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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT No. 1)
Filed by the Registrant /X/ Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
SEVEN J STOCK FARM, INC.
(name of Registrant Specified in its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box)
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, $1 par value
2) Aggregate number of securities to which transaction applies: 58,000
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined) $3.89*
4) Proposed maximum aggregate value of transaction: $225,620
5) Total fee paid: $18.25
* The price per unit is the product of the pre-reverse split price of $3.89
per share of old common stock to be paid for fractional shares.
/X/ Fee paid previously with preliminary materials
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
Amount Previously Paid:______________
Form or Registration Number:_________
Filing Party:________________________
Date Filed:__________________________
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SEVEN J STOCK FARM, INC.
16945 Northchase Drive, Suite 1800
Houston, Texas 77060
281-874-2101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 14, 2003
As a shareholder of Seven J Stock Farm, Inc. (the "Company"), you are hereby
given notice of and invited to attend in person or by proxy a Special Meeting of
the Shareholders of the Company to be held at the Company's corporate offices at
16945 Northchase Drive, Suite 1800, Houston, Texas 77060 on March 14, 2003 at
10:00 a.m. for the following purposes:
1. To consider and act upon a proposed Reverse Stock Split of the
Company's existing common stock that would result in:
a. The shareholders receiving one share of new common stock for
every one thousand shares of our old common stock that they
currently own, and
b. An amendment to the Company's Articles of Incorporation to
reduce the Company's authorized existing common stock from
1,500,000 to 1,500 authorized shares, which is in proportion
to the Reverse Stock Split. The Reverse Stock Split and
related cash purchase by the Company of fractional shares
for $3.89 per share of old Common Stock resulting from the
Reverse Stock Split is proposed to take the Company private
and take it out of the reporting system of the Securities
Exchange Act of 1934, as amended.
2. To transact such other business as may properly come before the
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on January 15, 2003 as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of and to vote at such meeting and any adjournment thereof.
Only shareholders at the close of business on the Record Date are entitled to
notice of the meeting and a vote at such meeting. The transfer books will not be
closed.
You are cordially invited to attend the meeting. WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING, MANAGEMENT DESIRES TO HAVE THE MAXIMUM REPRSENTATION AT THE
MEETING AND RESPECTFULLY REQUESTS THAT YOU DATE, EXECUTE AND MAIL PROMPTLY THE
ENCLOSED PROXY IN THE ENCLOSED STAMPED ENVELOPE FOR WHICH NO ADDITIONAL POSTAGE
IS REQUIRED IF MAILED IN THE UNITED STATES. A proxy may be revoked by a
shareholder by notifying the Secretary of the Company in writing at any time
prior to its use, by executing and delivering a subsequent proxy or by
personally appearing at the Special Meeting and casting your vote, each as
specified in the enclosed proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS
/s/JOHN R. PARTEN
------------------
John R. Parten, Chairman
March __, 2003
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SUMMARY TERM SHEET
WHY IS THE COMPANY PROPOSING A REVERSE STOCK SPLIT?
The one for one thousand Reverse Stock Split and purchase of fractional shares
has been unanimously approved by our Board of Directors and is proposed to take
us private by reducing the number of shareholders of record to fewer than 300,
thereby: (i) relieving us of the costs of filing public documents, (ii)
relieving the Company from the ongoing and increasing risks and obligations of
regulation under the Securities Exchange Act of 1934, as amended, and (iii)
allowing us to continue our long-term business plans.
Please refer to the discussion set forth herein under the caption "PURPOSE AND
REASONS FOR THE REVERSE STOCK SPLIT."
WHAT WILL I RECEIVE IF THE REVERSE STOCK SPLIT IS APPROVED?
If the Reverse Stock Split is approved by the shareholders and implemented:
- -Each share of existing Common Stock, par value $1.00 (the "Old Common Stock")
will be exchanged for 1/1,000 of a share of new common stock, par value $1,000
(the "New Common Stock").
- -No new certificates representing fractional shares will be issued. Instead,
fractional shares will be purchased from holders at a rate of $3.89 per whole
share of Old Common Stock. This transaction will not involve commissions or
transaction fees that would be charged if you sold shares on the open market. We
estimate that up to an aggregate of approximately $225,620 will be paid to
approximately 728 of our shareholders for their resulting fractional shares.
A detailed discussion is set forth herein under the captions "EXCHANGE OF
CERTIFICATES AND PAYMENT OF FRACTIONAL SHARES," "CERTAIN EFFECTS OF REVERSE
STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS," and "FEDERAL INCOME TAX
CONSEQUENCES."
HOW WILL THE ARTICLES OF INCORPORATION BE AMENDED?
Our Articles of Incorporation will be amended to reduce the number of authorized
shares of our Old Common Stock in the same one for one thousand ratio, from
1,500,000 shares to 1,500 authorized shares, which is in proportion to the
Reverse Stock Split.
See the information set forth herein under the caption "PROPOSAL-REVERSE STOCK
SPLIT AND RELATED AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION."
WHAT DOES GOING PRIVATE MEAN?
If the Reverse Stock Split is approved, after the transaction is completed, we
estimate that we will have approximately 33 shareholders, which is fewer than
300 shareholders of record remaining. Therefore, registration of our Old Common
Stock under the Securities Exchange Act of 1934, as amended, will be terminated.
As a result, after the registration is terminated, our Old Common Stock will no
longer be traded over-the-counter in the Pink Sheets, and there will be no
public market for the New Common Stock.
Additionally, once our registration is terminated, we will not have to provide
our shareholders with information that we currently provide, such as annual,
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quarterly and other reports required to be filed by us with the Securities and
Exchange Commission (the "SEC").
Please refer to the discussion herein under the caption "CERTAIN EFFECTS OF
REVERSE STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS."
DO I HAVE APPRAISAL OR DISSENTER'S RIGHTS?
Under Texas law, the law governing the Reverse Stock Split, you do not have the
right to demand the appraised value of your shares (dissenter's rights) if you
vote against the proposed transaction.
More detailed information is set forth herein under the caption "APPRAISAL
RIGHTS AND DISSENTER'S RIGHTS."
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS TO BE
HELD ON MARCH 14, 2003
Proxies in the form enclosed with this Proxy Statement are being solicited by
the Board of Directors of Seven J Stock Farm, Inc., a Texas corporation ("Seven
J" or the "Company"), for use at the Special Meeting of Shareholders (the
"Meeting") to be held March 14, 2003 at 10:00 a.m. at the offices of the Company
at 16945 Northchase Drive, Suite 1800, Houston, Texas 77060-2151. This Proxy
Statement is dated March 1, 2003. This Proxy Statement and the form of proxy
will be first mailed to shareholders on or about March 4, 2003.
At the Meeting, the shareholders will consider and vote upon a proposal to amend
the Company's Articles of Incorporation to effect a one for one thousand reverse
stock split of the Company's Old Common Stock, par value $1.00 and the issuance
of cash in lieu of fractional shares to holders who, as a result of that split,
will hold less that one share of the Company's New Common Stock (the "Reverse
Stock Split").
The Company's Board of Directors knows of no other matters that are expected to
come before the Meeting.
Only holders of record as of the close of business on January 15, 2003 (the
"Record Date"), of the Company's Old Common Stock, $1.00 par value per share
will be entitled to notice of, and to vote at, the Meeting. As of the date of
this Proxy Statement, 1,451,000 shares of Old Common Stock were issued and
outstanding. Old Common Stock is the only class of stock of the Corporation
issued and outstanding. Holders of Old Common Stock are entitled to one vote per
share held by them, and holders of Old Common Stock generally vote together as a
class on all matters.
The Board of Directors of the Company, as a group, has the right to vote 74.28%
of the Old Common Stock of the Company and has indicated that it will vote the
shares of Old Common Stock for which it has voting authority in favor of the
proposal set forth in this Proxy Statement. Therefore, we anticipate that the
proposal will be approved.
Shareholders may vote in person or by proxy. Granting a proxy does not affect a
shareholder's right to attend the Meeting and vote in person. Any shareholder of
the Company has the unconditional right to revoke a proxy at any time prior to
the voting thereof by (i) notifying the Secretary of the Company with a written
notice thereof addressed to the Company at 16945 Northchase Drive, Suite 1800,
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Houston, Texas 77060; (ii) executing and delivering a subsequent proxy; or (iii)
personally appearing at the Meeting and casting a contrary vote. No revocation
shall be effective unless and until notice of such revocation has been received
by the Company at or prior to the Meeting.
The persons named as attorneys in the proxy are John R. Parten and Virginia
Cortinas.
Employees of Seven J will respond to inquiries from the public with respect to
this proxy solicitation.
An annual report to the shareholders on Form 10-KSB for the fiscal year ended
October 31, 2002 has been furnished to all shareholders entitled to vote
concurrently with these proxy materials. Certain matters which are identified
below, set forth in the Form 10-KSB for the year ended October 31, 2002 have
been incorporated by reference into this Proxy Statement.
VOTING PROCEDURES
John R. Parten and Virginia Cortinas will vote all shares represented by
properly executed proxies returned in time to be counted at the Meeting. The
presence, in person or by proxy, of at least a majority of the issued and
outstanding shares of Old Common Stock entitled to vote at the Meeting is
necessary to establish a quorum for the transaction of business. As John R.
Parten, the President of Seven J, has beneficial ownership of 74.25% of the
Company's Old Common Stock, the presence of Mr. Parten at the Meeting or by
proxy will constitute a quorum at the Meeting.
All properly executed proxies delivered pursuant to this solicitation and not
revoked will be voted at the Meeting as specified by such proxies. Where a vote
has been specified in a proxy with respect to the matters identified in the
Notice of the Special Meeting, the shares represented by proxy will be voted in
accordance with those voting specifications. Shares represented by the proxy
will be voted in accordance with those voting specifications. Shares represented
by proxy will be voted in favor of each proposal identified in the Notice of the
Special Meeting if no voting instructions are indicated. If any other matter
should be presented at the Meeting upon which a vote may properly be taken, John
R. Parten and Virginia Cortinas, in their capacity as proxies, will vote shares
represented by all proxies received by the Board of Directors in accordance with
their judgment.
Any shareholder of the Company has the unconditional right to revoke a proxy at
any time prior to the voting thereof by (i) notifying the Secretary of the
Company with a written notice thereof addressed to the Company at 16945
Northchase Drive, Suite 1800, Houston, Texas 77060; (ii) executing and
delivering a subsequent proxy; or (iii) personally appearing at the Meeting and
casting a contrary vote. No revocation shall be effective unless and until
notice of such revocation has been received by the Company at or prior to the
Meeting.
Votes at the Meeting will be tabulated by one or more independent inspectors of
elections appointed by the Company's Board of Directors.
The affirmative vote of two-thirds (2/3) of shares present (in person or by
proxy) and voting on that matter is required for approval of the Reverse Stock
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Split. Shares voted to abstain and broker-non votes, since they are not
affirmative votes for a matter, will have the same effect as votes against that
matter.
Because the members of the Company's Board of Directors have indicated that they
intend to vote in favor of the proposal, and since the Board of Directors as a
group controls 74.28% of the outstanding shares of Old Common Stock, the
proposal is expected to be approved, regardless of the vote of Seven J's other
shareholders.
SPECIAL FACTORS
PURPOSE AND REASONS FOR THE REVERSE STOCK SPLIT
The Company and John R. Parten, Robert F. Pratka, W.C. Bennett and Bruce Franke
(collectively, the "Filing Persons") have determined that the purpose for the
Reverse Stock Split is to maximize shareholder value by relieving the Company of
the costs and obligations of remaining a public company reporting pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
providing a source of liquidity for shareholders of small amounts of stock. The
Filing Persons believe that because of the Company's continuing losses and
illiquid assets, the Old Common Stock has and will continue to remain at a low
value and to remain very thinly traded. The Company has sustained losses over
the last several years, and the Filing Persons hope that the reduction in
expenses by going private may permit the Company to reach a break even point
once again. The Company has two primary business segments, ranching and oil and
gas royalty interests (including pipeline income). While the ranching operations
are a significant asset in the balance sheet, it has been very difficult to
maintain positive revenues from those operations and, in fact, most cash
revenues supporting the Company have been derived from its royalty income and
associated pipeline activities. The oil and gas production from the Company's
property is mature and actual production has been decreasing, and is expected to
continue to decline. For the foreseeable future, the Filing Persons believe that
these business segments and their related income streams will not increase, and
in fact, may decrease, making cost cutting an imperative action for the
Company's continuing viability. There can be no assurance, however, that the
expense of going private can be offset by the reduction in costs, or that the
reduction in costs will be sufficient to restore the Company to a break-even
point, in light of its declining revenues.
In its analysis of costs and benefits, the Company prepared the following table
summarizing the Company's experience over the last five years of the costs and
benefits derived as a public company.
- ------------------------------------------------------------------------
5 Year
Total** Average Annual
- ------------------------------------------------------------------------
Net Loss $(642,000) $(128,400)
- ------------------------------------------------------------------------
Dividends Paid $ 58,000 $ 11,600
- ------------------------------------------------------------------------
Salaries of Officers* $ 100,800 $ 20,160
- ------------------------------------------------------------------------
Legal and Accounting Costs of $ 339,576 $ 67,915
Public Company Reporting
- ------------------------------------------------------------------------
*also shareholders.
**fiscal years 1998, 1999, 2000, 2001, 2002
During the immediately preceding 5-year period, the Filing Persons believe that
the legal and accounting costs of remaining a public company has exceeded the
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total benefits received by the shareholders for the same time. Approximately 80%
of the legal and accounting costs of the period are due directly to the
Company's status as a public company. The Filing Persons believe that
eliminating the expenses associated with maintaining public company status will
increase the Company's ability to reduce the losses it is currently suffering,
while giving a fair price to those shareholders being cashed out. Additionally,
the Filing Persons believe that the costs of maintaining public company status
will increase significantly following the implementation of the Sarbanes-Oxley
Act reforms. The Filing Persons expect no change in the situation regarding the
value and trading history of the Old Common Stock for the foreseeable future and
have determined that this is an appropriate time to engage in the going private
transaction.
More specifically, the Filing Persons believe that there are considerable and
inappropriate costs to the Company and its affiliated and nonaffiliated
shareholders in remaining a public reporting company. As part of its
registration under the Exchange Act, the Company incurs significant direct and
indirect costs associated with compliance with the filing and reporting
requirements imposed on public companies. Examples of direct costs savings from
termination of registration of the Old Common Stock include lower legal and
accounting fees; printing and mailing costs; less complicated disclosure due to
the Company's private status; reduction in direct expenses such as EDGARizing
and related charges associated with Securities and Exchange Commission ("SEC")
filings; and elimination of the charges of brokers and transfer agents in
forwarding materials to beneficial owners. The Filing Persons believe the
Company can eliminate eighty percent (80%) of its accounting and legal expenses
by terminating its public company status. Additional compliance procedures
mandated by the Sarbanes-Oxley Act are likely to further increase the costs of
reporting under the Exchange Act and increase the Company's audit fees. For
those shareholders remaining, however, there can be no assurance that the cost
of the going private transaction can be recouped from the cost savings and that
these cost savings will ultimately permit the Company to restore its operations
to break-even.
Based on its experience in prior years, the Company's direct costs, which
include a portion of the fees and expenses of independent auditors, printing,
and mailing are estimated at approximately $76,000 annually. This amount is just
an estimate, and the actual savings to be realized may be higher or lower than
such estimate. The Company cannot guarantee that the benefits of going private
will be accomplished as rapidly as currently expected, or at all.
The Reverse Stock Split would not only reduce the direct and indirect costs of
maintaining public company status, but would also provide a cash payment to
holders in lieu of fractional shares. Unaffiliated and affiliated shareholders
will benefit from the Reverse Stock Split in that they will receive a cash
payment for all or a portion of their existing holdings. Unaffiliated and
affiliated holders of fewer than 1,000 shares would receive a cash payment for
their entire interest in the Company, which the Company believes provides a
substantial benefit since there is currently not a vibrant trading market for
the Company's Old Common Stock. Both affiliated and unaffiliated shareholders of
1,000 or more shares of the Company's Old Common Stock would receive New Common
Stock for the whole number of shares they will own and a cash payment in lieu of
the fractional shares they would otherwise be entitled to receive as a result of
the Reverse Stock Split. The holders of New Common Stock will continue their
interests in the Company's businesses.
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The receipt of New Common Stock solely in exchange for Old Common Stock will not
result in recognition of gain or loss to the remaining shareholders. The
adjusted tax basis of the shareholder's New Common Stock will be the same as the
shareholder's adjusted tax basis in the Old Common Stock. The holding period of
New Common Stock received solely in exchange for New Common Stock will include
the shareholder's holding period in the Old Common Stock. No gain or loss will
be recognized by the Company upon the Reverse Stock Split.
Shareholders who receive cash in lieu of fractional shares of New Common Stock
will be treated as receiving cash as payment in exchange for their fractional
shares of New Common Stock, and they will be entitled to recognize a gain or
loss on sale, and based on the difference between the amount of cash received
and the adjusted basis of the fractional shares surrendered for cash. The gain
or loss may qualify as a capital gain or loss, depending on the holding period
and the nature of the holding.
With respect to affiliates, there are six affiliated persons participating as
shareholders. Three of those persons (who collectively own a total of 357
shares) will be cashed out completely and no longer be shareholders of the
Company. As a result, they will experience a taxable gain on the completion of
the Reverse Stock Split. Of the three remaining affiliates, two will own less
than 7% of the New Common Stock, and will also receive cash for a total of 1,071
shares. The sixth shareholder, John R. Parten, currently owns 1,077,425 shares
of Old Common Stock and will own 1077 shares of New Common Stock and receive
cash for 425 shares of Old Common Stock. The three affiliates who continue as
holders of New Common Stock will experience gain with respect to the shares
cashed out, and will maintain their current tax basis in the shares they will
receive in the Reverse Stock Split. Of the Filing Persons, Mr. Parten, Mr.
Franke, Mr. Bennett and Mr. Pratka will personally participate as shareholders
in the Reverse Stock Split, and Mr. Franke, Mr. Bennett and Mr. Pratka will have
all interests they personally own cashed out as fractional shares. Farmers Oil
Company is owned and controlled by Mr. Parten, and owns shares in the Company.
Mr. Franke is a beneficiary of the Betty Anne Franke Trust, although he
disclaims direct ownership or control as the trust is administered by an
independent trustee. Farmers Oil Company and the Betty Anne Franke Trust will
remain as shareholders of New Common Stock and will also receive cash for their
fractional shares.
While the Company believes the Reverse Stock Split will result in the benefits
described, there are certain disadvantages. Affiliated and unaffiliated
shareholders owning fewer than 1,000 shares of Old Common Stock will lose their
ownership interest in the Company and will not participate in the future growth
of the Company. The Company will become a private company, and continuing
shareholders will not have the opportunity for a public market for the Company's
securities to develop unless the Company re-registers under the Exchange Act in
the future, which is not anticipated. Termination of the Company's reporting
obligations under the Exchange Act will substantially reduce the information
that the Company is required to furnish to its affiliated and unaffiliated
shareholders or make publicly available. Additionally, various provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) of the Exchange Act, proxy statement disclosure in connection with
shareholders meetings and the related requirement of an annual report to
shareholders will no longer apply to the Company. Executive officers, directors
and other affiliates will no longer be subject to any of the reporting
requirements and restriction of the Exchange Act, including without limitation
the reporting and short-swing profit provisions of Section 16 and reporting
requirements of Section 13(d).
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The following sets forth a pro forma analysis of the number of shares and book
value per share of each affiliate participating in the going private
transaction.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
EFFECTS OF THE GOING PRIVATE TRANSACTION ON EACH AFFILIATE'S INTEREST
(IN THOUSANDS EXCEPT FOR SHARE, NET BOOK VALUE, AND NET EARNINGS DATA)
AS OF AND FOR THE YEAR ENDED OCTOBER 31, 2002
AFFILIATES:
<Table>
<Caption>
JOHN R. PARTEN
SHARES OF COMMON STOCK 1,077,425 (425) 1,077
NET BOOK VALUE - DOLLAR $ 721,006 (A2) $(145,008) $ 575,998
NET BOOK VALUE - PERCENTAGE 74.25% 3.06% 77.32%
NET EARNINGS (LOSS) - DOLLAR $ (256,176)(A3) $ (10,561) $ (266,737)
NET EARNINGS (LOSS) - PERCENTAGE 74.25% 3.06% 77.32%
BETTY ANNE FRANKE TRUST
SHARES OF COMMON STOCK 58,614 (614) 58
NET BOOK VALUE - DOLLAR $ 39,224 (A2) $ (8,205) 31,019 (B2)
NET BOOK VALUE - PERCENTAGE 4.04% 0.12% 4.16%
NET EARNINGS (LOSS) - DOLLAR $ (13,936)(A3) $ (428) $ (14,365)(B3)
NET EARNINGS (LOSS) - PERCENTAGE 4.04% 0.12% 4.16%
FARMERS OIL COMPANY
SHARES OF COMMON STOCK 29,457 (457) 29
NET BOOK VALUE - DOLLAR 19,712 (A2) $ (4,203) 15,510 (B2)
NET BOOK VALUE - PERCENTAGE 2.03% 0.05% 2.08%
NET EARNINGS (LOSS) - DOLLAR (7,004)(A3) $ (128) (7,182)(B3)
NET EARNINGS (LOSS) - PERCENTAGE 2.03% 0.05% 2.08%
WILLIAM C. BENNETT
SHARES OF COMMON STOCK 142 (142) --
NET BOOK VALUE - DOLLAR $ 95 (A2) $ (95) $ -- (B2)
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS (LOSS) - DOLLAR $ (34)(A3) $ 34 $ -- (B3)
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
ROBERT F. PRATKA
SHARES OF COMMON STOCK 131 (131) --
NET BOOK VALUE - DOLLAR $ 88 (A2) $ (88) $ -- (B2)
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS (LOSS) - DOLLAR $ (31)(A3) $ 31 $ -- (B3)
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
BRUCE FRANKE
SHARES OF COMMON STOCK 84 (84) --
NET BOOK VALUE - DOLLAR $ 56 (A2) $ (56) $ -- (B2)
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS (LOSS) - DOLLAR $ (20)(A3) $ 20 $ -- (B3)
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
TOTAL AFFILIATED SECURITY HOLDERS
AFFILIATED SECURITY HOLDERS
SHARES OF COMMON STOCK 1,165,853 (1,853) 1,164
NET BOOK VALUE - DOLLAR $ 780,181 (A2) $ 157,655) $ 622,527 (B2)
NET BOOK VALUE - PERCENTAGE 80.35% 3.21% 83.56%
NET EARNINGS (LOSS) - DOLLAR $ (277,201)(A3) $ (11,083) $ (288,284)(B3)
NET EARNINGS (LOSS) - PERCENTAGE 80.35% 3.21% 83.56%
UNAFFILIATED SECURITY HOLDERS
UNAFFILIATED SECURITY HOLDERS
SHARES OF COMMON STOCK 285,147 (56,147) 229
NET BOOK VALUE - DOLLAR $ 190,819 (A2) $ (68,345) $ 122,473 (B2)
NET BOOK VALUE - PERCENTAGE 19.65% 3.21% 16.44%
NET EARNINGS (LOSS) - DOLLAR $ (67,799)(A3) $ 11,083 $ (56,716)(B3)
NET EARNINGS (LOSS) - PERCENTAGE 19.65% 3.21% 16.44%
</Table>
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*The pro forma adjustments above represent the adjustments reflecting the
approval of the 1000 for 1 Reverse Stock Split in which each share of $1 par
value Old Common Stock is reclassified into 1/1000 of a share of $1,000 par
value New Common Stock. As part of the Reverse Stock Split, 58,000 fractional
shares are to be cashed-out and payments made to shareholders in lieu of
fractional shares at a per share price of $3.89 totaling $225,620. The pro forma
adjustment of $58,000 represents the purchase of the fractional shares at par
value ($1.00/share) and is charged to common stock. The pro forma adjustment of
$167,620 represents the excess purchase price ($3.89/share) over the par value
($1.00/share) of the fractional shares and is charged to accumulated deficit in
accordance with the retirement method of acquiring treasury stock. The pro forma
weighted average number of shares outstanding and net loss per share information
has been restated to reflect the effects of the Reverse Stock Split.
(A1) Common stock, par value $1 per share: authorized 1,500,000 shares; issued
and outstanding 1,451,000 shares
(B1) Common stock, par value $1,000 per share: authorized 1,500 shares; issued
and outstanding 1,393 shares
(A2) 1,451,000 shares outstanding.
(B2) 1,393 shares outstanding.
(A3) 1,451,000 weighted average shares outstanding.
(B3) 1,393 weighted average shares outstanding.
If the Reverse Stock Split is approved and implemented, the Company believes
that the number of shareholders of record of the Company's common shares will be
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fewer than 300. The Company intends to terminate the registration of the Old
Common Stock under the Exchange Act pursuant to Section 12(g)(4) of the Exchange
Act. The decision by the Company to terminate Exchange Act registration upon
implementation of the Reverse Stock Split does not require shareholder approval
and will not be voted on at the Meeting. The Company's duty to file periodic
reports with the SEC, such as quarterly and annual reports, will end and the
Company's Old Common Stock will no longer be traded over-the-counter in the Pink
Sheets.
In consideration of the aforementioned reasons, the Company's Board of Directors
on October 30, 2002 approved, subject to approval by the Company's shareholders,
a proposal to effect the Reverse Stock Split and the Amendment of the Articles.
The Board of Directors subsequently met on February 17, 2003 and ratified its
original approval of the Reverse Stock Split and Amendment of the Articles.
BACKGROUND
The Company had 1,451,000 shares of Old Common Stock issued on the Record Date.
If the Reverse Stock Split is approved and implemented, each share of Old Common
Stock will automatically be reclassified into 1/1000 of a fully paid and
non-assessable share of New Common Stock without any further action on the part
of the shareholders. Assuming no change in the number of outstanding shares from
the Record Date, if the Reverse Stock Split is approved, the currently
outstanding shares of Old Common Stock will be converted into approximately
1,393 shares of New Common Stock held by 33 shareholders. The Company estimates
that approximately 728 shareholders will hold fractional shares after the
Reverse Stock Split which fractional shares will be purchased at a total cost of
approximately $225,620. The total average number of shares to be cashed out is
79 shares per shareholder and the average number of shares to be cashed out by
shareholders owning fewer than 1,000 shares is 66.
To those shareholders who would be cashed out, the Reverse Stock Split would
terminate their interest in the ongoing business of the Company and provide a
cash payment to holders in lieu of their shares. The Company and the Filing
Persons believe that the cash price per share provides a substantial benefit
since there is currently no established trading market for the Company's Old
Common Stock, so the ability of all of the unaffiliated shareholders to
liquidate their stock is limited. Further, the Company's ongoing business is
comprised of two elements: ranching and operations related to its oil and gas
royalties, including royalty income and pipeline income. The Company does not
currently believe it will experience significant growth or asset appreciation in
either business segment and believes it is offering a fair cash price in
exchange for an illiquid stock with low prospects for added value.
While the Company and the Filing Persons believe the Reverse Stock Split will
result in the benefits described above, there are certain disadvantages.
Affiliated and unaffiliated shareholders owning fewer than 1,000 shares of Old
Common Stock will lose their ownership interest in the Company and will not
participate in the future business of the Company. If Management's conclusions
about the decreasing business opportunities prove incorrect, shareholders who
cashed out would not participate in any unexpected growth. Shareholders who are
cashed out will also not be able to easily monitor any progress or change in the
Company because public information will no longer be available. Continuing
shareholders will not have the opportunity for a public market for the Company's
securities to continue. Termination of the Company's reporting obligations under
the Exchange Act will substantially reduce the information that the Company is
required to furnish to its shareholders or make publicly available.
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The anti-fraud provisions of Section 10b-5 and related state law provisions,
however, will continue to apply after the going private transaction. Provisions
of the Exchange Act, such as the short-swing profit recovery provisions of
Section 16(b) of the Exchange Act, proxy statement disclosure in connection with
shareholders meetings and the related requirement of an annual report to
shareholders will no longer apply to the Company. Executive officers, directors
and other affiliates will no longer be subject to any of the reporting
requirements and restriction of the Exchange Act, including without limitation
the reporting and short-swing profit provisions of Section 16 or Section 13(d).
PRICE RANGE OF COMMON STOCK
The Company's securities are not traded on any public exchange, but are traded
over the counter in the Pink Sheets under the symbol SEVJ. There is no
established trading market for the securities, except for limited or sporadic
quotations. The prices reflect interdealer prices without retail mark-ups,
markdowns or commissions, and may not necessarily represent actual transactions.
The most recent quarterly high and low trading prices for the Company are as
follows:
QUARTER 2002 2001
High Low High Low
-------------------------------------------------------
First $2.50 $2.50 $3.00 $3.00
Second $3.50 $2.50 $3.00 $2.00
Third $3.50 $3.50 $3.00 $2.00
Fourth $3.50 $3.50 $2.50 $2.50
The Company has not paid any dividends with respect to any of its securities
during the fiscal years ended October 31, 2002 and 2001.
The Reverse Stock Split is estimated to reduce the number of shareholders of
record to 33, based on the number of outstanding shares and shareholders of the
Company on the Record Date.
REPORTS RELATING TO THE REVERSE STOCK SPLIT
The Board of Directors retained Howard Frazier Barker Elliott, Inc. ("HFBE") to
render an opinion with respect to fairness, from a financial point of view to
the Company shareholders of the proposed purchase price for fractional shares.
In requesting HFBE's fairness opinion, the Board did not give any special
instructions to HFBE or impose any limitations upon the scope of the
investigations that HFBE deemed necessary to enable it to deliver its opinion.
The report of HFBE is summarized below.
At the request of HFBE to complete its analysis, the Company also retained
certain parties to conduct an appraisal of the assets of the Company. The Board
retained James Connor Smith, MAI, ARA ("Smith") to appraise the Company's real
estate, Huddleston & Co., Inc. ("Huddleston") to appraise the estimated future
reserves and revenues of certain oil and gas interests held by the Company, and
Hawkins James & Still Equipment Co. ("Hawkins") to appraise the fair market
value of the Company's equipment. The Company selected each of these appraisers
based on their experience evaluating the specific assets they were engaged to
appraise. The Company selected Smith based on his qualifications as a Texas
state certified general real estate appraiser, an Appraisal Institute Member,
Accredited Rural Appraiser and Texas Real Estate Broker and his experience
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valuing real estate in this particular region in Texas for thirty-seven years.
The Board selected Huddleston because its longstanding reputation in the
industry for oil reserve valuations and its thirty-four years of experience. The
Company selected Hawkins to value the Company's equipment because the Company
believes that Hawkins has the most experience in buying and selling farm and
ranch equipment in the locale of the Company's ranching operations and is well
qualified to assess the market value of equipment in Houston County, Texas and
the surrounding areas. In requesting the appraisals from Smith, Huddleston, and
Hawkins, the Board did not give any special instructions or impose any
limitations upon the scope of the investigations that each appraiser deemed
necessary to enable it to deliver its appraisal.
In connection with the preparation of the initial filing of the materials for
the going private transaction, the Company received reports from the asset
appraisers and HFBE based on information derived from the quarterly reports
filed on Form 10-QSB during fiscal year 2002. Since the initial filing, the
Company has revisited the appraisals, and is satisfied that the appraisal of the
real estate and equipment remain accurate. The Company, however, determined that
due to the significant fluctuations in oil and gas prices at year end 2002, a
more current analysis from Huddleston & Co would be appropriate. As a result,
there are two updated reports on the value of the Company's royalty interests as
of January 2, 2003, one a fair market value report and one a report based on the
"SEC case," that is a report that would be rendered in connection with an Annual
Report on Form 10-KSB. HFBE also reviewed its opinion based on audited financial
statements for the year ended October 31, 2002 and on the revised Huddleston
reports. All reports, opinions and appraisals will be made available for
inspection and copying at the principal executive offices of the Company during
its regular business hours by any interested security holder of the Company or
representative of a security holder who has been so designated in writing. A
copy of any report, opinion or appraisal will be transmitted to any interested
security holder or designated representative of a security holder upon written
request at the expense of the requesting security holder.
REPORT OF HOWARD, FRAZIER, BARKER & ELLIOTT, INC.
Howard Frazier Barker Elliott, Inc. ("HFBE") has acted as our financial advisor
in connection with rendering a fairness opinion with respect to the Reverse
Stock Split. HFBE has advised our Board of Directors that, in its opinion, the
consideration to be received by the shareholders whose stock is to be redeemed
pursuant to the Reverse Stock Split is fair, from a financial point of view, to
such shareholders. HFBE originally issued its report as of October 29, 2002 and
has amended its report as of February 14, 2003, based on the audited financial
statements for the year ended October 31, 2002 and the fair market value report
from Huddleston. The full text of the original HFBE opinion and related
materials prepared for the Board of Directors and the amended HFBE report and
related materials prepared for the Board of Directors are included as Exhibits
(c)(1) and (c)(5), respectively, to the Schedule 13e-3. We urge you to read the
full opinions.
HFBE'S OPINION, AS REVISED, IS DIRECTED TO OUR BOARD OF DIRECTORS AND ADDRESSES
ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION PAYABLE TO
THE SHAREHOLDERS WHOSE STOCK IS TO BE REDEEMED PURSUANT TO THE REVERSE STOCK
SPLIT. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO PROCEED WITH THE
REVERSE STOCK SPLIT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER
AS TO HOW THE SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE REVERSE STOCK SPLIT OR
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ANY OTHER RELATED MATTER. HFBE'S OPINION IS BASED ON ANALYSES WHICH CONTAIN
ESTIMATES AND VALUATION RANGES WHICH ARE NOT NECESSARILY INDICATIVE OF ACTUAL
VALUES OR PREDICTIVE OF FUTURE RESULTS OR VALUES.
In arriving at its amended written opinion, HFBE, among other things:
- reviewed Seven J's Annual Report on Form 10-KSB and related financial
information for the fiscal years ended October 31, 2000, October 31,
2001, and October 31, 2002 and Quarterly Reports on Form 10-QSB and
related financial information for the quarters ended January 31, 2002,
April 30, 2002 and July 31, 2002;
- reviewed certain information, including the public reports, giving
details of the business, earnings, cash flow, assets and prospects of
Seven J with respect to its business segments furnished to HFBE by
Seven J;
- conducted discussions with members of senior management of Seven J
concerning its businesses and prospects;
- reviewed the historical market prices and trading activity for Seven
J's common stock;
- reviewed the proxy statement and Schedule 13e-3 filings;
- reviewed the appraisals of the assets as described above; and
- reviewed such other matters as HFBE deemed necessary, including an
assessment of general economic, market and monetary conditions.
In preparing its opinion, HFBE relied on the accuracy and completeness of all
information supplied or otherwise made available to it by Seven J. HFBE did not
obtain any material non-public information or projections prepared by or
concerning the Company. HFBE did not independently verify the furnished
information, or undertake an independent appraisal of the assets of Seven J.
HFBE's opinion is based upon market, economic, financial and other conditions as
they exist and can be evaluated as of the date of the amended opinion, February
14, 2003. HFBE was not requested to and did not solicit third party indications
of interest in acquiring all or part of Seven J. HFBE assumes that there has
been no material change in Seven J's financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to HFBE.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to particular circumstances.
Therefore, the HFBE opinion is not readily susceptible to partial analysis or
summary description. Furthermore, in arriving at its opinion, HFBE did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis or factor. Accordingly, HFBE believes that its analysis must be
considered as a whole and that considering any portion of its analysis and the
factors considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, HFBE made assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of Seven J. Estimates contained in these analyses are not necessarily
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indicative of actual values or predictive of future results or values. In
addition, analyses relating to the value of the business do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold.
The type and amount of consideration payable in the Reverse Stock Split and the
decision to enter into the Reverse Stock Split transaction was solely determined
by the Board of Directors of Seven J. HFBE's opinion and financial analyses were
only one of several factors considered by the Board of Directors of Seven J in
its evaluation of the Reverse Stock Split and should not be viewed as
determinative of the views of the Seven J Board of Directors or management with
respect to the Reverse Stock Split.
HFBE is a recognized business valuation and investment banking firm with
expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. HFBE is continually engaged in the valuation of
businesses and securities in connection with mergers and acquisitions, private
placements of equity and debt, corporate reorganizations, employee stock
ownership plans and other general corporate purposes. Seven J selected HFBE
because of its experience and expertise in performing valuation and fairness
opinion analyses. HFBE does not beneficially own nor has it ever beneficially
owned any interest in Seven J. Furthermore, HFBE has no agreement or
understanding to provide additional services to Seven J beyond the scope of this
fairness opinion.
VALUATION ANALYSIS
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
HFBE noted that, given the nature and diversity of business units of Seven J and
the relatively small size of each unit, there were no publicly-traded companies
that were comparable to Seven J. HFBE conducted a search for comparable
companies, but could not locate any companies, primarily due to the small size
of Seven J.
Furthermore, because Seven J generated net losses during the latest twelve month
period and the latest three fiscal years, historical earnings figures cannot be
used to make meaningful valuation judgments. Also, Seven J's earnings before
interest, taxes, depreciation and amortization ("EBITDA") were negative during
the latest twelve month period also rendering this pricing parameter unusable.
Although royalty and pipeline operations generated positive cash flow, this cash
flow was not sufficient to offset losses from other operations (pecan
processing) and the general and administrative expenses of the Company. As a
result, HFBE determined the comparable public company method would not yield any
meaningful parameters.
SELECTED MERGER & ACQUISITION TRANSACTIONS
HFBE conducted a search for recent merger and acquisition transactions involving
companies that were comparable to Seven J. HFBE noted that, given the nature of
the two business units of Seven J and the relatively small size of each unit,
there were no merger and acquisition transactions that were comparable to Seven
J. Assuming that each unit of the business segment of Seven J were analyzed
separately, the relative size of each business unit would be so small that any
comparison to merger and acquisition multiples would not be a reliable measure.
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Similarly to the comparable public company analysis, because Seven J generated
net losses during the latest twelve month period and the latest three fiscal
years, historical earnings figures cannot be used to make meaningful valuation
judgments. Furthermore, Seven J's EBITDA was negative during the latest twelve
month period rendering this pricing parameter unusable. As a result, HFBE
determined the selected merger and acquisition transaction method would not
yield any meaningful parameters.
Furthermore, because these methodologies would produce negative values using an
earnings or EBITDA multiple, HFBE believes it is highly unlikely that any
implied equity value for Seven J derived from the comparable company or
comparable merger and acquisition transaction methodologies would result in an
implied equity value greater than the value derived under the Net Asset Value
approach (see "Net Asset Value" below). Furthermore, given the diversity of the
Company's operations and relatively small size of each business segment
(revenues less than $1 million each), HFBE believes it would be extremely
difficult to locate a buyer for the entire Company. Based on HFBE's experience
in valuations, fairness opinions and merger and acquisition transactions and
given current market conditions, HFBE believes that businesses of this size
typically sell for 3-5 times EBITDA. Given that the Company has not generated
positive cash flow or EBITDA in several years and does not expect to generate
positive cash flow or EBITDA in the foreseeable future, a positive implied value
cannot be calculated. In these circumstances, tangible book value or multiples
of revenue may be used as pricing parameters. For Seven J, book value is not an
appropriate measure primarily because of the appreciated value of the real
estate owned by the Company. Further, HFBE believes, based on the industry
segments and size of Seven J, that the Company would most likely sell for less
than 1 times revenues (in this case, approximately $1.2 million). Therefore, it
is highly unlikely that the comparably public company methodology or the
comparable merger and acquisition transaction methodology would imply a higher
value than the net asset value approach.
DISCOUNTED CASH FLOW ANALYSIS
Typically, a discounted cash flow valuation analysis would also be performed,
but due to the difficulty in projecting future financial results for Seven J and
management's expectation that cash flows will continue to be negative for the
foreseeable future, HFBE concluded that the discounted cash flow analysis would
not be a reliable valuation measure. Again, while the primary source of cash
flow of Seven J has resulted from its oil and gas royalties and pipeline
operations, these revenues have not been sufficient to cover losses from other
operations and corporate overhead expenses.
NET ASSET VALUE
HFBE determined that the Net Asset Value was the most appropriate method to
calculate the fair market value of the shares of Seven J. Utilizing appraisals
of the value of certain assets provided by management, including the real estate
appraisal by James Connor Smith, MAI, ARA, the oil & gas reserve report by
Huddleston & Co., Inc., and the equipment appraisal by Hawkins James & Still
Equipment Co., HFBE calculated the net asset value of Seven J. The net asset
value is calculated by adjusting the book value of the assets of the Company, as
reported in the Company's balance sheet, to current fair market values. Based on
the interim balance sheet as of July 31, 2002, the value of Seven J's assets was
$9,635,000 and the value of liabilities was $1,280,000, resulting in a net asset
value of $8,355,000 or $5.76 per share before the effect of the Reverse Stock
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Split. HFBE did not assign any net asset value to the pipeline, primarily
because the pipeline has no value as an individual asset. It is important to
note that the net asset value excludes liquidation expenses, and a liquidation
analysis is set forth in the following paragraph.
The following is a table showing the actual calculation of Net Asset Value and
related adjusted balance sheet entries:
SEVEN J STOCK FARM, INC.
NET ASSET VALUE SUMMARY
AS OF OCTOBER 31, 2002
(IN $000S, EXCEPT PER SHARE AMOUNT)
----------------------
Market % of
Value Assets
----------------------
Assets
Current assets $671 7.0%
Property and equipment, net 8,909 92.5%
Other assets 55 0.6%
---------------------
Total assets $9,635 100.0%
=====================
Liabilities and shareholders' equity
Liabilities
Current liabilities $416 4.3%
Long-term debt 650 6.7%
Deferred revenues and other 214 2.2%
---------------------
Total liabilities 1,280 13.3%
Shareholders' equity 8,355 86.7%
---------------------
Total liabilities and Shareholders' equity $9,635 100.0%
=====================
Net asset value ("NAV") of the Company $8,355
NAV per share of common stock $5.76
Shares outstanding 1,451,000
To calculate the appropriate market value of the shares of the Company's Old
Common Stock to be redeemed, HFBE applied both a minority interest discount and
a marketability discount to the net asset value of the Company. The minority
interest discount was applied due to the small percentage ownership represented
by the shares to be purchased pursuant to this transaction due to the fact that
both before and after the transaction, Management will maintain voting control
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of the Company. HFBE determined the appropriate minority interest discount by
analyzing a study of real estate limited partnership interests trading in the
secondary market because such assets tend to sell on the basis of underlying
asset value and yield. The annual re-sale discount study is published in the
May/June 2002 issue of THE PARTNERSHIP SPECTRUM. HFBE determined that the
Company was most similar to the Undeveloped Land partnerships because the bulk
of the Company's income from the land derives from farming or leasing activities
rather than real estate development. According to the study, Undeveloped Land
partnerships have an average minority discount rate of 35%. Based on its
analysis of the study, HFBE determined that 30% was an appropriate conservative
minority interest discount for Seven J.
The marketability discount was applied as a result of the thinly traded nature
of the Company's stock. In determining the correct marketability discount, HFBE
analyzed several studies comparing marketability discounts applied in different
situations. According to the SEC Institutional Study, the midpoint of the range
of marketability discounts for OTC reporting companies was 20-30%. According to
a 1991 article in the Financial Analyst Journal written by Dr. William Silber,
the Company most closely resembled companies with a marketability discount
greater than 35%. HFBE reviewed a number of other studies that considered
marketability discounts based on revenues, profitability and price/earnings
ratio. Based on its analysis of these studies, HFBE determined that 25% was an
appropriate marketability discount.
Based on the net asset value analysis, HFBE calculated the per share market
value as of October 31, 2002 of the stock as follows:
NAV per share of common stock $5.76
Minority interest discount 30% (1.73)
------
Marketable minority interest value $4.03
per share ======
------------------------------------------------
Marketable minority interest value $4.03
per share
Discount for lack of marketability (a) 25% (1.01)
------
FAIR MARKET VALUE PER SHARE $3.02
======
LIQUIDATION ANALYSIS
The following sets forth a calculation of the estimated sales proceeds
distributable to shareholders if the assets of the Company were promptly sold at
the estimated fair market values set forth herein.
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SEVEN J STOCK FARM
LIQUIDATION ANALYSIS
ESTIMATED MARKET VALUE OF ASSETS AS OF 10/31/2002
Current assets $ 671
Real estate 8,469
Farm equipment 102
Oil & gas interests 338
-------
8,909
Other assets 55
Total assets 9,635
Current liabilities 416
Long term debt 650
Deferred income taxes 26
Accrued loss contingency 184
Deferred revenues 4
-------
864
Total liabilities $ 1,280
ESTIMATED LIQUIDATION PROCEEDS - SALE OF ASSETS
Gross proceeds before expenses $ 8,909
Less sales commission on land (5%) (423)
Other expenses (a) (250)
-------
Corporate Tax: 8,236
Gross Proceeds: 8,236
-------
Less Basis (1,525)
-------
6,711
-------
Tax Rate (34%) (2,282)
-------
After Tax proceeds 5,954
-------
-------
Payment of liabilities (1,280)
-------
Net Proceeds $ 4,674
-------
-------
Shares outstanding 1,451
-------
-------
Per Share (b) $ 3.22
-------
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(a) Includes legal, environmental study and remediation, title and other closing
costs.
(b) Dividends paid to shareholders are taxed as ordinary income.
HISTORICAL TRADING PRICES. Since the beginning of 2002, Seven J's Old Common
Stock price has been $3.50 per share through November 2002 and $4.00 thereafter.
As of the date of HFBE's opinion, the Old Common Stock price remained at $3.50
per share. The last trades were made on October 10, 2002 at $3.50 per share when
200 shares were traded and December 4, 2002 at $4.00 when 200 shares were
traded. Since January 1, 2002, a total of 3,900 shares of Seven J's Old Common
Stock have been traded. HFBE noted that the lack of any significant trading
volume has a substantial impact on the ability of Seven J Shareholders to sell
their shares. Further, most of the Shareholders affected by the going private
transaction own odd-lots (average holdings are 66 shares per Shareholder), thus
increasing the costs to liquidate their shares. HFBE also believes that because
of the thin trading volume, no significant block of shares could be sold without
a serious impact on per share prices. HFBE also noted that amount to be paid to
the shareholders in the redemption of their shares provided a certainty of a
return to such shareholders in contrast to the speculative nature of a
continuing interest in Seven J.
ALTERNATIVES
In assessing the fairness of the transaction to Seven J's public shareholders
from a financial point of view, HFBE also compared the consideration to be
received in the redemption of shares after the Reverse Stock Split to the most
likely alternatives of the redemption including a status quo scenario in which
Seven J continued to operate in the absence of the Reverse Stock Split and a
third party investor/acquirer.
In considering the status quo alternative, HFBE considered that there were no
material growth prospects for the business, and Management did not have any
plans to seek acquisitions or pursue other strategies to grow the business. With
respect to the farming and ranching operations, Management expects that there
will be continued downward pressure on revenues and cash flow. As reported in
the most recent annual report on Form 10-KSB for the year ended October 31,
2002, the Company anticipates that the amount per acre will drop to $12 per acre
from the current $16. Additionally, the Company will no longer be entitled to US
Department of Agriculture subsidies for its farm crops, which will most likely
increase its losses in farming activities. The royalty income and related
pipeline income are also declining from natural and expected deletion of the
properties, and the Company does not expect the depletion to be reversed. HFBE
reviewed all trades in the Company's stock between April 9, 2002 and December 4,
2002 reported in the Pink Sheets. During this time period, only 3,900 shares
were sold, all at $3.50 per share, except for one trade of 200 shares at $4.00
on December 4, 2002. Furthermore, as discussed above, given the lack of trading
volume in Seven J Old Common Stock, it is unlikely that a shareholder could
locate a buyer for any significant block of shares and, most likely, our
experience and related research indicates that an attempted sale of a larger
number of shares in the market would be at a price substantially below the
current market price per share.
In assessing the prospect of a third party acquirer, HFBE noted that there were
no offers to purchase the business of Seven J, and it was unlikely that a
potential buyer would value the business at a higher price than the net asset
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value previously calculated. In the event a buyer could be located, the
estimated per share distribution available to shareholders after sale of the
assets would be lower than the proposed purchase price in the going private
transaction. See "Liquidation Analysis" above. Furthermore, given the ownership
structure of Seven J, any transaction would have to be approved by Management
and the majority shareholders of Seven J. Management has indicated to HFBE that
they have no desire to sell the company now or any time in the foreseeable
future.
VALUATION CONCLUSION
Based on its analysis of the asset based approach, HFBE determined that the fair
market value of the fractional shares of Seven J to be redeemed was $3.02 per
share as of the valuation date, as set forth in the calculations in Net Asset
Value, above. As described in Net Asset Value above, HFBE performed the
following estimated per share calculation of the fair market value of one share
of Stock.
Net Asset Value $5.76
Less Minority Interest Discount-30% (1.73)
------
Marketable Minority Interest Value Per Share 4.03
Less Marketability Discount-25% (1.01)
------
Fair Market Value Per Share (rounded) $3.02
The shareholders whose stock is to be redeemed pursuant to the plan are to
receive $3.89 per share of Old Common Stock in the Reverse Stock Split
transaction. Since the market value of the fractional shares was estimated to be
$3.02 per share, the consideration to be received by such shareholders is fair,
from a financial point of view, to such shareholders.
Seven J paid HFBE a non-contingent fee of $25,000 for its opinion. In addition,
Seven J has agreed to reimburse HFBE for all its related expenses, and to
indemnify HFBE against certain liabilities, including liabilities under federal
securities laws. There is no other material relationship between HFBE and the
Company. The Company has not paid any other fees to HFBE in the previous two
years.
SMITH REPORT
Smith is a Texas state certified general real estate appraiser, an Appraisal
Institute Member, Accredited Rural Appraiser, Texas Real Estate Broker and
member of the National Association of Realtors and the Realtors Land Institute.
He has been engaged as an independent appraiser and consultant specializing in
the valuation and counseling for rural and commercial property since 1965.
Smith appraised the value of the surface estate interest in the 10,927.857 acre
property owned by the Company located approximately 19 miles southwest of
Crockett, Texas. Smith determined that a fair market value for this property on
August 14, 2002 was $775 per acre or a total of $8,469,089 based on a marketing
period of 18-24 months. Smith's methodology involved the following steps:
1. Inspect the property and surrounding neighborhood;
2. Gather appropriate site, neighborhood and economic data;
3. Investigate, confirm, and inspect comparable unimproved land sales to
determine land component unimproved land sales to determine land
component contributory values.
a. Date range of search: January 1, 1999 to July 30, 2002
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b. Geographical limits of search: Houston County, Texas
c. Size limits of search: 500 to 15,000 acres
d. Use or zoning limits of search: Livestock Ranches with
improved pasture, native pasture/wooded pasture and cropland
components
4. Estimate the reproduction cost of building and land improvements and
deduct accrued depreciation from all causes to estimate their
contributory value for use in the cost and sales comparison
approaches.
5. Investigate, confirm, and inspect comparable improved sales to
estimate the value of the subject property via the direct sales
comparison approach.
a. Date range of search: January 1, 1999 to July 30, 2002
b. Geographical limits of search: Houston County, Texas
c. Size limits of search: 500 to 15,000 acres
d. Use or zoning limits of search: Livestock Ranches with
residential/agricultural improvements
6. Analyze the time on the market of the comparable sales to develop an
estimated marketing period for the subject property
7. Reconcile the value indications from the two approaches to develop a
concluded value range and a final market value estimate of the subject
property
The Company paid Smith $20,410.18 for his appraisal of the real estate. There is
no other material relationship between the Company and Smith. The Company has
not paid any other fees to Smith in the previous two years.
HUDDLESTON REPORT
Huddleston & Co., Inc. is a corporation that provides petroleum and geological
engineering services, located in Houston, Texas. Huddleston has conducted
appraisals of oil and gas interests since 1968.
The Company requested Huddleston to provide Seven J with an estimate of fair
market value for the properties evaluated in this report. Huddleston estimated
the fair market value using the average of four methods that are commonly used
in the industry. It is the fair market value report that the Board considered in
its evaluation of the fairness of this transaction.
The four methods that have been considered in preparing our estimate of fair
market value follow:
1. Calculation of value on the basis of a 1.75:1 return on investment (or
about 57% of undiscounted future net revenues) over the economic life of
the properties;
2. Calculation of 70% of future revenues, discounted at 10%;
3. 100% of future net revenue, discounted at 15%; and
4. Cumulative undiscounted future net revenues recovered over the first three
and one-half years following the effective date of the report (3.5 year
payout).
Fair market value was then determined by calculating the average of the four
methods. Huddleston estimated the fair market value for the properties evaluated
in this report to be $309,253.
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RESERVE ESTIMATES
The reserve estimates for the Proved Developed Producing properties were based
on the extrapolation of historical production data. All of the producing
properties had reported production and all had sufficient data to suggest a
decline trend.
PRODUCT PRICES
The product prices utilized in this report were the actual NYMEX Strip prices
offered on December 19, 2002. Product prices were put into the cash flow model
annually for 2003, 2004, 2005 and 2006. Beginning January 1, 2007, prices were
escalated at 2% per year through the life of the properties.
Market prices for both oil and gas continue to be subject to a substantial
degree of variation as a result of a variety of market and seasonal factors.
Therefore, actual future receipts are likely to vary from the projections and
fluctuations of market prices will affect the projections of both future
reserves and revenues. The variations in product prices as shown on the summary
projections result from the net effect of computer averaging of the aggregate of
gross revenues and net revenues with varying rates of decline.
A comparison of the average product prices, weighted as a composite for all
properties over life, follows: (Gas prices have been adjusted for heating value
and are reported as dollars per Mcf).
ESCALATED PRICING CASE OIL/COND., $/BBL GAS, $/MCF
- ----------------------------------------------------------------
2003 25.81 3.80
2004 21.96 3.30
2005 21.30 3.14
2006 20.96 3.07
Maximum 25.81 4.04
Average over life 23.00 3.44
OPERATING EXPENSES, TAXES AND CAPITAL EXPENDITURES
Seven J supplied operating income/expense statements for the properties
evaluated in the Huddleston report. As a royalty interest owner, Seven J is not
directly burdened by operating expenses. Seven J is indirectly burdened by
operating expenses in that such expenses were considered in the cash flow model
to calculate the economic limit of the individual properties.
Beginning January 1, 2003, operating expenses were escalated at 2% per year
through the life of the properties.
Severance and ad valorem taxes were scheduled for each property where
applicable.
VALUES AND COSTS NOT CONSIDERED
General home office overhead (G&A), federal income taxes, and allowances for
depreciation, depletion, and amortization have not been deducted from estimated
revenues. Values were not assigned to nonproducing acreage or to the salvage
value of surface and subsurface equipment.
The Company has agreed to pay Huddleston approximately $2,000 for its appraisal.
There is no other material relationship between the Company and Huddleston. The
Company has not previously hired Huddleston, however three affiliates, Parten
Operation Company, Texas Epic Oil Company and Farmers Oil Company, paid
Huddleston a combined total of $7,067 for reserve evaluations in August of 2002.
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HAWKINS REPORT
Hawkins is an agricultural equipment dealer located in Crockett, Texas. Hawkins
reviewed each piece of equipment and estimated the value based on the sales
price at which, in its experience, it could sell the used farm equipment in the
local area where it conducts business. Based on Hawkins experience evaluating
and dealing in new and used agricultural equipment in Houston County, Texas,
Hawkins determined that the fair market value of the Company's equipment was
$102,150 on August 19, 2002.
The Company did not pay Hawkins for its appraisal and has not paid Hawkins for
any appraisals in the previous two years. The Company has purchased equipment
from Hawkins in the past, and may purchase additional equipment from Hawkins in
the future.
BOARD OF DIRECTORS DETERMINATION
At the Board of Directors' March 19, 2002 meeting, the Company's Board and
executive officers, John R. Parten, Robert F. Pratka and Virginia O. Cortinas
(such executive officers are collectively, "Management") expressed their view
that the Company and its shareholders are deriving little benefit from the
Company's status as a public company. The Company and its officers and directors
incur substantial risks. The Company also incurs substantial costs to maintain
this status. Despite these expenditures, the nature of the assets held by the
Company do not provide any synergies for the status as a public company. The
primary assets of the Company are raw land that is leased as ranch land and farm
land, royalty interests in oil and gas leases, a pipeline and a pecan processing
plant. The use and value of the assets has not substantially changed during the
Company's forty-year status as a reporting company, and the assets do not
produce an income stream that makes the public nature of the stock a useful
commodity or maintains the cost of a public company. More specifically, the
revenues from the oil and gas royalties and pipeline operations have
historically sustained the Company and those assets, and related revenues are
depleting and declining. The Board determined it would be in the best interests
of the Company to maintain this asset base and to cease being a public company.
The Board considered the advantages of being a public company such as access to
public trading markets, public availability of Company information, and
liquidity for the shareholders. The Board also considered the disadvantages of
being a public company such as the costs of maintaining public company status.
The Board also considered that the Company has historically not been able to
capitalize on its public company status because it is a small, thinly traded
company. The Board considered the advantages and disadvantages of being a
private company and unanimously directed Management to conduct a preliminary
cost and feasibility study of going private, including a determination of the
rights of dissenting shareholders.
Between March and October of 2002, the Company's Management held a series of
meetings with the Company's accountants, investment bankers and outside legal
counsel to discuss a Reverse Stock Split as well as other options for taking the
Company private. The Management considered a merger or a tender offer as
possible means of taking the Company private. After discussion with its advisors
of the options available, Management determined to recommend to the Board that a
Reverse Stock Split was the most feasible in the Company's current situation.
Management determined that the other means of taking the Company private would
not be appropriate in this situation due either to the proposed structure
(tender offer) or their cost and complexity (merger). Based on these
deliberations, Management engaged its outside auditors, its investment bankers
24
<Page>
and its legal counsel to assist the Company in pursuing the proposed Reverse
Stock Split.
At the Board of Directors October 30, 2002 meeting, Management reported that
taking the Company private could be accomplished through the process of going
private through a Reverse Stock Split, with cash being paid for fractional
shares that result. The Board reconfirmed unanimously its agreement that it
would be in the Company's best interests to go private and directed Management
to identify the issues involved in a Reverse Stock Split. Management reported
that based on the results of a its analysis, a 1-to-1,000 Reverse Stock Split to
take the number of shareholders of record below 300, and to a number appropriate
for a privately held company. In Management's opinion the 1-to-1,000 ratio was
preferable for accomplishing both goals.
After considering Management's evaluation, the Board authorized a 1-to-1,000
Reverse Stock Split, subject to the approval of the Company's shareholders.
The Board reviewed the duties of Directors under Texas law in evaluating a
Reverse Stock Split and reviewed the documents to be filed with the SEC in this
regard. Also at this meeting, the Board considered the fairness opinion of
Howard Frazier Barker & Elliott, Inc. as well as the Smith, Huddleston and
Hawkins appraisals obtained with respect to the assets. The Board of Directors
determined that the Smith report is an adequate reflection of the value of the
real estate, but considered additional information concerning the marketing and
sale of the particular parcel of land, especially its unusually large size, in
its evaluation of the Smith appraisals. Additionally, the Board reviewed the
previously filed financial statements of the Company.
After the filing of the preliminary proxy materials, the Company was required to
prepare and file its next Annual Report on Form 10-KSB for the year ended
October 31, 2002. In connection with the review and preparation of the report,
Management re-examined the data originally prepared for the October filings.
While Management determined that the real estate and equipment appraisals
continued to be accurate, oil and gas prices had changed significantly at the
end of 2002, and Management requested and received a revised engineering report
based on increased prices. As a result of that report, and in review of audited
financial information in the Form 10-KSB for the year ended October 31, 2002,
HFBE revised its report. The Board of Directors met via telephone on February
17, 2003 to review the revised reports and confirmed that the price of $3.89 per
share of Old Common Stock would be paid for fractional shares, resulting from
the Reverse Stock Split, and that, in light of current oil and gas prices, such
price would be fair to the shareholders.
FAIRNESS OF THE REVERSE STOCK SPLIT PROPOSAL
The directors of the Company, in their capacity as such and as filing persons,
believe this transaction is fair to and in the best interests of the Company and
its affiliated and unaffiliated shareholders. In determining the fairness of the
Reverse Stock Split, the Board considered a number of factors prior to approval
of the proposed transaction.
The Board recognized the concerns of shareholders owning a limited number of
shares of Old Common Stock, with reduced liquidity, because typical transaction
costs for public sale of their shares in most cases represents a large
percentage of the value of their holdings at current stock price trends. The
Reverse Stock Split will allow such shareholders to liquidate their holdings at
25
<Page>
a fair value without these transaction costs by receiving cash for their
fractional shares.
Shareholders receiving New Common Stock are anticipated to benefit from the
reduction of direct and indirect costs borne by the Company to maintain its
public company status. The Board of Directors also believes that the Company
will be more stable, given the nature of its assets and business, if it ceases
the costs and obligations of a publicly traded company. No assurances can be
given to the remaining shareholders, however, the costs of the going private
transaction will be lower than the ongoing reporting costs or that the Company
will be able to recoup the costs of going private from its revenues.
The Board also considered the financial condition of the Company and the cost of
the Reverse Stock Split and the cost of the continued reporting obligations
under the Exchange Act. The Board considered that the costs of public reporting
continue to increase, as well as the amount and nature of the obligations of a
reporting company. Notwithstanding the increase in regulation, the business of
the Company has not significantly changed, and, in fact, the revenues and
related asset base, particularly the oil and gas royalty interests are
deteriorating. The Board also determined that a change in the amount or the
nature of the business was not likely, therefore continuing to reduce the value
of the status of the Company as a public company.
The Board considered that during the preceding twelve month period, the Company
had not received any bona fide offers from any person for (i) the merger or
consolidation of the Company into or with any person, (ii) the sale or transfer
of all or any substantial part of the assets of the Company, or (iii) securities
of the Company which would enable the holder thereof to exercise control of the
Company. The Company during this period did not solicit any third party offers
to merge or acquire the Company, not did it authorize any member of the Board of
Directors or unaffiliated party to do so. The Board determined that it was not
in the best interests of the Company to sell.
The Board of Directors of the Company by unanimous vote on October 30, 2002, and
after review of revised materials in a meeting on February 17, 2003, with no
member of the Board of Directors dissenting or abstaining from such approval,
adopted a resolution declaring the terms and conditions of the Reverse Stock
Split to be advisable, and directing that a proposed amendment to the Articles
of Incorporation of the Company to reduce the Company's authorized capital be
submitted to shareholders of the Company for consideration. All material factors
considered by the Board of Directors are presented herein.
The Management was charged with the responsibility of recommending to the Board
of Directors a fair price to be paid for the fractional shares resulting from
the Reverse Stock Split. In fulfilling their responsibility, the Management
considered several factors relating to the fair value of the Company's Old
Common Stock:
- The nature of the income stream and underlying assets of the Company;
- The current and historic market value of the Old Common Stock, which
ranged between a high of $4.00 and a low of $2.00 for the period from
October 1999 through February 14, 2003;
- The net losses incurred for the fiscal years 1999, 2000, 2001 and 2002;
- The current and historic market value for the Old Common Stock in the
Pink Sheets.
- The absence of a meaningful market for the Company's shares as reflected
in the fact that only 3900 shares have traded since January 2002;
26
<Page>
- The $.67 book value per share of Old Common Stock(as of October 31,
2002.)
- The value of the Company's assets based on the independent appraisals of
Smith, Huddleston and Hawkins; and - The HFBE fairness opinion.
In reaching it decision to recommend $3.89 as the purchase price for a share of
Old Common Stock, in each of the October and February meetings, Management gave
consideration to the original and amended HFBE report, which considered the
numerous factors affecting the value of the Old Common Stock, including the
continuing losses, the appraisal value of the assets, and the lack of liquidity
for the stock.
At the February 17, 2003 Board meeting, Management presented each of the factors
discussed above in conjunction with its recommendation of $3.89 as the purchase
price per share. The Board analyzed each of the factors in consideration of
Management's recommendation. Due to the relative liquidity of the stock, the
Management and the Board placed more emphasis on the appraisals of the assets
and related analysis HFBE report than simply on the stock price as reported in
the Pink Sheets.
The HFBE report is the only report that considered and consolidated all of the
elements of value of the Company. The HFBE report considered the value of the
surface real estate, as valued by Smith. In addition, the Board believes that
the value of the surface real estate set forth by Smith was somewhat speculative
because to their personal knowledge, no tract of land of the size owned by the
Company has been sold recently in Houston County. Further, portions of the
Company's tract of land do not have access to roads, electricity or other
utilities that would make it feasible to sell smaller parcels at the same price
the entire parcel could be sold. The large size of the tract would also prolong
the time and relative cost to market and sell. It considered the value of the
underlying minerals as valued by Huddleston and agreed with the report. It
considered the value of the machinery and equipment as valued by Hawkins and
agreed with the report. It considered the other assets and liabilities of the
Company as reflected in the financial statements. None of the other appraisals
on their own ever purported to reflect the true value of the stock of the
Company. The Management of the Company and the Board of Directors has adopted
each of the independent appraisals that were considered by HFBE. The only
element of the HFBE analysis that the Board of Directors did not adopt was the
discount for minority share liquidity, which would place the stock value at
$3.02 per share. The Management and the Board of Directors of the Company
adopted the price of $3.89 per share after considering that it was in excess of
the estimated liquidation value of the Company ($3.22), in excess of the most
regular pink sheet value of the stock ($3.50) and considerably in excess of the
fully discounted minority share value of the stock ($3.02). Each member of the
Board of Directors believes that this method of valuation represents a fair
valuation of the Old Common Stock.
Based on the data presented to the Management and the Board of Directors, they
each reviewed the current prices at which the Old Common Stock of the Company
traded, as well as the historical market prices. The Board and Management
determined that net book value was not appropriate to consider because it
significantly undervalued the real estate. As a result, Management requested
appraisals of all assets marketed independently (which excluded only the
pipeline) and reviewed a calculation of Net Asset Value adjusted for estimated
current market prices of the assets. Attention to going concern value was
minimal because the cash flow and revenue of the Company has been negative, so
27
<Page>
the going concern value would produce a significantly lower valuation than the
Net Asset Value as adjusted for current asset values. Similarly, because of the
poor cash flow and revenue situation, as well as the fact that the business
segments and their component units are small, the Company could not consider
comparable companies or comparable merger and acquisition transactions. An
analysis of liquidation value produced results lower than the Net Asset Value
calculation. As a result, Management and the Board of Directors believe that the
price the Company is offered is fair. Each of the Filing Persons in their
individual capacity concurs with the Management and the Board of Directors.
The transaction is not structured to require a majority of the unaffiliated
security holders because over half of the security holders' location is unknown
to the Company. Specifically, out of approximately 728 security holders, 360
have known addresses and 370 security holders' whereabouts are unknown. No
unaffiliated representative has been retained to act solely on behalf of
unaffiliated security holders for the purpose of negotiating the terms of Rule
13-E transaction and/or preparing the report or transaction. Even though the
transaction will not require the approval of a majority of the unaffiliated
security holders and no unaffiliated representative was retained, the Board and
the Filing Persons believe the determination of the valuation of the Company's
stock was substantively and procedurally fair to the affiliated and
nonaffiliated shareholders because (i) affiliated and unaffiliated shareholders
are treated identically in the Reverse Stock Split; (ii) the Reverse Stock Split
does not significantly impact control of the Company; and (iii) the Board, based
on careful review of the independent appraisals and fairness opinion of HFBE,
believes that the outside independent analysis supports their conclusion as to
the fairness of the transaction.
While the Board considered the asset appraisals, the ability of the Company to
place the value of the assets directly into the hands of the shareholders
through liquidation or sale of assets is difficult because of the costs of the
transaction, including brokerage costs, transaction costs and tax consequences
of such a transaction. As described in the liquidation analysis set forth above,
while the $5.76 is a Net Asset Value per share, it does not account for the
significant corporate or shareholder expenses that would occur under a
liquidation, and the projected liquidation value is lower than amounts proposed
to be paid in the Reverse Stock Split.
In determining whether the price to be paid to the Company's shareholders for
fractional shares was fair, the Board received a fairness report from an
independent financial adviser. See "Report of Howard, Frazier, Barker & Elliott,
Inc." above. In determining the fairness to shareholders who will receive New
Common Stock, the Board of Directors considered the value of the underlying
assets, the continuing losses of the Company, the extremely limited market for
the Company's stock and the cost savings associated with no longer being a
public company. Of the factors, the Board believes the most important factor is
the potential costs savings from no longer reporting as a public company.
To the Company's knowledge, each executive officer and director of the Company
will vote all shares of Old Common Stock those persons have proxy authority for,
for the proposed Reverse Stock Split and related Amendment to the Company's
Articles of Incorporation. These shares represent approximately 74.28% of the
voting power on the Record Date.
EXCHANGE OF CERTIFICATES AND PAYMENT OF FRACTIONAL SHARES
If the shareholders approve the Reverse Stock Split, the Company will file the
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Amendment with the Secretary of State of Texas. The Reverse Stock Split will
become effective on the date the Certificate of Amendment is issued by the
Secretary of State of Texas (the "Effective Date").
As soon as practicable after the Effective Date, each holder of an outstanding
certificate theretofore representing Old Common Stock will receive from the
Company instructions for the surrender of such certificate. The instructions
will include a Letter of Transmittal to be completed and returned to the Company
with such certificate or an affidavit of lost certificate. As soon as
practicable after the surrender to the Company of any certificate which
represented shares of Old Common Stock (or affidavit as to loss), together with
a duly executed Letter of Transmittal and other documents the Company may
specify, the Company shall deliver to the person in whose name such certificates
have been issued, (i)certificates registered in the name of such person
representing the number of full shares of New Common Stock into which the shares
of Old Common Stock represented by the surrendered certificate shall have been
reclassified, and/or (ii) cash for fractional shares. Until surrendered as
contemplated by the preceding sentence, each certificate which represented
shares of Old Common Stock shall be deemed at and after the Effective Date to
represent the number of full shares of New Common Stock contemplated by the
preceding sentence.
For the purpose of determining ownership of Old Common Stock at the Effective
Date, shares will be considered to be held by the person in whose name those
shares are registered in the stock records of the Company, regardless of the
beneficial ownership of those shares. No service charges, brokerage commission
or transfer taxes shall be payable by any holder of any certificate which prior
to the approval of the Reverse Stock Split represented any shares of Old Common
Stock, except that if any certificates for New Common Stock are to be issued in
a name other than that in which the certificates for shares of Common Stock
surrendered are registered, it shall be a condition of such issuance that (i)
the person requesting such issuance pay to the Company any transfer taxes
payable by reason thereof (or prior transfer of such surrendered certificate, if
any) or establish to the satisfaction of the Company that such taxes have been
paid or are not payable, and (ii) such surrendered certificate shall be properly
endorsed and otherwise in proper form for transfer, or the holder will supply a
duly executed affidavit of lost certificate.
No certificates or scrip representing fractional shares of New Common Stock
shall be issued in connection with the Reverse Stock Split. Instead,
shareholders holding a number of shares of Old Common Stock not evenly divisible
by one thousand, and shareholders holding fewer than one thousand shares of Old
Common Stock, upon surrender of their old certificates will receive cash in lieu
of fractional shares of New Common Stock. The price payable by the Company for
fractional shares will be determined by multiplying the fraction of a share of
Old Common Stock by $3.89, the fair market value of a share of Old Common Stock.
The Company currently estimates that approximately 370 of the 728 shareholders
that will hold fractional shares have had their proxy materials returned,
undeliverable to the Company for more than two years. Texas Business Corporation
Act ("TBCA") Article 2.25B states that notice otherwise required to be given to
any shareholder pursuant to the TBCA, or the articles or bylaws of the
corporation need not be given if (i) notice of two consecutive annual meetings
and all notices of meetings held during the period between those annual
meetings; or (ii) all (no less than two) payments of distributions or interest,
sent by first class mail during a 12 month period have been mailed to the
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<Page>
shareholder, addressed to the address shown on the transfer records of the
corporation have been returned undeliverable. The Company will make efforts to
locate missing shareholders by checking addresses with internal resources such
as phone books and publicly available resources on the internet. Any unclaimed
funds payable to the shareholders who cannot be located by the Company will be
tendered to the State of Texas pursuant to its escheat laws.
Approval of the Reverse Stock Split will require approval by two-thirds (2/3) of
the shares of Old Common Stock that were outstanding on the Record Date.
Accordingly, the Reverse Stock Split will be approved if at least 967,333 shares
of Old Common Stock are voted in favor of the Reverse Stock Split.
CERTAIN EFFECTS OF REVERSE STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS
1. RIGHTS, PREFERENCES AND LIMITATIONS. There are no differences
between the respective rights, preferences or limitations of the Old
Common Stock and the New Common Stock. If the Reverse Stock Split is
approved and implemented, each shareholder's percentage interest will
be the same as it was prior to the approval of the proposal, except
for the effect of the elimination of fractional shares. There will be
no differences with respect to dividend, voting, liquidation or other
rights associated with the Company's Old Common Stock before or after
the Reverse Stock Split.
2. FINANCIAL EFFECT. The Company expects that the total cost of the
going private transaction will be approximately $340,260, including an
estimated $115,000 in expenses and an estimated $225,620 to purchase
fractional shares. Most of the purchase of fractional shares pursuant
to the going private transaction will be funded pursuant to a loan
secured by the real estate of the Company, as described below. The
other expenses of the transaction will be paid out of the operating
cash flow of the Company.
The Company borrowed $610,000 on October 28, 2002 from Capital Farm
Credit at 6.65% annual interest pursuant to a 15-year note (the
"Note"). Approximately $200,000 of the proceeds of this Note will be
used in conjunction with the going private transaction. The Company
plans to repay the Note out of the operating cash flow of the Company.
Of the $610,000 borrowed, approximately $200,000 will be used to fund
the repurchase of shares of the Company. The remaining costs
(primarily expenses of the transaction) have been funded from the
Company's operating cash flow. The remaining proceeds of the Note have
been contributed to TVPC in connection with transactions not related
to the Reverse Stock Split. The loan was used as a capital
contribution to TVPC which allowed it to repay certain outstanding
bank debt (on which the Company was a guarantor, and for which
guarantee the Company had begun to accrue). The Company's potential
liability as a guarantor of the TVPC debt will be reduced from
$333,000 to $171,548 as a result of the reduction in amounts owed by
TVPC. Additionally, TVPC paid to the Company $120,000 owed, increasing
the cash of the Company and reducing its receivables.
The Reverse Stock Split will require a restatement of the Company's
earnings per share and book value per share, but we do not believe the
restatement is material. The restatement is found in the amended
Schedule 13e-3 under the heading "Financial Statements."
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3. EFFECT ON MARKET FOR SHARES. The Company estimates that the number of
shares of New Common Stock outstanding after the Reverse Stock Split,
if effected will be approximately 1,393 in the hands of approximately
33 shareholders. As a result, there will be no organized market for
the Company's shares.
The Company has no current plans to issue additional shares of stock,
but the Company reserves the right to do so at any time and from time
to time at such prices and on such terms as the Board determines to be
in the best interests of the Company and its then shareholders.
Persons who continue as shareholders following implementation of the
Reverse Stock Split proposal will not have any preemptive or other
preferential rights to purchase any of the Company's stock that may be
issued by the Company in the future, unless such rights are currently
specifically granted to such shareholder.
4. TERMINATION OF EXCHANGE ACT REGISTRATION OF NEW COMMON STOCK. The
Reverse Stock Split proposal will terminate the public registration
of the Old Common Stock with the SEC under the Exchange Act, and the
Company intends to terminate this registration as soon as practicable
after approval of the Reverse Stock Split proposal by the
shareholders. The Company may terminate registration under the
Exchange Act if the New Common Stock is no longer held by 300 or more
shareholders of record. Termination of registration of the Old Common
Stock under the Exchange Act would substantially reduce the
information required to be furnished by the Company to its
shareholders and to the SEC and would make certain provisions of the
Exchange Act, such as the requirement of providing annual and
quarterly reports to shareholders, no longer applicable to the
Company.
With respect to the executive officers and directors of the Company,
in the event of the intended termination of registration of the Old
Common Stock under the Exchange Act: a) executive officers, directors
and other affiliates would no longer be subject to many of the
reporting requirements and restrictions of the Exchange Act,
including without limitation, the reporting requirements and
short-swing profit provisions of Section 16 thereof. Upon termination
of Exchange Act registration, the Company will continue to be subject
to the general anti-fraud provisions of federal and applicable state
securities laws.
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION SUMMARIZING FEDERAL TAX CONSEQUENCES IS BASED ON
CURRENT LAW.
The receipt of New Common Stock solely in exchange for Old Common Stock will not
result in recognition of gain or loss to the remaining shareholders. The
adjusted tax basis of the remaining shareholder's New Common Stock will be the
same as the shareholder's adjusted tax basis in the Old Common Stock. The
holding period of New Common Stock received solely in exchange for Old Common
Stock will include the shareholder's holding period in the Old Common Stock. No
gain or loss will be recognized by the Company upon the Reverse Stock Split.
Shareholders who receive cash in lieu of fractional shares of New Common Stock
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will be treated as receiving cash as payment in exchange for their fractional
shares of New Common Stock, and they will be entitled to recognize a gain or
loss on sale, based on the difference between the amount of cash received and
the adjusted basis of the fractional shares surrendered for cash. The gain or
loss may qualify as a capital gain or loss, depending on the holding period and
the nature of the holding.
APPRAISAL RIGHTS AND DISSENTER'S RIGHTS
The shareholders do not have the right to demand the appraised value of their
shares (dissenter's rights) in conjunction with the Reverse Stock Split under
the Texas Business Corporations Act. There may exist other rights or actions
under the Texas Business Corporations Act, Texas common law or federal or state
securities laws for shareholders who are aggrieved by the Reverse Stock Split
generally. Although the nature and extent of such rights or actions are
uncertain and may vary depending on facts or circumstances, shareholder
challenges to corporate action in general are related to the fiduciary
responsibilities of corporate officers and directors and to the fairness of
corporate transactions.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
REVERSE STOCK SPLIT AND THE RELATED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION.
OWNERSHIP OF VOTING SECURITIES OF THE COMPANY
The following table contains information concerning the persons known by the
Company to be the beneficial owners of more than five percent of the Common
Stock of the Company at the close of business on January 31, 2003:
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF COMMON STOCK
- -------------------------- ------------------------- ----------------------- -----------------------
Common Stock, par value $1 John R. Parten 1,077,425 74.25%
16945 Northchase Drive,
Suite 1800,
Houston, Texas
77060-2151
Common Stock, par value $1 Patrick J. Moran 73,017(2) 5.03%
2803 Sackett
Houston, Texas
77098-1125
</Table>
(1) Based on information furnished by the respective shareholders.
(2) Included are 14,800 shares of Old Common Stock of the Company held by
The Moran Employees Trust. Patrick J. Moran is co-trustee of such
Trust and has shared power to vote the shares held by the Trust,
however he disclaims any beneficial interest in such shares.
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The following table contains information as to the Old Common Stock of the
Company beneficially owned as of January 31, 2003, by all directors and
executive officers as a group.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF COMMON STOCK
-------------------------- ------------------------- ----------------------- -----------------------
Common Stock, par value $1 John R. Parten 1,077,425 74.25%
Chairman, President and
Director
16945 Northchase Drive,
Suite 1800,
Houston, TX 77060
Common Stock, par value $1 R.F. Pratka 131 .01%
Vice President, Treasurer and
Director
16945 Northchase Drive,
Suite 1800,
Houston, TX 77060
Common Stock, par value $1 William C. Bennett 142 .01%
Director
P.O. Box 666
Madisonville, Texas 77864
Common Stock, par value $1 Bruce Franke 85 -
Director
P.O. Box 557
Willis, Texas 77378
Common Stock, par value $1 Virginia Cortinas 0 -
Secretary
16945 Northchase Drive,
Suite 1800,
Houston, TX 77060
Common Stock, par value $1 All Directors and Executive 1,077,782 74.28%
Officers as a Group (five in
number)
</Table>
(1) Based on information furnished by the respective shareholders.
PERSONS MAKING THE SOLICITATION
The enclosed proxy is solicited on behalf of the Board of Directors of the
Company. The cost of soliciting proxies on the accompanying forms will be borne
by the Company. In addition to the use of mail, officers of the Company may
solicit proxies by telephone or telegraph. Upon request, the Company will
reimburse brokers, dealers, banks and trustees or their nominees, for reasonable
expenses incurred by them in forwarding proxy material to beneficial owners of
shares of Old Common Stock.
ACCOUNTANTS
Representatives of the principal accountants for the current year and for the
most recently completed fiscal year are expected to be present at the Meeting,
will have the opportunity to make a statement if they desire to do so, and are
expected to be available to respond to appropriate questions.
REVOCABILITY OF PROXY
Shares represented by valid proxies will be voted in accordance with
instructions contained therein, or, in the absence of such instructions, in
accordance with the Board of Directors' recommendations. Any shareholder of the
Company has the unconditional right to revoke a proxy at any time prior to the
voting thereof by (i) notifying the Secretary of the Company with a written
notice thereof addressed to the Company at 16945 Northchase Drive, Suite 1800,
Houston, Texas 77060; (ii) executing and delivering a subsequent proxy; or (iii)
personally appearing at the Meeting and casting a contrary vote. No revocation
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shall be effective unless and until notice of such revocation has been received
by the Company at or prior to the Meeting.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for action at
the Meeting other than the matters set forth herein. If any other matter should
be presented at the Meeting upon which a vote may properly be taken, John R.
Parten and Virginia Cortinas will vote shares represented by all proxies
received by the Board of Directors in accordance with their judgment.
ANNUAL MEETING OF THE SHAREHOLDERS
The annual meeting of the shareholders of Seven J is typically held in March of
each year. The deadline for the submission of timely shareholder proposals to
the Company is November 18, 2002. Shareholder proposals received thereafter will
not be included with the materials for the annual shareholder meeting. The Board
of Directors has determined to delay the annual meeting during the pendency of
the Reverse Stock Split transaction.
FINANCIAL INFORMATION AND INCORPORATION BY REFERENCE
A copy of the Company's Annual Report on Form 10-KSB for the year ended October
31, 2002 is incorporated herein by reference. Copies of this report accompany
this Proxy Statement and is available for review from the EDGAR filings obtained
through the SEC's Internet Website (http://www.sec.gov). UPON REQUEST TO THE
COMPANY'S OFFICES AT 16945 NORTHCHASE DRIVE, SUITE 1800, HOUSTON, TEXAS 77060,
PHONE 281-874-2101, THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER OF THE COMPANY,
WITHOUT CHARGE, A COPY OF ANY AND ALL DOCUMENTS FILED WITH THE SEC INCORPORATED
BY REFERENCE HEREIN THAT ARE NOT INCLUDED WITH THIS PROXY STATEMENT.
AVAILABLE INFORMATION
The Company is subject to the information requirement of the Exchange Act of
1934, as amended, and in accordance therewith, files reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and the regional office of the SEC at Suite 1400, Citicorp Center, 14th
Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates by writing to the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C 20549. In addition, such reports, proxy statements and other
information are available from the EDGAR filings obtained through the SEC's
Internet Website (HTTP://WWW.SEC.GOV).
THE COMPANY HAS FAILED TO ELECTRONICALLY FILE ITS ANNUAL MEETING INFORMATION
STATEMENT (SCHEDULE 14C) MATERIALS WITH THE SECURITIES AND EXCHANGE COMMISSION
BETWEEN 1996 AND 2001. THE COMPANY INCORRECTLY BELIEVED THAT IT COULD CONTINUE
TO FILE PAPER COPIES OF THE SCHEDULE 14C MATERIALS AND DID NOT REALIZE IT WAS
SUBJECT TO ELECTRONIC FILING REQUIREMENTS. THE COMPANY DID MAIL ITS SCHEDULE 14C
MATERIALS TO EACH OF THE SHAREHOLDERS IN CONJUNCTION WITH ITS ANNUAL REPORT. THE
COMPANY HAS NOT SOLICITED ANY PROXIES SINCE 1996, BUT HAS HELD SHAREHOLDER
MEETINGS WITHOUT FILING ITS MATERIALS PROPERLY WITH THE SECURITIES AND EXCHANGE
COMMISSION. UPON REQUEST TO THE COMPANY'S OFFICES AT 16945 NORTHCHASE DRIVE,
SUITE 1800, HOUSTON, TEXAS 77060, PHONE 281-874-2101, THE COMPANY WILL PROVIDE
34
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TO ANY SHAREHOLDER OF THE COMPANY, WITHOUT CHARGE, A COPY OF ANY AND ALL
SCHEDULE 14C DOCUMENTS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/John R. Parten
---------------------------------------
John R. Parten, Chairman and President
EXHIBIT 1
THESE ARE THE PROPOSED ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION
OF SEVEN J STOCK FARM, INC. THESE ARTICLES OF AMENDMENT WILL BE FILED
WITH THE SECRETARY OF STATEOF TEXAS TO BECOME EFFECTIVE ONLY
UPON RECEIPT OF THE APPROVAL OF THE SHAREHOLDERS TO THE
TRANSACTIONS PROPOSED IN THIS PROXY STATEMENT.
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
SEVEN J STOCK FARM, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following articles of
amendment to its articles of incorporation.
ARTICLE ONE
The name of the corporation is Seven J Stock Farm, Inc.
ARTICLE TWO
The following amendments to the articles of incorporation (the "Articles"),
were adopted by the shareholders of the corporation on March 14, 2003. The
shareholders of the corporation approved an amendment to conduct a 1-for-1000
Reverse Stock Split whereby the one million five hundred thousand (1,500,000)
authorized shares of common stock with $1.00 par value were reclassified and
changed into one thousand five hundred (1,500) shares of common stock with
$1,000 par value.
1. AMENDMENT ONE alters or changes Article VI of the Articles, and the full
text of the provision as altered is as follows:
The issued and outstanding one million four hundred fifty one thousand
(1,451,000) shares of common stock of the corporation, with $1.00 par value, are
hereby reclassified and changed into one thousand four hundred fifty one (1,451)
shares of common stock with $1,000 par value.
The aggregate number of shares which the Corporation shall have the
authority to issue is one thousand five hundred (1,500) of the par value of one
thousand dollars ($1,000) each. No shareholder shall have a pre-emptive right to
acquire any share or security of any kind, whether now or hereafter authorized,
which may, at any time, be issued, sold or offered for sale by the Corporation.
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ARTICLE THREE
The number of shares of the corporation outstanding at the time of adopting
these amendments was one million four hundred fifty one thousand (1,451,000);
and the number of shares entitled to vote thereon was one million four hundred
fifty one thousand (1,451,000).
ARTICLE FOUR
The number of shares that voted for the amendment is ______________ and the
number of shares that voted against the amendment is _________.
ARTICLE FIVE
The manner in which any exchange, reclassification or cancellation of
issued shares provided for in Amendment One shall be effected is as follows:
Each one thousand shares of common stock with $1.00 par value previously
issued and outstanding at the time of the adoption of these amendments shall be
exchanged for one share of common stock with $1,000 par value. Fractional shares
will be purchased at a rate of $3.89 per 1 share of the old common stock.
ARTICLE SIX
Amendment One will not effect a change in the amount of stated capital.
EXECUTED, by the undersigned, this ___ day of March, 2003.
SEVEN J STOCK FARM, INC.
By:
------------------------------------
John R. Parten, President
PROXY
SEVEN J STOCK FARM, INC.
ANNUAL MEETING OF SHAREHOLDERS
March 14, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints John R. Parten and Virginia
Cortinas, or either of them, as the true and lawful attorneys and proxies of the
undersigned with full power of substitution to represent the undersigned and to
vote, as designated, all of the shares of Common Stock of Seven J Stock Farm,
Inc. ("the Company") that the undersigned is entitled to vote at the Special
Meeting of Shareholders of the Company to be held on March 14, 2003 and at any
adjournments thereof.
PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE /X/
APPROVAL OF A PROPOSED REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK THAT
WOULD RESULT IN:
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a. THE SHAREHOLDERS RECEIVING ONE SHARE OF COMMON STOCK FOR
EVERY ONE THOUSAND SHARES OF OUR COMMON STOCK THAT THEY
CURRENTLY OWN, AND
b. AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO
REDUCE THE COMPANY'S AUTHORIZED COMMON STOCK FROM 1,500,000
TO 1,500 AUTHORIZED SHARES, WHICH IS IN PROPORTION TO THE
REVERSE STOCK SPLIT. THE REVERSE STOCK SPLIT AND RELATED
CASH PURCHASE BY THE COMPANY OF FRACTIONAL SHARES FOR $3.89
PER SHARE OF OLD COMMON STOCK RESULTING FROM THE REVERSE
STOCK SPLIT IS PROPOSED TO TAKE THE COMPANY PRIVATE AND TAKE
IT OUT OF THE REPORTING SYSTEM OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED.
FOR / /
AGAINST / /
WITHHOLD AUTHORITY / /
TO BE SIGNED ON THE REVERSE SIDE
Proxy card side one
THIS PROXY WILL BE VOTED AS SPECIFIED, IF NO SPECIFIC DIRECTIONS ARE GIVEN, THIS
PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS SET FORTH HEREON.
PLEASE SIGN EXACTLY AS THE NAME APPEARS ON THE CERTIFICATE OR CERTIFICATES
REPRESENTING SHARES TO BE VOTED BY THIS PROXY. WHEN SIGNING AS EXECUTOR,
ADMINISTRATOR, ATTORNEY, TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED PERSON. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
DATED:____________________
--------------------------
SIGNATURE OF SHAREHOLDER
--------------------------
SIGNATURE IF JOINTLY OWNED
Proxy card side two