- ------- -------
$ 6,304 $ 201 $ 54
======= ======= =======
7. Stock Option and Other Employee Benefit Plans
In 1992, the Company established the 1992 PetroCorp Stock Option Plan (the
Option Plan). The Option Plan allows up to 957,357 option shares to be granted.
The following table summarizes these options:
Weighted
Average Exercise
Options Price
------- ----------------
Outstanding at December 31, 1997................ 865,740 $ 7.86
Granted....................................... -- --
Forfeited..................................... (81,740) $10.00
Exercised..................................... (64,500) $ 5.42
-------
Outstanding at December 31, 1998................ 719,500 $ 7.87
Granted....................................... -- --
Forfeited..................................... (20,000) $ 6.38
Exercised..................................... (27,000) $ 5.00
-------
Outstanding at December 31, 1999................ 672,500 $ 8.04
Granted....................................... -- --
Forfeited..................................... -- --
Exercised..................................... (20,700) $ 6.38
-------
Outstanding at December 31, 2000................ 651,800 $ 8.09
=======
Of the 651,800 outstanding options under the Option Plan at December 31,
2000, 148,500 options with an exercise price of $5.00, 139,300 options with an
exercise price of $6.38 and 364,000 options with an exercise price of $10 had
weighted average contractual lives of 1.3 years, 1.1 years and 1.0 years,
respectively. All of these options are exercisable as of December 31, 2000.
XI-37
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In 1997, the Company established the 1997 PetroCorp Non-Employee Director
Stock Option Plan (the Director Option Plan) for the benefit of the Company's
Board of Directors. This plan allows up to 75,000 option shares to be granted.
The Director Options were fully vested and exercisable at the date of grant.
The following table summarizes these options:
Weighted
Average Exercise
Options Price
------- ----------------
Outstanding at December 31, 1997................. 25,000 $8.63
Granted........................................ 6,000 $8.25
Forfeited...................................... -- --
Exercised...................................... -- --
------
Outstanding at December 31, 1998................. 31,000 $8.55
Granted........................................ 6,000 $6.75
Forfeited...................................... -- --
Exercised...................................... -- --
------
Outstanding at December 31, 1999................. 37,000 $8.26
Granted........................................ -- --
Forfeited...................................... -- --
Exercised...................................... -- --
------
Outstanding at December 31, 2000................. 37,000 $8.26
======
As of December 31, 2000, the weighted average remaining contractual life of
the outstanding options under the Director Option Plan was 7.1 years and the
exercise prices ranged from $6.75 to $8.63.
In 2000, the Company established the 2000 Stock Option Plan for the benefit
of employees and the Company's Board of Directors. Employee options vest one
year from date of grant and director options vest six months from the date of
grant. This plan allows up to 600,000 option shares to be granted. The
following table summarizes these options:
Weighted
Average Exercise
Options Price
------- ----------------
Outstanding at December 31, 1999................. -- --
Granted........................................ 106,650 $6.34
Forfeited...................................... -- --
Exercised...................................... -- --
-------
Outstanding at December 31, 2000................. 106,650 $6.34
=======
As of December 31, 2000, the weighted average remaining contractual life of
the outstanding options under the 2000 Stock Option Plan was 9.2 years. Of the
outstanding options, 5,000 were exercisable at year end with an average
remaining contractual life of 9.4 years. At December 31, 2000, exercise prices
ranged from $6.13 to $7.06.
Stock options under all three plans expire ten years from the date of grant
and exercise price equals market value on the grant date.
XI-38
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation,"
effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the
fair value based method of accounting for their stock-based compensation plans,
the Company has elected to continue to utilize the intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Compensation expense has been recognized for these stock-based
compensation plans for any grants to individuals who do not meet the definition
of employee. Had compensation cost for the 2000 Stock Option Plan and the
Director Option Plan been determined based upon the fair value at the grant
date for awards under the plans, consistent with the methodology prescribed
under SFAS No. 123, the Company's 2000, 1999 and 1998 net income and earnings
per share would have been reduced by approximately $330,000, $17,000 and
$16,000, or $0.04, nil and nil per share, respectively. The fair value of the
options granted during 2000, 1999 and 1998 were $432,000, $27,000 and $26,000,
respectively, on the dates of grants using the Black-Scholes option-pricing
model with the following assumptions:
2000 1999 1998
--------- ---- ----
Weighted average life, in years..................... 10 10 10
Risk-Free interest rate............................. 6.0%-6.5% 6.1% 5.8%
Expected Volatility................................. 41% 46% 26%
Expected Dividend Rate None None None
Effective January 1, 1993, the Company established a savings plan, which is
available to eligible employees and qualifies as a deferred compensation plan
under Section 401(k) of the Internal Revenue Code. The Company matches employee
contributions for an amount up to 6% of each employee's salary. The Company's
contributions to the plan, which are charged to expense, totaled $100,000,
$198,000 and $192,000 in 2000, 1999 and 1998, respectively.
XI-39
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
8. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except per share amounts).
Per Share Amounts
----------------------------------
Net Income
(Loss) Before Net
Extraordinary Extraordinary Income
Income Shares Item Item (Loss)
-------- ------ ------------- ------------- ------
Year ended December 31,
2000
Basic EPS:
Net income(A)......... $ 12,818 8,692 $ 1.50 $(0.03) $ 1.47
Effect of dilutive
securities:
Options............... -- 94 (0.01) -- (0.01)
-------- ----- ------ ------ ------
Diluted EPS:
Net income(A)......... $ 12,818 8,786 $ 1.49 $(0.03) $ 1.46
======== ===== ====== ====== ======
Year ended December 31,
1999
Basic EPS:
Net loss.............. $ (206) 8,658 $(0.02) $ -- $(0.02)
Effect of dilutive
securities:
Options............... -- -- -- -- --
-------- ----- ------ ------ ------
Diluted EPS:
Net loss.............. $ (206) 8,658 $(0.02) $ -- $(0.02)
======== ===== ====== ====== ======
Year ended December 31,
1998
Basic EPS:
Net loss.............. $(24,395) 8,637 $(2.82) $ -- $(2.82)
Effect of dilutive
securities:
Options............... -- -- -- -- --
-------- ----- ------ ------ ------
Diluted EPS:
Net loss.............. $(24,395) 8,637 $(2.82) $ -- $(2.82)
======== ===== ====== ====== ======
- --------
(A) Net of extraordinary loss of $242.
The 2000 net income per share and the 1999 and 1998 net loss per share
amounts do not include the effect of potentially dilutive securities of
395,000, 709,500 and 750,500, respectively, as the impact of these outstanding
options was antidilutive.
XI-40
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
9. Geographic Area Information
The principal business of the Company is oil and gas, which consists of the
exploration, development, acquisition, exploitation and operation of oil and
gas properties and the production and sale of crude oil and natural gas in
North America. Pertinent information with respect to the Company's oil and gas
business is presented in the following table (amounts in thousands):
United General
States Canada Corporate Total
------- ------- --------- --------
2000:
Revenues.......................... $23,588 $20,985 $ -- $ 44,573
Income (loss) from operations..... 12,353 14,402 (1,084)(A) 25,671
Depreciation, depletion and
amortization..................... 5,178 4,293 -- 9,471
Capital expenditures.............. 1,730 6,459 -- 8,189
Long-lived assets at December 31.. 44,259 36,931 242 81,432
1999:
Revenues.......................... $15,565 $11,561 $ -- $ 27,126
Income (loss) from operations 5,045 5,607 (8,400)(B) 2,252
Depreciation, depletion and
amortization..................... 5,746 3,714 446 9,906
Capital expenditures.............. 1,043 2,212 -- 3,255
Long-lived assets at December 31.. 51,516 36,106 107 87,729
1998:
Revenues.......................... $15,911 $ 9,296 $ -- $ 25,207
Income (loss) from operations (35,593)(C) 3,381 (4,840) (37,052)
Depreciation, depletion and
amortization..................... 12,511 3,698 359 16,568
Capital expenditures.............. 11,673 7,653 68 19,394
Long-lived assets at December 31.. 54,335 36,668 308 91,311
- --------
(A) Net of $445 restructuring cost credits.
(B) Includes $3,643 of restructuring costs.
(C) Includes a $33,600 oil and gas property valuation adjustment.
The following table reflects purchasers which accounted for more than 10% of
the Company's oil and gas revenues:
2000 1999 1998
---- ---- ----
Pan-Alberta Gas Ltd........................................... 19% 18% 23%
EOTT Energy Operating Limited Partnership..................... -- 11% 10%
Conoco Inc.................................................... -- -- 10%
Engage Energy LP.............................................. 27% 17% --
During 1999 and prior, the majority of the Company's Canadian gas was
dedicated under long-term contracts to Pan-Alberta Gas Ltd., a major Canadian
aggregator. However, as part of a legal settlement effective December 31, 1998,
approximately 50% of PetroCorp's dedicated gas volumes have been released from
the Pan-Alberta contracts. These released volumes are now sold on the spot
market at prevailing prices. The Company does not believe the loss of any
purchaser would have a material adverse effect on its financial position since
the Company believes alternative sales arrangements could be made on relatively
comparable terms.
XI-41
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
10. Fair Value of Financial Instruments
The following information discloses the fair value of the Company's
financial instruments in accordance with SFAS 107, "Disclosures About Fair
Value of Financial Instruments" (amounts in thousands):
Carrying Fair
Amount Value
-------- -------
1999:
Long-term debt:
Series B, 7.55% senior notes........................ $17,350 $17,811
The carrying amounts approximate fair value for the Company's cash and cash
equivalents, accounts receivable, accounts payable, and bank debt. Due to the
nature and terms of the Nonrecourse Notes Payable, the Company believes that it
is not practicable to estimate the fair value. The Company estimated the fair
value of the Series B, 7.55% senior notes using discounted cash flow analysis
based on 115 basis points above year end LIBOR rates.
11. Commitments and Contingencies
The Company has entered into operating lease agreements with noncancelable
terms in excess of one year for office space. Future minimum lease payments are
$99,000 and $58,000 for the years ending December 31, 2001 and 2002,
respectively with no payments after that time. Future minimum sublease income
with noncancelable terms in excess of one year for office space are $60,000 and
$35,000 for the years ending December 31, 2001 and 2002. Total rental expense
for office space for the years ended December 31, 2000, 1999 and 1998 was
$111,000, $583,000 and $560,000, respectively. Accrued restructuring costs
include $70,000 of office lease discontinuance costs at December 31, 2000.
On December 22, 2000, the Company and Southern Mineral Corporation (Southern
Mineral) announced they have executed a definitive agreement regarding Southern
Mineral's merger into PetroCorp. In the merger, expected to close in the second
quarter of 2001, shareholders of Southern Mineral will receive consideration of
$4.71 per share in cash or, at their election, PetroCorp common stock or a
combination of cash and stock, subject to certain adjustments. The merger will
be accounted for under the purchase method of accounting.
There are other claims and actions pending against the Company. In the
opinion of management, the amounts, if any, which may be awarded in connection
with any of these claims and actions would not be material to the Company's
consolidated financial position or results of operations.
12. Related Party Transactions
The Company has engaged an engineering consulting company to procure certain
services and equipment pertaining to its Canadian operations. The consulting
company solicits bids from various vendors in order to obtain competitive
pricing. During 2000, 1999 and 1998, the consulting company procured nil,
$45,000 and $236,000 from an equipment supplier partly owned by a director of
the Company's Canadian subsidiaries who is a relative of the Company's previous
Chief Executive Officer.
The Company is a joint-interest owner in a project operated by Kaiser-
Francis Oil Company, a shareholder. During 2000, 1999 and 1998, the Company
remitted $154,000, $95,000 and $181,000, respectively, to Kaiser-Francis as
payment of the Company's share of the joint operation. During 2000, the Company
remitted $2,076,000 to Kaiser-Francis for management fees and cost
reimbursements under the Management Agreement (see Note 2). Amounts payable to
Kaiser-Francis at December 31, 2000 and 1999 were $22,055 and $100,000,
respectively.
XI-42
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
13. Oil and Gas Reserves and Related Financial Data
Capitalized Costs Related to Oil and Gas Producing Activities
The following table presents total capitalized costs of proved and unproved
properties and accumulated depreciation, depletion and amortization related to
petroleum producing operations (amounts in thousands):
U.S. Canada Total
--------- -------- ---------
2000:
Proved properties........................ $ 176,834 $ 49,979 $ 226,813
Unproved properties...................... 1,223 809 2,032
--------- -------- ---------
178,057 50,788 228,845
Accumulated depreciation, depletion and
amortization............................ (144,105) (16,308) (160,413)
--------- -------- ---------
$ 33,952 $ 34,480 $ 68,432
========= ======== =========
1999:
Proved properties........................ $ 171,931 $ 45,060 $ 216,991
Unproved properties...................... 4,599 1,555 6,154
--------- -------- ---------
176,530 46,615 223,145
Accumulated depreciation, depletion and
amortization............................ (139,323) (13,670) (152,993)
--------- -------- ---------
$ 37,207 $ 32,945 $ 70,152
========= ======== =========
1998:
Proved properties........................ $ 168,071 $ 40,283 $ 208,354
Unproved properties...................... 7,417 1,734 9,151
--------- -------- ---------
175,488 42,017 217,505
Accumulated depreciation, depletion and
amortization............................ (133,914) (10,261) (144,175)
--------- -------- ---------
$ 41,574 $ 31,756 $ 73,330
========= ======== =========
Of the unproved properties capitalized cost at December 31, 2000,
approximately $349,000 and $99,000 were incurred in 2000 and 1999,
respectively. The Company anticipates evaluating these properties during
subsequent years.
XI-43
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Costs Incurred in Oil and Gas Producing Activities
Presented below are costs incurred in petroleum property acquisition,
exploration and development activities (amounts in thousands):
U.S. Canada Total
------- ------ -------
2000:
Acquisition of properties:
Proved properties................................. $ 104 $ 126 $ 230
Unproved properties............................... 80 269 349
Exploration costs................................... -- 166 166
Development costs(A)................................ 1,553 5,365 6,918
------- ------ -------
Total........................................... $ 1,737 $5,926 $ 7,663
======= ====== =======
1999:
Acquisition of properties:
Proved properties................................. $ 150 $ 230 $ 380
Unproved properties............................... 90 9 99
Exploration costs................................... 27 204 231
Development costs................................... 776 1,603 2,379
------- ------ -------
Total........................................... $ 1,043 $2,046 $ 3,089
======= ====== =======
1998:
Acquisition of properties:
Proved properties................................. $ 4,260 $ 595 $ 4,855
Unproved properties............................... 1,227 -- 1,227
Exploration Costs................................... 3,168 4,436 7,604
Development costs................................... 2,861 1,713 4,574
------- ------ -------
Total........................................... $11,516 $6,744 $18,260
======= ====== =======
Included in the above amounts for the years ended December 31, 2000, 1999
and 1998 were nil, $1,188 and $1,811, respectively, of capitalized internal
costs related to property acquisition, exploration and development.
(A) Includes approximately $600 of costs for development of properties
previously classified as proved undeveloped properties.
XI-44
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Results of Operations From Petroleum Producing Activities (unaudited)
The results of operations from petroleum producing activities, which do not
include revenues associated with the production and sale of sulfur, are as
follows (amounts in thousands):
U.S. Canada Total
-------- ------- --------
2000:
Revenues........................................ $ 23,481 $18,783 $ 42,264
Production costs................................ (5,813) (2,225) (8,038)
Depreciation, depletion and amortization........ (4,782) (3,165) (7,947)
Income tax benefit (expense).................... (4,728) (5,078) (9,806)
-------- ------- --------
Results of operations from petroleum producing
activities (excluding corporate overhead and
interest costs)................................ $ 8,158 $ 8,315 $ 16,473
======== ======= ========
1999:
Revenues........................................ $ 15,506 $ 9,656 $ 25,162
Production costs................................ (4,555) (2,178) (6,733)
Depreciation, depletion and amortization........ (5,410) (2,728) (8,138)
Income tax benefit (expense).................... (2,050) (973) (3,023)
-------- ------- --------
Results of operations from petroleum producing
activities (excluding corporate overhead and
interest costs)................................ $ 3,491 $ 3,777 $ 7,268
======== ======= ========
1998:
Revenues........................................ $ 15,911 $ 7,710 $ 23,621
Production costs................................ (5,171) (2,173) (7,344)
Depreciation, depletion and amortization........ (12,105) (2,856) (14,961)
Oil and gas property valuation adjustment....... (33,600) -- (33,600)
Income tax benefit (expense).................... 12,937 (134) 12,803
-------- ------- --------
Results of operations from petroleum producing
activities (excluding corporate overhead and
interest costs)................................ $(22,028) $ 2,547 $(19,481)
======== ======= ========
XI-45
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Reserve Quantities (unauditied)
Estimates of proved reserves and the related standardized measure of
discounted future net cash flow information are based on the reports of
independent petroleum engineers. These estimates represent the Company's
interest in the reserves associated with properties held directly and its
proportionate share of reserves held indirectly through partnerships or joint
ventures.
The Company's estimates of its proved reserves and proved developed reserves
of oil and gas as of December 31, 2000, 1999 and 1998 and the changes in its
proved reserves are as follows:
U.S. Canada Total
-------------- -------------- --------------
Oil Gas Oil Gas Oil Gas
(MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf)
------- ------ ------- ------ ------- ------
2000:
Proved reserves:
Beginning of year............ 3,261 20,950 1,320 55,409 4,581 76,359
Production................... (294) (3,850) (110) (4,519) (404) (8,369)
Purchase of minerals-in-
place....................... 8 1 -- 213 8 214
Extensions and discoveries... 155 1,314 100 4,049 255 5,363
Improved recoveries.......... -- -- -- -- -- --
Sales of minerals-in-place... -- (213) -- -- -- (213)
Revision to previous
estimates................... (21) 4,507 (209) (2,602) (230) 1,905
----- ------ ----- ------ ----- ------
End of year.................. 3,109 22,709 1,101 52,550 4,210 75,259
===== ====== ===== ====== ===== ======
Proved developed reserves:
Beginning of year............ 3,180 18,906 1,187 47,026 4,367 65,932
===== ====== ===== ====== ===== ======
End of year.................. 2,888 20,551 1,068 46,624 3,956 67,175
===== ====== ===== ====== ===== ======
1999:
Proved reserves:
Beginning of year............ 2,578 21,970 1,412 57,422 3,990 79,392
Production................... (324) (4,421) (138) (4,660) (462) (9,081)
Purchase of minerals-in-
place....................... -- 148 -- 1,098 -- 1,246
Extensions and discoveries... -- -- 6 1,066 6 1,066
Improved recoveries.......... 605 91 -- -- 605 91
Sales of minerals-in-place... -- -- -- -- -- --
Revision to previous
estimates................... 402 3,162 40 483 442 3,645
----- ------ ----- ------ ----- ------
End of year.................. 3,261 20,950 1,320 55,409 4,581 76,359
===== ====== ===== ====== ===== ======
Proved developed reserves:
Beginning of year............ 2,499 19,454 1,081 47,460 3,580 66,914
===== ====== ===== ====== ===== ======
End of year.................. 3,180 18,906 1,187 47,026 4,367 65,932
===== ====== ===== ====== ===== ======
1998:
Proved reserves:
Beginning of year............ 3,473 27,279 1,562 60,025 5,035 87,304
Production................... (422) (4,932) (143) (4,579) (565) (9,511)
Purchase of minerals-in-
place....................... 22 1,807 4 382 26 2,189
Extensions and discoveries... 11 694 155 4,613 166 5,307
Sales of minerals-in-place... (53) (3) (48) (2,746) (101) (2,749)
Revision to previous
estimates................... (453) (2,875) (118) (273) (571) (3,148)
----- ------ ----- ------ ----- ------
End of year.................. 2,578 21,970 1,412 57,422 3,990 79,392
===== ====== ===== ====== ===== ======
Proved developed reserves:
Beginning of year............ 3,385 24,011 1,469 55,204 4,854 79,215
===== ====== ===== ====== ===== ======
End of year.................. 2,499 19,454 1,081 47,460 3,580 66,914
===== ====== ===== ====== ===== ======
XI-46
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
The standardized measure of discounted future net cash flows was calculated
by applying current prices to estimated future production, less future
expenditures (based on current costs) to be incurred in developing and
producing such proved reserves and the estimated effect of future income taxes
based on the current tax law. The resulting future net cash flows were
discounted using a rate of 10% per annum.
The standardized measure of discounted future net cash flow amounts
contained in the following tabulation do not purport to represent the fair
market value of oil and gas properties. No value has been given to unproved
properties. There are significant uncertainties inherent in estimating
quantities of proved reserves and in projecting rates of production and the
timing and amount of future costs. Future realization of oil and gas prices
over the remaining reserve lives may vary significantly from current prices. In
addition, the method of valuation utilized, based on current prices and costs
and the use of a 10% discount rate, is not necessarily appropriate for
determining fair value. The average prices used in determining future cash
inflows for natural gas and oil as of December 31, 2000, were $9.19 per Mcf and
$27.16 per barrel, respectively. These prices were based on the adjusted cash
spot price for natural gas and oil at December 31, 2000. These prices are
significantly higher than the average natural gas and oil price received by
PetroCorp during December 2000, and the prices PetroCorp expects to receive
during 2001 and ensuing years. At December 31, 2000, there were no hedges
outstanding.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows (amounts in thousands):
U.S. Canada Total
-------- -------- --------
2000:
Future gross revenues............................. $313,677 $501,760 $815,437
Less--future costs:
Production...................................... 55,534 31,530 87,064
Development(A).................................. 2,457 2,979 5,436
-------- -------- --------
Future net cash flows before income taxes......... 255,686 467,251 722,937
Less--10% annual discount for estimated timing of
cash flows....................................... 103,563 209,119 312,682
-------- -------- --------
Present value of future net cash flows before
income tax....................................... 152,123 258,132 410,255
Less--present value of future income taxes........ 42,860 110,860 153,720
-------- -------- --------
Standardized measure of discounted future net cash
flows............................................ $109,263 $147,272 $256,535
======== ======== ========
(A) $3,232 of development costs are for proved undeveloped properties.
1999:
Future gross revenues............................. $128,792 $129,892 $258,684
Less--future costs:
Production...................................... 35,640 23,544 59,184
Development..................................... 1,799 3,530 5,329
-------- -------- --------
Future net cash flows before income taxes......... 91,353 102,818 194,171
Less--10% annual discount for estimated timing of
cash flows....................................... 30,671 44,753 75,424
-------- -------- --------
Present value of future net cash flows before
income tax....................................... 60,682 58,065 118,747
Less--present value of future income taxes........ 4,276 20,711 24,987
-------- -------- --------
Standardized measure of discounted future net cash
flows............................................ $ 56,406 $ 37,354 $ 93,760
======== ======== ========
XI-47
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
U.S. Canada Total
------- -------- --------
1998:
Future gross revenues.............................. $73,407 $107,803 $181,210
Less--future costs:
Production....................................... 27,841 17,501 45,342
Development...................................... 2,094 3,719 5,813
------- -------- --------
Future net cash flows before income taxes.......... 43,472 86,583 130,055
Less--10% annual discount for estimated timing of
cash flows........................................ 12,508 39,535 52,043
------- -------- --------
Present value of future net cash flows before
income tax........................................ 30,964 47,048 78,012
Less--present value of future income taxes......... -- 16,470 16,470
------- -------- --------
Standardized measure of discounted future net cash
flows............................................. $30,964 $ 30,578 $ 61,542
======= ======== ========
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows (amounts in
thousands):
U.S. Canada Total
-------- -------- --------
2000:
Standardized measure--beginning of period...... $ 56,406 $ 37,354 $ 93,760
Sales of oil and gas produced, net of
production costs.............................. (17,668) (16,558) (34,226)
Purchases of minerals-in-place................. 23 75 98
Extensions, discoveries and improved recovery.. 8,502 18,626 27,128
Sales of minerals-in-place..................... (108) -- (108)
Net changes in prices and productions costs.... 94,155 219,553 313,708
Development costs incurred and changes in
estimated future development costs............ 238 2,705 2,943
Revisions to previous quantity estimates....... 16,130 (18,563) (2,433)
Accretion of discount.......................... 6,068 5,807 11,875
Changes in timing of production and other...... (15,899) (11,579) (27,478)
Net changes in income taxes.................... (38,584) (90,148) (128,732)
-------- -------- --------
Standardized measure--end of period............ $109,263 $147,272 $256,535
======== ======== ========
1999:
Standardized measure--beginning of period...... $ 30,964 $ 30,578 $ 61,542
Sales of oil and gas produced, net of
production costs.............................. (10,950) (7,479) (18,429)
Purchases of minerals-in-place................. 187 1,491 1,678
Extensions and discoveries..................... 3,198 1,100 4,298
Sales of minerals-in-place..................... -- -- --
Net changes in prices and productions costs.... 27,195 11,517 38,712
Development costs incurred and changes in
estimated future development costs............ 456 805 1,261
Revisions to previous quantity estimates....... 14,144 1,672 15,816
Accretion of discount.......................... 3,096 4,706 7,802
Changes in timing of production and other...... (7,608) (2,795) (10,403)
Net changes in income taxes.................... (4,276) (4,241) (8,517)
-------- -------- --------
Standardized measure--end of period............ $ 56,406 $ 37,354 $ 93,760
======== ======== ========
XI-48
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
U.S. Canada Total
------- ------- -------
1998:
Standardized measure--beginning of period......... $61,239 $31,048 $92,287
Sales of oil and gas produced, net of production
costs............................................ (10,740) (5,537) (16,277)
Purchases of minerals-in-place.................... 2,547 437 2,984
Extensions and discoveries........................ 609 2,833 3,442
Sales of minerals-in-place........................ (266) (1,432) (1,698)
Net changes in prices and productions costs....... (29,854) 11,599 (18,255)
Development costs incurred and changes in
estimated future development costs............... 1,870 714 2,584
Revisions to previous quantity estimates.......... (4,790) (1,191) (5,981)
Accretion of discount............................. 6,863 4,219 11,082
Changes in timing of production and other......... (4,378) (6,622) (11,000)
Net changes in income taxes....................... 7,864 (5,490) 2,374
------- ------- -------
Standardized measure--end of period............... $30,964 $30,578 $61,542
======= ======= =======
The standardized measure amounts are based on current prices at each year
end and reflect overall weighted average prices of:
U.S. Canada Total
------ ------ ------
2000:
Oil (per BBL)...................................... $26.25 $29.73 $27.16
Gas (per Mcf)...................................... 9.98 8.85 9.19
1999:
Oil (per BBL)...................................... $24.40 $22.84 $23.95
Gas (per Mcf)...................................... 2.35 1.80 1.95
1998:
Oil (per BBL)...................................... $10.15 $ 8.63 $ 9.63
Gas (per Mcf)...................................... 2.15 1.66 1.80
XI-49
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
14. Summarized Quarterly Financial Data (unaudited)
(amounts in thousands, except per share
data)
First Second Third Fourth
quarter quarter quarter quarter Year
------- ------- ------- ------- -------
Year ended December 31, 2000:
Revenues........................... $7,742 $9,203 $11,787 $15,841 $44,573
Gross profit(1).................... 3,778 4,917 6,850 11,210 26,755
Income from operations............. 3,394 4,840 6,422 11,015 25,671
Net income (loss)(2)............... 1,510 2,330 3,264 5,714 12,818
Net income (loss) per share--
basic(2).......................... $ 0.17 $ 0.27 $ 0.38 $ 0.66 $ 1.47
Year ended December 31, 1999:
Revenues........................... $5,405 $6,460 $ 7,728 $ 7,533 $27,126
Gross profit(1).................... 1,038 2,094 3,223 3,851 10,206
Income from operations............. (1,106) 1,273 (3) 2,088 2,252
Net income (loss).................. (1,121) 483 (370) 802 (206)
Net income (loss) per share--
basic............................. $(0.13) $ 0.06 $ (0.04) $ 0.09 $ (0.02)
- --------
(1) Revenues less operating expenses other than general and administrative and
restructuring costs.
(2) Net income for the second quarter and year are net of a $242 extraordinary
loss ($0.03 per share).
XI-50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PetroCorp Incorporated
(Registrant)
/s/ Gary R. Christopher
By:__________________________________
Gary R. Christopher
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary R. Christopher President, Chief Executive March 26, 2001
______________________________________ Officer (Principal
Gary R. Christopher Executive Officer) and
Director
/s/ Steven R. Berlin Vice President--Finance, March 26, 2001
______________________________________ Secretary & Treasurer
Steven R. Berlin (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Steven E. Amos Controller March 26, 2001
______________________________________
Steven E. Amos
/s/ Lealon L. Sargent Chairman of the Board of March 26, 2001
______________________________________ Directors
Lealon L. Sargent
/s/ Thomas N. Amonett Director March 26, 2001
______________________________________
Thomas N. Amonett
/s/ Mark W. Files Director March 26, 2001
______________________________________
Mark W. Files
/s/ W. Neil McBean Director March 26, 2001
______________________________________
W. Neil McBean
/s/ Stephen M. McGrath Director March 26, 2001
______________________________________
Stephen M. McGrath
/s/ Robert C. Thomas Director March 26, 2001
______________________________________
Robert C. Thomas
XI-51
EXHIBIT INDEX
No. Item
--- ----
21 --List of material subsidiaries
23.1 --Consent of PricewaterhouseCoopers LLP
23.2 --Consent of Huddleston & Co., Inc.
XI-52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
PetroCorp's Restated Articles of Incorporation provide that the liability of
the directors for monetary damages shall be limited to the fullest extent
permissible under Texas law. Texas law and PetroCorp's Restated Articles of
Incorporation provide PetroCorp with broad powers and authority to indemnify
its directors and officers and to purchase and maintain insurance for such
purposes. Pursuant to such authority, PetroCorp has purchased insurance against
certain costs of indemnification of its officers and directors.
Item 21. Exhibits and Financial Statement Schedules
Set forth below is a list of the exhibits included as part of this
Registration Statement.
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger, dated as of December 22, 2000, among
PetroCorp Incorporated ("PetroCorp" or "the Company"), PetroCorp
Acquisition Company and Southern Mineral Corporation, as amended by
Amendment No. 1 to the Agreement and Plan of Merger, dated as of March
9, 2001 (included as Annex I to this joint proxy statement/prospectus
forming a part of this registration statement and incorporated
herein).
2.2 Plan of Merger and Combination Agreement, dated September 18, 1991, by
and among Park Avenue Exploration Corporation, PetroCorp, L.S. Holding
Company, PetroCorp Incorporated, PetroPartners Limited Partnership,
PetroCorp Acquisition Corporation and Management Shareholders, as
amended by the First Amendment, dated October 1, 1992, and by the
Simplification Agreement described in Exhibit 2.3 hereto. Incorporated
by reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-1(Registration No. 33-36972) initially filed with the
Securities and Exchange Commission (SEC) on August 26, 1993,
Registration Statement).
2.3 Simplification Agreement, dated August 24, 1993, by and among Park
Avenue Exploration Corporation, L.S. Holding Company, PetroCorp,
PetroCorp Incorporated, PetroPartners Limited Partnership, PetroCorp
Employees Partnership, L.P., Lealon L. Sargent, W. Neil McBean, Don A.
Turkleson, Michael L. Lord, Antonio F. Pelletier, David G. Campbell,
Fletcher S. Hicks, Craig K. Townsend, Clifford G. Zwahlen, Charles L.
Zorio, Rodney Rother, Mark Meyer and Carl Campbell (Simplification
Agreement). Incorporated by reference to Exhibit 2.2 to the
Registration Statement.
3.1 Amended and Restated Articles of Incorporation of PetroCorp
Incorporated. Incorporated by reference to Exhibit 3.2 to the
Registration Statement.
3.2 Amended and Restated Bylaws of PetroCorp Incorporated. Incorporated by
reference to Exhibit 3.2 to PetroCorp's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996, filed August 14, 1996,
file no. 000-22650.
4.1 Statement of Designations, Preferences, Limitations and Relative
Rights of Its Series A Junior Participating Preferred Stock.
Incorporated by reference to Exhibit 3.1 to PetroCorp's Form 8-K,
filed November 20, 1998, file no. 001-14459.
4.2 Rights Agreement dated as of November 12, 1998, between PetroCorp
Incorporated and First Union National Bank, as Rights Agent.
Incorporated by reference to Exhibit 4.1 to PetroCorp's Form 8-K,
filed November 20, 1998, file no. 001-14459.
4.3 Form of Right Certificate. Incorporated by reference to Exhibit 4.2 to
PetroCorp's Form 8-K, filed November 20, 1998, file no. 001-14459.
4.4 Specimen certificate for shares of PetroCorp's Common Stock.
Incorporated by reference to Exhibit 4.1 to the Registration
Statement.
PART II-1
Exhibit
No. Description
------- -----------
4.5 Note Purchase Agreement, dated July 29, 1993, among PetroCorp
Incorporated, United States Fidelity and Guaranty Company, Connecticut
General Life Insurance Company, Indiana Insurance Company, Security
Life of Denver Insurance Company, Southland Life Insurance Company,
Life Insurance Company of Georgia and Life Insurance Company of North
America. Incorporated by reference to Exhibit 4.2 to the Registration
Statement.
5.1* Opinion of Frederic Dorwart, Lawyers regarding the legality of the
securities.
8.1* Opinion of Akin, Gump, Strauss, Hauer, Feld, L.L.P. regarding certain
tax matters.
9.1 Shareholder Agreement, dated December 22, 2000, between Kaiser-Francis
Oil Company and Southern Mineral Corporation (included as Annex II to
this joint proxy statement/prospectus forming a part of this
registration statement and incorporated herein).
9.2 Shareholder Agreement, dated December 22, 2000, between St. Paul Fire
and Marine Insurance Company and Southern Mineral Corporation
(included as Annex III to this joint proxy statement/prospectus
forming a part of this registration statement and incorporated
herein).
9.3 Shareholder Agreement, dated December 22, 2000, among PetroCorp
Incorporated; and Donald H. Wiese, Jr. and DHW Energy, Inc. (included
as Annex IV to this joint proxy statement/prospectus forming a part of
this registration statement and incorporated herein).
9.4 Shareholder Agreement, dated December 22, 2000, among PetroCorp
Incorporated; and Thomas R. Fuller, and Michmatt, Inc. (included as
Annex V to this joint proxy statement/prospectus forming a part of
this registration statement and incorporated herein).
9.5 Shareholder Agreement, dated December 22, 2000, among PetroCorp
Incorporated, CoMac Partners, L.P., CoMac Endowment Fund, L.P.; CoMac
International N.V.; CoMac Opportunities Fund, L.P.; and Carol Ann
Coughlin (included as Annex VI to this joint proxy
statement/prospectus forming a part of this registration statement and
incorporated herein).
9.6 Voting Agreement, dated January 18, 1994, by and among USF&G
Corporation, Park Avenue Exploration Corporation, United States
Fidelity and Guaranty Company, CIGNA Corporation, L.S. Holding
Company, American Oil & Gas Investors, AmGO II, First Reserve Fund V,
Limited Partnership, First Reserve Fund V-2, Limited Partnership,
First Reserve Fund VI, Limited Partnership and First Reserve
Corporation. Incorporated by reference to Exhibit 9.2 to the Form 8-K.
10.1 Amended and Restated 1992 PetroCorp Stock Option Plan. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1996, filed November
14, 1996, file No. 000-22650.
10.2 Hanlan-Robb Area Agreement of Purchase and Sale, effective August 1,
1991, between Gulf Canada Resources Limited and Petro-Canada and PCC
Energy Inc. Incorporated by reference to Exhibit 10.3 to the
Registration Statement.
10.3 Registration Rights Agreement, dated August 24, 1993, between L.S.
Holding Company (assigned to Kaiser-Francis Oil Company) and PetroCorp
Incorporated. Incorporated by reference to Exhibit 10.5 to the
Registration Statement.
10.4 Registration Rights Agreement, dated August 24, 1993, between Park
Avenue Exploration Corporation and PetroCorp Incorporated.
Incorporated by reference to Exhibit 10.6 to the Registration
Statement.
10.5 Registration Rights Agreement, dated January 18, 1994, between
PetroCorp Incorporated and American Oil & Gas Investors, AmGO II,
First Reserve Fund V, Limited Partnership, First Reserve Fund V-2,
Limited Partnership, First Reserve Fund VI, Limited Partnership and
First Reserve Corporation (assigned to Kaiser-Francis Oil Company).
Incorporated by reference to Exhibit 10.1 to the Form 8-K.
10.6 Piggyback Registration Rights Agreement, dated October 27, 1993,
between Lealon L. Sargent and PetroCorp Incorporated. Incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993. This is a management
contract or compensatory plan or arrangement required to be filed as
an exhibit.
PART II-2
Exhibit
No. Description
------- -----------
10.7 Separation Benefits Agreement, dated September 27, 1993, between
Lealon L. Sargent and PetroCorp Incorporated. Incorporated by
reference to Exhibit 10.8 to the Registration Statement. This is a
management contract or compensatory plan or arrangement required to be
filed as an exhibit.
10.8 Executive Management Annual Incentive Compensation Plan, effective
January 1, 1994. Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (1994 Form 10-K). This is a management contract or
compensatory plan or arrangement required to be filed as an exhibit.
10.9 Share Purchase Agreement, dated December 13, 1996, between 702056
Alberta Ltd. and shareholders of Millarville Oil & Gas Ltd.
Incorporated by reference to Exhibit 2 to the Company's Current Report
on Form 8-K, dated December 23, 1996, filed January 7, 1997, file no.
000-22650.
10.10 Agreement for Purchase and Sale, dated June 5, 1997, between PetroCorp
Incorporated and Great River Oil and Gas Corporation. Incorporated by
reference to Exhibit 2.1 to the Company's current report on Form 8-K
dated July 1, 1997, filed July 16, 1997, file no. 000-22650.
10.11 First Amendment to Agreement for Purchase and Sale, dated June 30,
1997, between PetroCorp Incorporated and Great River Oil and Gas
Corporation. Incorporated by reference to Exhibit 2.2 to the current
report on Form 8-K dated July 1, 1997, filed July 16, 1997, file no.
000-22650.
10.12 Credit Agreement, dated June 26, 1997, among PetroCorp Incorporated,
PCC Energy Limited, PCC Energy Corp, and Toronto-Dominion (Texas),
Inc. and Toronto-Dominion Bank. Incorporated by reference to Exhibit
10 to the Company's current report on Form 8-K dated July 1, 1997,
filed July 16, 1997, file no. 000-22650.
10.13 1997 Non-Employee Director Stock Option Plan. Incorporated by
reference to Exhibit A to the Proxy Statement for the Annual Meeting
of Shareholders held on May 16, 1997, filed April 8, 1997, file no.
000-22650.
10.14 Management Agreement, dated August 3, 1999, between PetroCorp
Incorporated and Kaiser-Francis Oil Company. Incorporated by reference
to Annex A of the Company's proxy statement filed September 30, 1999,
file no. 001-14459.
10.15 Credit Agreement dated July 21, 2000 among PetroCorp Incorporated, PC
Energy Limited, PCC Corp., Toronto Dominion (Texas), Inc., The
Toronto-Dominion Bank, TD Securities (USA), Inc. and various lenders
signature thereto. Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000, filed August 11, 2000, file no. 001-14459.
10.16 PetroCorp Incorporated 2000 Stock Option Plan. Incorporated by
reference to Exhibit 4.0 of the Company's registration of such plan on
Form S-8 filed on December 19, 2000, file no. 333-52184.
10.17 First Amendment to Management Agreement dated October 28, 1999 between
PetroCorp Incorporated and Kaiser-Francis Oil Company.
10.18 Second Amendment to Management Agreement, dated March 1, 2001 between
PetroCorp Incorporated and Kaiser-Francis Oil Company.
13.1 PetroCorp Amended 2000 Annual Report on Form 10-K (included as Annex
XI to this joint proxy statement/prospectus forming a part of this
registration statement and incorporated herein).
21 List of material subsidiaries. Incorporated by reference to Exhibit 21
of PetroCorp's Amended 2000 Annual Report on Form 10-K, filed March
26, 2001, file no. 001-14459.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of KPMG LLP.
23.3* Consent of Huddleston & Co., Inc.
23.4* Consent of Netherland, Sewell & Associates, Inc.
PART II-3
Exhibit
No. Description
------- -----------
23.5* Consent of Chapman Petroleum Engineering Ltd.
23.6* Consent of Gilbert Laustsen Jung Associates Ltd.
99.1 Form of Southern Mineral Affiliate Letter (included as Annex VII to
this joint proxy statement/prospectus forming a part of this
registration statement and incorporated herein).
99.2* Consent of Petrie Parkman & Co, Inc.
99.3* Form of Proxy of PetroCorp.
99.4* Form of Proxy of Southern Mineral.
99.5* Form of Cover Letter and Stock Election Form
99.6 Agreement to furnish document relating to subsidiary. Incorporated by
reference to Exhibit 99.1 to the 1994 PetroCorp Form 10-K.
- --------
* Filed herewith. All other exhibits not incorporated by reference have been
previously filed.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement;
(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 (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by the Registrant pursuant to Section 13 or 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.
PART II-4
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) (1) The undersigned Registrant hereby undertakes as follows: 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.
(2) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the 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-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.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11, or 13 herein, 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.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
PART II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tulsa, State of Oklahoma, on the 28th day of March,
2001.
PetroCorp Incorporated
By: /s/ Steven R. Berlin
-----------------------------------
Steven R. Berlin
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below.
Signature Title Date
--------- ----- ----
/s/ Gary R. Christopher President, Chief Executive March 28, 2001
______________________________________ Officer and Director
Gary R. Christopher
/s/ Steven R. Berlin Chief Financial Officer, March 28, 2001
______________________________________ Secretary and Treasurer
Steven R. Berlin
* Corporate Controller March 28, 2001
______________________________________
Steven E. Amos
* Director March 28, 2001
______________________________________
Thomas N. Amonett
* Director March 28, 2001
______________________________________
Mark W. Files
* Director March 28, 2001
______________________________________
W. Neil McBean
* Director March 28, 2001
______________________________________
Stephen M. McGrath
* Director March 28, 2001
______________________________________
Lealon L. Sargent
* Director March 28, 2001
______________________________________
Robert C. Thomas
/s/ Gary R. Christopher March 28, 2001
*By: _________________________________
Gary R. Christopher
Attorney-in-fact
PART II-6