1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
MCFARLAND ENERGY, INC.
(Name of Subject Company)
MCFARLAND ENERGY, INC.
(Name of Person Filing Statement)
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class of Securities)
CUSIP NO. 580432 10 2
(CUSIP Number of Class of Securities)
---------------------
CRAIG M. STURTEVANT
VICE PRESIDENT AND GENERAL COUNSEL
MCFARLAND ENERGY, INC.
10425 SOUTH PAINTER AVENUE
SANTA FE SPRINGS, CALIFORNIA 90670
(562) 944-0181
(Name, address and telephone number of person
authorized to receive notice and communications
on behalf of the person filing statement)
With a copy to:
WALTER J. SMITH
BAKER & BOTTS, L.L.P.
910 LOUISIANA
ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
(713) 229-1234
================================================================================
2
ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is McFarland Energy, Inc., a Delaware
corporation ("McFarland" or the "Company"). The address of the principal
executive offices of McFarland is 10425 South Painter Avenue, Santa Fe Springs,
California 90670. The title of the class of equity securities to which this
Schedule relates is McFarland's Common Stock, par value $1.00 per share (the
"Common Stock").
ITEM 2. TENDER OFFER OF THE BIDDER.
This Schedule relates to the tender offer by Monterey Acquisition
Corporation, a Delaware corporation (the "Offeror"), and a wholly owned
subsidiary of Monterey Resources, Inc., a Delaware corporation ("Monterey"), to
purchase all outstanding shares of Common Stock at the purchase price of $18.55
per share of Common Stock, net to the tendering holder (pre-tax) in cash, on the
terms and subject to the conditions set forth in the Offer to Purchase dated
June 23, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal
(which together constitute the "Offer"). The Offer is disclosed in a Tender
Offer Statement on Schedule 14D-1 dated June 23, 1997. According to the Offer to
Purchase, the principal executive offices of the Offeror and Monterey are
located at 5201 Truxtun Avenue, Bakersfield, California 93309.
The Offer is being made pursuant to the Agreement and Plan of Merger, dated
as of June 16, 1997 (the "Merger Agreement"), among McFarland, Monterey and the
Offeror. A copy of the Merger Agreement is filed as Exhibit 1 to this Schedule
and is incorporated herein by reference in its entirety. For a summary of the
material terms of the Merger Agreement, see Annex I to this Schedule. The Merger
Agreement provides that following the completion of the Offer, the Offeror will
be merged into McFarland, with McFarland continuing as a wholly owned subsidiary
of Monterey (the "Merger"). In the Merger, all remaining shares of Common Stock
not tendered in the tender offer (other than shares of Common Stock owned by
McFarland or any subsidiary of McFarland, the Offeror, Monterey or any other
subsidiary of Monterey and shares of Common Stock held by stockholders who
perfect any available appraisal rights under Delaware General Corporation Law)
will be converted into the right to receive $18.55 per share in cash.
ITEM 3. IDENTITY AND BACKGROUND.
(a) Identity.
The name and business address of McFarland, which is the person filing this
Schedule, are set forth in Item 1 above.
(b) Contracts.
Except as otherwise described in this Schedule or in the exhibits or
annexes hereto, to the knowledge of McFarland, as of the date hereof, there are
no material contracts, agreements, arrangements or understandings, or any actual
or potential conflicts of interest, between McFarland or its affiliates and (i)
McFarland or its executive officers, directors or affiliates, or (ii) the
Offeror, Monterey or their executive officers, directors or affiliates.
Information with respect to certain contracts, agreements, arrangements or
understandings between McFarland and certain of its directors, executive
officers and affiliates is set forth in Annexes I and III hereto and is
incorporated herein by reference. Descriptions of how outstanding options to
purchase Common Stock, some of which are held by officers and directors of
McFarland, will be treated in connection with the Offer and the Merger, and of
provisions in the Merger Agreement dealing with the indemnification of and
insurance for officers and directors of McFarland and certain employee benefit
and employment matters are set forth in Annex I, "Description of Merger
Agreement," under the captions "Treatment of Stock Options," "Indemnification
and Insurance" and "Employee Benefits." Information regarding employment
agreements between McFarland and its executive officers, the Company's Change in
Control Retention/Severance Plan and a consulting agreement between the Company
and a director of the Company is set forth in Annex III under the captions
"Executive Compensation -- Employment Agreements" and "-- Severance Plan" and
"Certain Relationships and Related Transactions," respectively.
2
3
STOCKHOLDERS AGREEMENT
J. C. McFarland and William E. Carl, directors, and in the case of Mr.
McFarland, an executive officer, of the Company, Carolyn J. McFarland and the
McFarland Family Trust, of which Mr. McFarland is a Trustee (the
"Stockholders"), are each party to a Stockholders Agreement dated June 16, 1997
with Monterey and the Offeror. The Stockholders Agreement provides that each of
the Stockholders will tender all of such Stockholder's shares of Common Stock
into the Offer so long as the Per Share Amount is not less than $18.55 in cash
(net to the seller). Additionally, each of the Stockholders has agreed to sell,
and the Offeror has agreed to purchase, such Stockholder's shares of Common
Stock at a price per share equal to $18.55, or such higher price per share as
may be offered by the Offeror in the Offer, provided that such obligations to
purchase and sell are both subject to (i) the Offeror having accepted Shares for
payment under the Offer and the Minimum Condition (as defined in the Merger
Agreement) of the Offer (minus any shares which are the subject of the
Stockholders Agreement but are not purchased in the Offer) having been
satisfied, and (ii) the expiration or termination of any applicable waiting
period under the HSR Act. Each of the Stockholders also has agreed not to
transfer, or agree to transfer, such Stockholder's shares, grant a proxy for
such shares or enter into a voting agreement regarding them, or take any other
action that would in any way restrict, limit or interfere with the performance
of such Stockholder's obligations under the Stockholders Agreement. The
Stockholders Agreement terminates upon the earlier of (i) the Merger Agreement
being terminated by the Company, Monterey or the Offeror, or (ii) the purchase
and sale of the shares held by the Stockholders as described above. The
foregoing summary of the Stockholders Agreement is qualified in its entirety by
the text of the Stockholders Agreement, a copy of which is filed as Exhibit 3 to
this Schedule and is incorporated herein by reference.
CONFIDENTIALITY AGREEMENT
On April 29, 1997, the Company and Monterey entered into a confidentiality
agreement (the "Confidentiality Agreement") pursuant to which the Company agreed
to provide to Monterey and its representatives certain information and material
concerning the Company on a confidential basis. In consideration of such
disclosure, Monterey agreed that, subject to certain exceptions and for a period
of 18 months, it would not solicit to employ any of the current officers and
employees of the Company without the Company's prior written consent. Monterey
also agreed on behalf of itself and its affiliates to certain standstill
provisions for a period of 18 months with respect to certain actions involving
or leading to a transaction with the Company without the prior consent of the
Company. The foregoing summary of the Confidentiality Agreement is qualified in
its entirety by the text of the Confidentiality Agreement, a copy of which is
filed as Exhibit 4 to this Schedule and is incorporated herein by reference.
CONSULTING AGREEMENT
Prior to the Tender Offer Acceptance Date (as defined in the Merger
Agreement), but conditioned thereon, Monterey and J. C. McFarland will enter
into a consulting agreement pursuant to which Mr. McFarland will agree to
consult with Monterey and assist on any project or subject within his area of
expertise, as reasonably requested and subject to the limitation that such
activities shall not require more than one-half of his professional time. The
agreement will have a four-year term, contain a non-compete provision in favor
of Monterey and provide for compensation in an amount per year equal to Mr.
McFarland's current base salary with the Company, together with health benefits
and reimbursement for all direct out-of-pocket expenses reasonably incurred. In
addition, prior to the end of 1997, Mr. McFarland will be appointed to
Monterey's Board of Directors as a member of the class of directors whose term
expires in the year 2000. In such capacity, Mr. McFarland will be considered a
non-employee director and will receive all compensation and other benefits
granted by Monterey to non-employee directors, other than the annual cash
retainer. Pursuant to the consulting agreement, Mr. McFarland will agree to
utilize all cash severance benefits payable under his employment agreement with
the Company, net of any taxes owing thereon, to purchase shares of common stock
of Monterey in the open market.
3
4
INDEMNIFICATION AGREEMENTS
The Company entered into indemnification agreements with each person who as
of June 16, 1997 was a director or executive officer of the Company. The
indemnification agreements generally provide (i) for the prompt indemnification
to the fullest extent permitted by law against (a) any and all expenses
(including attorneys' fees) and all other costs paid or incurred in connection
with investigating, preparing to defend, defending or otherwise participating in
any threatened, pending or completed action, suit or proceeding related to the
fact that such indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company or is or was serving at the Company's request as a
director, officer, employee, agent or fiduciary of another entity, or by reason
of anything done or not done by such indemnitee in any such capacity and (b) any
and all judgments, fines, penalties and amounts paid in settlement of any claim,
unless the "Reviewing Party" (defined as one or more members of the Board or
appointee(s) of the Board who are not parties to the particular claim, or
independent legal counsel) determines that such indemnification is not permitted
under applicable law and (ii) for the prompt advancement of expenses to an
indemnitee as well as the reimbursement by such indemnitee of such advancement
to the Company if the Reviewing Party determines that the indemnitee is not
entitled to such indemnification under applicable law. In addition, the
indemnification agreements provide (i) a mechanism through which an indemnitee
may seek court relief in the event the Reviewing Party determines that the
indemnitee would not be permitted to be indemnified under applicable law (and
would therefore not be entitled to indemnification or expense advancement under
the indemnification agreement) and (ii) indemnification against all expenses
(including attorneys' fees), and the advancement thereof, if requested, incurred
by the indemnitee in any action brought by the indemnitee to enforce an
indemnity claim or to collect an advancement of expenses or to recover under a
directors' and officers' liability insurance policy, regardless of whether such
action is ultimately successful or not. Furthermore, the indemnification
agreements provide that after there has been a "change in control" in the
Company (as defined in the indemnification agreements), then, with respect to
all determinations regarding rights to indemnification and the advancement of
expenses, the Company will seek legal advice as to the right of the indemnitee
to indemnification under applicable law only from independent legal counsel
selected by the Company and approved by the indemnitee.
The indemnification agreements impose upon the Company the burden of
proving that an indemnitee is not entitled to indemnification in any particular
case and negate certain presumptions that may otherwise be drawn against an
indemnitee seeking indemnification in connection with the termination of actions
in certain circumstances. Indemnitees' rights under the indemnification
agreements are not exclusive of any other rights they may have under Delaware
law, the Company's By-laws or otherwise. Although not requiring the maintenance
of directors' and officers' liability insurance, the indemnification agreements
require that indemnitees be provided with the maximum coverage available for any
Company director or officer if there is such a policy. A copy of the form of
indemnification agreement has been filed as Exhibit 11 to this Schedule and is
incorporated herein by reference in its entirety.
INDEMNIFICATION UNDER DELAWARE LAW AND THE COMPANY'S CHARTER
The Company is a Delaware corporation. Reference is made to Section 145 of
the Delaware General Corporation Law ("Delaware Law"), which provides that a
corporation may indemnify any person who is, or is threatened to be made, a
party to any threatened, pending or completed legal action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation), by reason of the fact that such person
is or was an officer, director, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such officer, director, employee or
agent acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests and, for criminal proceedings, had
no reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
4
5
liable to the corporation. If an officer or director is successful on the merits
or otherwise in the defense of any action referred to above, the corporation
must indemnify him against the expenses that such officer or director actually
and reasonably incurred.
Reference is also made to Section 102(b)(7) of Delaware Law, which enables
a corporation in its original certificate of incorporation or an amendment
thereto to eliminate or limit the personal liability of a director to the
corporation or its stockholders for violations of the director's fiduciary duty,
except (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of Law, (iii) pursuant to
Section 174 of Delaware Law (providing for liability of directors for unlawful
payment of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Article VII of the Amended and Restated Certificate of Incorporation of the
Company provides that, except under certain circumstances, directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duties as a director.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendation.
THE BOARD OF DIRECTORS OF MCFARLAND (THE "BOARD") UNANIMOUSLY HAS
DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS
OF, THE STOCKHOLDERS OF MCFARLAND. THE BOARD UNANIMOUSLY RECOMMENDS THAT ALL
HOLDERS OF COMMON STOCK ACCEPT THE OFFER AND TENDER ALL THEIR SHARES OF COMMON
STOCK PURSUANT TO THE OFFER. The Board's determination and recommendation were
made at the Board's June 16, 1997 meeting at which all the Company's directors
were present in person or by conference telephone.
The Board's recommendation is based in part on the oral opinion delivered
by Oppenheimer & Co., Inc. ("Oppenheimer") on June 16, 1997, that, as of such
date, the consideration to be received by the stockholders of McFarland pursuant
to the Merger Agreement was fair from a financial point of view to the
stockholders of McFarland. Oppenheimer subsequently confirmed its opinion in
writing on June 16, 1997 following the Board meeting. The full text of such
opinion, which sets forth the assumptions made, the matters considered and the
limitations on the review undertaken by Oppenheimer, is set forth as Annex II
hereto and is incorporated herein by reference.
A copy of the letter to McFarland's stockholders communicating the Board's
recommendation is filed as Exhibit 2 to this Schedule and is incorporated herein
by reference.
(b) Background and Reasons for the Recommendation.
In late February 1997, Mr. James Parkman of Petrie Parkman & Co., Inc.,
Monterey's financial advisor, contacted Mr. J. C. McFarland, Chairman of the
Board and Chief Executive Officer of the Company. Mr. Parkman told Mr. McFarland
he would like to meet to discuss the level of interest that the Company might
have in a potential transaction in which the Company would be acquired by
Monterey.
At a meeting on March 4, 1997, Mr. Parkman advised Mr. McFarland that
Monterey was interested in pursuing a cash acquisition of the Company at what he
characterized as a significant premium to the then market price. Mr. Parkman
explained that Monterey was interested in a cash rather than stock acquisition
because of constraints on Monterey's ability to issue stock resulting from its
proposed spin-off from Santa Fe Energy Resources, Inc. Mr. Parkman stressed that
Monterey believed it could achieve significant economies and efficiencies by
combining the Company's Midway-Sunset properties with its own. Mr. McFarland
responded that he would report Monterey's interest to the Company's Board and
respond directly to Monterey's management in a couple of weeks.
Mr. McFarland reported the substance of his meeting with Mr. Parkman at the
regular meeting of the Board held on March 12, 1997. After considerable
discussion, the Board directed Mr. McFarland to arrange a
5
6
meeting with Monterey's Chief Executive Officer, Mr. R. Graham Whaling, to gain
a better understanding of the level of Monterey's interest in the Company and
the potential acquisition parameters. Mr. McFarland subsequently telephoned Mr.
Whaling and they arranged for a meeting on March 17, 1997.
Messrs. McFarland and Whaling met on March 17, 1997, at which meeting Mr.
McFarland informed Mr. Whaling that the Company was not for sale and that he was
not authorized to speak for the Board, but was only authorized to gain more
information about Monterey's level of interest and report back to the Board. Mr.
Whaling informed Mr. McFarland that, based on the public information reviewed by
Monterey, Monterey was prepared to make a cash offer in the $14 to $16 per share
range, subject to further diligence and fact-finding. Mr. McFarland responded
that he believed that a proposal made at that level would not be of interest to
the Board. At Mr. Whaling's request, Mr. McFarland agreed to supply Monterey
with additional information concerning the Company's non-California properties,
with Mr. Whaling expressing the view that perhaps, upon reviewing additional
information, the quoted range could be increased.
On March 18, 1997, Mr. McFarland reported informally to the directors
concerning his meeting with Mr. Whaling.
On March 26, 1997, Messrs. McFarland and Whaling spoke by telephone to
discuss Monterey's review of the additional information provided by the Company.
Mr. Whaling reiterated Monterey's interest in the previously stated range. Mr.
McFarland responded that he did not believe the Board would find that
acceptable, but that he would report to the Board and get back to Mr. Whaling.
On March 27, 1997, Messrs. McFarland and Whaling again spoke by telephone
concerning the additional information provided.
On March 30, 1997, Mr. McFarland reported informally to the directors
concerning his conversations with Mr. Whaling.
On April 3, 1997, the Board held a special meeting by telephone to review
the status of discussions between the Company and Monterey. The Board concluded
that Monterey's proposal was inadequate. The Board determined that it would be
advisable to retain legal and financial advisors to advise it concerning its
legal responsibilities with respect to Monterey's proposal and explore
alternatives to maximize stockholders' value. The Board also directed Mr.
McFarland to contact Mr. Whaling to request that Monterey submit its proposal in
writing, advise him of the Board's decision to retain legal and financial
advisors and advise him of the Board's conclusion concerning Monterey's
proposal. Following the meeting, the Company retained Baker & Botts, L.L.P. as
the Company's legal counsel and Oppenheimer as the Company's financial advisor.
On April 4, 1997, Mr. McFarland telephoned Mr. Whaling and advised him as
instructed by the Board.
By letter dated April 8, 1997, Monterey expressed an interest in a cash
merger with the Company in a range between $15 and $16.50 per share. Monterey
requested a brief period within which to conduct a due diligence review and
suggested that, following such review, it would be prepared to submit a
definitive offer, perhaps at a higher price than that suggested in the letter.
Mr. McFarland telephoned Mr. Whaling upon receipt of the letter to convey his
disappointment at the range quoted in the letter.
On April 17, 1997, a special meeting of the Board was held to consider what
action, if any, the Board desired to take with respect to Monterey's written
proposal or otherwise concerning the possible sale or merger of the Company. At
the meeting, Mr. McFarland reviewed with the directors his discussions with Mr.
Whaling, and the Company's legal and financial advisors made presentations to
the Board. The Board considered the Company's prospects, developments in the
California heavy crude markets and overall market conditions in the oil and gas
industry. The Board considered the advisability of contacting additional
companies with California operations to determine their level of interest in a
possible merger or sale transaction. Oppenheimer and the Company's management
proceeded to identify a group of companies other than Monterey that they
believed might have an interest in acquiring or merging with the Company, and
suggested two companies from the group that they believed were likely to have
both a high degree of interest in, and the financial capability to consummate,
such a transaction. The Board concluded that, although no decision had yet been
made to sell the Company, it was appropriate under the circumstances to take
certain
6
7
steps in order to be in a position to consider such matter on a fully informed
basis in the future. The Board instructed Mr. McFarland and Oppenheimer to
establish a process to solicit indications of interest from Monterey and the two
other likely interested parties previously identified by Oppenheimer and the
Company's management. Mr. McFarland also was instructed by the Board to inform
Monterey that the range outlined in the April 8 letter was unacceptable. At the
meeting, the Board also considered and approved the Company's Change in Control
Severance/Retention Plan and instructed its legal and financial advisors to
begin work on a stockholder rights plan.
On April 18, 1997, Mr. McFarland telephoned Mr. Whaling and informed him of
the Board's decision and invited Monterey to participate in the next phase of
the process.
Between April 18 and April 30, 1997, two other potential interested parties
and Monterey were contacted by management of the Company and Oppenheimer and
confidentiality/standstill agreements were executed with such parties. The
agreement with Monterey was executed on April 29, 1997 and contained an 18-month
standstill provision.
On April 29, 1997, the Board held a special meeting by telephone to receive
reports from its legal and financial advisors concerning the possible adoption
of a stockholder rights plan. No formal action was taken by the Board at the
meeting.
By letter dated May 6, 1997, the other interested parties and Monterey were
advised by Oppenheimer of the procedures to be followed in submitting
preliminary indications of interest by May 14, 1997, and were provided with
operational and technical information describing the Company, its operations and
assets. The letter indicated that the Company and Oppenheimer intended to review
the indications of interest for the purpose of determining whether a party would
be invited to participate in the second phase of the review process. During the
next eight days, numerous discussions were held between representatives of the
interested parties and management of the Company and Oppenheimer concerning the
Company's operations.
By letter dated May 14, 1997, Monterey submitted an offer of $17.00 per
share, in cash, subject only to a brief period to conduct confirming due
diligence.
On May 20, 1997, the Board held a special meeting by telephone to review
the indications of interest received from Monterey and other interested parties
and discuss possible courses of action with management and the Company's legal
and financial advisors. The Board instructed Mr. McFarland and Oppenheimer to
contact Mr. Whaling and the chief executive officer of one other interested
party and invite them to participate in the second phase of the process and make
definitive offer proposals. Mr. McFarland and Oppenheimer also were instructed
to inform Monterey that its offer of $17.00 per share was not the highest bid
received by the Company in the first phase of the process. In addition, legal
counsel and management were instructed to prepare a form of transaction
agreement to be delivered to Monterey and the other interested party with an
invitation to comment thereon when submitting their definitive proposals.
By letter dated May 23, 1997, Oppenheimer notified Monterey and the other
interested party of procedures to be followed in the second phase of the
process, including that definitive bids were to be received by the Company prior
to noon on Monday, June 9, 1997.
Definitive proposals were submitted by Monterey and the other interested
party on June 9, 1997. Monterey proposed that, subject to certain conditions, it
would acquire the Company in a cash merger at $18.25 per share. The Company's
management and legal and financial advisors analyzed Monterey's proposal and
contacted Monterey's management and legal advisors to clarify various matters in
Monterey's proposal.
On June 11, 1997, the Board held a special meeting by telephone to receive
reports from management and Oppenheimer on the definitive proposals and consult
with its legal advisors. Mr. McFarland was directed to negotiate with Monterey
to see if an acquisition with appropriate price and other conditions
satisfactory to the Company could be structured. Later that day, Messrs.
McFarland and Whaling met to discuss Monterey's offer. At such meeting, Mr.
Whaling indicated Monterey's willingness to increase its offer to $18.55 per
share, an amount Mr. McFarland suggested he would be willing to recommend to the
Board for approval.
7
8
Thereafter, on June 12, 1997, negotiations and discussions among
representatives of Monterey and the Company and their respective legal and
financial advisors began with respect to the terms and conditions of a Merger
Agreement. Monterey proceeded to complete its remaining confirmatory due
diligence review and the parties proceeded to resolve substantially all issues
regarding the form of proposed Merger Agreement.
On the evening of June 16, 1997, a special meeting of the Board was held.
Two directors were present in person at the meeting and five directors were
present by telephone. At the meeting, the Board received presentations from
management and the Company's legal and financial advisors regarding Monterey's
offer as well as the results of negotiation of the Merger Agreement with
Monterey. In addition, Oppenheimer delivered its oral opinion (subsequently
confirmed in writing that evening) that, as of that date and subject to the
matters described by it and set forth in the written opinion, the consideration
to be received by the stockholders of McFarland pursuant to the Merger Agreement
was fair from a financial point of view to the stockholders of McFarland. The
Board also considered the Company's business, financial condition, results of
operations, current business strategy and future prospects, recent and
historical prices for the Common Stock and other matters. In addition,
Oppenheimer reviewed and updated its presentations made earlier to the Board.
The Board was also advised that Monterey's Board had approved the Merger
Agreement, the Offer and the Merger. At the meeting, the Board, among other
things, by unanimous vote (i) determined that the Offer and the Merger were fair
to and in the best interests of the stockholders of the Company, (ii) authorized
and approved the Merger Agreement, and (iii) recommended that the stockholders
of the Company accept the Offer and tender their shares pursuant to the Offer.
Immediately after the conclusion of the meeting, the Company, Offeror and
Monterey executed the Merger Agreement, pursuant to which Offeror agreed to make
the Offer. In addition, a stockholders agreement by and among Monterey, the
Offeror, Mr. and Mrs. J. C. McFarland, William E. Carl and the McFarland Family
Trust (the "Stockholders Agreement") was executed, pursuant to which such
persons agreed to tender their shares of Common Stock in the Offer and to sell
such shares to the Offeror, at the price paid in the Offer, subject to certain
conditions. The parties issued a joint press release publicly announcing the
transaction before the opening of the markets on June 17, 1997.
See Annex I, "Description of Merger Agreement," for additional summary
information regarding the terms and conditions of the Merger Agreement.
(c) Factors Considered by the Board.
In determining to recommend to the Company's stockholders that they accept
the Offer and tender their Common Stock pursuant thereto, the Board considered a
number of factors, including, without limitation, the following:
(i) the Board's familiarity with and review of the Company's business,
financial condition, results of operations, business strategy and
prospects;
(ii) the financial and other terms and conditions of the Offer and the
Merger Agreement, and the fact that the $18.55 per share cash consideration
offered for the Common Stock in the Offer and Merger was higher than the
consideration offered in any other indication of interest or definitive
proposal received in the Company's process of evaluating strategic
alternatives;
(iii) the written opinion, dated June 16, 1997, of Oppenheimer that,
as of such date, the consideration to be received by the stockholders of
McFarland pursuant to the Merger Agreement was fair from a financial point
of view to the stockholders of McFarland; a copy of such opinion, setting
forth procedures followed, assumptions made, areas of reliance and other
matters considered by Oppenheimer in arriving at their opinion, is attached
as Annex II to this Schedule and is incorporated herein by reference, and
should be read in its entirety; in considering such opinion, the Board was
aware that, upon delivery thereof, Oppenheimer became entitled to certain
fees described in Item 5 below in connection with its engagement by the
Company and that, in addition, Oppenheimer expressed no opinion or
recommendation as to how the stockholders of the Company should vote with
respect to the Merger;
(iv) the presentations of Oppenheimer in connection with such opinion
as to various financial and other considerations deemed relevant to the
Board's evaluation of the Offer and the Merger;
8
9
(v) the historic and recent market prices of the Shares and the fact
that the $18.55 per share Offer price represents, among other things, a
premium of 12% over the closing price for the Common Stock on the Nasdaq
National Market on the trading day before the announcement of the Offer, of
40% over such closing price on the day two trading days before the
announcement of the Offer and of 50% over such closing price 30 days before
such announcement;
(vi) the terms and conditions of the Offer and the Merger Agreement,
including that the Offer is not subject to financing but is subject to
minimum tender conditions and that the Board is entitled, prior to the
consummation of the Offer, to terminate the Merger Agreement and withdraw
its recommendation of the Offer in order to approve an alternative
transaction with a third party on terms more favorable to the Company's
stockholders from a financial point of view than the Offer and the Merger
taken together, provided that the Company is obligated to pay Monterey a
fee of $2.78 million upon any such termination (such amount representing
2 1/2% of the aggregate cash consideration of $111.2 million); in assessing
the termination fee, the Board of Directors considered the likelihood of
any third party making a proposal for a third party transaction and that
the effect of the termination fee would be to increase by the amount of
such termination fee the costs to a third party of acquiring the Company;
(vii) the financial ability of Monterey to consummate the Offer and
the Merger;
(viii) the possible impact of the Offer and the Merger and of
alternatives thereto on the Company's business and prospects; and
(ix) the fact that, following the consummation of the Offer and the
Merger, the current stockholders of the Company will no longer be able to
participate in any increases or decreases in the value of the Company's
business and profits.
The foregoing discussion of the information and facts considered by the
Board is not intended to be exclusive. In view of the wide variety of factors
considered in connection with its evaluation of the Offer and the Merger, the
Board did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the individual factors considered in reaching its
determination. In addition, individual members of the Board may have given
different weights to different factors.
(d) Opinion of Financial Advisor.
Oppenheimer was retained by McFarland to act as financial advisor in
connection with the Offer. In connection with such engagement, McFarland
requested that Oppenheimer render its opinion as to the fairness, from a
financial point of view, to McFarland's stockholders of the consideration to be
received by such stockholders in the Offer and subsequent Merger.
On June 16, 1997, at a meeting of the Board of Directors of McFarland held
to evaluate the proposed Offer, Oppenheimer delivered an oral opinion
(subsequently confirmed by delivery of a written opinion dated such date) to the
Board of Directors of McFarland (the "Oppenheimer Opinion") to the effect that,
as of the date of such opinion, and subject to certain assumptions, factors and
limitations set forth in such written opinion, the consideration to be received
by the stockholders of McFarland was fair, from a financial point of view, to
the stockholders of McFarland.
THE FULL TEXT OF THE OPPENHEIMER OPINION IS ATTACHED AS ANNEX II TO THIS
SCHEDULE. MCFARLAND STOCKHOLDERS ARE URGED TO READ THE OPPENHEIMER OPINION
CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE
FACTORS CONSIDERED, THE ASSUMPTIONS AND QUALIFICATIONS MADE BY OPPENHEIMER IN
RENDERING ITS OPINION AND OTHER FACTORS RELATING TO OPPENHEIMER'S ENGAGEMENT BY
MCFARLAND'S BOARD OF DIRECTORS. THE OPPENHEIMER OPINION, WHICH WAS DIRECTED TO
THE BOARD OF DIRECTORS OF MCFARLAND, RELATES ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE RECEIVED BY THE STOCKHOLDERS
OF MCFARLAND PURSUANT TO THE MERGER AGREEMENT, DOES NOT ADDRESS ANY OTHER ASPECT
OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER OF MCFARLAND AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE
MERGER. THE SUMMARY OF THE OPPENHEIMER OPINION SET FORTH IN THIS SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
9
10
The Oppenheimer Opinion is for the use and benefit of the Board of
Directors of McFarland and was rendered to the Board of Directors in connection
with its consideration of the Offer. The Oppenheimer Opinion was only one of
many factors considered by the Board of Directors of McFarland in its evaluation
of the Offer and should not be viewed as determinative of the views of
McFarland's Board of Directors or management with respect to the Offer or the
proposed Merger. Oppenheimer was not requested to and did not make any
recommendation to the Board of Directors of McFarland as to the form or amount
of consideration to be offered to McFarland's stockholders in the Offer, which
was determined through arm's-length negotiations between McFarland and Monterey.
In arriving at its opinion, Oppenheimer did not ascribe a specific range of
value to McFarland, but made its determination as to fairness, from a financial
point of view, to McFarland's stockholders of the Offer on the basis of
financial and comparative analyses summarized below.
The Oppenheimer Opinion contemplates economic, market, financial and other
facts and conditions existing as of June 16, 1997, and is based on the
information made available to Oppenheimer as of such date and on the review and
analyses conducted by Oppenheimer as of such date. Events and conditions
subsequent to such date have not been considered and may materially alter the
assumptions relied upon and the conclusions stated by Oppenheimer in the
Oppenheimer Opinion. Oppenheimer has no obligation to update, revise or reaffirm
the fairness opinion rendered in the Oppenheimer Opinion, and McFarland does not
intend to seek any such updating, revisions or reaffirmation by Oppenheimer.
In arriving at its opinion, Oppenheimer reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of McFarland concerning the business, operations
and prospects of McFarland. Oppenheimer examined certain publicly available
business and financial information relating to McFarland, as well as certain
financial forecasts and other data which were provided to Oppenheimer by the
senior management of McFarland. Oppenheimer reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other things:
current and historic market prices and trading volumes of the Common Stock;
McFarland's historic and projected earnings and cash flow; and the
capitalization and financial condition of McFarland. Oppenheimer also
considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which Oppenheimer considered
comparable in evaluating the Merger, and analyzed certain financial, stock
market and other publicly available information relating to the businesses of
other companies whose operations it considered comparable in evaluating those of
McFarland. In addition to the foregoing, Oppenheimer conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Oppenheimer deemed appropriate in arriving at its opinion.
In rendering its opinion, Oppenheimer assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available, including such information furnished to
Oppenheimer or otherwise discussed with Oppenheimer by management of McFarland.
With respect to financial forecasts and other information so provided or
otherwise discussed with Oppenheimer, Oppenheimer assumed, with the consent of
the Board of Directors of McFarland, that such forecasts and other information
were reasonably prepared to reflect the best currently available estimates and
good faith judgments of the management of McFarland as to the expected future
financial performance of McFarland. Other than reserve reports prepared by
Netherland, Sewell & Associates as of December 31, 1996 and DeGolyer &
MacNaughton as of December 31, 1996, Oppenheimer did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of McFarland, nor has Oppenheimer made
physical inspection of all of the properties or assets of McFarland.
The following is a summary of the material factors considered and principal
financial analyses performed by Oppenheimer to arrive at the Oppenheimer
Opinion. Oppenheimer performed certain procedures, including each of the
financial analyses described below, and reviewed with the management of
McFarland the assumptions on which such analyses were based and other factors,
including the historical financial results and the estimated financial results
for McFarland.
10
11
Analysis of Certain Publicly Traded Companies
Using publicly available information, Oppenheimer compared selected
historical and projected operating and financial data and ratios of McFarland to
the corresponding data and ratios of certain publicly traded oil and natural gas
companies considered by Oppenheimer to be reasonably comparable to McFarland,
including companies with properties in California (the "Comparable California
Companies") and companies with similar operating strategies as McFarland (i.e.,
acquire and exploit properties) (the "Comparable U.S. Exploitation Companies").
The Comparable California Companies consist of Berry Petroleum, Harcor Energy,
Monterey Resources, Nuevo Energy, Plains Resources, Saba Petroleum and Vintage
Petroleum. The Comparable U.S. Exploitation Companies consist of Abraxas
Petroleum, Belco Oil & Gas, Bellwether Exploration, Callon Petroleum, Chesapeake
Energy, Coho Energy, Comstock Resources, Costilla Energy, Denbury Resources,
Lomak Petroleum, National Energy Group and Swift Energy.
Oppenheimer's analysis included, among other things, the consideration of a
company's market capitalization of common stock as of June 13, 1997 (the "Market
Capitalization") as a multiple of the latest 12-month period ("LTM") operating
cash flow ("OCF") and estimated 1997 and 1998 OCF. OCF is defined as net income
before extraordinary items plus deferred taxes, depreciation, depletion and
amortization and any other noncash charges, excluding changes to working
capital. Oppenheimer's analysis also included the consideration of a company's
Market Capitalization plus total debt, and preferred stock less cash and cash
equivalents ("Aggregate Value"), as a multiple of LTM and estimated 1997 and
1998 earnings before interest, taxes and depreciation, depletion and
amortization ("EBITDA"), and the consideration of the ratio of Aggregate Value
to PV-10 Value. Projected OCF and EBITDA for McFarland, Comparable California
Companies and Comparable U.S. Exploitation Companies were based on estimates
compiled by Institutional Brokers Estimate Service and published estimates of
selected investment banking firms, including Oppenheimer.
Although Oppenheimer used the information with respect to these companies
for comparison purposes, none of such companies is identical to McFarland. Such
analysis indicated that the average values, excluding highest and lowest values
(the "adjusted average values"), of Market Capitalization as a multiple of LTM
OCF and estimated fiscal years 1997 and 1998 OCF were 8.8x, 6.0x and 4.7x,
respectively, for the Comparable California Companies, and 6.1x, 4.6x, and 3.6x,
respectively, for the Comparable U.S. Exploitation Companies, as compared to the
Company's implied multiples of 8.3x, 7.8x and 6.2x based upon the proposed
$18.55 offer price the ("Acquisition Price"). The adjusted average values of
Aggregate Value as a multiple of LTM EBITDA and estimated 1997 and 1998 EBITDA
were 7.6x, 6.6x and 5.4x, respectively, for the Comparable California Companies,
and 8.7x, 5.7x and 4.6x, respectively, for the Comparable U.S. Exploitation
Companies, as compared to the Company's implied multiples of 6.6x, 6.7x and 5.7x
based on the Acquisition Price. The adjusted average values of Aggregate Value
as a multiple of PV-10 Value was 0.7x for the Comparable California Companies
and 0.9x for the Comparable U.S. Exploitation Companies, as compared to the
Company's implied multiple of 0.9x based on the Acquisition Price.
Transaction Analysis
Oppenheimer reviewed publicly available information relating to certain
acquisitions of oil and natural gas companies which were announced from January
1994 through June 1997. These transactions, included, among others, the
following: Apache Corporation and Phoenix Resource Companies, Inc.; HS
Resources, Inc. and Tide West Oil Co.; Enron Oil & Gas Company and Coda Energy,
Inc.; Hugoton Energy Corporation and Consolidated Oil & Gas, Inc.; YPF Sociedad
Anonima and Maxus Energy Corporation; Lomak Petroleum, Inc. and Red Eagle
Resources Corporation; United Meridian Corporation and General Atlantic
Resources, Inc.; Alexander Energy Corporation and American Natural Energy
Corporation; Devon Energy Corporation and Alta Energy Corporation; Norcen Energy
Resources Ltd. and Basic Petroleum International, Ltd.; Texas Pacific Group and
Belden & Blake; Mesa Inc. and Parker & Parsley Petroleum; Lomak Petroleum and
American Cometra; and Columbia Gas Systems, Inc. and Alamco Inc., among others.
These selected transactions were not intended to represent the complete list of
oil and natural gas transactions which have occurred or been announced during
this period; rather, such transactions represent selected recent transactions
involving publicly traded oil and natural gas companies engaged in oil and gas
exploration and production
11
12
activities that were deemed by Oppenheimer to operate in comparable producing
basins or have comparable financial and operating characteristics to McFarland.
Oppenheimer reviewed the consideration paid in such transactions in terms
of the price paid for the common stock ("Equity Purchase Price") as a multiple
of LTM OCF. Oppenheimer also reviewed the Equity Purchase Price plus total debt,
preferred stock and transaction costs less cash and cash equivalents ("Total
Transaction Value") of such transactions as a multiple of LTM EBITDA, PV-10
Value and total proved reserves on a BOE basis.
The analysis of Equity Purchase Price as a multiple of LTM OCF indicated a
range of these transaction values of 4.3x to 51.9x and an adjusted average value
of 11.2x, compared to the implied value of McFarland based on the Acquisition
Price of 8.0x. The analysis of Total Transaction Value as a multiple of LTM
EBITDA, PV-10 Value and total proved reserves indicated the following: (i) on a
LTM EBITDA basis, a range of 3.4x to 19.1x and an adjusted average value of
8.6x; (ii) on a PV-10 Value basis, a range of 0.50x to 2.56x and an adjusted
average value of 1.14x; and (iii) on a proved BOE basis, a range of $2.19 to
$13.18 per BOE and an adjusted average value of $5.80 per BOE. This compares to
the implied values for McFarland based on the Acquisition Price of 7.8x LTM
EBITDA, 1.24x the PV-10 Value of McFarland's proved reserves using "normalized
pricing" and $6.15 per BOE. The PV-10 Value of McFarland's proved reserves at
December 31, 1996 under "normalized pricing" is calculated based upon a
per-barrel oil price of $15.67 and a per-mcf gas price of $1.81, which the
Company's 1997 budget estimates to be the average prices received for its oil
and gas during the first quarter of 1997, as opposed to the PV-10 Value
calculated by McFarland's independent engineers that used prices at December 31,
1996, which were significantly higher than historic averages.
No company or transaction used in the analysis described above was directly
comparable to McFarland or the proposed transaction. Accordingly, analysis of
the results of the foregoing was not simply mathematical nor necessarily
precise; rather, it involved complex consideration and judgments concerning
differences in financial and operating characteristics of companies and other
factors that could affect public trading values.
Net Asset Appraisal
Oppenheimer determined a net asset appraisal value for McFarland by
calculating a net asset value net of long-term debt and other noncurrent
liabilities outstanding as estimated at the time of the Merger. McFarland's
asset value was based on (i) the PV-10 Value of McFarland's proved reserves
using normalized pricing, (ii) the net working capital estimate at the time of
the Merger, and (iii) certain other assets deemed appropriate by Oppenheimer. As
a result, Oppenheimer calculated a net asset appraisal value for McFarland of
$110.8 million or $18.45 per share on a fully diluted basis under normalized
pricing.
Comparable Reserve Acquisitions
Oppenheimer also reviewed selected acquisitions of oil and gas reserves
from January 1, 1995 to June 13, 1997. There were over 335 transactions. The
selected transactions were obtained from John S. Herold, Inc. and were not
intended to represent the complete list of oil and natural gas transactions
which have occurred or been announced. Oppenheimer reviewed transactions
involving the purchase of properties in the United States, particularly focusing
on the acquisition of California oil and gas properties.
Oppenheimer reviewed the consideration paid in such transactions in terms
of the aggregate purchase price paid as a multiple of the reported total proved
reserves on a BOE basis. The analyses of purchase price as a multiple of proved
reserves indicated an adjusted average value of $4.43 per BOE for all
transactions, $4.75 per BOE for acquisitions of U.S. properties with aggregate
purchase prices between $50 million and $200 million, and $2.52 per BOE for
California property acquisitions, as compared to the implied multiple of $6.15
per BOE for McFarland based upon the Acquisition Price.
The summary set forth above does not purport to be a complete description
of the analyses performed by Oppenheimer. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances
12
13
and, therefore, such an opinion is not readily susceptible to summary
description. The preparation of a fairness opinion does not involve a
mathematical evaluation or weighing of the results of the individual analyses
performed, but requires Oppenheimer to exercise its professional judgment based
on its experience and expertise in considering a wide variety of analyses taken
as a whole. Each of the analyses conducted by Oppenheimer was carried out in
order to provide a different perspective on the transaction and add to the total
mix of information available. Oppenheimer did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed to
support an opinion as to fairness. Rather, in reaching its conclusion,
Oppenheimer considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Oppenheimer did not place particular reliance or weight on any individual
analysis, but instead concluded that its analyses, taken as whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, Oppenheimer believes that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, may create an incomplete view of
the evaluation process underlying its opinion. In performing its analyses,
Oppenheimer made numerous assumptions with respect to industry performances,
business and economic conditions and other matters. The analyses performed by
Oppenheimer are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses.
Financial Advisor Fee
Oppenheimer is a nationally recognized investment banking firm and was
selected by the Board of Directors of McFarland to act as McFarland's financial
advisor, based on Oppenheimer's substantial experience in transactions similar
to the Merger and familiarity with McFarland and its operations and the oil and
natural gas industry generally. Oppenheimer regularly engages in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements, and valuations for corporate and
other purposes.
For information concerning the terms of the fee arrangement between
McFarland and Oppenheimer, see Item 5 below. The terms of the fee arrangement
with Oppenheimer, which Oppenheimer and McFarland believe are customary in
transactions of this nature, were negotiated at arm's-length between McFarland
and Oppenheimer, and the Board of Directors of McFarland was aware of such
arrangement. In the ordinary course of its business, Oppenheimer and its
affiliates may actively trade the securities of McFarland and Monterey for its
own account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Pursuant to an engagement letter dated May 12, 1997 (the "Engagement
Letter"), McFarland has retained Oppenheimer to render certain financial
advisory and investment banking services to McFarland in connection with a
possible "Transaction." The Engagement Letter defines "Transaction" as (a) any
merger, consolidation, reorganization, recapitalization, business combination or
other transaction pursuant to which either the Company is acquired by, or
combined with, a third party or (b) the acquisition, directly or indirectly, by
a third party, in a single transaction or a series of transactions, of (i) all
or substantially all of the assets or operations of the Company, or (ii) 50% or
more of the Company's outstanding common stock (whether by way or tender or
exchange offer, open market purchases, negotiated purchases or otherwise).
For such financial advisory and investment banking services, McFarland has
paid or agreed to pay Oppenheimer under the Engagement Letter as follows: (a) an
engagement fee (the "Engagement Fee") of $25,000; plus (b) an additional cash
fee (the "Rights Plan Fee") of $10,000 payable at the time the Company requests
Oppenheimer to begin advising it with respect to the possible adoption of a
stockholder rights plan; plus (c) an additional cash fee (the "Memorandum Fee")
of $25,000 payable at the time the Company requests Oppenheimer to begin
assisting it in the preparation of a confidential placement memorandum; plus (d)
an opinion fee (the "Opinion Fee") of $250,000 payable upon delivery of an oral
or written opinion as to the fairness, from a financial point of view, of the
consideration to be received by McFarland or its
13
14
stockholders in connection with a Transaction; plus (e) a transaction fee (the
"Transaction Fee") equal to (i) 0.875% of the Consideration (as hereinafter
defined) up to $100 million, plus (ii) 1.50% of the consideration in excess of
$100 million. The Engagement Fee, the Rights Plan Fee, the Memorandum Fee and
the Opinion Fee may be credited in their entirety, if previously paid to
Oppenheimer, against the Transaction Fee. The Transaction Fee is payable in full
upon consummation of a Transaction during the term of the Engagement Letter.
McFarland also has agreed to reimburse Oppenheimer for its reasonable direct,
out-of-pocket expenses and to indemnify Oppenheimer and certain related persons
against certain liabilities resulting from or arising out of its performance
under the Engagement Letter.
The Engagement Letter defines "Consideration" as the value of all cash,
securities, the assumption of debt by the purchaser and any other forms of
payment received or to be received, directly or indirectly, by McFarland or the
stockholders of McFarland pursuant to a Transaction, including the total of all
interest-bearing indebtedness of McFarland (both long term and short term,
including capitalized leases) outstanding, assumed or refinanced at the closing
of a Transaction and also including any infusions of cash, securities, assets or
other forms of value into McFarland pursuant to a Transaction. The term
"Consideration" expressly includes (i) the value of all options and warrants
purchased or assumed in connection with a Transaction, and (ii) the value of any
of the Company's securities, including but not limited to its Common Stock,
which remain outstanding subsequent to the consummation of a Transaction.
Neither McFarland nor any person acting on its behalf currently intends to
employ, retain or compensate any other person to make solicitations or
recommendations to security holders on their behalf concerning the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Transactions in Securities.
To the knowledge of McFarland, no transactions in the Common Stock have
been effected during the past 60 days by McFarland or by any executive officer,
director, affiliate or subsidiary of McFarland.
(b) Intent to Tender.
To the knowledge of McFarland, all of its executive officers, directors,
affiliates or subsidiaries currently intend to tender pursuant to the Offer all
shares of Common Stock that are held of record or beneficially owned by such
persons.
Under the Stockholders Agreement, J. C. McFarland, Carolyn J. McFarland,
William E. Carl and the McFarland Family Trust have agreed to tender their
shares of Common Stock in the Offer and to sell such shares to the Offeror, at
the price paid in the Offer, subject to certain conditions. See Item 3(b) above.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Negotiations.
Except as set forth in this Schedule, no negotiation is being undertaken or
is underway by McFarland in response to the Offer which relates to or would
result in: (i) an extraordinary transaction, such as a merger or reorganization,
involving McFarland or any subsidiary thereof; (ii) a purchase, sale or transfer
of a material amount of assets by McFarland or any subsidiary thereof; (iii) a
tender offer for or other acquisition of securities by or of McFarland; or (iv)
any material change in the present capitalization or dividend policy of
McFarland.
(b) Transactions and Other Matters.
Except as set forth in this Schedule, there are no transactions, Board
resolutions, agreements in principle or signed contracts in response to the
Offer that relate to or would result in one or more of the events referred to in
Item 7(a) above.
14
15
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
None.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
*1 -- Agreement and Plan of Merger, dated as of June 16, 1997,
among McFarland, Monterey and the Offeror.
**2 -- Letter to the stockholders of the Company dated June 23,
1997.
*3 -- Stockholders Agreement, dated as of June 16, 1997, among
Monterey, the Offeror, J. C. McFarland, Carolyn J.
McFarland, the McFarland Family Trust, and William E.
Carl.
*4 -- Confidentiality Agreement dated as of April 29, 1997
between McFarland Energy, Inc. and Monterey.
*5 -- Agreement dated as of August 9, 1995 by and between
McFarland Energy, Inc. and J. C. McFarland.
*6 -- Agreement dated as of August 8, 1995 by and between
McFarland Energy, Inc. and Ronald T. Yoshihara.
*7 -- Agreement dated as of August 8, 1995, as amended on
December 10, 1996, by and between McFarland Energy, Inc.
and Craig M. Sturtevant.
*8 -- Agreement dated as of August 25, 1995, as amended on
December 10, 1996, by and between McFarland Energy, Inc.
and William H. Moodie.
*9 -- Agreement dated as of August 10, 1995 by and between
McFarland Energy, Inc. and Robert E. Ransom.
*10 -- Change in Control Retention/Severance Plan.
*11 -- Form of Indemnification Agreement between McFarland
Energy, Inc. and its directors and executive officers.
**12 -- Opinion of Oppenheimer & Co., Inc. dated June 16, 1997.
- - ---------------
* Filed herewith.
** Included in copies mailed to Stockholders.
15
16
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
MCFARLAND ENERGY, INC.
By: /s/ J. C. MCFARLAND
----------------------------------
J. C. McFarland
Chairman and Chief Executive
Officer
Dated: June 23, 1997
16
17
ANNEX I
DESCRIPTION OF MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions thereof
and is qualified in its entirety by reference to the full text thereof, which is
incorporated herein by reference and a copy of which has been filed as Exhibit 1
to this Schedule. Capitalized terms used in this Annex I and not otherwise
defined in this Schedule have the meanings ascribed to them in the Merger
Agreement.
The Offer. The Merger Agreement provides for the commencement of the Offer
as promptly as reasonably practicable, but in no event later than five business
days after the initial public announcement of Offeror's intention to commence
the Offer. The obligation of Offeror to accept for payment Shares tendered
pursuant to the Offer is subject to (i) the condition (the "Minimum Condition")
that at least the number of Shares that, when combined with the Shares already
owned by Monterey and its direct or indirect subsidiaries and any Shares
purchased pursuant to the Stockholders Agreement, constitute a majority of the
then outstanding Shares on a fully diluted basis, including, without limitation,
all Shares issuable upon the conversion of any convertible securities or upon
the exercise of any options, warrants or rights shall have been validly tendered
and not withdrawn prior to the expiration of the Offer and (ii) the satisfaction
or waiver of the other conditions described below under "Conditions to the
Offer." Offeror and Monterey have agreed that no change in the Offer may be made
which (a) decreases the price per Share payable in the Offer, (b) reduces the
maximum number of Shares to be purchased in the Offer, (c) imposes conditions to
the Offer in addition to those described below under "Conditions to the Offer,"
(d) amends or changes the terms and conditions of the Offer in any manner
materially adverse to the holders of Shares other than Monterey and its
subsidiaries or (e) changes or waives the Minimum Condition.
The Merger. The Merger Agreement provides that, upon the terms and subject
to the conditions thereof (and described below under "Conditions to the
Merger"), and in accordance with Delaware Law, at the effective time of the
Merger under Delaware Law (the "Effective Time"), Offeror shall be merged with
and into the Company. As a result of the Merger, the separate corporate
existence of Offeror will cease and the Company will continue as the Surviving
Corporation and will become a wholly owned subsidiary of Monterey. Upon
consummation of the Merger, each issued and then outstanding Share (other than
any Shares held in the treasury of the Company, or owned by Offeror, Monterey or
any direct or indirect wholly owned subsidiary of Monterey or of the Company and
any Shares that are held by stockholders who have not voted in favor of the
Merger or consented thereto in writing and who shall have demanded properly in
writing appraisal for such Shares in accordance with Delaware Law) shall be
canceled and converted automatically into the right to receive an amount equal
to the price per share being paid by Offeror in the Offer (the "Merger
Consideration").
Pursuant to the Merger Agreement, each share of common stock, par value
$.01 per share, of Offeror issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one share of common
stock, par value $1.00 per share, of the Surviving Corporation.
The Merger Agreement provides that the directors of Offeror immediately
prior to the Effective Time will be the initial directors of the Surviving
Corporation and that the officers of the Company immediately prior to the
Effective Time will be the initial officers of the Surviving Corporation. The
Merger Agreement provides that, at the Effective Time, unless otherwise
determined by Monterey prior to the Effective Time, and subject to the
requirements of sections of the Merger Agreement that provide for
indemnification of directors and officers (as described herein), the Certificate
of Incorporation of the Offeror, as in effect immediately prior to the Effective
Time, will be the Certificate of Incorporation of the Surviving Corporation and
shall be amended and restated to conform to the Certificate of Incorporation of
Offeror as in effect immediately prior to the Effective Time. The Merger
Agreement also provides that the By-laws of Offeror, as in effect immediately
prior to the Effective Time, and subject to the requirements of sections of the
Merger Agreement that provide for indemnification of directors and officers,
will be the By-laws of the Surviving Corporation.
I-1
18
Agreements of Monterey, Offeror and the Company. Pursuant to the Merger
Agreement, subject to its fiduciary duties under applicable law as advised in
writing by independent counsel, the Company, acting through the Board, shall, if
required by applicable law and the Company's Certificate of Incorporation and
By-laws, duly call, give notice of, convene and hold an annual or special
meeting of its stockholders as soon as practicable following consummation of the
Offer for the purpose of considering and taking action on the Merger Agreement
and the transactions contemplated thereby (the "Stockholders' Meeting").
Proxy Statement. The Merger Agreement provides that, if required by
applicable law, the Company shall, as soon as practicable following consummation
of the Offer, file with the Commission under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and use its reasonable best efforts to
have cleared by the Commission, a proxy statement and related proxy materials
(the "Proxy Statement") with respect to the Stockholders' Meeting and shall
cause the Proxy Statement to be mailed to Stockholders of the Company at the
earliest practicable time. The Company has also agreed, subject to its fiduciary
duties under applicable law as advised by counsel, to include in the Proxy
Statement the recommendation of the Board that the stockholders of the Company
approve and adopt the Merger Agreement and the transactions contemplated
thereby. To the extent permitted by law, Monterey and Offeror have each agreed
to vote all shares beneficially owned by them in favor of the Merger.
Conduct of Business. Pursuant to the Merger Agreement, the Company has
covenanted and agreed that, between the date of the Merger Agreement and the
election or appointment of Offeror's designees to the Board (as described in the
next following paragraph) upon the purchase by Offeror of any Shares pursuant to
the Offer (the "Offeror's Election Date"), unless Monterey shall otherwise agree
in writing, the businesses of the Company and its subsidiaries (the
"Subsidiaries" and, individually, a "Subsidiary") shall be conducted only in,
and the Company and the Subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice; and
the Company shall use its reasonable best efforts to preserve substantially
intact the business organization of the Company and the Subsidiaries, to keep
available the services of the current officers, employees and consultants of the
Company and the Subsidiaries and to preserve the goodwill of those current
relationships of the Company and the Subsidiaries with customers, suppliers and
other persons with which the Company or any Subsidiary has significant business
relations. The Merger Agreement provides that by way of amplification and not
limitation, and except as contemplated therein, the Company shall not, between
the date of the Merger Agreement and Offeror's Election Date, directly or
indirectly do, or propose to do, any of the following, without the prior written
consent of Monterey: (a) amend or otherwise change the certificate of
incorporation or by-laws or equivalent organizational documents of the Company
or the Subsidiaries; (b) issue, sell, pledge, dispose of, grant, encumber, or
authorize the issuance, sale, pledge, disposition, grant or encumbrance of (i)
any shares of capital stock of any class of the Company or any Subsidiary, or
any options, warrants, convertible securities or other rights of any kind to
acquire any shares of such capital stock, or any other ownership interest
(including, without limitation, any phantom interest) of the Company or any
Subsidiary (except for the issuance of Shares issuable pursuant to Options (as
hereinafter defined) outstanding on the date of the Merger Agreement), or (ii)
any assets of the Company or any Subsidiary, except for sales of products in the
ordinary course of business and in a manner consistent with past practice; (c)
declare, set aside, make or pay any dividend or other distribution, payable in
cash, stock, property or otherwise, with respect to any of its capital stock
(except for such declarations, set asides, dividends, and other distributions
made from any Subsidiary to the Company); (d) reclassify, combine, split,
subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any
of its capital stock; (e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
other business organization or any division thereof or any material amount of
assets other than in the ordinary course of business, (ii) incur any
indebtedness for borrowed money or issue any debt securities or assume,
guarantee or endorse, or otherwise as an accommodation become responsible for,
the obligations of any person, or make any loans or advances, except in the
ordinary course of business and consistent with past practice, or (iii) enter
into or amend any contract, agreement, commitment or arrangement with respect to
any of the foregoing matters in this clause (e); (f) increase the compensation
payable or to become payable to its officers or employees, except for increases
in accordance with past practices in salaries or wages of employees of the
Company or any Subsidiary who are not officers of the Company, or grant any
severance or termination pay to, or enter into any employment or
I-2
19
severance agreement with any director, officer or other employee of the Company
or any Subsidiary, or establish, adopt, enter into or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or employee; (g) make any
tax election or settle or compromise any material federal, state, local or
foreign income tax liability; (h) pay, discharge or satisfy any claim, liability
or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the ordinary
course of business and consistent with past practice, of liabilities reflected
or reserved against in the 1996 Balance Sheet or subsequently incurred in the
ordinary course of business and consistent with past practice; (i) settle or
compromise any pending or threatened suit, action or claim which is material or
which relates to the Offer, the Merger, or any of the transactions contemplated
thereby; (j) undertake any capital commitment not reflected in the Company's
budget in an individual amount greater than $100,000 or, when aggregated with
all other capital commitments not reflected in the Company's budget, in an
aggregate amount greater than $1,000,000; or (k) take or offer or propose to
take, or agree to take in writing, or otherwise, any of the actions described
above or any action that would result in any of the conditions to the Offer not
being satisfied (other than as contemplated by the Merger Agreement).
Designation of Directors. The Merger Agreement provides that, promptly upon
the purchase by Offeror of Shares pursuant to the Offer, and from time to time
thereafter, Offeror shall be entitled to designate up to such number of
directors, rounded up to the next whole number, on the Board as shall give
Offeror representation on the Board equal to the product of the total number of
directors on the Board (giving effect to the directors elected pursuant to this
sentence), multiplied by the percentage that the aggregate number of Shares
beneficially owned by Offeror or any affiliate of Offeror at such time bears to
the total number of Shares then outstanding, and the Company shall, at such
time, promptly take all actions necessary to cause Offeror's designees to be
elected as directors of the Company, including increasing the size of the Board
or securing the resignations of incumbent directors, or both. The Merger
Agreement also provides that, at such times, the Company shall use its best
efforts to cause persons designated by Offeror to constitute the same percentage
as persons designated by Offeror shall constitute of the Board of (i) each
committee of the Board (some of the members of which may be required to be
independent as required by applicable law), (ii) each board of directors of each
domestic Subsidiary and (iii) each committee of each such board, in each case
only to the extent permitted by applicable law. Notwithstanding the foregoing,
until the time Offeror acquires a majority of the then outstanding Shares on a
fully diluted basis, the Company has agreed to use its best efforts to ensure
that all the members of the Board and each committee of the Board and such
boards and committees of the domestic Subsidiaries as of the date of the Merger
Agreement who are not employees of the Company shall remain members of the Board
and of such boards and committees.
Amendments. The Merger Agreement provides that following the election or
appointment of Offeror's designees in accordance with the immediately preceding
paragraph and prior to the Effective Time, any amendment of the Merger Agreement
or the Certificate of Incorporation or Bylaws, of the Company, any termination
of the Merger Agreement by the Company, any extension by the Company of the time
for the performance of any of the obligations or other acts of Monterey or
Offeror or waiver of any of the Company's rights thereunder, will require the
concurrence of a majority of those directors of the Company then in office who
were neither designated by Offeror nor are employees of the Company or if no
such directors are then in office, no such amendment, termination, extension or
waiver shall be effected which is materially adverse to the holders of Shares
(other than Monterey and its subsidiaries).
Access to Information; Confidentiality. Pursuant to the Merger Agreement,
from the date of the Merger Agreement until the consummation of the Offer, the
Company shall, and shall cause the Subsidiaries and the officers, directors,
employees, auditors and agents of the Company and the Subsidiaries to, afford
the officers, employees and agents of Monterey and Offeror and persons providing
or committing to provide Monterey or Offeror with financing for the transactions
contemplated by the Merger Agreement complete access at all reasonable times to
the officers, employees, agents, properties, offices, plants and other
facilities, books and records of the Company and each Subsidiary, and shall
furnish Monterey and Offeror and persons providing or committing to provide
Monterey or Offeror with financing for the transactions contemplated by the
Merger
I-3
20
Agreement with all financial, operating and other data and information as
Monterey or Offeror, through its officers, employees or agents, may reasonably
request. Monterey and Offeror have agreed to keep such information confidential
in accordance with the terms of a Confidentiality Agreement dated as of April
29, 1997 entered into between the Company and Monterey, a copy of which has been
filed as Exhibit 4 to this Schedule 14D-9 and is incorporated herein by
reference in its entirety.
The Company has agreed that to the extent permitted by applicable law, in
order to facilitate the continuing operation of the Company by Monterey and
Offeror from and after the completion of the Offer without disruption and to
assist in an achievement of an orderly transition in the ownership and
management of the Company, from the date of the Merger Agreement and until
completion of the Offer, the Company, Monterey and Offeror shall cooperate
reasonably with each other to effect an orderly transition including, without
limitation, with respect to communications with employees.
No Solicitation of Transactions. The Company has agreed that, until the
Merger Agreement shall have been terminated according to its terms (as described
below), neither it nor any Subsidiary shall, directly or indirectly, through any
officer, director or any agent, investment banker, financial advisor, attorney,
accountant or other representative retained by the Company or any Subsidiary or
otherwise, solicit, initiate or encourage the submission of any proposal or
offer from any person relating to any acquisition or purchase of all or (other
than in the ordinary course of business) any substantial portion of the assets
of, or any equity interest in, the Company (including, without limitation, any
take-over bid or tender offer or exchange offer, merger, consolidation or
similar transaction involving the Company or any of its subsidiaries (other than
the transactions contemplated by the Merger Agreement) (any of such transactions
being an "Acquisition Transaction") or any business combination with the Company
or, except to the extent required by fiduciary obligations under applicable law
as advised by independent counsel, participate in any negotiations regarding, or
furnish to any other person any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any other person to do or seek any of the foregoing;
provided, however, that nothing contained in the Merger Agreement shall prohibit
the Board from furnishing information to, or entering into discussions or
negotiations with, any person in connection with an unsolicited (from the date
of the Merger Agreement) proposal in writing by such person to acquire the
Company pursuant to a merger, consolidation, share exchange, business
combination or other similar transaction or to acquire all or substantially all
of the assets of the Company or any of its Subsidiaries, if, and only to the
extent that, (i) the Board, after consultation with independent counsel (which
may include its regularly engaged independent counsel), determines in good faith
that such action is required for the Board to act in a manner that is consistent
with its fiduciary duties to stockholders imposed by Delaware Law (such
determination having been made by the full Board and not having been delegated
to any committee thereof) and (ii) prior to furnishing such information to, or
entering into discussions or negotiations with, such person the Company obtains
from such person an executed confidentiality agreement on terms no less
favorable to the Company than those contained in the Confidentiality Agreement
with Monterey. The Merger Agreement required the Company immediately to cease
and cause to be terminated any discussions or negotiations existing at the date
of the Merger Agreement with any parties conducted prior to the date of the
Merger Agreement with respect to any of the foregoing. The Company has also
agreed to notify Monterey promptly if any such proposal or offer, or any inquiry
or contact with any person with respect thereto, is made. The Company has also
agreed not to release any third party from any confidentiality restriction or,
subject to the fiduciary duties of the Board, standstill agreement to which the
Company is or may become a party.
Treatment of Stock Options. Prior to the date on which Offeror shall have
accepted for payment all Shares validly tendered and not withdrawn prior to the
expiration date with respect to the Offer (the "Tender Offer Acceptance Date"),
the Company shall enter into an agreement with each holder of an employee or
director stock option to purchase Shares (in each case, an "Option") that
provides that, immediately prior to the Effective Time, each Option that is then
outstanding, whether or not then exercisable or vested, shall be canceled by the
Company, and each holder of a canceled Option shall be entitled to receive from
the Offeror at the time of such cancellation, an amount in cash equal to the
product of (i) the number of Shares previously subject to such Option, whether
or not then exercisable or vested, and (ii) the excess, if any, of the
I-4
21
Per Share Amount over the exercise price per Share applicable to such Option,
reduced by any applicable withholding.
Indemnification and Insurance. The Merger Agreement further provides that
the Certificate of Incorporation of the Surviving Corporation and each of its
Subsidiaries shall contain provisions no less favorable with respect to
limitation of liability than are set forth in Article VII of the Certificate of
Incorporation of the Company as of the date of the Merger Agreement, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who from and after the date of the Merger
Agreement and to and including the Effective Time were directors, officers,
employees, fiduciaries or agents of the Company or any of its Subsidiaries in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the matters contemplated by the Merger
Agreement), unless such modification is required by law. The Company has agreed
that from and after the Offeror's Election Date, the Company shall not amend,
repeal or otherwise modify the limitation of liability provisions of Article VII
of the Certificate of Incorporation of the Company or the indemnification or
advancement of expenses provisions in the Certificate of Incorporation of any of
the Company's Subsidiaries in any manner that would adversely affect the rights
thereunder of individuals who at any time from and after the date of the Merger
Agreement and to and including the Effective Time were directors, officers,
employees, fiduciaries or agents of the Company or any of its Subsidiaries in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the matters contemplated by the Merger
Agreement), unless such modification is required by law.
The Merger Agreement also provides that the Company shall, to the fullest
extent permitted under applicable law and regardless of whether the Merger
becomes effective, indemnify and hold harmless, and after the Effective Time,
the Surviving Corporation shall, to the fullest extent permitted under
applicable law, indemnify and hold harmless, each present and former director,
officer, employee, fiduciary and agent of the Company and each Subsidiary
(collectively, the "Indemnified Parties") against all costs and expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any threatened or
actual claim, action, suit, proceeding or investigation (whether arising before
or after the Effective Time) (a "Claim"), whether civil, criminal,
administrative or investigative, arising out of or pertaining to any action or
omission in their capacity as an officer, director, employee, fiduciary or agent
(including, without limitation, any Claim arising out of the Merger Agreement or
any of the transactions contemplated thereby), whether occurring before or after
the Effective Time, whether asserted prior to or at or after the Effective Time,
for a period of six years after the later of the date of the Merger Agreement
and the Effective Time in each case to the fullest extent permitted under
Delaware Law (and will pay any expenses in advance of the final disposition of
any such action or proceeding to each Indemnified Party to the fullest extent
permitted under Delaware Law, upon receipt from the Indemnified Party to whom
expenses are advanced of any undertaking to repay such advances required under
Delaware Law). In the event of any such claim, action, suit, proceeding or
investigation, the Merger Agreement provides that (i) the Indemnified Parties
may retain counsel, including local counsel, satisfactory to them and the
Company or the Surviving Corporation, as the case may be, shall pay the
reasonable fees and expenses of such counsel promptly after statements therefor
are received and (ii) the Company and the Surviving Corporation shall use all
reasonable efforts in the vigorous defense of any such matter; provided,
however, that neither the Company nor the Surviving Corporation shall be liable
for any settlement effected without its written consent (which consent may not
be unreasonably withheld); and provided, further, that neither the Company nor
the Surviving Corporation shall be obligated to pay the fees and expenses of
more than one counsel (plus appropriate local counsel) for all Indemnified
Parties in any single action unless there is, as determined by counsel to the
Indemnified Parties, under applicable standards of professional conduct, a
conflict or a reasonable likelihood of a conflict on any significant issue
between the positions of any two or more Indemnified Parties, in which case such
additional counsel (including local counsel) as may be required to avoid any
such conflict or likely conflict may be retained by the Indemnified Parties at
the expense of the Company or the Surviving Corporation; and provided, further,
that, in the event that any claim for indemnification is asserted or made within
such six-year period, all rights to indemnification in respect of such claim
shall continue until the disposition of such claim.
I-5
22
The Merger Agreement provides that the Company shall, from and after the
date of the Merger Agreement and to and including the Effective Time, and the
Surviving Corporation shall, for six years from the Effective Time, maintain in
effect the current directors' and officers' liability insurance policies
maintained by the Company (provided that the Surviving Corporation may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are no less advantageous to such officers
and directors so long as substitution does not result in gaps or lapses in
coverage) with respect to matters occurring prior to the Effective Time.
The Merger Agreement also provides that except as otherwise provided in the
Merger Agreement and only to the extent permitted by applicable law and public
policy, the Surviving Corporation, Monterey and Offeror each release and
discharge each Indemnified Party from, and covenant not to sue any Indemnified
Party with regard to, any Claim, whether civil, criminal, administrative or
investigative, arising out of or pertaining to any action or omission in their
capacity as an officer, director, employee, fiduciary or agent (including,
without limitation, any Claim arising out of the Merger Agreement or any of the
transactions contemplated thereby or the operations of the Company or the
condition of the assets of the Company). Such release and covenant not to sue
include Claims resulting in any way from the negligence or strict liability of
any Indemnified Party, whether the negligence or strict liability is active,
passive, joint, concurrent, or sole.
Monterey, Offeror and the Company have also agreed that in the event the
Company or the Surviving Corporation or any of their respective successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then and in each such case, proper provision shall be made so
that the successors and assigns of the Company or the Surviving Corporation, as
the case may be, or at Monterey's option, Monterey, shall assume the foregoing
indemnity obligations.
The Merger Agreement provides that the By-laws of the Surviving Corporation
and each of its Subsidiaries shall contain the provisions with respect to
indemnification and advancement of expenses set forth in the By-laws of the
Company on the date of the Merger Agreement, and that such provisions shall not
be amended, repealed or otherwise modified for a period of six years after the
Effective Time in any manner that would affect adversely the rights thereunder
of individuals who at any time from and after the date of the Merger Agreement
and to and including the Effective Time were directors, officers, employees,
fiduciaries or agents of the Company or any of its Subsidiaries in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by the Merger Agreement),
unless such modification is required by law or is desired to conform such
provisions with comparable provisions in the By-laws of Monterey, which By-law
provisions shall be at least as favorable to such individuals as the provisions
contained in the By-laws of Monterey on the date of the Merger Agreement. From
and after the Offeror's Election Date, the Company shall not amend, repeal or
otherwise modify the indemnification, defense and advancement of expenses
provisions of the By-laws of the Company or the indemnification, defense and
advancement of expenses provisions in the By-laws of any of the Company's
Subsidiaries in any manner that would adversely affect the rights thereunder of
individuals who at any time from and after the date of the Merger Agreement and
to and including the Effective Time were directors, officers, employees,
fiduciaries or agents of the Company or any of its Subsidiaries in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the matters contemplated by the Merger Agreement), unless
such modification is required by law or is desired to conform such provisions
with comparable provisions in the By-laws of Monterey, which By-law provisions
shall be at least as favorable to such individuals as the provisions contained
in the By-laws of Monterey on the date of the Merger Agreement.
The Merger Agreement provides that the obligations of the Company or the
Surviving Corporation with respect to the above-described agreements regarding
indemnification and insurance shall not be terminated or modified in such a
manner as to adversely affect any director, officer, employee, fiduciary and
agent to whom the indemnification and insurance provisions therein apply without
the consent of each affected director, officer, employee, fiduciary and agent.
I-6
23
The Merger Agreement provides that in the event that the Company or the
Surviving Corporation should fail, at any time from and after the Offeror's
Election Date, to comply with any of the foregoing indemnification and insurance
obligations for any reason, Monterey shall be responsible therefor. Monterey
agreed to perform such obligations unconditionally without regard to any defense
or other basis for nonperformance which the Company or the Surviving Corporation
may have or claim (except as would otherwise be prohibited by applicable
Delaware Law). Monterey, Offeror, and the Company intend that the officers,
directors, employees, fiduciaries and agents of the Company and its Subsidiaries
shall be fully indemnified and that the foregoing indemnification provisions
shall be obligation of Monterey and not merely a guarantee by Monterey of the
obligations of the Company or Offeror.
Employee Benefits. Except to the extent otherwise required by the next
paragraph, under the Merger Agreement Monterey has agreed to provide the
Company's employees with compensation and employee benefit plans or programs on
substantially the same basis as the same are provided to similarly situated
employees of Monterey or any of its subsidiaries; provided, however, in lieu
thereof Monterey may elect to continue one or more of the Company's existing
benefit plans for any continuing employees for such period or periods as
Monterey may determine; and provided further, however, that employees of the
Company shall be given credit for years of service with Monterey and Offeror
equal to the number of years of service with the Company.
Monterey has also agreed that until two years after the Tender Offer
Acceptance Date, the Surviving Corporation will provide (i) severance payments
consistent with the Company's existing Change in Control Retention/Severance
Plan to all officers and employees, and (ii) reasonable outplacement services
for all officers of the Company and its subsidiaries employed by the Company or
its subsidiaries at the Tender Offer Acceptance Date, in each case, who are
terminated without cause (as that term is defined in the Company's Change in
Control Retention/Severance Plan), prior to such date.
Monterey has agreed further that the occurrence of the Tender Offer
Acceptance Date shall be treated as a Change in Control for purposes of the
Company's Change in Control Retention/Severance Plan and for each of the
Agreements regarding employment between the Company and each of J. C. McFarland,
Craig M. Sturtevant, Ronald T. Yoshihara, William H. Moodie, Robert E. Ransom
and Reinhard J. Suchsland. Monterey has agreed that cash amounts owing under
such Agreements if the employment of the executive a party thereto is
Involuntarily Terminated are as calculated and set forth in a schedule thereof
previously delivered to Monterey.
In addition, Monterey has agreed to cause the Company's Employee Retirement
Savings and Stock Ownership Plan and Trust to be amended to provide that all
participants therein as of the Tender Offer Acceptance Date shall be fully
vested in their benefits thereunder as of such date.
Further Action. The Merger Agreement provides that, subject to its terms
and conditions, each of the parties thereto shall (i) make promptly its
respective filings, and thereafter make any other required submissions, under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), with respect to the transactions, (ii) use its reasonable best efforts to
take, or cause to be taken, all appropriate action, and to do or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
the Merger Agreement, including, without limitation, using its reasonable best
efforts to obtain all licenses, permits (including, without limitation,
environmental permits), consents, approvals, authorizations, qualifications and
orders of governmental authorities and parties to contracts with the Company and
the Subsidiaries as are necessary for the consummation of the transactions
contemplated by the Merger Agreement and to fulfill the conditions to the Offer
and the Merger, and (iii) except as contemplated by the Merger Agreement, use
its reasonable best efforts not to take any action, or enter into any
transaction, which would cause any of its representations or warranties
contained in the Merger Agreement to be untrue or result in a breach of any
covenant made by it in the Merger Agreement.
Under the Merger Agreement, Monterey has agreed to take all action
necessary to cause Offeror to perform all of Offeror's, and the Surviving
Corporation to perform all of the Surviving Corporation's, agreements, covenants
and obligations under the Merger Agreement and to consummate the Offer and the
I-7
24
Merger on the terms and conditions set forth in the Merger Agreement. The Merger
Agreement provides that Monterey shall be liable for any breach of any
representation, warranty, covenant or agreement of Offeror and for any breach of
the foregoing covenant.
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto including
representations by the Company as to the absence of certain changes or events
concerning the Company's business, compliance with law, litigation, employee
benefit plans, labor matters, financial statements, brokers and taxes.
Conditions of the Offer. The Merger Agreement provides that,
notwithstanding any other provision of the Offer, the Offeror shall not be
required to accept for payment or pay for any Shares tendered pursuant to the
Offer, and may terminate or amend the Offer and may postpone the acceptance for
payment of and payment for Shares tendered, if (i) the Minimum Condition shall
not have been satisfied, (ii) any applicable waiting period under the HSR Act
shall not have expired or been terminated prior to the expiration of the Offer
after 30 days from the commencement of the Offer or (iii) at any time on or
after the date of the Merger Agreement, and prior to the acceptance for payment
of Shares, any of the following conditions shall exist:
(a) there shall have been issued and remain in effect any temporary
restraining order, preliminary or final injunction, order or decree by any
court or governmental, administrative or regulatory authority or agency,
domestic or foreign, resulting from any action or proceeding brought by any
person which (i) restrains or prohibits the making of the Offer or the
consummation of any other Transaction, (ii) prohibits or limits ownership
or operation by the Company, Monterey or Offeror of all or any material
portion of the business or assets of the Company and its Subsidiaries,
taken as a whole, Monterey or any of their subsidiaries, or compels the
Company, Monterey or any of their subsidiaries to dispose of or hold
separate all or any material portion of the business or assets of the
Company, Monterey or any of their subsidiaries or imposes any material
limitation on the ability of Monterey or Offeror to conduct such business
or own such assets, in each case as a result of the Transactions; (iii)
imposes material limitations on the ability of Monterey or Offeror to
exercise effectively full rights of ownership of any Shares, including,
without limitation, the right to vote any Shares acquired by Offeror
pursuant to the Offer, or otherwise on all matters properly presented to
the Company's stockholders, including, without limitation, the approval and
adoption of the Merger Agreement and the Transactions; (iv) requires
divestiture by Monterey or Offeror of any Shares;
(b) there shall have been any action taken, or any statute, rule,
regulation, order or injunction enacted, entered, enforced, promulgated,
amended, issued or deemed applicable to (i) Monterey, the Company or any
subsidiary or affiliate of Monterey or the Company or (ii) any Transaction,
by any legislative body, court, government or governmental, administrative
or regulatory authority or agency, domestic or foreign, in the case of both
(i) and (ii) other than the routine application of the waiting period
provisions of the HSR Act to the Offer, or the Merger, in each case which
results in any of the consequences referred to in clauses (i) through (iv)
of paragraph (a) above;
(c) there shall have occurred and be continuing (i) any general
suspension of, or limitation on prices for, trading in securities on the
New York Stock Exchange or in the over-the-counter market, (ii) a
declaration of a banking moratorium or any substantial limitation or
suspension of, payments in respect of banks in the United States, (iii) any
limitation (whether or not mandatory) by any U.S. federal or state
government or governmental, administrative or regulatory authority or
agency on the extension of credit by banks or other lending institutions,
(iv) a commencement of a war or armed hostilities or other national or
international calamity directly or indirectly involving the United States
or (v) in the case of any of the foregoing existing on the date hereof, a
material acceleration or worsening thereof;
(d) (i) the Board shall have withdrawn or modified in a manner adverse
to Monterey or Offeror the approval or recommendation of the Offer, the
Merger or the Merger Agreement or approved or recommended any takeover
proposal or any other acquisition of Shares other than the Offer and the
Merger or (ii) the Board shall have resolved to do any of the foregoing;
I-8
25
(e) any representation and warranty of the Company in the Merger
Agreement shall not be true and correct and the failure to be true and
correct has a Material Adverse Effect and such failure shall not have been
cured (provided five days' written notice of such failure has been provided
by Offeror to the Company) (if a representation and warranty of the Company
shall, by its terms, only be not true and correct if the consequences
thereof constitute a Material Adverse Effect, then the failure of such
representation and warranty to be true and correct shall be deemed to have
a Material Adverse Effect with in the meaning of this paragraph (e));
(f) the Company shall have failed to perform in any material respect
any material obligation or to comply in any material respect with any
material agreement or covenant of the Company to be performed or complied
with by it under the Merger Agreement and shall not have cured such default
(provided five days' written notice of such failure has been provided by
Offeror to the Company);
(g) the Merger Agreement shall have been terminated in accordance with
its terms; or
(h) Offeror and the Company shall have agreed that Offeror shall
terminate the Offer or postpone the acceptance for payment of or payment
for Shares thereunder;
The Merger Agreement provides that the foregoing conditions are for the
sole benefit of Offeror and Monterey and may be asserted by Offeror or Monterey
regardless of the circumstances giving rise to any such condition or may be
waived by Offeror or Monterey in whole or in part at any time and from time to
time in their sole discretion. The failure by Monterey or Offeror at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right; the waiver of any such right with respect to particular facts and other
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right that may be
asserted at any time and from time to time.
Conditions of the Merger. Under the Merger Agreement, the respective
obligations of each party to effect the Merger are subject to the satisfaction
at or prior to the Effective Time of the following conditions and only the
following conditions: (a) the Merger Agreement and the Merger shall have been
approved and adopted by the affirmative vote of the stockholders of the Company
to the extent required by Delaware Law and the Company's Certificate of
Incorporation; (b) any waiting period (and any extension thereof) applicable to
the consummation of the Merger under the HSR Act shall have expired or been
terminated; (c) no foreign, United States or state governmental authority or
other agency or commission or foreign, United States or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of making the acquisition of Shares by Monterey or Offeror or any
affiliate of either of them illegal or otherwise preventing or prohibiting
consummation of the Transactions; and (d) Offeror or its permitted assignee
shall have purchased all Shares validly tendered and not withdrawn pursuant to
the Offer; provided, however, neither Monterey nor Offeror shall be entitled to
assert the failure of this condition if, in breach of the Merger Agreement or
the terms of the Offer, Offeror fails to purchase any Shares validly tendered
and not withdrawn pursuant to the Offer.
Termination; Fees and Expenses. The Merger Agreement provides that it may
be terminated and the Merger and the other transactions may be abandoned at any
time prior to the Effective Time, notwithstanding any requisite approval and
adoption of the Merger Agreement and the transactions by the stockholders of the
Company: (a) by mutual written consent duly authorized by the Boards of
Directors of Monterey, Offeror and the Company prior to Offeror's Election Date;
(b) by Monterey, Offeror or the Company if (i) the Effective Time shall not have
occurred on or before September 30, 1997; provided, however, that the right to
terminate this Agreement under this clause (b) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before such date or (ii) any court of competent jurisdiction in the United
States or other governmental authority shall have issued an order, decree,
ruling or taken any other action restraining, enjoining or otherwise prohibiting
the Merger and such order, decree, ruling or other action shall have become
final and nonappealable; (c) by Monterey if (i) due to an occurrence or
circumstance that results in a failure to satisfy any condition set forth in
Annex A to the Merger Agreement, Offeror shall have (A) failed to commence the
I-9
26
Offer within 10 days following the date of the Merger Agreement, (B) terminated
the Offer without having accepted any Shares for payment thereunder or (C)
failed to pay for Shares pursuant to the Offer within 90 days following the
commencement of the Offer, unless any such failure listed above shall have been
caused by or resulted from the failure of Monterey or Offeror to perform in any
material respect any material covenant or agreement of either of them contained
in the Merger Agreement or the material breach by Monterey or Offeror of any
material representation or warranty of either of them contained in the Merger
Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, Board
or any committee thereof (A) shall have withdrawn or modified in a manner
adverse to Offeror or Monterey its approval or recommendation of the Offer, the
Merger Agreement, the Merger or any other Transaction or (B) shall have
recommended another Acquisition Transaction with a third party; (d) by the
Company, upon approval of the Board, if (i) Offeror shall have (A) failed to
commence the Offer within 10 days following the date of this Agreement, (B)
terminated the Offer without having accepted any Shares for payment thereunder
or (C) failed to pay for Shares pursuant to the Offer within 90 days following
the commencement of the Offer, unless such failure to pay for Shares shall have
been caused by or resulted from the failure of the Company to satisfy the
conditions set forth in paragraphs (f) or (g) of Annex A to the Merger Agreement
or (ii) prior to the purchase of Shares pursuant to the Offer, the Board, after
consultation with independent counsel, shall have withdrawn or modified in a
manner adverse to Offeror or Monterey its approval or recommendation of the
Offer, the Merger Agreement or the Merger as a result of a proposal by a third
party for an Acquisition Transaction.
In the event of the termination of the Merger Agreement, the Merger
Agreement provides that it shall forthwith become void and there shall be no
liability thereunder on the part of any party thereto except under the
provisions of the Merger Agreement related to fees and expenses described below
and under certain other provisions of the Merger Agreement which survive
termination.
Under the Merger Agreement, provided that neither Monterey nor Offeror
shall be in material breach of its obligations under the Merger Agreement (which
breach has not been cured promptly following receipt by Monterey or Offeror, as
the case may be, of written notice thereof by the Company specifying in
reasonable detail the basis of such alleged breach), the Company shall pay to
Monterey the sum of $2,780,000 (the "Termination Fee") if (i) this Agreement is
terminated either (A) by the Company prior to the purchase of Shares pursuant to
the Offer, the Board, after consultation with independent counsel, shall have
withdrawn or modified in a manner adverse to Offeror or Monterey its approval or
recommendation of the Offer, the Merger Agreement or the Merger as a result of a
proposal by a third party for an Acquisition Transaction or (B) by Monterey or
Offeror if prior to the purchase of Shares pursuant to the Offer, the Board or
any committee thereof, shall have withdrawn or modified in a manner adverse to
Offeror or Monterey its approval or recommendation of the Offer, the Merger
Agreement, the Merger or any other Transaction or shall have recommended another
Acquisition Transaction with a third party. Any payment required by this
paragraph shall become payable upon termination of the Merger Agreement in the
manner provided.
Except as set forth in the preceding paragraph, all costs and expenses
incurred in connection with the Merger Agreement, the Stockholders Agreement and
the transactions contemplated by the Merger Agreement shall be paid by the party
incurring such expenses, whether or not any such transaction is consummated.
I-10
27
ANNEX II
[OPPENHEIMER LETTERHEAD]
June 16, 1997
PERSONAL AND CONFIDENTIAL
The Board of Directors
McFarland Energy, Inc.
10425 South Painter Avenue
Santa Fe Springs, California 90670
Gentlemen:
You have requested Oppenheimer & Co., Inc. ("Oppenheimer") to render an
opinion (the "Opinion") as to the fairness to the holders of the common stock of
McFarland Energy, Inc. ("McFarland" or the "Company"), from a financial point of
view, of the consideration to be received by such holders pursuant to the
proposed Agreement and Plan of Merger dated June 16, 1997 (the "Merger
Agreement"), by and among McFarland, Monterey Resources, Inc. ("Monterey") and
Monterey Acquisition Corporation, a wholly owned subsidiary of Monterey
("Offeror"). The Merger Agreement provides that, among other items, (i) each
issued and outstanding share of McFarland common stock, par value $1.00, will be
acquired for $18.55 in cash (the "Offer"), and (ii) Offeror will be merged with
and into McFarland and McFarland will be the surviving corporation and will
become a wholly-owned subsidiary of Monterey and the separate corporate
existence of Offeror shall cease.
In arriving at our opinion, we reviewed the latest available draft of the
Merger Agreement and held discussions with certain senior officers, directors
and other representatives and advisors of the Company concerning its business,
operations and prospects. We examined certain publicly available business and
financial information relating to the Company as well as certain financial
forecasts, reserve reports and other data which were provided to us by
McFarland's senior management. We reviewed the Offer and related financial terms
set forth in the Merger Agreement in relation to, among other things, the
current and historic market prices and related trading volumes of McFarland's
common stock, the Company's historic and projected earnings and cash flow and
the Company's capitalization and financial condition. We also considered, to the
extent publicly available, the financial terms of certain other similar
transactions recently effected which we considered comparable to the transaction
set forth in the Merger Agreement and we analyzed certain financial, stock
market and other publicly available information relating to the business of
other companies whose operations we considered comparable to those of the
Company. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic, market and other
criteria as we deemed necessary to arrive at the Opinion.
In rendering our Opinion, we have relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
financial and other information available to us from public sources and provided
to us by McFarland and its representatives. With respect to financial forecasts
and other information so provided or otherwise discussed with us by McFarland,
we assumed with the consent of McFarland's Board of Directors, that such
forecasts and other information were reasonably prepared to reflect the best
currently available estimates and good faith judgments of the Company's
management as to McFarland's expected future financial performance. Other than
the reserve reports prepared for McFarland by Netherland, Sewell & Associates,
Inc. and DeGolyer and MacNaughton, both as of December 31, 1996, we have not
been provided with, nor have we made any, independent evaluations or appraisals
of the Company's assets or liabilities (contingent or otherwise). In addition,
we have not made a physical inspection of all of McFarland's properties or other
assets. Our Opinion is necessarily based upon financial, economic, stock market
and other conditions and circumstances existing and disclosed to us as of the
date hereof and changes in such conditions and circumstances would require
re-evaluation of this Opinion. We disclaim any obligations to update, revise or
reaffirm this Opinion.
II-1
28
Oppenheimer has been engaged to render financial advisory services to
McFarland in connection with the transaction and activities leading up to the
receipt of the Offer as set forth in the Merger Agreement. Oppenheimer will
receive a fee for such services which includes the delivery of this Opinion. In
the ordinary course of our business, we and our affiliates may actively trade
the securities of McFarland and Monterey (collectively, the "Securities"), for
our own account or for the accounts of our customers and, accordingly, may at
any time hold a long or short position in the Securities.
Our advisory services and the Opinion expressed herein are provided for the
use of McFarland's Board of Directors in its evaluation of the Merger Agreement,
and are not intended to confer rights or remedies upon any stockholder of the
Company. The Opinion may not be published or otherwise used or referred to, in
whole or in part, nor shall any public reference to Oppenheimer be made without
our prior written consent; provided that this Opinion may be included in its
entirety in any filing made by McFarland or Monterey with the Securities and
Exchange Commission with respect to the merger contemplated by the Merger
Agreement and the transactions related thereto. This Opinion does not constitute
a recommendation to any stockholder of the Company as to how such stockholders
should vote with respect to the merger contemplated by the Merger Agreement.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the consideration to be received
by the holders of McFarland's common stock, pursuant to the Merger Agreement, is
fair from a financial point of view, to the common stockholders of McFarland.
Very truly yours,
OPPENHEIMER & CO., INC.
II-2
29
ANNEX III
MCFARLAND ENERGY, INC.
10425 SOUTH PAINTER AVENUE
SANTA FE SPRINGS, CALIFORNIA 90670
---------------------
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
---------------------
NO VOTE OR OTHER ACTION OF MCFARLAND'S STOCKHOLDERS
IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT.
NO PROXIES ARE BEING SOLICITED AND
YOU ARE REQUESTED NOT TO SEND A PROXY TO MCFARLAND.
---------------------
This Information Statement is being mailed on or about June 23, 1997 as
part of the Company's Solicitation/Recommendation Statement on Schedule 14D-9
(the "Schedule 14D-9") to the holders of shares of the Company's Common Stock,
par value $1.00 per share (the "Common Stock"), of McFarland Energy, Inc., a
Delaware corporation ("McFarland" or the "Company"). Capitalized terms used and
not otherwise defined herein shall have the meanings set forth in the Schedule
14D-9. This Information Statement is being furnished in connection with the
possible designation by Monterey Resources, Inc., a Delaware corporation
("Monterey"), and the direct parent of Monterey Acquisition Corporation, a
Delaware corporation ("Offeror") of persons (the "Offeror Designees") to the
Board of Directors of McFarland (the "Board"). Such designation is to be made
pursuant to an Agreement and Plan of Merger dated June 16, 1997 (the "Merger
Agreement") among McFarland, Monterey and Offeror.
The Merger Agreement provides that, promptly upon the purchase by Offeror
of Shares pursuant to the Offer, and from time to time thereafter, Offeror shall
be entitled to designate up to such number of directors, rounded up to the next
whole number, on the Board as shall give Offeror representation on the Board
equal to the product of the total number of directors on the Board (giving
effect to the directors elected pursuant to this sentence), multiplied by the
percentage that the aggregate number of Shares beneficially owned by Offeror or
any affiliate of Offeror at such time bears to the total number of Shares then
outstanding, and the Company shall, at such time, promptly take all actions
necessary to cause Offeror's designees to be elected as directors of the
Company, including increasing the size of the Board or securing the resignations
of incumbent directors, or both. The Merger Agreement also provides that, at
such times, the Company shall use its best efforts to cause persons designated
by Offeror to constitute the same percentage as persons designated by Offeror
shall constitute of the Board of (i) each committee of the Board (some of the
members of which may be required to be independent as required by applicable
law), (ii) each board of directors of each domestic Subsidiary and (iii) each
committee of each such board, in each case only to the extent permitted by
applicable law. Notwithstanding the foregoing, until the time Offeror acquires a
majority of the then outstanding Shares on a fully diluted basis, the Company
has agreed to use its best efforts to ensure that all the members of the Board
and each committee of the Board and such boards and committees of the domestic
Subsidiaries as of the date of the Merger Agreement who are not employees of the
Company shall remain members of the Board and of such boards and committees.
The information contained in this Information Statement concerning Monterey
and the Offeror Designees has been furnished to McFarland by such persons, and
McFarland assumes no responsibility for the accuracy or completeness of such
information.
III-1
30
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
The outstanding voting securities of McFarland as of May 31, 1997 consisted
of 5,727,422 shares of Common Stock, with 443,313 shares reserved for issuance
pursuant to outstanding stock options granted by McFarland to employees,
directors and consultants. The holders of the McFarland's Common Stock are
entitled to one vote for each share of such stock held of record by them.
BENEFICIAL OWNERSHIP
The following table sets forth, as of March 28, 1997, the information with
respect to ownership of the Company's Common Stock by (i) each person known by
the Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each director of McFarland, (iii) the Chief Executive Officer and each of the
four most highly compensated executive officers of McFarland, and (iv) all
executive officers and directors of McFarland as a group. Unless otherwise
indicated, to McFarland's knowledge, such persons have sole voting and
investment power with respect to such shares, and all such shares are owned
beneficially and of record by the person indicated.
BENEFICIAL OWNERSHIP
-----------------------
NUMBER OF PERCENT
BENEFICIAL OWNER SHARES(1) OF CLASS
---------------- --------- --------
White River Corporation(2)(3)............................... 640,200 11.2%
777 Westchester Avenue, Suite 201
White Plains, NY 10604
David L. Babson & Co.(3).................................... 553,700 9.7%
One Memorial Drive
Cambridge, MA 02142-1300
McFarland Family Trust(4)................................... 527,696 9.3%
10425 South Painter Avenue
Santa Fe Springs, CA 90670
Croft-Leominster, Inc. ..................................... 334,900 5.9%
207 E. Redwood Street
Baltimore, MA 21202
Dimensional Funds Advisors, Inc.(5)......................... 308,500 5.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Fund American Enterprises Holdings, Inc.(3)(6).............. 300,000 5.3%
The 1820 House, Main Street
Norwich, VT 05055-0850
J. C. McFarland............................................. 169,920(4)(7) 3.0%
William E. Carl............................................. 120,362(4)(8) 2.1%
Daniel J. Redden............................................ 7,100(8) *
Herbert M. Rome............................................. 19,542(8) *
Daniel E. Pasquini.......................................... 4,000(8) *
John C. Capshaw............................................. 6,000(8) *
John B. Pollara............................................. 4,500(9) *
Ronald T. Yoshihara......................................... 43,480(10) *
Robert E. Ransom............................................ 36,625(11) *
William H. Moodie........................................... 7,875(12) *
Craig M. Sturtevant......................................... 8,125(13) *
All executive officers and directors as a group (11
persons).................................................. 427,529(14) 7.4%
III-2
31
- - ---------------
* Less than one percent
(1) Includes shares owned by spouses of individuals, but does not include
shares in the Employee Retirement Savings and Stock Ownership Plan.
(2) Prior to December 22, 1993, White River Corporation ("WRC") was a
wholly-owned subsidiary of Fund American Enterprises Holdings, Inc.
("FAEH"), formerly Fireman's Fund Corporation. WRC purchased the shares of
the Company from FAEH on September 24, 1993 as part of the initial
capitalization of WRC. In October 1993, FAEH provided the Company with a
letter which stated that WRC had agreed to be bound by all the obligations
of FAEH as set forth in that certain Letter Agreement dated September 1,
1989, between FAEH and the Company (the "Letter Agreement"). The Letter
Agreement provides that for a period of no less than five years FAEH (a)
will not buy shares of Common Stock without its consent if the purchases
would increase FAEH's holding above 15%; (b) if by the Company's actions
the percentage ownership would be increased to more than 15% of the Common
Stock, and if the Company asks FAEH, FAEH will sell back to the Company, at
a price both parties consider reasonable, enough stock to hold the shares
owned by FAEH to 15%; (c) FAEH will continue to support the Company's
current senior management and Board of Directors at stockholder meetings
and will vote as the Company asks; and (d) FAEH will not sell its shares as
a block without first discussing with the Company and in a manner amenable
to the Company. On January 4, 1993, the principal terms of the Letter
Agreement were extended to January 4, 1998 in conjunction with the
Company's refinancing of its $2.6 million convertible note through FAEH.
The newly issued convertible note had a conversion rate of one share of
Common Stock for each $6.50 principal amount and was convertible by FAEH
after January 4, 1994. Provisions (a) and (b) of the Letter Agreement were
amended to exclude any shares issued upon conversion of the convertible
note. See Note (6) below regarding conversion of the note.
(3) Based upon Schedule 13D or 13G as filed with the Securities and Exchange
Commission.
(4) As part of the transaction whereby the Company acquired Carl Oil & Gas Co.,
Messrs. L. C. McFarland and William E. Carl entered into a Stockholder
Agreement dated July 15, 1988, as amended, which contained obligations and
restrictions on sales of the Company's shares by Carl and what is now the
estate of Mr. L. C. McFarland. The Stockholder Agreement has now expired by
its terms.
(5) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 308,500 shares of
McFarland stock as of December 31, 1996, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares.
(6) On January 29, 1996, the Company converted the $2.6 million convertible
note held by FAEH into 400,000 shares of Common Stock. These unregistered
shares are subject to all of the provisions of the Letter Agreement
identified in Note (2) above, as amended.
(7) Includes 94,625 shares which are purchasable upon exercise of outstanding
stock options.
(8) Includes 4,000 shares which are purchasable upon exercise of outstanding
stock options.
(9) Includes 2,000 shares which are purchasable upon exercise of outstanding
stock options.
(10) Includes 40,750 shares which are purchasable upon exercise of outstanding
stock options.
(11) Consists of 36,625 shares which are purchasable upon exercise of
outstanding stock options.
(12) Consists of 7,875 shares which are purchasable upon exercise of outstanding
stock options.
(13) Consists of 8,125 shares which are purchasable upon exercise of outstanding
stock options.
(14) Includes 197,000 shares which are purchasable upon exercise of outstanding
stock options.
III-3
32
THE BOARD OF DIRECTORS
OFFEROR DESIGNEES
Monterey has informed McFarland that each of the Offeror Designees listed
below has consented to act as a director. To the best knowledge of McFarland,
none of the Offeror Designees or their associates beneficially owns any equity
securities of McFarland or has been involved in any transaction with McFarland
or any of its directors or executive officers that is required to be disclosed
pursuant to the rules and regulations of the SEC.
It is expected that, upon assuming office, the Offeror Designees will
thereafter constitute at least a majority of the Board of McFarland.
Monterey may designate the following individuals to the Board of McFarland.
Each such individual's name, age as of the date hereof, current principal
occupation or employment and five-year employment history is set forth below.
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT AND FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
---- ---- -------------------------------
R. Graham Whaling....................... 42 Chairman and Chief Executive Officer of Monterey; Mr.
Whaling was Senior Vice President and Chief Financial
Officer of Santa Fe Energy Resources, Inc. ("SFR") from
January 1995 to November 1996. Prior to that time he was
with CS First Boston, an investment banking firm, as Vice
President, Corporate Finance from 1991 to 1994 and
Director, Corporate Finance from 1994 to 1995. Prior to
joining First Boston, Mr. Whaling served as a petroleum
engineer for Sun Oil Corporation and petroleum reservoir
consulting engineer for Ryder Scott. Mr. Whaling has been
an officer and director of Monterey since September 1996.
Craig A. Huff........................... 32 Principal in Ziff Brothers Investments since July of 1993.
Prior to joining Ziff Brothers, Mr. Huff received a degree
from the Harvard Business School in 1993. Ziff Brothers
currently holds approximately 3.7% of SFR's outstanding
common stock and approximately 0.8% of Monterey's
outstanding common stock. Mr. Huff was a director of SFR in
1996.
Robert J. Wasielewski................... 34 Employed by GKH Partners, L.P. ("GKH") since October 1991.
GKH is an investment partnership whose general partners
include entities controlled by Jay and Tom Pritzker, Dan W.
Lufkin and Melvyn N. Klein. From July 1996 to the present,
Mr. Wasielewski has held the position of Managing Director
of GKH. He was employed by Citicorp in the Leveraged
Capital Division from September 1987 to October 1991,
serving as Assistant Vice-President from December 1990
until joining GKH. Mr. Wasielewski serves as a director and
officer of various privately-held affiliates of GKH. GKH
through an affiliate, HC Associates, a Delaware general
partnership, currently holds approximately 5.5% of SFR's
outstanding common stock.
Michael A. Morphy....................... 65 Retired Chairman and Chief Executive Officer of California
Portland Cement Company. Mr. Morphy is also a director of
Cyprus Amax Minerals Co. and Santa Fe Pacific Pipelines,
Inc. and was a director of SFR from 1990 to 1996.
III-4
33
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT AND FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
---- ---- -------------------------------
James L. Payne.......................... 60 Chairman of the Board, President and Chief Executive
Officer of SFR since June 1990, Mr. Payne was President of
Santa Fe Energy Corporation, a predecessor in interest of
SFR, from January 1986 to January 1990, when he became
President of SFR. Mr. Payne is also a director of Pool
Energy Services Co., an oilfield services corporation.
Robert F. Vagt.......................... 50 President and Chief Operating Officer of Seagull Energy
Corporation since October 1996, Mr. Vagt was Chairman of
the Board, President, Chief Executive Officer and director
of Global Natural Resources, Inc. (oil and gas exploration
and production) from May 1992 to October 1996; President
and Chief Operating Officer of Adobe Resources Corporation
(oil and gas exploration and production) from November 1990
to May 1992; Executive Vice President of Adobe from August
1987 to October 1990; and Senior Vice President of Adobe
from October 1985 to August 1987. Mr. Vagt is also a
director of First Albany Corporation (brokerage firm) and
was a director of SFR from 1992 to 1996.
CURRENT DIRECTORS
The following table sets forth the name, age as of the date hereof, term
and current principal occupation or employment and five-year employment history
for the seven members currently serving on the Company's Board of Directors.
McFarland's Restated Certificate of Incorporation and By-laws provide that the
directors of McFarland are to be divided into three classes, with the directors
in each class serving for three-year terms and until their successors are
elected. The terms of the persons currently serving on the Board expire at the
annual meetings of stockholders for the years indicated: Messrs. Rome and
Pasquini: 1998; Messrs. Capshaw and Pollara: 1999; and Messrs. McFarland, Carl
and Redden: 2000. Unless otherwise noted, each director has maintained the same
principal occupation during the past five years.
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT AND FIVE-YEAR
NAME AGE DIRECTOR SINCE EMPLOYMENT HISTORY
---- --- -------------- -------------------------------
J. C. McFarland................ 50 1982 Mr. McFarland is the Chairman of the Board and
Chief Executive Officer of the Company. He also
serves as a member of the Nominating Committee
of the Board of Directors. Mr. McFarland joined
the Company in 1977 and served as Treasurer,
Secretary, Vice President and Chief Operating
Officer prior to attaining his current
positions.
William E. Carl................ 71 1988(1) Mr. Carl is the Vice Chairman of the Board of
Directors of the Company. From 1988 to 1995, Mr.
Carl was president of Carl Oil & Gas Co., a
wholly owned subsidiary of the Company engaged
in oil and gas exploration and production. Carl
Oil & Gas merged into McFarland in 1995. Mr.
Carl serves as a member of the Audit and
Nominating Committees of the Board of Directors
of McFarland.
III-5
34
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT AND FIVE-YEAR
NAME AGE DIRECTOR SINCE EMPLOYMENT HISTORY
---- --- -------------- -------------------------------
Daniel J. Redden............... 55 1986 Mr. Redden is a principal of Redden-Schaffer
Group, a retained executive search and
management consultant firm. Mr. Redden serves as
a member of the Nominating and Compensation
Committees of the Board of Directors of
McFarland.
Herbert M. Rome................ 70 1992 Mr. Rome served as Executive Vice President of
Eldon Industries, Inc. from 1978 until his
retirement in 1991. He also served on Eldon
Industries, Inc.'s Board of Directors from 1979
through 1990. Mr. Rome currently serves as a
member of the Audit and Compensation Committees
of the Board of Directors of McFarland.
Daniel E. Pasquini............. 54 1994 Mr. Pasquini served as President and Chief
Executive Officer of Fortune Petroleum
Corporation from 1987 through 1994. He currently
serves as a Member of the Compensation Committee
of the Board of Directors of McFarland.
John C. Capshaw................ 64 1994 Mr. Capshaw served as Chairman, Chief Executive
Officer and President of Hadson Energy Resources
Corporation until his retirement in 1993. Mr.
Capshaw also served as Chief Executive Officer
and President of UMC Petroleum Corporation from
1988 to 1989. He currently serves as a Member of
the Audit Committee of the Board of Directors of
McFarland.
John B. Pollara................ 49 1996 Mr. Pollara is President, Chief Executive
Officer and part owner of Zieman Manufacturing
Company, a leading manufacturer of recreational
and equipment hauling trailers. Mr. Pollara
serves as a Member of the Audit Committee of the
Board of Directors of McFarland.
- - ---------------
(1) Initially elected to the Board of Directors pursuant to the terms of the
Stockholder Agreement discussed in Note (4) following the table in the
"Security Ownership of Certain Beneficial Owners and Management" section.
III-6
35
BOARD COMMITTEES
The Board of Directors maintains standing Audit, Compensation and
Nominating Committees. The purpose and objective of the Audit Committee is to
provide assistance and advice to the directors in connection with corporate
accounting, auditing and reporting practices and to facilitate communication
between the Board and the independent auditors of the Company. It meets
periodically with management and external auditors and reviews the Company's
accounting policies and internal controls. The committee recommends the firm of
independent accountants to be retained by the Company and approves all material
non-audit services provided by them.
The Compensation Committee's functions are to review the Company's policies
and programs for the development of management personnel; to make
recommendations to the Board with respect to any proposals for compensation or
compensation adjustments for other elected officers of the Company; to
administer the Company's stock option plans; and to make recommendations to the
Board with respect to director's compensation.
The Nominating Committee considers and makes recommendations to the Board
as to the number of directors to constitute the whole Board, the names of
persons whom it concludes should be considered for Board membership, and
recommends matters relating to the selection, tenure and retirement of
directors.
DIRECTOR COMPENSATION
The Company does not pay any salaried employee of the Company additional
compensation for service on the Board of Directors or any Board committee. For
directors who are not salaried employees of the Company, the currently
established fee for attending meetings of the Board is $1,000. The fee for
attending meetings of the Audit, Compensation and Nominating Committees is $500
if a meeting occurs on the same day as a regularly scheduled Board meeting;
however, if a meeting occurs on a day separate from a Board meeting, the fee is
$1,000. In addition, except for any salaried employee or retained consultant,
directors receive an annual retainer of $10,000. The Company has entered into a
two-year Consulting Agreement with William E. Carl, which is described in
further detail hereafter under the heading "Certain Relationships and Related
Transactions."
Pursuant to the Non-Employee Director Stock Option Plan, each non-employee
director receives an initial option to purchase 2,000 shares of Common Stock.
Annually thereafter, options to purchase 1,000 shares of Common Stock are
granted to each non-employee director. The option exercise price is equal to the
fair market value of the Common Stock on the date of grant. The options are
exercisable immediately after grant date.
III-7
36
EXECUTIVE COMPENSATION
The following tables set forth, for the fiscal year ended December 31,
1996, certain information concerning compensation paid to or accrued for all
executives who were serving as executive officers during 1996 and whose annual
salary and bonus exceeded $100,000 in the current fiscal year.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
NUMBER OF
SHARES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- -------- -------- ------------ ---------------
J. C. McFarland...................... 1996 $190,184 $143,100 20,000 $10,500
Chairman of the Board and 1995 182,896 82,300 15,000 10,500
Chief Executive Officer 1994 166,322 77,700 13,500 7,582
Ronald T. Yoshihara.................. 1996 105,704 71,500 11,000 10,076
Vice President and Treasurer 1995 101,276 42,100 7,000 8,861
1994 92,122 36,050 5,000 6,753
Robert E. Ransom..................... 1996 97,681 53,200 9,500 8,597
Vice President -- Corporate 1995 93,625 30,200 6,000 8,493
Development 1994 87,115 31,800 5,000 6,385
William H. Moodie.................... 1996 86,890 59,100 9,500 8,399
Vice President -- Operations 1995 82,863 33,600 6,000 7,265
1994 79,116 27,700 5,000 5,535
Craig M. Sturtevant.................. 1996 93,207 53,200 7,500 5,927
Vice President and General 1995 87,828 30,200 5,000 3,152
Counsel 1994 14,475 -- 5,000 --
- - ---------------
(1) Amounts represent the matching contributions made by the Company under its
Employees Savings and Stock Ownership Plan.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS EMPLOYEES BASE PIRCE EXPIRATION --------------------
NAME GRANTED(1) IN 1996 PER SHARE(2) DATE 5% 10%
---- ---------- ---------- ------------ ---------- -------- ---------
J. C. McFarland............. 20,000 23% $7.50 1/10/06 $94,500 $238,500
Ronald T. Yoshihara......... 11,000 13 7.50 1/10/06 51,975 131,175
Robert E. Ransom............ 9,500 11 7.50 1/10/06 44,888 113,288
William H. Moodie........... 9,500 11 7.50 1/10/06 44,888 113,288
Craig M. Sturtevant......... 7,500 9 7.50 1/10/06 35,438 89,438
- - ---------------
(1) Option holders vest in the granted options at the rate of 25% per year,
commencing on the first anniversary of the grant date.
(2) All options were granted at the Company's Common Stock fair market value on
the date of grant.
(3) These columns present hypothetical future values of the stock obtainable
upon exercise of the options net of the option's exercise price, assuming
that the market price of the Company's Common Stock appreciates at a five
and ten percent compound annual rate over the ten-year term of the options.
The five and ten percent rates of stock price appreciation are presented as
examples pursuant to the Securities and Exchange Commission Rules and do not
necessarily reflect management's assessment of the Company's future stock
price performance. The potential realizable values presented are not
intended to indicate the value of the options.
III-8
37
AGGREGATED OPTION EXERCISES IN 1996 AND
YEAR ENDED DECEMBER 31, 1996 VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
J. C. McFarland......................... -- -- 82,500 38,000 $628,188 $205,000
Ronald T. Yoshihara..................... -- -- 35,250 18,750 267,969 98,906
Robert E. Ransom........................ -- -- 31,500 16,500 238,500 87,563
William H. Moodie....................... 2,500 $10,938 2,750 15,250 17,406 78,969
Craig M. Sturtevant..................... -- -- 3,750 13,750 24,531 73,906
- - ---------------
(1) The amounts represent the difference between the fair market value of the
Common Stock on December 31, 1996 of $12.125 and the option exercise price.
These amounts do not reflect the actual amounts, if any, which may be
realized in the future upon exercise of stock options and should not be
considered indicative of future stock performance.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. McFarland,
Yoshihara, Ransom, Moodie and Sturtevant. The initial term of each employment
agreement expires on December 31, 1999, or 24 months following a "Change in
Control" (as defined below). The consummation of the Offer will constitute a
Change of Control for purposes of these agreements. Mr. McFarland's agreement
provides that if, following a Change of Control, he is terminated without "Good
Cause" (as defined below) or voluntarily resigns for "Good Reason" (as defined
below), he will receive a cash lump payment equal to two times his base salary
plus bonus, be entitled to receive medical benefits for a two-year period and
receive outplacement services for a one-year period. In the event Mr. McFarland
is involuntarily terminated without Good Cause prior to a Change in Control, the
agreement generally provides that he will be entitled to receive a lump sum
amount equal to two weeks salary for every year of service and medical benefits
for the same number of weeks as the number of weeks of salary he is entitled to
receive. The employment agreements of Messrs. Yoshihara, Ransom, Moodie and
Sturtevant generally provide, in the event of involuntary termination without
Good Cause or resignation for Good Reason following a Change in Control, for a
cash lump sum payment equal to one and one-half times their salary plus bonus,
and otherwise are identical to Mr. McFarland's employment agreement.
Under the agreements, a "Change in Control" is defined as the occurrence of
an event whereby (i) the directors in office at the beginning of a 24-month
period cease to constitute a majority of the directors then in office; (ii) any
person or group becomes the beneficial owner of 35% or more of the combined
voting power of the Company's outstanding securities; or (iii) subject to
certain limitations, the Company merges or combines into another corporation.
Under the agreements, termination with "Good Cause" shall mean that any of the
following conditions are met: (i) grounds exists to terminate the employment of
the individual pursuant to California Labor Code Section 2924; (ii) the
individual engages in serious or willful misconduct which is detrimental to the
interests of the employer or its stockholders; or (iii) the individual willfully
refuses to carry out the directions and responsibilities assigned to him. Under
the agreements, an employee is deemed to have "Good Reason" to resign
voluntarily if (i) there is a significant adverse change in the nature or scope
of his authorities or duties, (ii) there is a significant reduction in
compensation or benefits or (iii) the geographic location at which he is
required to perform his principal duties is moved more than 50 miles from where
he previously carried out such duties.
It is currently estimated that Mr. McFarland would receive approximately
$527,287, Mr. Yoshihara approximately $282,851, Mr. Ransom approximately
$250,460, Mr. Moodie approximately $246,140 and Mr. Sturtevant approximately
$242,960 as severance payments upon termination in connection with the
consummation of the change in control of McFarland, and, in each case, with the
health benefits and outplacement services described above.
III-9
38
SEVERANCE PLAN
On April 17, 1997, the Company adopted the McFarland Energy, Inc. Change in
Control Retention/Severance Plan (the "Severance Plan") covering regular
full-time or part-time employees of the Company who continue in the employ of
the Company after a "Change in Control" (as defined below). The Severance Plan
provides that Messrs. McFarland, Yoshihara, Ransom, Moodie and Sturtevant are
not entitled to benefits under the Plan. A Change of Control for purposes of the
Severance Plan occurs (i) at such time any person becomes the beneficial owner
of more than 35% of the then outstanding Common Stock or the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors, (ii) at such time individuals who, as of
the date the Severance Plan was adopted, constituted all of the members of the
Board of Directors of the Company cease for any reason to constitute at least a
majority of the members of the Board, (iii) upon consummation of a
reorganization, merger, consolidation or sale or other disposition of all or
substantially all of the assets of the Company, or (iv) upon the approval of the
stockholders of the Company of a complete liquidation or dissolution of the
Company, unless (with respect to clause (iii)) the stockholders of the Company
retain at least 75% of the voting power of the resulting or acquiring entity, no
person owns 35% or more of the resulting or acquiring entity and at least a
majority of the resulting or acquiring entity's directors were members of the
Board at the time of the execution of the initial agreement providing for such
reorganization, merger, consolidation or sale. Consummation of the Offer by the
Offeror will result in a Change of Control under the Severance Plan. Under the
Severance Plan, severance benefits are payable only in the event a covered
employee is terminated without "Cause" or resigns under certain circumstances
(for "Good Reason") within 24 months of the date of consummation of a Change of
Control. Termination for "Cause" means a covered employee is terminated because
of the willful and continued failure of the employee to perform substantially
the employee's duties or the willful engaging by the employee in illegal conduct
or gross misconduct that is materially and demonstrably injurious to the
Company. "Good Reason" includes a material reduction in a covered employee's
duties, responsibilities or annual salary or benefits or any transfer of the
employee's job to a location more than 50 miles from his or her current work
site. Severance benefits under the Severance Plan are generally equal to one
month's pay for each whole or partial year of service not exceeding nine, plus
one-half month's pay for each year of service in excess of nine, subject to a
minimum benefit of three months of pay, payable in cash, and continued coverage
under medical benefits and life insurance arrangements substantially similar to,
and at no greater cost to the employee than, those in effect immediately prior
to a Change of Control for a period of time equal to that used to measure the
cash severance benefit. A copy of the Severance Plan has been filed as Exhibit
10 to this Schedule and is incorporated herein by reference in its entirety.
ACCELERATION AND TREATMENT OF OPTIONS
The Merger Agreement provides that prior to the date on which Offeror shall
have accepted for payment all shares validly tendered and not withdrawn prior to
the expiration date with respect to the Offer (the "Tender Offer Acceptance
Date"), the Company shall enter into an agreement with each holder of an
employee or director stock option to purchase Shares (in each case, an "Option")
that provides that, immediately prior to the effective time, each Option that is
then outstanding, whether or not then exercisable or vested, shall be canceled
by the Company, and each holder of a canceled Option shall be entitled to
receive from the Offeror at the time of such cancellation, an amount in cash
equal to the product of (i) the number of Shares previously subject to such
Option, whether or not then exercisable or vested, and (ii) the excess, if any,
of the per share price paid in the Offer over the exercise price per Share
applicable to such Option, reduced by any applicable withholding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a two-year Consulting Agreement with William E.
Carl, a director, commencing on July 15, 1995, and terminating on July 14, 1997,
pursuant to which he would continue as a consultant to the Company. In
consideration of such consulting services, the Company pays Mr. Carl $60,000 per
year. In addition, the Company provides Mr. Carl with group dental and term life
insurance and pays the cost of Medicare supplemental coverage.
III-10
39
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and the rules thereunder require
McFarland's directors and executive officers, and persons who own more than 10%
of a registered class of McFarland's equity securities, to file reports of
ownership and changes in ownership of shares of McFarland's stock with the
Securities and Exchange Commission and the Nasdaq National Market and to furnish
McFarland with copies. Based on McFarland's review of the copies of such reports
received by it, or written representations from certain reporting persons,
McFarland believes that, from January 1 through December 31, 1996, all filing
requirements applicable to its officers, directors, and greater than 10%
beneficial owners were complied with.
III-11
40
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
*1 -- Agreement and Plan of Merger, dated as of June 16, 1997,
among McFarland, Monterey and the Offeror.
**2 -- Letter to the stockholders of the Company dated June 23,
1997.
*3 -- Stockholders Agreement, dated as of June 16, 1997, among
Monterey, the Offeror, J. C. McFarland, Carolyn J.
McFarland, the McFarland Family Trust, and William E.
Carl.
*4 -- Confidentiality Agreement dated as of April 29, 1997
between McFarland Energy, Inc. and Monterey.
*5 -- Agreement dated as of August 9, 1995 by and between
McFarland Energy, Inc. and J. C. McFarland.
*6 -- Agreement dated as of August 8, 1995 by and between
McFarland Energy, Inc. and Ronald T. Yoshihara.
*7 -- Agreement dated as of August 8, 1995, as amended on
December 10, 1996, by and between McFarland Energy, Inc.
and Craig M. Sturtevant.
*8 -- Agreement dated as of August 25, 1995, as amended on
December 10, 1996, by and between McFarland Energy, Inc.
and William H. Moodie.
*9 -- Agreement dated as of August 10, 1995 by and between
McFarland Energy, Inc. and Robert E. Ransom.
*10 -- Change in Control Retention/Severance Plan.
*11 -- Form of Indemnification Agreement between McFarland
Energy, Inc. and its directors and executive officers.
**12 -- Opinion of Oppenheimer & Co., Inc. dated June 16, 1997.
- - ---------------
* Filed herewith.
** Included in copies mailed to Stockholders.