Registration of Securities Issued in a Business-Combination Transaction — Form S-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-4 Texas Standard Oil Company 101 474K
2: EX-2.1 Purchase and Sale Agreement 23 80K
3: EX-3.1 Articles of Incorporation 4 12K
4: EX-3.2 Articles of Amendment of Articles of Incorporation 7 20K
5: EX-3.3 Amended and Restated Bylaws 12 42K
6: EX-5.1 Opinion of Haynes and Boone, LLP 3 13K
7: EX-10.1 Promissory Note to Roberson Oil Company 2 11K
8: EX-10.3 2002 Equity Incentive Plan 17 85K
9: EX-23.2 Consent of Hein & Associates LLP 1 7K
10: EX-23.3 Consent of Ryder Scott Company, L.P. 1 7K
11: EX-99.1 Form of Letter to Record Holders 2± 8K
12: EX-99.2 Form of Letter to Clients 2 11K
13: EX-99.3 Form of Letter of Transmittal 8 41K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2002
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TEXAS STANDARD OIL COMPANY
(Exact name of registrant as specified in its charter)
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TEXAS 1311 76-0675803
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
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6371 RICHMOND AVENUE, SUITE 100 CHIP LANGSTON
HOUSTON, TEXAS 77057 6371 Richmond Avenue, Suite 100
(713) 655-1195 Houston, Texas 77057
(Address, including zip code, and telephone number, (713) 655-1195
including (Name, address, including zip code, and telephone number,
area code, of Registrant's principal executive offices) including area code, of agent for service)
COPIES TO:
GEORGE G. YOUNG III
HAYNES AND BOONE, LLP
1000 LOUISIANA STREET, SUITE 4300
HOUSTON, TEXAS 77002
(713) 547-2000
(713) 547-2600 (FACSIMILE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [X] ________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [X]________
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
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Common Stock, par value $0.01 per share(1)... 706,765 $1.20 $848,118 $212
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Common Stock, par value $0.01 per share(2)... 42,003 $1.97 $ 82,746 $ 21
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Warrants(3).................................. 42,003 -- -- --
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Total...................................... $ $233
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(1) Represents the maximum number of shares of Texas Standard common stock, par
value $0.01 per share, estimated to be issuable upon the consummation of the
exchange offer for units of the Freeport-McMoRan Oil and Gas Realty Trust
tendered by record holders of 2,000 or more units. The proposed maximum
offering price per share was calculated pursuant to Rule 457(f) of the
Securities Act of 1933, as amended, and solely for the purpose of
calculating the registration fee, based on the average of the high and low
sales price of $.06 on January 7, 2002 of a unit of the Freeport-McMoRan Oil
and Gas Royalty Trust multiplied by 20 units.
(2) Represents the maximum number of shares of Texas Standard common stock, par
value $0.01 per share, estimated to be issuable upon the exercise of
warrants issuable upon the consummation of the exchange offer for units of
the Freeport-McMoRan Oil and Gas Realty Trust tendered by record holders of
less than 2,000 units. The proposed maximum offering price per share was
calculated pursuant to Rule 457(f) of the Securities Act of 1933, as
amended, and solely for the purpose of calculating the registration fee,
based on the average of the high and low sales price of $.06 on January 7,
2002 of a unit of the Freeport-McMoRan Oil and Gas Royalty Trust multiplied
by 20 units plus the maximum unadjusted exercise price of each warrant of
$.77 per share.
(3) Pursuant to Rule 457(g) of the Securities Act of 1933, as amended, no
separate filing fee is required because the securities to be offered pursuant to
such warrants are being registered in this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 10, 2002
TEXAS STANDARD OIL COMPANY
OFFER TO EXCHANGE
COMMON STOCK OF TEXAS STANDARD OIL COMPANY
FOR
UNITS OF THE FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
Expiration Date. The exchange offer expires at 5:00 p.m., New York City
time, on , 2002, unless extended. Units tendered pursuant to the offer
may be withdrawn at any time prior to the expiration of the offer.
Record Holders of 2,000 or More Units. We will issue one share of our
common stock in exchange for every 20 units of the Freeport-McMoRan Oil and Gas
Royalty Trust that are tendered to us by holders of record holding at least
2,000 units of the Trust.
Record Holders of Fewer Than 2,000 Units. We will issue a warrant to
purchase one share of our common stock in exchange for every 20 units of the
Freeport-McMoRan Oil and Gas Royalty Trust that are tendered to us by holders of
record holding fewer than 2,000 units. The warrants have an exercise price of
$.77 per share, are nontransferable and will be exercisable for a period of 30
days after the consummation of the exchange offer.
Conditions. Our obligation to complete the exchange offer is conditioned
on at least 50% of the total outstanding units being tendered for exchange and
not withdrawn.
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YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is , 2002
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS....................................... iv
SUMMARY..................................................... 1
Information about Texas Standard and the Trust............ 1
The Exchange Offer........................................ 2
Background and Reasons for the Exchange Offer............. 3
Our Plans for the Future.................................. 3
Risk Factors.............................................. 3
Method of Determining Exchange Values..................... 4
Appraisal Rights; Investor Lists.......................... 4
Shareholder Approval and Regulatory Requirements.......... 4
Accounting Treatment...................................... 4
Tax Consequences.......................................... 4
Recommendation of the Trustee............................. 4
Alternatives to the Exchange Offer........................ 5
Comparative Rights of Security Holders.................... 5
Unaudited Pro Forma Financial Data........................ 5
Market Price Information.................................. 5
Comparative Per Share Data................................ 5
FORWARD-LOOKING STATEMENTS.................................. 6
RISK FACTORS................................................ 7
Risks Related to the Transaction.......................... 7
Risk Factors Relating to Our Business..................... 7
Risk Factors Related To Our Common Stock.................. 13
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER............... 15
Background of the Trust................................... 15
Background of the Exchange Offer.......................... 15
Reasons for the Exchange Offer............................ 19
Other Transactions and Relationships...................... 20
Alternatives to the Exchange Offer........................ 20
THE EXCHANGE OFFER.......................................... 20
Terms of the Exchange Offer............................... 20
Issuance of Shares and Warrants; Fractional Shares........ 21
Expiration Date; Extensions; Amendments................... 21
Procedures for Tendering.................................. 21
Withdrawal Of Tenders..................................... 23
Conditions................................................ 24
Exchange Agent............................................ 25
Solicitation of Tenders; Fees and Expenses................ 25
Accounting Treatment...................................... 26
No Consents or Authorizations............................. 26
Regulatory Requirements................................... 26
No Independent Representative or Fairness Opinion......... 26
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................... 27
General................................................... 27
Assumptions............................................... 27
No Tax Rulings............................................ 27
Royalty Partnership....................................... 27
Royalty Trust............................................. 28
Record Holders of 2,000 or More Units..................... 28
Record Holders of Fewer Than 2,000 Units.................. 28
RIGHTS OF DISSENTING SHAREHOLDERS........................... 29
Access to Investor List................................... 29
METHOD OF DETERMINING EXCHANGE VALUES....................... 29
RECOMMENDATION OF THE TRUSTEE............................... 29
PLAN OF OPERATION........................................... 30
Results of Operations..................................... 30
Liquidity and Capital Resources........................... 30
BUSINESS AND PROPERTIES..................................... 31
Properties................................................ 32
Oil and Gas Reserves...................................... 33
Productive Wells.......................................... 34
Leasehold Acreage......................................... 34
Major Customers........................................... 34
Title to Properties....................................... 34
Competition............................................... 34
Markets................................................... 35
Corporate Offices......................................... 35
Employees................................................. 35
Legal Proceedings......................................... 36
Environmental Regulations................................. 36
MANAGEMENT.................................................. 39
Officers and Directors.................................... 39
EXECUTIVE COMPENSATION...................................... 40
Summary Compensation Table................................ 40
Employment Agreements, Termination of Employment and
Change-in-Control Arrangements......................... 40
Stock-Based Plans......................................... 40
Option/ SAR Grants In Last Fiscal Year.................... 40
Aggregate Option/ SAR Exercise in Last Fiscal Year and
Fiscal Year-End Option/SAR Values...................... 40
Long Term Incentive Plan Awards........................... 40
BENEFICIAL OWNERSHIP OF OUR COMMON STOCK.................... 41
CERTAIN TRANSACTIONS........................................ 41
Working Capital Loans..................................... 41
Services Agreements and Purchase of Assets................ 42
Goliad County Well........................................ 42
COMPARISON OF SECURITY HOLDER RIGHTS AND CERTAIN CHANGES IN
THE RIGHTS OF UNITHOLDERS................................. 43
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DESCRIPTION OF CAPITAL STOCK................................ 53
Preferred Stock........................................... 53
Common Stock.............................................. 53
Texas Anti-Takeover Law and Articles of Incorporation
Bylaw Provisions....................................... 54
Limitation of Liability; Indemnification.................. 54
Transfer Agent and Registrar.............................. 55
MARKET FOR THE TRUST'S UNITS................................ 55
MARKET FOR OUR COMMON STOCK................................. 55
LEGAL MATTERS............................................... 56
INDEPENDENT AUDITORS........................................ 56
RESERVE ENGINEERS........................................... 56
WHERE YOU CAN FIND MORE INFORMATION ABOUT TEXAS STANDARD.... 56
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE TRUST......... 56
GLOSSARY OF OIL AND GAS TERMS............................... 58
INDEX TO FINANCIAL STATEMENTS............................... F-1
iii
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this document. You may
request a copy of this information, at no cost, by writing or telephoning us at
the following address:
Texas Standard Oil Company
6371 Richmond Avenue, Suite 100
Houston, Texas 77057
Attn: Chip Langston
Phone: (713) 655-1195
THE EXCHANGE OFFER IS EXPECTED TO EXPIRE ON , 2002. YOU MUST MAKE
YOUR EXCHANGE DECISION BY THIS EXPIRATION DATE. TO OBTAIN TIMELY DELIVERY OF THE
REQUESTED INFORMATION, YOU MUST REQUEST THIS INFORMATION BY , 2002, OR
THE DATE THAT IS NO LATER THAN FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE.
THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES COMMISSIONER OF
THE STATE OF LOUISIANA. THE SECURITIES COMMISSIONER, BY ACCEPTING REGISTRATION,
DOES NOT IN ANY WAY ENDORSE OR RECOMMEND THE PURCHASE OF ANY OF THESE
SECURITIES.
You should rely only on the information contained in this prospectus or,
with respect to the Trust, incorporated by reference into this prospectus. We
have not authorized anyone else to provide you with different information. We
are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
QUESTIONS AND ANSWERS
Q: WHAT IS BEING PROPOSED?
A: We are offering to exchange one share of our common stock for every 20 units
of the Freeport-McMoRan Oil and Gas Royalty Trust tendered by record holders
who own at least 2,000 units. We are also offering to exchange a warrant to
purchase one share of our common stock for every 20 units of the Trust that
are tendered to us by holders of record holding fewer than 2,000 units. The
warrants have an exercise price of $.77 per share, are nontransferable and
will be exercisable for a period of 30 days after the consummation of the
exchange offer.
Q: WHY IS TEXAS STANDARD OIL COMPANY MAKING THE EXCHANGE OFFER?
A: On October 11, 2001, we acquired the sole asset of the Trust other than cash,
a royalty that burdens oil and gas properties located in federal waters
offshore Texas and Louisiana. In connection with our purchase of the royalty,
we agreed to use commercially reasonable efforts to make this exchange offer.
The terms of this exchange offer were described in a letter from us to the
Trustee of the Trust that is included in this prospectus. The Trustee
included a copy of this letter in the proxy statement circulated by the Trust
relating to the dissolution of the Trust.
Q: WHO IS ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER?
A: All unitholders are entitled to participate in the exchange offer. Holders of
record of 2,000 or more units are eligible to tender their units in exchange
for shares of our common stock. Holders of record who own less than 2,000
units will receive a nontransferable warrant to purchase our common stock if
they tender their units.
Q: WHAT ARE THE CONDITIONS TO CONSUMMATION OF THE EXCHANGE OFFER?
A: Units representing at least 50% of the total outstanding units must be
tendered and not withdrawn in order for us to consummate the exchange offer.
Q: WHAT IS THE EXPIRATION DATE OF THE EXCHANGE OFFER?
A: The expiration date is , 2002, unless extended.
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Q: WHEN DO YOU EXPECT THE EXCHANGE OFFER TO BE COMPLETED?
A: We expect to consummate the exchange offer one day after the expiration date
of the exchange offer. We will not complete the exchange offer if the
requisite number of units are not tendered. Although we have the right to
extend the exchange offer, we do not intend to extend the exchange offer
unless we determine that an extension is necessary to comply with legal
requirements.
Q: WHAT IF I DO NOT WANT TO PARTICIPATE IN THE EXCHANGE OFFER?
A: If you do not tender your units in the exchange offer, you will continue to
own your beneficial interest in the Trust. On October 5, 2001, the
unitholders of the Trust voted to sell the Trust's royalty interest, its sole
asset other than cash, to us. As part of this sale, we agreed to use our
commercially reasonable efforts to effect this exchange offer. The Trust
Agreement provides that the Trustee is required to terminate the Trust upon
the sale of the Trust's sole asset. On December 26, 2001, the Trustee of the
Trust stated that the Trust would make no further distributions to holders of
units. We believe the Trust will cease to exist promptly following the
closing of this exchange offer.
Q: WHAT ARE THE FEDERAL TAX CONSEQUENCES OF THE EXCHANGE OFFER?
A: We believe that, for federal income tax purposes, the royalty was transferred
to us in a nontaxable transaction described in Section 351 of the Internal
Revenue Code. This position is based on our belief that, for federal income
tax purposes, the stock and warrants we are issuing pursuant to the exchange
offer are, in substance, part of the consideration for the royalty we
purchased from the partnership, which is the entity that held the royalty for
the Trust, on October 5, 2001, and should be treated for such purposes as if
they were issued to the partnership and ultimately distributed to the
unitholders. As a result, the partnership, and ultimately the unitholders,
cannot recognize any loss upon the transfer of the royalty to us, and will
not be required to recognize any gain upon the transfer of the royalty to us,
except to the extent of the sum of $1,000, which is the cash amount paid by
us in exchange for the royalty, plus the fair market value of the warrants we
are issuing pursuant to the exchange offer. The unitholders must treat a
portion of such gain, if any, as ordinary income to recapture prior
depletion. If the Internal Revenue Service or the courts disagree with this
treatment, the exchange offer and related transactions may be fully taxable
to the unitholders. You should consult your tax advisor concerning the
Federal and other tax consequences of the proposed exchange offer.
Q: HOW DO I PARTICIPATE IN THE EXCHANGE OFFER?
A: In order to participate in the exchange offer, you must deliver to the
exchange agent on or before the expiration date:
- a completed and signed letter of transmittal, along with certificates for
the units you are tendering and any other required documentation; or
- a computer-generated message, known as an agent's message, transmitted by
means of DTC's Automated Tender Offer Program (ATOP) system that, when
received by the exchange agent will form a part of a confirmation of
book-entry transfer in which you acknowledge and agree to be bound by the
terms of the letter of transmittal and a timely confirmation of book-entry
transfer of your units into the exchange agent's account at DTC.
If you own your units in the name of a broker, dealer or other nominee, then
your broker, dealer or other nominee is the record holder of the units you
own. The record holder must participate in the exchange offer on your behalf
for the units you wish to tender. If you wish to participate in the exchange
offer, please contact the record holder as soon as possible and instruct them
to tender on your behalf and comply with the instructions in this prospectus.
If you beneficially own fewer than 2,000 units, but your nominee is a record
holder of at least 2,000 units, you are eligible to exchange your units for
our common stock in the exchange offer.
Q: WHEN AND HOW CAN I WITHDRAW TENDERED UNITS?
A: You may withdraw units you tendered by furnishing a notice of withdrawal to
the exchange agent at any time before 5:00 p.m., New York City time, on the
expiration date, and, unless we have previously
v
accepted your units, they may be withdrawn at any time after ,
2002. The written notice of withdrawal must contain your name and address,
the number of units to be withdrawn, the certificate number of the units to
be withdrawn, and the name of the registered holder who tendered the units.
Q: WHAT DOES THE TRUSTEE RECOMMEND?
A: The Trustee has not made any recommendation regarding participation in the
exchange offer.
Q: WHO CAN HELP ANSWER ADDITIONAL QUESTIONS THAT I MAY HAVE?
A: Securities Transfer Corporation is serving as exchange agent for the exchange
offer. The address for the exchange agent is 2591 Dallas Parkway, Suite 102,
Frisco, Texas, 75034. If you would like more information about the exchange
offer, you should call the exchange agent at 1-888-328-6381. The facsimile
for the exchange agent is (469) 633-0088.
vi
SUMMARY
The following summary highlights information from this prospectus but does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of this exchange offer and
for a more complete understanding of our business, you should carefully read
this entire prospectus and the documents to which we have referred you,
particularly the section entitled "Risk Factors." When we use the terms "Texas
Standard," "we," "us" or "our," we are referring to Texas Standard Oil Company,
unless the context otherwise requires. If you are not familiar with the terms
used to describe the quantities, present value and other information about oil
and gas reserves, please see "Glossary of Oil and Gas Terms."
INFORMATION ABOUT TEXAS STANDARD AND THE TRUST
TEXAS STANDARD OIL COMPANY
6371 RICHMOND AVENUE, SUITE 100
HOUSTON, TEXAS 77057
PHONE: (713) 655-1195
Texas Standard Oil Company was incorporated in Texas in March 2001. We were
formed to acquire from the Trust the net overriding royalty interests on two
properties located in federal waters offshore Louisiana and to acquire the
working interests burdened by the royalty interests from IMC Global, Inc. We
acquired the royalty interests and related working interests in October 2001. As
of September 30, 2001, there were eight productive oil wells and five productive
gas wells on these properties. In addition, in October, 2001, we acquired a 21%
working interest in a gas well onshore Texas. These are the only oil and gas
properties we own. As of September 30, 2001, our estimated net proved reserves,
on a pro forma basis, were 938,134 barrels of oil equivalent, or BOE, all of
which were proved developed.
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
C/O CHASE MANHATTAN BANK, AS TRUSTEE
700 LAVACA, 5TH FLOOR
AUSTIN, TEXAS 77002
PHONE: (512) 479-2562
The Freeport-McMoRan Oil and Gas Royalty Trust was formed in September
1983. The Trust owned, through a general partnership, a net overriding royalty
interest that burdened working interests in three offshore oil and gas
properties. The Trust is a passive entity. Chase Manhattan Bank is the Trustee
and has only such powers as are necessary for the collection and distribution of
revenues attributable to the royalty, the payment of Trust liabilities and the
protection of Trust assets. The Trustee cannot allow the Trust to engage in any
business or investment activity and cannot acquire any assets other than its
interest in the partnership and cash being held for payment of liabilities or
distribution to unitholders.
The Trusts sole activity was to receive royalty payments attributable to
the sale of production from the working interests burdened by the net overriding
royalty interest held by the Trust, and distribute these royalty payments to
owners of units of beneficial interest in the Trust. The royalty owned by the
Trust entitled the Trust to receive 90% of the "net proceeds" attributable to
sale of oil and gas from the burdened working interests. Net proceeds means the
gross proceeds received for sale of oil and gas less "production costs."
Production costs include all cost attributable to the working interest,
including capital costs to develop the properties. If production costs exceed
gross proceeds, the working interest owner is required to pay the excess cost.
The royalty provides that the working interest owner may recover these excess
costs, with interest, from the future proceeds of the sale of oil and gas.
Because of substantial development expenditures during the early 1990s,
production costs substantially exceeded gross proceeds from the sale of oil and
gas.
Because of the substantial production costs incurred, the Trust did not
receive any royalty payments or make any distributions to holders of units since
1995. The Trust Agreement originally stated that the Trustee
1
must sell the Trust's interest in the partnership or cause the partnership to
sell the royalty and liquidate the Trust if the amount of cash per year received
by the Trust for each of three successive years was less than $3 million. This
condition was satisfied at the end of 1998. However, at a special meeting of the
unitholders held on March 12, 1999, the unitholders approved a unitholder
proposal to amend the Trust Agreement to extend the life of the Trust for at
least another two years. The Trust did not receive any royalty payments in 1999
or 2000. Therefore, the Trust Agreement required the Trustee to sell the Trust's
interest in the partnership or to cause the partnership to sell the royalty. On
October 5, 2001, the unitholders of the Trust approved the sale of the royalty,
the sole asset of the Trust, to us for $1,000. On October 11, 2001, we purchased
the royalty from the Trust. As part of our agreement to purchase the royalty, we
agreed to make this exchange offer.
THE EXCHANGE OFFER (SEE PAGES 20-26)
We are offering to exchange one share of our common stock for every 20
units of the Trust tendered by record holders who own at least 2,000 units. We
are also offering to exchange a warrant to purchase one share of our common
stock for every 20 units of the Trust tendered to us by holders of record
holding fewer than 2,000 units. The warrants have an excessive price of $.77 per
share, are nontransferable and will be exercisable for a period of 30 days after
the consummation of the exchange offer. The exchange offer expires at 5:00 p.m.,
New York City time, on , 2002, unless we extend the exchange offer. We
do not intend to extend the exchange offer, but may do so if we determine that
it is necessary to comply with legal requirements.
Assuming all unitholders who hold of record 2,000 or more units participate
in the exchange offer, we will issue 706,765 shares of our common stock,
representing 36% of our outstanding shares immediately following consummation of
the exchange offer. In addition, if all of the unitholders who hold of record
fewer than 2,000 units participate in the exchange offer and elect to exercise
their warrants and purchase our common stock, we will issue an additional 42,003
shares, or 2%, of our common stock assuming all units are tendered.
At least 50% of the total outstanding units must be properly tendered and
not withdrawn in order for us to consummate the exchange offer. If the
conditions to the exchange offer are satisfied, we will accept for exchange any
and all units that are properly tendered before the expiration date. If we close
the exchange offer, certificates representing shares of our common stock and
warrants to purchase our common stock will be delivered promptly following the
expiration date. If we do not close the exchange offer, we will promptly return
any units tendered.
In order to participate in the exchange offer, you must deliver to the
exchange agent on or before the expiration date:
- a completed and signed letter of transmittal, along with certificates for
the units you are tendering and any other required documentation; or
- a computer-generated message, known as an agent's message, transmitted by
means of DTC's Automated Tender Offer Program (ATOP) system that, when
received by the exchange agent will form a part of a confirmation of
book-entry transfer in which you acknowledge and agree to be bound by the
terms of the letter of transmittal and a timely confirmation of
book-entry transfer of your units into the exchange agent's account at
DTC.
If you are a beneficial holder that holds your units in the name of a
broker, dealer or other nominee, then your broker, dealer or other nominee is
the record holder of the units you own. The record holder must participate in
the exchange offer on your behalf for the units you wish to tender. If you wish
to participate in the exchange offer, please contact the record holder as soon
as possible and instruct them to tender on your behalf and comply with the
instructions in this prospectus. If you beneficially own fewer than 2,000 units,
but your nominee is a record holder of at least 2,000 units, you are eligible to
exchange your units for our common stock in the exchange offer. You may withdraw
units you tendered by furnishing a notice of withdrawal to the exchange agent at
any time before 5:00 p.m., New York City time, on the expiration date.
2
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER (SEE PAGES 15-20)
We acquired the working interests held by IMC Global on October 12, 2001
and the royalty burdening such working interests held by the Trust on October
11, 2001. When we offered to purchase the royalty interest from the Trust, we
agreed to use commercially reasonable efforts to effect an exchange offer as
soon as practicable. We are making the exchange offer described in this
prospectus to comply with our agreement with the Trustee.
OUR PLANS FOR THE FUTURE (SEE PAGES 30-31)
Our current plans are to operate as an independent oil and gas company. We
will use our cash flows and, if available, borrowings, to seek to acquire
working interests in oil and gas properties to increase our reserves and cash
flows.
RISK FACTORS (SEE PAGES 7-14)
There are numerous risks associated with the exchange offer which are
summarized below. For a more complete description of these risk factors, please
see "Risk Factors".
RISKS RELATED TO THE EXCHANGE OFFER
- We may not be required to file reports with the SEC in the future.
- The exercise price of the warrants may exceed the value of our common
stock.
- If the Internal Revenue Service or the courts disagree with our treatment
of the exchange offer and related transactions, the exchange offer and
related transactions may be fully taxable to unitholders.
RISKS RELATED TO OUR BUSINESS
- We have limited operating history, and we may not remain or ever become
successful.
- Oil and natural gas prices fluctuate widely, and a decrease in oil and
gas prices may adversely affect our results of operations and financial
condition.
- A significant part of the value of our production and reserves is
concentrated in a single offshore property, and any production problems,
adverse weather conditions or inaccuracies in reserve estimates related
to those properties would adversely impact our business.
- Unless we are able to replace reserves that we have produced, our cash
flows and production will decrease over time.
- If we are unable to raise capital, we may not be able to replace our
reserves or acquire new properties.
- Because we do not control operations on any of our properties, we have
limited influence over their development.
- Our reserve information represents estimates that may turn out to be
incorrect if the assumptions upon which these estimates are based are
inaccurate. Any material inaccuracies in these reserve estimates or
underlying assumptions will materially affect the quantities and present
value of our reserves.
RISKS RELATED TO OUR COMMON STOCK
- We do not expect an active market to develop for our common stock.
- No assurances can be made regarding the value of our common stock.
3
- We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
- Timothy M. Roberson and Joseph F. Langston, Jr. will control us and we
will not be able to take any actions without their approval.
METHOD OF DETERMINING EXCHANGE VALUES (SEE PAGE 29)
Based on our evaluation of the value of the cost savings associated with
our acquisition of the royalty, we were willing to offer unitholders up to 36%
of our common stock in order to induce unitholders to approve the sale of the
royalty to us. We did not feel the costs associated with exchanging our common
stock with record holders of less than 2,000 units was justified. We are
offering warrants in exchange for the units owned by such holders in order to
provide them an opportunity to acquire our common stock if they wish to do so.
APPRAISAL RIGHTS; INVESTOR LISTS (SEE PAGE 29)
Under Texas law, unitholders are not entitled to any appraisal or
dissenters' rights.
A unitholder may inspect the list of unitholders in the Trust during
reasonable business hours at the offices of the Trustee located at 700 Lavaca,
5th Floor, Austin, Texas 77002.
SHAREHOLDER APPROVAL AND REGULATORY REQUIREMENTS (SEE PAGE 26)
The proposed exchange offer does not require the approval of our
shareholders or the Trust's unitholders. Other than compliance with federal and
state securities laws, we are not required to comply with any other federal or
state regulatory requirements and no other federal or state regulatory approvals
are required in connection with the consummation of the exchange offer.
ACCOUNTING TREATMENT (SEE PAGE 26)
The exchange offer will be accounted for as an acquisition of oil and gas
interests in exchange for an issuance of equity, using the purchase method of
accounting.
TAX CONSEQUENCES (SEE PAGES 27-29)
We believe that, for federal income tax purposes, the royalty was
transferred to us in a nontaxable transaction described in Section 351 of the
Internal Revenue Code. This position is based on our belief that, for federal
income tax purposes, the stock and warrants we are issuing pursuant to the
exchange offer are, in substance, part of the consideration for the royalty we
purchased from the partnership, which is the entity that held the royalty for
the Trust, on October 5, 2001, and should be treated for such purposes as if
they were issued to the partnership and ultimately distributed to the
unitholders. As a result, the partnership, and ultimately the unitholders,
cannot recognize any loss upon the transfer of the royalty to us, and will not
be required to recognize any gain upon the transfer of the royalty to us, except
to the extent of the sum of $1,000, which is the cash amount paid by us in
exchange for the royalty, plus the fair market value of the warrants we are
issuing pursuant to the exchange offer. The unitholders must treat a portion of
such gain, if any, as ordinary income to recapture prior depletion. If the
Internal Revenue Service or the courts disagree with this treatment, the
exchange offer and related transactions may be fully taxable to the unitholders.
You should consult your own tax advisor regarding the specific consequences of
any federal, state, local or other tax applicable to you and any tax return
filing or other reporting requirements that you may have.
RECOMMENDATION OF THE TRUSTEE (SEE PAGE 29)
The Trust is a passive entity and does not engage in an active business.
The Trust Agreement does not require the Trustee to accept or reject the
exchange offer or take any actions with respect to the offer. The Trustee,
therefore, has not expressed an opinion regarding the exchange offer or made a
recommendation regarding the acceptance of the offer.
4
ALTERNATIVES TO THE EXCHANGE OFFER (SEE PAGE 20)
We are not aware of any alternative to the exchange offer, other than to
continue to own units of the Trust. We expect the Trust to terminate promptly
after the exchange offer and do not expect the Trust to make any further
distributions to unitholders.
COMPARATIVE RIGHTS OF SECURITY HOLDERS (SEE PAGES 43-52)
For a comparison of the rights of our shareholders under Texas law and our
articles of incorporation and bylaws with rights of the unitholders of the Trust
under Texas law and the Trust Agreement, please see "Comparison of Security
Holder Rights and Certain Changes in the Rights of Unitholders."
UNAUDITED PRO FORMA FINANCIAL DATA (SEE PAGES F-13 - F-17)
Unaudited pro forma financial information based on our historical financial
statements, adjusted to give effect to our acquisition of the working interests
from IMC Global, is included at pages F-13 through F-17. The pro forma financial
data is not necessarily indicative of results that actually would have occurred
if we had owned the working interests on the dates indicated or which may be
obtained in the future. The exchange offer will not affect our financial
statements.
MARKET PRICE INFORMATION (SEE PAGE 55)
Our common stock is privately held, and is not listed on any securities
exchange, the NASDAQ stock market or otherwise publicly traded. We do not expect
a market for our shares to develop. On April 2, 2001, the last trading day prior
to the public announcement of the terms of our proposed exchange offer, units in
the Trust were trading at $.08 per unit. Units of the Trust were trading at $.06
per unit on January 7, 2002.
COMPARATIVE PER SHARE DATA
The following table sets forth pro forma per share data for us giving
effect to our acquisition of the working interests from IMC Global, historical
per unit data for the Trust, and unaudited pro forma per share data for us after
giving effect to the closing of the exchange offer.
[Download Table]
NINE MONTHS ENDED
SEPTEMBER 30, 2001
------------------
Pro Forma -- Texas Standard Earnings (Loss) Per
Share:
Basic.......................................... $ 22.05
Diluted........................................ $ 22.05
Book Value Per Share -- Diluted................... $(14.66)
[Enlarge/Download Table]
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
------------------ ------------------
Historical -- Freeport-McMoRan Oil and Gas Royalty
Trust Earnings (Loss) Per Unit:
Basic.......................................... $ (.02) $ (.03)
Diluted........................................ $ (.02) $ (.03)
Book Value Per Unit -- Diluted.................... $ .04 $ .01
[Download Table]
NINE MONTHS ENDED
SEPTEMBER 30, 2001
------------------
Pro Forma Combined -- Texas Standard Earnings (Loss)
Per Share:
Basic.......................................... $ 1.89
Diluted........................................ $ 1.86
Book Value Per Share -- Diluted................... $ .94
We have not paid any dividends since our incorporation in March 2001 and
the Trust has not made a distribution to unitholders since 1995.
5
FORWARD-LOOKING STATEMENTS
In this prospectus, we make many forward-looking statements. We cannot
assure you that the plans, intentions or expectations upon which our
forward-looking statements are based will occur. Our forward-looking statements
are subject to risks, uncertainties and assumptions, including those discussed
elsewhere in this prospectus. Some of the risks which could affect our future
results and could cause results to differ materially from those expressed in our
forward-looking statements include:
- the uncertainty of our ability to attract capital;
- the volatility of oil and natural gas prices;
- the uncertainty of estimates of oil and natural gas reserves;
- the impact of competition;
- difficulties encountered during the exploration for and production of oil
and natural gas;
- the difficulties encountered in delivering oil and natural gas to
commercial markets;
- changes in customer demand;
- changes in the extensive government regulations regarding the oil and
natural gas business; and
- compliance with environmental regulations.
The information contained in this prospectus, including the information set
forth under the heading "Risk Factors," identifies additional factors that could
affect our operating results and performance. We urge you to carefully consider
those factors.
Our forward-looking statements are expressly qualified in their entirety by
this cautionary statement.
6
RISK FACTORS
Investing in our common stock will provide you with an equity ownership in
our company. As one of our shareholders, you will be subject to risks inherent
in our business. The value of your shares will be affected by the performance of
our business relative to, among other things, competition, market conditions and
general economic and industry conditions. The value of your investment may
decrease, resulting in a loss. You should carefully consider the following
factors as well as other information contained in this prospectus before
deciding to participate in the exchange offer.
RISKS RELATED TO THE TRANSACTION
WE MAY NOT BE REQUIRED TO FILE REPORTS WITH THE SEC IN THE FUTURE.
We will be required to file annual, quarterly and current reports with the
SEC following the consummation of the exchange offer. However, our obligation to
file reports with the SEC will cease if, one year following the consummation of
our exchange offer, we have fewer than 300 shareholders.
THE EXERCISE PRICE OF THE WARRANTS MAY EXCEED THE VALUE OF OUR COMMON STOCK.
The exercise price of the warrants was based on 80% of the pro forma book
value of our common stock of $.96 on September 30, 2001, calculated immediately
prior to the exercise of any warrants and assuming that all unitholders who hold
2,000 or more units of record tender their units. The book value of our common
stock may experience an immediate dilution following the exchange offer.
Assuming all eligible unitholders participate in the exchange offer and
unitholders who receive warrants exercise warrants to purchase 32,153 shares of
our common stock, the book value of our common stock following the exchange
offer will be $.94. We can not make any assurances that the book value of our
common stock reflects the actual value of our common stock. The actual value of
our common stock may be significantly less than the exercise price of our
warrants or the book value of our common stock.
IF THE INTERNAL REVENUE SERVICE OR THE COURTS DISAGREE WITH OUR TREATMENT OF
THE EXCHANGE OFFER AND RELATED TRANSACTIONS, THE EXCHANGE OFFER AND RELATED
TRANSACTIONS MAY BE FULLY TAXABLE TO UNITHOLDERS.
We have taken the position that, for federal income tax purposes, the stock
and warrants we are issuing pursuant to the exchange offer are, in substance,
part of the consideration for the royalty we purchased from the partnership,
which is the entity that held the royalty for the Trust, on October 5, 2001, and
should be treated for such purposes as if they were issued to the partnership
and ultimately distributed to the unitholders. We believe that, for federal
income tax purposes, the royalty was transferred to us in a nontaxable
transaction described in Section 351 of the Internal Revenue Code. As a result,
the partnership, and ultimately the unitholders, cannot recognize any loss upon
the transfer of the royalty to us, and will not be required to recognize any
gain upon the transfer of the royalty to us, except to the extent of the sum of
$1,000, which is the cash amount paid by us in exchange for the royalty, plus
the fair market value of the warrants we are issuing pursuant to the exchange
offer. The unitholders must treat a portion of such gain, if any, as ordinary
income to recapture prior depletion. If the Internal Revenue Service or the
courts disagree with this treatment, the exchange offer and related transactions
may be fully taxable to the unitholders.
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, AND WE MAY NOT REMAIN OR EVER BECOME
SUCCESSFUL.
We are a newly formed entity created in March 2001 for the purpose of
acquiring and combining the working interests owned by IMC Global and the
royalty interests burdening the properties operated by the working interests.
Consequently, we have no operating history on which you can base your investment
decision regarding whether to accept shares of our common stock in the exchange
offer or to exercise warrants to purchase our common stock. Further, our
management team has not worked together for an extended period of time. In
addition, period-to-period comparisons of our operating results to date may not
be meaningful. You should not rely on our results of operations for any prior
period as an indication of our future performance or prospects.
7
As a newly-formed company in the highly competitive oil and gas industry,
we are subject to risks and uncertainties inherent in companies at such an early
stage of development, including:
- the risks associated with operating in markets that are subject to a high
degree of competition;
- the risk that we will have inadequate management resources to capitalize
on market opportunities and execute our strategy;
- the risk that we will be unable to execute successfully each portion of
our business strategy on schedule;
- the risk that we may not identify prospects with sufficient reserves to
justify our investment in those prospects; and
- the risk that adequate capital may not be available to fund our continued
development.
OIL AND NATURAL GAS PRICES FLUCTUATE WIDELY, AND A DECREASE IN OIL AND GAS
PRICES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our revenues, profitability and future growth are highly dependent on
prices for oil and gas, which are extremely volatile. Any substantial or
extended decline in the price of oil or gas would have a material adverse effect
on us. Oil and gas markets are both seasonal and cyclical. The prices of oil and
gas depend on factors we cannot control, such as:
- the level of consumer product demand;
- weather conditions;
- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political conditions in oil and gas producing regions;
- the domestic and foreign supply of oil and gas;
- the price of foreign imports; and
- overall economic conditions.
Prices of oil and gas will affect the following aspects of our business:
- our revenues, cash flows and earnings;
- the amount of oil and gas that we are economically able to produce;
- our ability to attract capital to finance our operations and our cost of
that capital;
- the value of our oil and gas properties; and
- the profit or loss we incur in exploring for and developing our reserves.
WEATHER, UNEXPECTED SUBSURFACE CONDITIONS, AND OTHER UNFORESEEN OPERATING
HAZARDS MAY ADVERSELY IMPACT OUR ABILITY TO CONDUCT BUSINESS.
There are many operating hazards in exploring for and producing oil and
gas, including:
- our drilling operations may encounter unexpected formations or pressures
which could cause damage to equipment or reservoirs, or personal injury;
- we may experience equipment failures which curtail or stop production;
and
- we could experience blowouts or other damages to the productive
formations that may require a well to be re-drilled or other corrective
action to be taken.
8
In addition, any of the foregoing may result in environmental damages for
which we will be liable. Moreover, a substantial portion of our operations are
offshore and are subject to a variety of risks peculiar to the marine
environment such as capsizing, collisions, hurricanes and other adverse weather
conditions. These conditions can cause substantial damages to facilities and
interrupt production. Offshore operations are also subject to more extensive
governmental regulation.
For some risks, we may not obtain insurance if we believe the cost of
available insurance is excessive relative to the risks presented. In addition,
pollution and environmental risks generally are not fully insurable. If a
significant accident or other event occurs and is not fully covered by
insurance, it could adversely affect our operations.
A SIGNIFICANT PART OF THE VALUE OF OUR PRODUCTION AND RESERVES IS CONCENTRATED
IN A SINGLE OFFSHORE PROPERTY, AND ANY PRODUCTION PROBLEMS, ADVERSE WEATHER
CONDITIONS OR INACCURACIES IN RESERVE ESTIMATES RELATED TO THOSE PROPERTIES
WOULD ADVERSELY IMPACT OUR BUSINESS.
For 2001, all of our pro forma daily production came from our two
properties in the Gulf of Mexico. Moreover, one property, West Cameron 498,
consisting of ten wells, accounted for 95% of our production during this period.
As of September 30, 2001, one well on this property comprised more than half of
the oil production from the property. If mechanical problems, storms or other
events curtailed a substantial portion of this production, our results of
operations would be adversely affected.
In addition, at September 30, 2001, on a pro forma basis, all of our proved
reserves were located in two fields in the Gulf of Mexico. If the actual
reserves associated with any one of these two properties are less than our
estimated reserves, our results of operations and financial condition could be
adversely affected.
WE ARE VULNERABLE TO OPERATIONAL, REGULATORY AND OTHER RISKS ASSOCIATED WITH
THE GULF OF MEXICO BECAUSE WE CURRENTLY PRODUCE PRIMARILY IN THAT AREA.
Our operations and revenues are impacted acutely by conditions in the Gulf
of Mexico because we currently produce primarily in that area. This
concentration of activity makes us more vulnerable than many of our competitors
to the risks associated with the Gulf of Mexico, including delays and increased
costs relating to:
- adverse weather conditions;
- increased oil field service costs;
- difficulties securing oil field services; and
- compliance with environmental and other laws and regulations.
UNLESS WE ARE ABLE TO REPLACE RESERVES THAT WE HAVE PRODUCED, OUR CASH FLOWS
AND PRODUCTION WILL DECREASE OVER TIME.
Our future success depends upon our ability to find, develop and acquire
oil and gas reserves that are economically recoverable. Production of reserves
from reservoirs in the Gulf of Mexico generally declines more rapidly than from
reservoirs in many other producing regions of the world. This rapid decline
results in our recovery of a relatively higher percentage of reserves from
properties in the Gulf of Mexico during the initial few years of production. As
a result, we must continually locate and develop or acquire new oil and gas
reserves to replace those being depleted by production. We must do this even
during periods of low oil and gas prices when it is difficult to raise the
capital necessary to finance these activities and during periods of high
operating costs when it is expensive to contract for drilling rigs and other
equipment and personnel necessary to explore for oil and gas. Without successful
exploration or acquisition activities, our reserves, production and revenues
will decline rapidly. We cannot assure you that we will be able to find and
develop or acquire additional reserves at an acceptable cost.
Also, because of the short life of our reserves, our revenues and return on
the investment we make in our oil and gas wells and the value of our oil and gas
wells will depend significantly on prices prevailing during
9
relatively short production periods. Our potential need to generate revenues to
fund ongoing capital commitments or reduce indebtedness may limit our ability to
slow or shut-in production from producing wells during periods of low prices for
oil and gas.
WE MAY NOT BE SUCCESSFUL IN ACQUIRING AND DEVELOPING OIL AND GAS PROPERTIES.
The successful acquisition and development of oil and gas properties
requires an assessment of recoverable reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact. As a result, we may not
recover the purchase price of a property from the sale of production from the
property, or may not recognize an acceptable return from properties we acquired.
In addition, we cannot assure you that our exploitation and development
activities will result in any increases in reserves. Our operations may be
curtailed, delayed or canceled as a result of lack of adequate capital and other
factors, such as title problems, weather, compliance with governmental
regulations or price controls, mechanical difficulties or shortages or delays in
the delivery of equipment. In addition, the costs of exploitation and
development may materially exceed initial estimates.
IF WE ARE UNABLE TO RAISE CAPITAL, WE MAY NOT BE ABLE TO REPLACE OUR RESERVES
OR ACQUIRE NEW PROPERTIES.
We will be required to make substantial capital expenditures to develop our
existing reserves and to discover new oil and gas reserves. We intend to finance
these expenditures primarily with cash from operations, proceeds from bank
borrowings and proceeds from the sale of debt and equity securities. We cannot
assure you that we will be able to raise capital in the future. We also intend
to make offers to acquire oil and gas properties in the ordinary course of our
business. If these offers are accepted, our capital needs may increase
substantially. We cannot be certain that additional financing will be available
to us on acceptable terms or at all. In the event additional capital resources
are unavailable, we may curtail our drilling, development and other activities
or be forced to sell some of our assets on an untimely or unfavorable basis.
BECAUSE WE DO NOT CONTROL OPERATIONS ON ANY OF OUR PROPERTIES, WE HAVE LIMITED
INFLUENCE OVER THEIR DEVELOPMENT.
We do not operate any of our properties and have limited influence over the
operations of some of these properties. Our lack of control could result in the
following:
- the operator may initiate exploration or development on a faster or
slower pace than we prefer;
- the operator may propose to drill more wells or build more facilities on
a project than we have funds for or than we deem appropriate, which may
mean that we are unable to participate in the project or share in the
revenues generated by the project even though we paid our share of
exploration costs;
- if an operator refuses to initiate a project, we may be unable to pursue
the project; and
- an operator could elect to abandon a property sooner than we have
anticipated or budgeted, resulting in our incurring plugging and
abandonment liabilities that may exceed the amount of funds that we have
available to pay such expenses or that may require us to forego other
planned capital expenditures in order to pay such expenses.
Any of these events could materially reduce the value of our properties.
COMPETITIVE INDUSTRY CONDITIONS MAY NEGATIVELY AFFECT OUR ABILITY TO CONDUCT
OPERATIONS.
We operate in the highly competitive areas of oil and gas exploration,
development and production. We will compete for the purchase of leases in the
Gulf of Mexico and elsewhere from the U.S. government and from other oil and gas
companies. These leases include exploration prospects as well as properties with
proved reserves. Factors that affect our ability to compete in the marketplace
include:
- our access to the capital necessary to drill wells and acquire
properties;
- our ability to acquire and analyze seismic, geological and other
information relating to a property;
10
- our ability to retain the personnel necessary to properly evaluate
seismic and other information relating to a property;
- the location of, and our ability to access, platforms, pipelines and
other facilities used to produce and transport oil and gas production;
- the standards we establish for the minimum projected return on an
investment of our capital; and
- the availability of alternate fuel sources.
We expect to compete with independent oil and gas companies for property
acquisitions. We also compete for the equipment and labor required to operate
and develop these properties. Most of our competitors have substantially greater
financial and other resources than us. In addition, larger competitors may be
able to absorb the burden of any changes in federal, state and local laws and
regulations more easily than we can, which would adversely affect our
competitive position. These competitors may be able to pay more for exploratory
prospects and productive oil and gas properties and may be able to define,
evaluate, bid for and purchase a greater number of properties and prospects than
we can. Our ability to explore for oil and gas prospects and to acquire
additional properties in the future will depend on our ability to conduct
operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. In addition, most of our
competitors have been operating in the oil and gas business for a much longer
time than we have and have demonstrated the ability to operate through industry
cycles.
OUR COMPETITORS WILL USE SUPERIOR TECHNOLOGY THAT WE WILL BE UNABLE TO AFFORD
OR THAT WOULD REQUIRE COSTLY INVESTMENT BY US IN ORDER TO COMPETE.
Our industry is subject to rapid and significant advancements in
technology, including the introduction of new products and services using new
technologies. As our competitors use or develop new technologies, we may be
placed at a competitive disadvantage, and competitive pressures may force us to
implement new technologies at a substantial cost. In addition, our competitors
may have greater financial, technical and personnel resources that allow them to
enjoy technological advantages and may in the future allow them to implement new
technologies before we can. We cannot be certain that we will be able to
implement technologies on a timely basis or at a cost that is acceptable to us.
One or more of the technologies that we currently use or that we may implement
in the future may become obsolete, and we may be adversely affected.
OUR RESERVE INFORMATION REPRESENTS ESTIMATES THAT MAY TURN OUT TO BE INCORRECT
IF THE ASSUMPTIONS UPON WHICH THESE ESTIMATES ARE BASED ARE INACCURATE. ANY
MATERIAL INACCURACIES IN THESE RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS
WILL MATERIALLY AFFECT THE QUANTITIES AND PRESENT VALUE OF OUR RESERVES.
The process of estimating oil and gas reserves is complex. It requires
interpretations of available technical data and various assumptions, including
assumptions relating to economic factors. Any significant inaccuracies in these
interpretations or assumptions could materially affect the estimated quantities
and present value of reserves shown in this prospectus.
In order to prepare these estimates, we must project production rates and
the timing of development expenditures. We must also analyze available
geological, geophysical, production and engineering data, the extent, quality
and reliability of which can vary. The process also requires economic
assumptions, such as oil and gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. Therefore, estimates of
oil and gas reserves are inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from our estimates. Any significant variance
could materially affect the estimated quantities and present value of reserves
shown in this prospectus. In addition, we may adjust estimates of proved
reserves to reflect production history, results of exploration and development,
prevailing oil and gas prices and other factors, many of which are beyond our
control.
11
You should not assume that the present value of future net cash flows from
our proved reserves referred to in this prospectus is the current market value
of our estimated oil and gas reserves. In accordance with SEC requirements, we
generally base the estimated discounted future net cash flows from our proved
reserves on prices and costs on the date of the estimate. Actual future prices
and costs may differ materially from those used in the present value estimate.
Information about reserves constitutes forward-looking information. See
"Forward-Looking Statements" for information regarding forward-looking
information. The discounted present value of our oil and gas reserves is
prepared in accordance with guidelines established by the SEC. A purchaser of
reserves would use numerous other factors to value our reserves. The discounted
present value of reserves, therefore, does not represent the fair market value
of those reserves.
HEDGING OUR PRODUCTION MAY RESULT IN LOSSES.
To reduce our exposure to fluctuations in the prices of oil and gas, we may
enter into hedging arrangements. Hedging arrangements would expose us to risk of
financial loss in some circumstances, including the following:
- if production is less than expected;
- if the other party to the hedging contract defaults on its contract
obligations; or
- if there is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received.
In addition, these hedging arrangements may limit the benefit we would
receive from increases in the prices for oil and gas.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS COULD BE COSTLY
AND COULD NEGATIVELY IMPACT PRODUCTION.
Our operations are subject to numerous laws and regulations governing the
operation and maintenance of our facilities and the discharge of materials into
the environment or otherwise relating to environmental protection. These laws
and regulations may:
- require that we acquire permits before commencing drilling;
- restrict the substances that can be released into the environment in
connection with drilling and production activities;
- limit or prohibit drilling activities on protected areas such as wetlands
or wilderness areas; and
- require remedial measures to mitigate pollution from former operations,
such as dismantling abandoned production facilities.
Under these laws and regulations, we could be liable for personal injury
and clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain limited insurance
coverage for sudden and accidental environmental damages. We do not believe that
insurance coverage for environmental damages that occur over time is available
at a reasonable cost. Also, we do not believe that insurance coverage for the
full potential liability that could be caused by sudden and accidental
environmental damages is available at a reasonable cost. Accordingly, we may be
subject to liability or we may be required to cease production from properties
in the event of environmental damages.
12
FACTORS BEYOND OUR CONTROL AFFECT OUR ABILITY TO MARKET PRODUCTION AND OUR
FINANCIAL RESULTS.
The ability to market oil and gas from our wells depends upon numerous
factors beyond our control. These factors include:
- the extent of domestic production and imports of oil and gas;
- the proximity of the gas production to gas pipelines;
- the availability of pipeline capacity;
- the demand for oil and gas by utilities and other end users;
- the availability of alternative fuel sources;
- the effects of inclement weather;
- state and federal regulation of oil and gas marketing; and
- federal regulation of gas sold or transported in interstate commerce.
Because of these factors, we may be unable to market all of the oil or gas
we produce. In addition, we may be unable to obtain favorable prices for the oil
and gas we produce.
WE MAY BE REQUIRED TO TAKE WRITEDOWNS OF THE CARRYING VALUE OF OUR OIL AND GAS
PROPERTIES AS A RESULT OF A DECREASE IN OIL AND GAS PRICES.
We may be required to writedown the carrying value of our oil and gas
properties in the future if oil and gas prices decline or if we have substantial
downward adjustments to our estimated net proved reserves, increases in our
estimates of development costs or deterioration in our exploration results.
Under the full cost method we use to account for our oil and gas properties, the
net capitalized costs of our oil and gas properties may not exceed the present
value, discounted at 10%, of future net cash flows from estimated net proved
reserves, using period end oil and gas prices and costs, plus the lower of cost
or fair market value of our unproved properties. If net capitalized costs of our
oil and gas properties exceed this limit, we must charge the amount of the
excess to earnings. This type of charge will not affect our cash flows, but will
reduce the book value of our shareholders' equity. We review the carrying value
of our properties quarterly, based on prices in effect as of the end of each
quarter or at the time of reporting our results. Once incurred, a writedown of
oil and gas properties is not reversible at a later date, even if prices
increase.
RISK FACTORS RELATED TO OUR COMMON STOCK
WE DO NOT EXPECT AN ACTIVE MARKET TO DEVELOP FOR OUR COMMON STOCK.
Before this offering, there has been no market for our common stock. Our
common stock will not be listed on any national securities exchange or the
NASDAQ stock market. We have not arranged for any broker-dealers to make a
market in our stock. We do not expect that an active trading market for our
shares will develop. Accordingly, we cannot offer you any assurances as to the
liquidity of the market for our common stock or the prices at which you may be
able to sell our common stock.
NO ASSURANCES CAN BE MADE REGARDING THE VALUE OF OUR COMMON STOCK.
Upon completion of the exchange offer, we will have 1,963,236 shares of
common stock outstanding if all eligible unitholders participate in the exchange
offer. We anticipate that, to the extent trading in our common stock occurs, it
will be sporadic and relatively infrequent. If a trading market in our common
stock develops, we anticipate that the price of our common stock will be
discounted to reflect its reduced liquidity. The limited nature of any market
for our stock that may develop will also cause greater price volatility. The
sale of a material number of our shares of common stock in the public market or
the perception that such sales could occur could have a material adverse effect
on the trading price of our common stock.
13
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND DO NOT ANTICIPATE PAYING
DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid cash dividends on our common stock, and we
do not anticipate that we will pay dividends in the foreseeable future. We
anticipate that future earnings, if any, will be retained for development of our
business.
TIMOTHY M. ROBERSON AND JOSEPH F. LANGSTON, JR. WILL CONTROL US AND WE WILL
NOT BE ABLE TO TAKE ANY ACTIONS WITHOUT THEIR APPROVAL.
Following the exchange offer, assuming all unitholders that hold of record
2,000 or more units participate in the exchange offer, Mr. Roberson will own
38.1% of our outstanding common stock and Mr. Langston will own 25.9% of our
outstanding common stock. As a result, together they will be able to determine
all of the members of our board of directors and will be able to approve all
corporate actions requiring the approval of only a majority of the shares
present and entitled to vote at a meeting of shareholders. Mr. Roberson and Mr.
Langston will be permitted to take shareholder action without soliciting the
proxies of other shareholders. In addition, Mr. Roberson will be able to prevent
any corporate action that requires a supermajority vote of shareholders. This
will allow Mr. Roberson to prevent a change of control or other business
combination that would be economically beneficial to our other shareholders.
IF OUR COMMON STOCK TRADES AT A MARKET PRICE OF LESS THAN $5 PER SHARE, IT
WILL BE DEEMED A "PENNY STOCK" AND YOU MAY BE UNABLE TO RESELL IT IN THE
SECONDARY MARKET.
A "penny stock" is an equity security with a market price of less than $5
per share that is not listed on the NASDAQ stock market or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker-dealers to deliver a
standardized risk disclosure document that provides information about penny
stocks and the nature and level of risks in the penny stock market prior to
effecting transactions in penny stocks for a customer. In addition, prior to
entering into a transaction in a penny-stock with or on behalf of a customer, a
broker-dealer must:
- have made a special written determination that the penny stock is a
suitable investment for the customer;
- receive the customer's written agreement to the transaction;
- provide current bid and offer quotations for the penny stock; and
- disclose the compensation the broker-dealer and persons associated with
the broker-dealer will receive in the penny stock transaction.
Broker-dealers that effect transactions in penny stocks for their customers
must also provide their customers with monthly account statements showing the
market value of each penny stock held in a customer's account. These additional
penny stock disclosure requirements limit the ability of broker-dealers to sell
penny stocks and may reduce the trading activity in the market for our common
stock if it is a penny stock. Because of these extra requirements, many
broker-dealers are unwilling to sell penny stocks at all. As a result, you may
be unable to resell our stock and could lose your entire investment if it is a
penny stock.
14
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER
BACKGROUND OF THE TRUST
The Freeport-McMoRan Oil and Gas Royalty Trust was formed on September 30,
1983. On that date, Freeport-McMoRan, Inc. transferred to a general partnership
a net overriding royalty interest that burdened working interests in 18
productive and 12 undeveloped oil and gas properties in exchange for a 99.9%
interest in the partnership. The royalty entitled the partnership to receive 90%
of the net proceeds attributable to the sale of oil and gas from the working
interests owned by Freeport-McMoRan. The net overriding royalty interest is
referred to in this prospectus as the "royalty."
Immediately after Freeport-McMoRan transferred the royalty to the
partnership, it conveyed its 99.9% general partnership interest to the Trust in
exchange for units of the Trust. Freeport-McMoRan then distributed the units of
beneficial interest in the Trust to its stockholders. Units of beneficial
interest in the Trust are traded on the over the counter market under the
trading symbol "FMOLS."
IMC Global, Inc. acquired the working interests burdened by the royalty in
December 1997 following the merger of Freeport-McMoRan into IMC Global. On
October 11, 2001, the Trust sold the royalty to us. IMC Global sold the working
interests to us on October 12, 2001.
The general partnership that held title to the royalty was formed under the
laws of the State of Texas. The partnership existed for the purpose of holding
the royalty, paying the liabilities and expenses of the partnership and
disbursing the remaining revenues from the royalty to the Trustee and the
managing general partner, who held a 0.1 percent interest in the partnership.
The Trust is passive, with Chase Manhattan Bank, as Trustee, having only
such powers as are necessary for the collection and distribution of revenues
attributable to the royalty, the payment of Trust liabilities and the protection
of Trust assets. The Trustee cannot engage in any business or investment
activity and cannot acquire any asset other than its interest in the partnership
and cash being held for payment of liabilities or distribution to unitholders.
The Trust Agreement provides generally that the Trust shall terminate upon the
sale of all the Trust's interest in the partnership, or the sale by the
partnership of all the assets of the partnership, including the royalty. As a
result of the sale of the royalty to us, the Trustee is in the process of
terminating the Trust.
The royalty is a non-operating interest which means that the holder does
not have any authority to make, or responsibility for making, decisions
regarding oil and gas operations. The royalty entitles the owner to receive 90%
of the "net proceeds" attributable to the sale of oil and gas from the working
interests. Net proceeds is defined as the excess of the sales proceeds of oil
and gas less production costs. Production costs consist of all costs incurred in
the development, production and marketing of oil and gas, including capital
costs. If production costs during any period exceed the proceeds of sales of oil
and gas, the royalty owners is not liable for the costs. Such costs must be paid
by the owner of the working interests. The owner of the working interests is
entitled to carry-forward such costs, plus interest, and recover them in future
periods when the proceeds of the sale of oil and gas exceed production costs.
As a result of capital costs incurred by the working interests in the early
1990s, production costs have greatly exceeded proceeds from the sale of oil and
gas and a substantial cost carry-forward has been created. Since 1995, because
of the cost carry-forward, there have not been any distributions with respect to
the royalty. On September 30, 2001, the cost carry-forward was $13.7 million.
Based on the reserve report for the working interests and the royalty, the
Trustee determined that the future proceeds from the sale of oil and gas
attributable to the working interests would probably be insufficient to fully
pay the cost carry-forward. As a result, the Trustee concluded that it was
unlikely any amounts would be paid with respect to the royalty prior to the
depletion of the working interests.
BACKGROUND OF THE EXCHANGE OFFER
The Trust has not received any royalty payments since 1995. The Trust
Agreement originally stated that the Trustee must sell the Trust's interest in
the partnership or cause the partnership to sell the royalty if the
15
amount of cash per year received by the Trust for each of three successive years
was less than $3 million. This condition was satisfied at the end of 1998.
However, at a special meeting of the unitholders held on March 12, 1999, the
unitholders approved a unitholder proposal to amend the Trust Agreement to
extend the life of the Trust for at least another two years. The Trust did not
receive any royalty payments in 1999 or 2000. Therefore, the Trust Agreement
required the Trustee to sell the Trust's interest in the partnership or to cause
the partnership to sell the royalty.
According to the proxy statement filed by the Trust in August 2001, several
unitholders contacted the Trustee in September 2000 to request or demand that
the Trustee call a special meeting of unitholders to vote on a proposal for a
further extension of the life of the Trust. Most unitholders proposed an
extension for an additional five years. The unitholders apparently believed that
if the Trust's life were extended the Trust might eventually begin receiving
royalty payments once again. However, the Trustee was unwilling to approve such
an extension because the Trust's expense reserve was inadequate to provide for
the Trust's administrative expenses for such a long period, and it was not clear
that there would ever be payments made with respect to the royalty. A
representative of the Trustee had a number of conversations with the requesting
unitholders regarding possible extensions, suggesting that the Trustee might
submit an extension proposal to a unitholder vote if the proposal stated that
the Trust would terminate on the earlier of the end of a specified extension
period or depletion of the Trust's expense reserve below $100,000. These
conversations took place over a period of several weeks, but the Trustee reached
no clear understanding with any requesting unitholder regarding an extension
proposal.
In December 2000, Roberson Oil Company approached the Trustee regarding a
possible transaction whereby Texas Standard, a company to be formed, would
effect an exchange offer, registered under the Securities Act of 1933, in which
common stock and warrants of Texas Standard would be exchanged for the
outstanding units. Texas Standard also offered to issue common stock to the
working interest owner in exchange for the working interests. On December 29,
2000, the Trustee received a letter from Roberson Oil detailing its proposal.
The letter indicated that Roberson Oil, on behalf of Texas Standard, had offered
to purchase the working interest from the working interest owner. The letter
requested that the Trustee agree to the proposal by January 3, 2001. Through its
counsel, the Trustee responded by informing Roberson Oil that there was no need
for the Trustee to agree to the proposal because the transactions described in
the letter involved the unitholders and not the Trust itself. In response,
Roberson Oil indicated that it needed the cooperation of the Trustee because
otherwise the Trustee might proceed to auction the royalty as required by the
Trust Agreement. Roberson Oil did not want to proceed with the transaction
unless Texas Standard could acquire the royalty as well as the working interest.
The terms of the royalty prohibited Texas Standard from acquiring the working
interests. Therefore, it was necessary for Texas Standard to acquire the royalty
in order to waive the restrictions on its purchase of the working interests.
Counsel for the Trustee pointed out that an exchange offer by itself, even if
successful, would not result in ownership of the royalty by Texas Standard
because the Trustee would be required to act in accordance with the Trust
Agreement. The Trust Agreement required the Trustee to auction the royalty and
terminate the Trust. Thus, it appeared unlikely that Texas Standard could
accomplish its objectives without a vote of unitholders to amend the Trust
Agreement. Counsel for the Trustee indicated that the Trustee might be willing
to entertain a unitholder proposal on amendments to the Trust Agreement if the
unitholder proposal were properly presented in accordance with SEC rules and if
the Trustee did not find the proposal objectionable.
On February 2, 2001, counsel to IMC Global called the Trustee's counsel and
indicated that IMC Global had received two non-binding offers for the working
interest, one of which was from Roberson Oil on behalf of Texas Standard.
Counsel for IMC Global indicated that neither proposal was for an amount in
excess of $3 million, that both proposals were contingent on the ability of the
acquiring company to acquire the royalty and that the working interest owner
wanted to pursue the Roberson Oil proposal, which IMC Global believed was the
more well thought out of the two proposals. The Trustee's representatives agreed
to meet with representatives of Roberson Oil and IMC Global to discuss Roberson
Oil's proposal. On February 5, 2001, representatives of the Trustee and its
counsel met with representatives of Roberson Oil and IMC Global to discuss the
proposed transaction. At the meeting, the representatives of Roberson Oil and
IMC Global indicated that the two companies had entered into a non-binding
letter of intent relating to the acquisition of
16
the working interests by Texas Standard. The representatives of Roberson Oil
presented to the Trustee's representatives their ideas regarding a transaction
that might lead to the acquisition of the royalty by Texas Standard. They
suggested that the Trustee enter into an agreement to sell the royalty to Texas
Standard upon completion of an exchange offer in which a specified number of
unitholders accepted Texas Standard common stock in exchange for units. The
representatives of the Trustee indicated that the Trustee would not be willing
to enter into any agreement to sell the royalty or to delay the liquidation and
termination of the Trust without being instructed to do so by a unitholder vote.
They stated that the Trustee's role as a passive Trustee, with only such powers
as are granted to it pursuant to the Trust Agreement, prevented it from
sponsoring or advocating any such transaction. The Trustee stated that it would
be willing to entertain a unitholder proposal to amend the Trust Agreement in
order to provide an opportunity for the unitholders to make a decision regarding
whether to accept an exchange offer. The representatives of Roberson Oil
expressed an unwillingness to incur the expenses of registration of the exchange
offer with the SEC unless the Trustee committed that it would not auction the
royalty unless and until the exchange offer proved to be unsuccessful.
After this meeting, the parties continued communications concerning the
details of a possible transaction that would satisfy their respective concerns.
Roberson Oil concluded that it would be unwilling for Texas Standard to incur
the expenses of registration of the exchange offer until unitholders approved
appropriate amendments to the Trust Agreement. The Trustee and its counsel
cooperated with representatives of Roberson Oil and its counsel in formulating a
proposal from Texas Standard and a related unitholder proposal that would be
unobjectionable to the Trustee. Additionally, a representative of Roberson Oil
inquired if the Trustee was aware of any unitholders that met the requirements
for submitting a unitholder proposal under SEC rules and who might be interested
in presenting the unitholder proposal relating to amendments to the Trust
Agreement in order to provide an opportunity for the unitholders to make a
decision regarding whether to accept an exchange offer. The representative of
the Trustee indicated that it was unaware of any such unitholder, but referred
Roberson Oil to Robert J. DeBeer, a broker with Paine Webber whose clients
included several unitholders. Roberson Oil approached Mr. DeBeer and explained
the potential transaction, the Trust's role as a passive trust and the need for
a unitholder proposal. Mr. DeBeer agreed to arrange a meeting with Roberson Oil
and a client that might be interested in presenting a unitholder proposal. On
March 28, 2001, Mr. DeBeer, representatives of Roberson Oil and Greg Haskin, a
unitholder, met to discuss the proposed transaction and unitholder proposal. Mr.
Haskin subsequently agreed to present the proposed transaction to the Trust as a
unitholder proposal. Mr. Haskin and Roberson Oil had no prior relationship or
affiliation with each other.
On March 30, 2001, the Trustee received a letter from Texas Standard,
setting forth a proposal relating to its proposed exchange offer. In accordance
with Rule 135 under the Securities Act of 1933, the letter contained only
limited information regarding the exchange offer. Contemporaneously with the
receipt of the letter from us, the Trustee received a unitholder proposal from
Mr. Haskin. After reviewing the unitholder proposal, the Trustee determined that
it would call a special meeting of unitholders to consider and vote on the
proposed amendments to the Trust Agreement set forth in the unitholder proposal.
The Trust filed preliminary proxy materials and revised preliminary proxy
materials with the SEC and received comments from the staff of the SEC on the
preliminary proxy materials, revised preliminary proxy materials and on the
Trust's Form 10-K for the year ended December 31, 2001.
17
In light of the time required for the SEC staff's review process and the
Trust's preparation of responses to comments from the staff, the Trustee
concluded that the timetable contemplated by the original letter from us and the
original unitholder proposal was unrealistic. The Trustee offered us the
opportunity to make additional revised submissions. The Trustee received a
revised letter from us dated July 3, 2001, which provided that we would effect
an exchange offer as soon as practicable to acquire the units of the Trust in
exchange for our common stock and warrants if we purchased the working interest
from IMC Global and the royalty from the Trust. The full text of our revised
letter is as follows:
July 3, 2001
The Chase Manhattan Bank, Trustee
Freeport-McMoRan Oil and Gas Royalty Trust
700 Lavaca
Austin, Texas 78702
Attn: Michael Ulrich
Re: Exchange Offer
Ladies and Gentlemen:
Pursuant to a letter of intent, Texas Standard Oil Company, a Texas
corporation (the "TXS"), or its designee, proposes to purchase from IMC Global,
Inc ("IMC") certain working interests in oil and gas properties (the "Working
Interests"). The letter of intent states that, as consideration for the purchase
of the Working Interests, the purchaser will pay to IMC less than $5 million in
cash, payable at the closing of the purchase (the "Closing"). The Working
Interests consist of all oil and gas properties burdened by the overriding
Royalty interest (the "Royalty") owned by Freeport-McMoRan Oil and Gas Royalty
Trust (the "Trust"). TXS desires to acquire both the Working Interests and the
Royalty.
If TXS purchases both the Working Interests and the Royalty, as soon as
practicable following the Closing, TXS proposes to effect an exchange offer (the
"Exchange Offer") pursuant to which it will acquire Units of Beneficial Interest
in the Trust (the "Units") in exchange for shares of its common stock, par value
$0.01 per share ("TXS Common Stock"), and warrants to purchase Company Common
Stock (the "Warrants"). The Exchange Offer is more fully described below.
TXS understands that a holder of Units has submitted to the Trustee a
proposal (the "Shareholder Proposal") to be voted on at a Special Meeting of
Unitholders. If the Shareholder Proposal is approved by the requisite vote of
Unitholders, the Trustee will be instructed (a) to sell the Royalty to TXS for
$1,000 on the same day that TXS purchases the Working Interests from IMC, and
(b) to delay any liquidating distribution of Trust assets until completion of
the Exchange Offer or December 31, 2001, whichever first occurs.
This letter constitutes TXS's commitment to Unitholders that, if the
Shareholder Proposal is approved at the Special Meeting by the requisite vote of
Unitholders, TXS will use its commercially reasonable efforts (a) to acquire the
Working Interests from IMC on or before August 31, 2001, (b) to acquire the
Royalty for $1,000 in cash on the same day, (c) to file with the Securities
Exchange Commission (the "SEC"), as soon as practicable following such Closing,
a registration statement under the Securities Act of 1933 relating the Exchange
Offer, (d) to cause such registration statement to become effective as soon as
practicable thereafter, (e) upon effectiveness of the registration statement, to
make the Exchange Offer on substantially the terms described in this letter and
(f) to complete the Exchange offer as soon as practicable but in any event prior
to December 31, 2001.
The Exchange Offer
The following is a brief summary of the basic terms of the Exchange Offer:
1. Prospectus. The Exchange offer will be made only by means of a
prospectus.
2. Record Holders of At Least 2,000 Units. All Unitholders holding
of record at least 2,000 Units will be offered the opportunity to exchange
their Units for securities of TXS as follows: for every 20 Units
18
tendered for exchange, TXS will issue one share of Common Stock. Without
consideration of the effects of any exercise of the Warrants, if all
eligible Unitholders exchange their units for shares of TXS Common Stock,
the Unitholders as a group will own not less than 36% of the total
outstanding shares of TXS.
3. Record Holders of Fewer than 2,000 Units. Unitholders holding of
record fewer than 2,000 Units will not be entitled to exchange their units
for Common Stock, but upon consummation of the Exchange offer such holders
will be issued warrants entitling the holder to purchase shares of Common
Stock on terms and for the consideration per share to be set forth in the
prospectus.
4. Minimum Condition. TXS's obligation to exchange shares of Common
Stock and to issue Warrants in the Exchange Offer will be subject to the
condition that Unitholders holding at least 50% of the total Units
outstanding tender their Units for exchange.
5. Timing of the Exchange Offer. TXS will not effect the Exchange
Offer unless the Shareholder Proposal is approved at the Special Meeting.
As soon as practicable following such approval and the acquisition of both
the Royalty and the Working Interests, it will use commercially reasonable
efforts to file with the SEC a registration statement relating to the
Exchange Offer. The Exchange Offer will be made promptly following
effectiveness of the registration statement. TXS will not commence the
Exchange Offer unless the registration statement becomes effective on or
prior to November 30, 2001.
6. Purposes of the Exchange Offer. The purposes of the Exchange
Offer are (a) to give Unitholders an incentive to vote in favor of the
Shareholder Proposal at the Special Meeting, (b) to give Unitholders the
opportunity to continue to participate as owners of interests in the oil
and gas properties that the Royalty now burdens and (c) to provide funds
for TXS's use (consisting of liquidating distributions on Units acquired in
the Exchange Offer and any proceeds from the exercise of Warrants). Any
such funds will be used for general corporate purposes and to repay
indebtedness.
TXS is a newly organized entity with no substantial assets, but TXS has
obtained commitments that it believes will be sufficient to provide resources
necessary to permit it to acquire the Working Interests from IMC and to effect
the Exchange Offer. To TXS's knowledge, there is no fact or circumstance
relating to TXS, its directors, officers or controlling persons that would
prevent TXS's registration statement relating to the Exchange Offer from being
declared effective by the SEC.
Very truly yours,
TEXAS STANDARD OIL COMPANY
By: /s/ TIMOTHY M. ROBERSON
------------------------------------
Timothy M. Roberson
President
The exchange offer described in this document is being made in accordance
with our letter dated July 3, 2001. The Trustee also received a revised
unitholder proposal on the date of our revised letter. The revised unitholder
proposal was approved at a special meeting of unitholders on October 5, 2001.
The unitholder proposal provided that the Trust Agreement be amended to instruct
the Trustee to sell the royalty to us for $1,000 and to delay any liquidating
distribution of Trust assets until the earlier of completion of any exchange
offer by us and December 31, 2001. We purchased the working interests from IMC
Global on October 12, 2001 and the royalty from the Trust on October 11, 2001.
REASONS FOR THE EXCHANGE OFFER
We are making the exchange offer to comply with the representations in our
letter to the Trustee dated July 3, 2001. We agreed to make the exchange offer
upon the purchase of the working interests and the royalty, which occurred in
October 2001.
19
OTHER TRANSACTIONS AND RELATIONSHIPS
Prior to our proposal to purchase the working interest burdened by the
royalty from IMC Global and the royalty from the Trust, we did not have any
relationship with the Trust. Other than with respect to the transaction
discussed above, we have never had any material contacts or negotiations with
the Trust regarding a merger, tender offer, purchase of assets or other similar
transaction. We do not, to our knowledge the Trustee does not, and none of our
officers, directors or affiliates, or any associate or majority owned subsidiary
of any of the foregoing do not, beneficially own any units of the Trust. Other
than with respect to our exchange offer, to our knowledge, none of the persons
or entities described in the preceding sentence has entered into a transaction
regarding the Trust's securities during the past 60 days.
ALTERNATIVES TO THE EXCHANGE OFFER
We are not aware of any alternative to the exchange offer, other than to
continue to own units of the Trust. The Trust Agreement requires the Trustee to
liquidate the Trust. Based on publicly available information, we do not expect
the Trust to make any additional distributions of cash to the unitholders.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions stated in this prospectus and
in the letter of transmittal, we will accept all units properly tendered and not
withdrawn prior to 5:00 p.m. New York City time, on the expiration date. We are
offering to exchange one share of our common stock for every 20 units of the
Trust tendered by record holders holding at least 2,000 units of the Trust. We
are also offering to exchange a warrant to purchase one share of our common
stock for every 20 units of the Trust that are tendered to us by holders of
record holding fewer than 2,000 units. The warrants have an exercise price of
$.77 per share, are nontransferable and will be exercisable for a period of 30
days after the consummation of the exchange offer.
As of the date of this prospectus, 14,975,390 units were issued and
outstanding. This prospectus, together with the accompanying letter of
transmittal, is initially being sent to all registered holders of the units as
of the close of business on , 2002.
We intend to conduct the exchange offer as required by the Exchange Act,
and the rules and regulations of the SEC under the Exchange Act, including Rule
14e-1, to the extent applicable. Rule 14e-1 describes unlawful tender practices
under the Exchange Act. This section requires us, among other things:
- to hold our exchange offer open for twenty business days;
- to keep the exchange offer open for at least 10 business days after we
change the percentage of units sought or the consideration we are
offering;
- to promptly pay the consideration offered or return the units tendered
after the termination of our exchange offer; and
- to issue a press release in the event of an extension of the exchange
offer.
If any tendered units are not accepted for exchange because of an invalid
tender or the occurrence of other events described in this prospectus,
certificates for these unaccepted units will be returned, at our cost, to the
tendering holder of the units or, in the case of existing notes tendered by
book-entry transfer, into the holder's account at DTC, according to the
procedures described below, as promptly as practicable after the expiration
date.
Holders who tender units in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes related to the exchange of units in the exchange
offer. We will pay all charges and expenses, other than applicable taxes, in
connection with the exchange offer.
20
NEITHER WE, OUR BOARD OF DIRECTORS OR THE TRUSTEE MAKES ANY RECOMMENDATION
TO HOLDERS OF UNITS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR UNITS TO THE EXCHANGE OFFER. MOREOVER, NO ONE HAS BEEN
AUTHORIZED TO MAKE ANY RECOMMENDATION. HOLDERS OF UNITS MUST MAKE THEIR OWN
DECISION WHETHER TO TENDER IN THE EXCHANGE OFFER AND, IF SO, THE AMOUNT OF UNITS
TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND
CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION
AND REQUIREMENTS.
ISSUANCE OF SHARES AND WARRANTS; FRACTIONAL SHARES
We shall be considered to have accepted units tendered according to the
procedures in this prospectus when, as and if we have given oral or written
notice of acceptance to the exchange agent. The exchange agent will act as agent
for the tendering holders for the purpose of receiving shares of common stock
and warrants from us and delivering certificates representing shares of our
common stock and warrants to those holders. Assuming the conditions to the
exchange offer are met and the exchange offer is consummated, we will issue
shares of common stock and warrants to unitholders that have properly tendered
and not withdrawn their units as soon as practicable following the expiration
date.
We will not issue any fractional shares or warrants to purchase fractional
shares in the exchange offer. We will determine the number of shares of common
stock or the number of warrants to purchase shares of common stock to be issued
to each tendering unitholder by dividing the number of units tendered by 20 and
rounding up to the nearest whole number.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date for the exchange offer is 5:00 p.m., New York City
time, on , 2002, unless extended. We, in our sole discretion, reserve
the right to extend the exchange offer. We can extend the exchange offer by
giving oral or written notice to the exchange agent. During any extension, all
units previously tendered and not withdrawn will remain subject to our offer. We
currently do not intend to extend the exchange offer unless an extension is
required to comply with any applicable legal requirements.
Subject to the SEC's rules and regulations, we also expressly reserve the
right, in our sole discretion:
- to delay acceptance for exchange or exchange of any units, or to
terminate the exchange offer and to refuse to accept for exchange or
exchange any units not previously accepted, if any of the conditions to
the exchange offer are not satisfied on the expiration date; or
- to waive any condition or otherwise amend the terms of the exchange offer
in any manner.
Any delay in acceptance, termination, extension, or amendment will be
followed as promptly as practicable by oral or written notice to the exchange
agent and by making a public announcement. If the exchange offer is amended in a
manner determined by us to constitute a material change, we will promptly
disclose the amendment in a manner reasonably calculated to inform unitholders
of the amendment. Without limiting the manner in which we may choose to make
public announcements of any delay in acceptance, termination, extension, or
amendment of the exchange offer, we shall have no obligation to publish, advise,
or otherwise communicate any public announcement, other than by making a timely
release to Business Wire.
If we make a material change in the terms of our exchange offer or the
information concerning our offer, or if we waive a material condition of our
offer, we will extend our offer to the extent required under the Exchange Act.
If we make a change in the percentage of units sought or the consideration we
are offering and our offer is scheduled to expire at any time earlier than the
tenth business day from and including the date that notice of such change is
first so published, sent or given, we will extend our exchange offer until the
expiration of that ten business day period.
PROCEDURES FOR TENDERING
Only a registered holder may tender its units in the exchange offer. Any
beneficial owner whose units are registered in the name of his broker, dealer,
commercial bank, trust company or other nominee and who
21
wishes to tender should contact the registered holder promptly and instruct the
registered holder to tender on his behalf and comply with the instructions in
this prospectus and the letter of transmittal. If you beneficially own fewer
than 2,000 units, but your nominee is a record holder of at least 2,000 units,
you are eligible to tender your units in exchange for common stock. If the
beneficial owner wishes to tender on his own behalf, the beneficial owner must,
prior to completing and executing the letter of transmittal and delivering his
units, either make appropriate arrangements to register ownership of the units
in the owner's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
The tender by a holder will constitute an agreement between the holder, us
and the exchange agent according to the terms and subject to the conditions
described in this prospectus and in the letter of transmittal.
THE METHOD OF DELIVERY OF UNITS, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
UNITHOLDERS. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED
TO ASSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. NO LETTER
OF TRANSMITTAL OR UNITS SHOULD BE SENT TO US. A UNITHOLDER MAY ALSO REQUEST THAT
ITS RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
EFFECT THE TENDER FOR SUCH UNITHOLDER IN EACH CASE AS DESCRIBED IN THIS
PROSPECTUS AND IN THE LETTER OF TRANSMITTAL.
UNITS HELD IN CERTIFICATED FORM
For a unitholder to validly tender units, the exchange agent must receive,
prior to 5:00 p.m. New York City time on the expiration date, at its address set
forth in this prospectus:
- a properly completed and validly executed letter of transmittal, or a
manually signed facsimile thereof, together with any signature guarantees
and any other documents required by the instructions to the letter of
transmittal, and
- certificates for tendered units.
UNITS HELD IN BOOK-ENTRY FORM
We understand that the exchange agent will make a request promptly after
the date of the prospectus to establish accounts for the units at DTC for the
purpose of facilitating the exchange offer, and subject to their establishment,
any financial institution that is a participant in DTC may make book-entry
delivery of units by causing DTC to transfer the units into the exchange agent's
account for the units using DTC's procedures for transfer.
If you desire to transfer units held in book-entry form with DTC, the
exchange agent must receive, prior to 5:00 p.m. New York City time on the
expiration date, at its address set forth in this prospectus, a confirmation of
book-entry transfer of the existing notes into the exchange agent's account at
DTC, which is referred to in this prospectus as a "book-entry confirmation,"
and:
- a properly completed and validly executed letter of transmittal, or a
manually signed facsimile thereof, together with any signature guarantees
and other documents required by the instructions in the letter of
transmittal; or
- an agent's message transmitted pursuant to DTC's Automated Tender Offer
Program.
TENDER OF EXISTING NOTES USING DTC'S AUTOMATED TENDER OFFER PROGRAM (ATOP)
The exchange agent and DTC have confirmed that the exchange offer is
eligible for DTC's Automated Tender Offer Program. Accordingly, DTC participants
may electronically transmit their acceptance of the exchange offer by causing
DTC to transfer units held in book-entry form to the exchange agent in
accordance with DTC's ATOP procedures for transfer. DTC will then send a
book-entry confirmation, including an agent's message to the exchange agent.
22
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, which states
that DTC has received an express acknowledgment from the participant in DTC
tendering units that are the subject of that book-entry confirmation that the
participant has received and agrees to be bound by the terms of the letter of
transmittal, and that we may enforce such agreement against such participant. If
you use ATOP procedures to tender units you will not be required to deliver a
letter of transmittal to the exchange agent, but you will be bound by its terms
just as if you had signed it.
SIGNATURES
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or Trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act, unless the units tendered with the letter of
transmittal are tendered:
- by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" in the
letter of transmittal; or
- for the account of an institution eligible to guarantee signatures.
If the letter of transmittal is signed by a person other than the
registered holder who is listed as the owner, the units must be endorsed or
accompanied by appropriate bond powers which authorize the person to tender the
units on behalf of the registered holder who is listed as the owner, signed as
the name of the registered holder(s) who appears on the units. If the letter of
transmittal or any units or bond powers are signed or endorsed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
DETERMINATIONS OF VALIDITY
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of the tendered units will be determined by
us in our sole discretion. This determination will be final and binding. We
reserve the absolute right to reject any and all units not properly tendered or
any units our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the absolute right to waive any irregularities or
conditions of tender as to particular units. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of units must be cured
within the time we shall determine. Although we intend to notify unitholders of
defects or irregularities related to tenders of units, neither we, the exchange
agent nor any other person shall be under any duty to give notification of
defects or irregularities related to tenders of units nor shall any of them
incur liability for failure to give notification. Tenders of units will not be
considered to have been made until the irregularities have been cured or waived.
Any units received by the exchange agent that we determine are not properly
tendered or the tender of which is otherwise rejected by us and as to which the
defects or irregularities have not been cured or waived by us will be returned
by the exchange agent to the tendering unitholder or, in the case of units
tendered by book-entry transfer into the holder's account at DTC, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of units may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date. In addition, you may withdraw any units that we have not previously
accepted for exchange and exchanged for our common stock after , 2002.
To withdraw a tender of units in the exchange offer, a written or facsimile
transmission of a notice of withdrawal must be received by the exchange agent at
its address listed below or you must comply with the procedures for DTC's
23
Automated Tender Offer Program. A notice of withdrawal that is being sent prior
to the expiration of the exchange offer must be received by the exchange agent
prior to 5:00 p.m., New York City time, on the expiration date. Any notice of
withdrawal must:
- specify the name of the person having deposited the units to be
withdrawn;
- identify the units to be withdrawn, including the certificate number or
numbers and number of units or, in the case of existing notes transferred
by book-entry transfer, the name and number of the account at the
depositary to be credited;
- be signed by the same person and in the same manner as the original
signature on the letter of transmittal by which the units were tendered,
including any required signature guarantee, or be accompanied by
documents of transfer sufficient to permit the transfer agent for the
units to register the transfer of the units into the name of the person
withdrawing the tender; and
- specify the name in which any of these units are to be registered and the
address to which units should be returned, if different from that of the
person who deposited the units to be withdrawn.
All questions as to the validity, form and eligibility, including time of
receipt, of withdrawal notices will be determined by us. Our determination will
be final and binding on all parties. Any units so withdrawn will be judged not
to have been tendered according to the procedures in this prospectus for
purposes of the exchange offer, and no shares of common stock or warrants will
be issued in exchange for those units unless the units so withdrawn are validly
re-tendered. Any units that have been properly withdrawn and are not accepted
for exchange will be returned to the holder of the units or, in the case of
units tendered by book-entry transfer into the holder's account at DTC, without
cost to the holder. This return or crediting will take place as soon as
practicable after withdrawal. Properly withdrawn units may be re-tendered by
following one of the procedures described above under "Procedures for Tendering"
at any time prior to the expiration date.
CONDITIONS
Consummation of the exchange offer is subject to the following conditions:
- Holders of units representing at least 50% of the total outstanding units
must validly tender and not withdraw their units prior to the expiration
date.
- The Trustee must not have completed the liquidation of the Trust prior to
the expiration date.
- The exchange offer must comply with the securities laws or any applicable
interpretation of the staff of the Securities and Exchange Commission and
the securities law of states where unitholders are citizens and which are
applicable to us as a result of this exchange offer.
- The registration statement of which this prospectus is a part must have
become effective and the SEC must not have issued a stop order suspending
the effectiveness of the registration statement or initiated or
threatened proceedings for the purpose of issuing a stop order suspending
the effectiveness of the registration statement.
- We must have received all necessary state securities law or "blue sky"
authorizations.
- There must not be in effect any temporary restraining order, preliminary
or permanent injunction or other order or decree issued by any court or
agency of competent jurisdiction or other legal restraint or prohibition
preventing the completion of the exchange offer.
- There must not have been enacted, entered, promulgated or enforced by any
court, administrative agency or commission, or other governmental
authority or instrumentality, any statute, rule, regulation, order,
injunction or decree that prohibits, restricts or makes illegal the
completion of our exchange offer.
- There must not be pending or threatened any suit, action or proceeding by
any governmental entity challenging our exchange offer, seeking to
restrain or prohibit the completion of our exchange offer or
24
seeking to obtain from us any damages that are material to us or which is
otherwise reasonably likely to have a material adverse effect on us.
The conditions listed above are solely for our benefit and we may assert
them regardless of the circumstances giving rise to any of the conditions,
including any action or inaction by us. We may waive any of these conditions in
whole or in part. The determination as to whether any condition has been
satisfied shall be in our reasonable judgment and will be final and binding. We,
in our sole discretion, will not be required to accept for exchange or exchange
any units and may terminate the exchange offer if any of the conditions
described above are not met. In the event that any of these conditions are not
met and the exchange offer is not consummated, we will return all certificates
representing units that have been tendered to us as soon as possible following
the expiration date.
EXCHANGE AGENT
Securities Transfer Corporation has been appointed as exchange agent for
the exchange offer. In this capacity, the exchange agent has no fiduciary duties
and will be acting solely on the basis of our directions. Requests for
assistance and requests for additional copies of this prospectus or of the
letter of transmittal should be directed to the exchange agent. You should send
certificates for units, letters of transmittal and any other required documents
to the exchange agent addressed as follows:
By Mail:
Securities Transfer Corporation
P.O. Box 701629
Dallas, TX 75370-1629
By Hand Delivery or Overnight Courier:
Securities Transfer Corporation
2591 Dallas Parkway, Suite 102
Frisco, TX 75034
Facsimile Transmission: (469) 633-0088
Confirm by Telephone: (469) 633-0069
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS LISTED
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS DESCRIBED
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
SOLICITATION OF TENDERS; FEES AND EXPENSES
We will bear the expenses of requesting that unitholders tender their units
for common stock. The principal solicitation under the exchange offer is being
made by mail. Additional solicitations may be made by our officers and regular
employees and our affiliates in person, by telegraph, telephone or telecopier.
We will retain a broker-dealer in those states where state securities laws
require offers to be made by a broker-dealer registered in such state. Other
than our retention of a broker-dealer for the purpose of complying with state
"blue sky" laws, we have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the exchange offer. We, however, will pay the
exchange agent reasonable and customary fees for its services and will reimburse
the exchange agent for its reasonable out-of-pocket costs and expenses in
connection with the exchange offer and will indemnify the exchange agent for all
losses and claims incurred by it as a result of the exchange offer. We may also
pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
prospectus, letters of transmittal and related documents to the beneficial
owners of the units and in handling or forwarding tenders for exchange.
We will pay the expenses to be incurred in connection with the exchange
offer, including fees and expenses of the exchange agent, accounting and legal
fees, and printing costs. The Trust will not pay any
25
portion of the fees and expenses of the exchange offer. We will use our cash
flows from operations to cover the expenses of the exchange offer. We estimate
that the costs and expenses incurred in connection with the exchange offer will
be approximately $625,233, as summarized below:
[Download Table]
ESTIMATED
AMOUNT
---------
SEC Registration Fee........................................ $ 233
State "Blue Sky" Registrations Fees......................... 20,000
Broker-Dealer Fees.......................................... 40,000
Legal Fees.................................................. 350,000
Accounting Fees............................................. 30,000
Reserve Report Preparation Fees............................. 25,000
Printing Costs.............................................. 40,000
Mailing Costs............................................... 40,000
Exchange Agent Fees......................................... 50,000
Transfer Agent Fees......................................... 15,000
Information Agent fees...................................... 5,000
Miscellaneous Other Fees.................................... 10,000
--------
Total............................................. $625,233
========
You will not be obligated to pay any transfer tax in connection with the
exchange, except if you instruct us to register common stock in the name of, or
request that units not tendered or not accepted in the exchange offer be
returned to, a person other than you, you will be responsible for the payment of
any applicable transfer tax.
ACCOUNTING TREATMENT
The exchange offer will be accounted for as an acquisition of oil and gas
interests in exchange for an issuance of equity, using the purchase method of
accounting.
NO CONSENTS OR AUTHORIZATIONS
Under the Texas Trust Code, no vote of the unitholders of the Trust is
required in connection with this exchange offer. No vote of our shareholders is
required under the Texas Business Corporation Act in connection with the
exchange offer. No additional consents or authorizations from either party are
necessary for the consummation of this exchange offer.
REGULATORY REQUIREMENTS
This registration statement on Form S-4 must become effective and we must
comply with state securities laws in the states where unitholders are citizens.
No other state or federal regulatory requirements have to be complied with or
approval obtained in connection with the exchange offer.
NO INDEPENDENT REPRESENTATIVE OR FAIRNESS OPINION
No independent representative of the unitholders was engaged for purposes
of negotiating the terms of the exchange offer, nor was a fairness opinion,
appraisal or other report related to the exchange offer obtained from an
unaffiliated third party. The absence of these protections was considered, but
was not judged to be significant by us, in determining the fairness of the
proposed exchange offer to the unitholders. We determined that the likelihood
that such an unaffiliated representative of the unitholders or a fairness
opinion would add value to the process of structuring the combination
transactions was minimal and outweighed the costs of retaining such a
representative or fairness opinion. As a result, the exchange rate, warrant
exercise price and
26
other terms of the exchange offer may not be as favorable as the terms that
might have been obtained had an independent representative been retained or a
fairness opinion requested.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section is a summary of the material federal income tax consequences
of the exchange offer that generally apply to unitholders who are U.S. persons
and who hold their units as capital assets within the meaning of Section 1221 of
the Internal Revenue Code. Many aspects of federal income taxation that may be
relevant to a particular unitholder, or to types of unitholders who are subject
to specific tax treatment, including non-U.S. persons, financial institutions,
tax-exempt organizations, insurance companies, broker-dealers and possibly other
types of taxpayers, are not addressed. In addition, this summary is based on
current provisions of the Internal Revenue Code, existing and proposed
regulations under the Internal Revenue Code, and current administrative rulings
and court decisions, all of which may be changed retroactively or prospectively.
ASSUMPTIONS
We believe that, for federal income tax purposes, the stock and warrants we
are issuing pursuant to the exchange offer are, in substance, part of the
consideration for the royalty we purchased from the partnership, which is the
entity that held the royalty for the Trust, on October 5, 2001, and should be
treated for such purposes as if they were issued to the partnership and
ultimately distributed to the unitholders. We also believe that, for federal
income tax purposes, the royalty was transferred to us in a nontaxable
transaction described in Section 351 of the Internal Revenue Code. This summary
assumes such treatment.
NO TAX RULINGS
No rulings have been requested from the Internal Revenue Service regarding
the federal income tax consequences of the exchange offer or related
transactions. No assurances can be given that the Internal Revenue Service or
the courts will agree with this summary. If the Internal Revenue Service or the
courts do not treat the exchange offer as a nontaxable transaction described in
Section 351 of the Internal Revenue Code, or otherwise disagree with this
summary, the exchange offer and related transactions may be fully taxable to the
unitholders.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE EXCHANGE OFFER APPLICABLE TO YOU, AND CONCERNING ANY SPECIAL
TAX CONSIDERATIONS THAT MAY APPLY TO YOU, INCLUDING ALTERNATIVE MINIMUM,
FOREIGN, STATE AND LOCAL TAXES.
ROYALTY PARTNERSHIP
The partnership cannot recognize any loss upon the transfer of the royalty
to us. In addition, the partnership will not be required to recognize any gain
upon the transfer of the royalty to us, except to the extent of the sum of
$1,000, which is the cash amount paid by us in exchange for the royalty, plus
the fair market value of the warrants we are issuing pursuant to the exchange
offer. Because we believe that the shares of our common stock which are subject
to the warrants are priced at their fair market value, and because the warrants
are nontransferable and may be exercised for a period of only 30 days, we
believe that the fair market value of the warrants is less than $1 per share.
The partnership is not subject to federal income taxes at the partnership
level. Instead, each partner includes its distributive share of the
partnership's income, gains, losses, deductions and credits when computing its
taxable income. The Trust's distributive share is equal to its percentage
interest in the partnership, or 99.9%.
The partnership will not recognize any gain or loss upon distributing to
the Trust the proceeds from the royalty transfer.
27
ROYALTY TRUST
The Trust is a grantor trust for federal income tax purposes, meaning that
for such purposes the Trust is disregarded and the unitholders are treated as if
they directly own undivided interests in the Trust income and principal. As a
result, the Trust is not subject to federal income taxes at the Trust level.
Instead, each unitholder includes the income, gains, losses, deductions and
credits attributable to such unitholder's share of the Trust assets when
computing its taxable income.
RECORD HOLDERS OF 2,000 OR MORE UNITS
A record holder of 2,000 or more units will include in income its
distributive share of the partnership's gain, if any, upon the transfer of the
royalty to us. Except to the extent of the depletion recapture amount described
below, such gain will be a long-term capital gain. If the unitholder is an
individual, such gain will be taxable at a maximum rate of 20%. The unitholder
must treat as ordinary income its depletion recapture amount, which is the
amount equal to the lesser of such gain or the sum of the unitholder's prior
depletion deductions with respect to the royalty, but not in excess of the
unitholder's initial tax basis in the unitholder's units.
A record holder of 2,000 or more units will recognize gain upon the
partnership's distribution to the Trust of the proceeds from the royalty
transfer only to the extent that the unitholder's share of the amount of money
distributed exceeds the unitholder's tax basis in the unitholder's units
immediately before the distribution. If the unitholder is an individual and has
held his units for at least 12 months, such gain will be a long-term capital
gain taxable at a maximum rate of 20%.
Except as described above, a record holder of 2,000 or more units will not
recognize any gain or loss upon the exchange of such unitholder's units for
shares of our common stock pursuant to the exchange offer. The unitholder's tax
basis in the stock the unitholder receives pursuant to the exchange offer will
equal the unitholder's tax basis in the unitholder's units. The unitholder's
holding period for such stock will include the partnership's holding period for
the royalty.
RECORD HOLDERS OF FEWER THAN 2,000 UNITS
A record holder of fewer than 2,000 units will include in income the
unitholder's distributive share of the partnership's gain, if any, upon the
transfer of the royalty to us. Except to the extent of the depletion recapture
amount described below, such gain will be a long-term capital gain. If the
unitholder is an individual, such gain will be taxable at a maximum rate of 20%.
The unitholder must treat as ordinary income the unitholder's depletion
recapture amount, which is the amount equal to the lesser of such gain or the
sum of the unitholder's prior depletion deductions with respect to the royalty,
but not in excess of the unitholder's initial tax basis in the unitholder's
units
A record holder of fewer than 2,000 trust units will recognize gain upon
the partnership's distribution to the trust of the proceeds from the royalty
transfer only to the extent that the unitholder's share of the amount of money
distributed exceeds the unitholder's tax basis in the unitholder's units
immediately before the distribution. If the unitholder is an individual and has
held his units for at least 12 months, such gain will be a long-term capital
gain taxable at a maximum rate of 20%.
Except as described above, a record holder of fewer than 2,000 trust units
will not recognize any gain or loss upon the exchange of the unitholder's units
for warrants pursuant to the exchange offer. The unitholder's tax basis in the
warrants the unitholder receives pursuant to the exchange offer will equal the
unitholder's tax basis in the unitholder's units. The unitholder's holding
period for such warrants will include the partnership's holding period for the
royalty.
If the warrants lapse before they are exercised, the unitholder will
recognize a capital loss equal to the unitholder's tax basis in the warrants.
The ability to use capital losses is subject to substantial restrictions.
A unitholder will not recognize any gain or loss upon exercising the
warrants. The unitholder's tax basis in our common stock acquired through the
exercise of such warrants will equal the sum of the unitholder's tax
28
basis in such warrants, plus the exercise price paid for such stock. The holding
period for such stock will begin on the date of exercise.
RIGHTS OF DISSENTING SHAREHOLDERS
There are no appraisal or dissenters' rights that arise as a result of this
exchange offer. Your choice as a unitholder of the Trust is to either
participate in the exchange offer and tender all or some of your units for our
common stock, or not participate in this exchange offer and retain your units.
ACCESS TO INVESTOR LIST
Under the Trust Agreement, a unitholder may inspect the list of unitholders
in the Trust during reasonable business hours at the offices of the Trustee
located at 700 Lavaca, 5th Floor, Austin, Texas 77002. Unitholders also have the
right under the Trust Agreement to inspect the books and records of the Trustee
at reasonable times.
METHOD OF DETERMINING EXCHANGE VALUES
Acquiring the royalty allows us, as the owner of the working interests, to
save the administrative, reporting and computational burdens associated with the
royalty. In order to save these costs, we were willing to offer up to 36% of our
common stock to the unitholders. The percentage interest we were willing to
offer was based on:
- our evaluation of the present value of the working interests and the
present value of the cost savings associated with combining the ownership
of the working interests and the royalty; and
- the amount of common stock we deemed necessary to induce the unitholders
to approve the sale of the royalty to us.
The Trust's sole remaining asset consists of cash that will be used to pay
the Trustee's fees and expenses. Consequently, we did not allocate any value to
Trust assets or the units. To our knowledge, the Trustee does not hold any units
and therefore, will not be participating in the exchange offer.
The exercise price of the warrants was based on 80% of the pro forma book
value of our common stock of $.96 on September 30, 2001, calculated immediately
prior to the exercise of any warrants and assuming that all unitholders who hold
2,000 or more units of record tender their units. Because there is no market for
our stock, we are unable to determine whether 80% of book value is more or less
than the price at which our common would trade.
RECOMMENDATION OF THE TRUSTEE
The Trust is a passive entity and does not engage in an active business.
The Trust Agreement does not require the Trustee to accept or reject the
exchange offer or take any actions with respect to the offer. The Trustee,
therefore, has not expressed an opinion regarding the exchange offer or made a
recommendation regarding the acceptance of the offer.
29
PLAN OF OPERATION
We were incorporated on March 27, 2001. On October 12, 2001, we acquired
working interests ranging from 23% to 35% in three properties in the Gulf of
Mexico located in federal waters offshore Louisiana. As of September 30, 2001,
there were eight productive oil wells and five productive gas wells on two of
these properties. On October 11, 2001, we acquired the royalty interest that
burdens the working interests from the Trust. In addition to these acquisitions,
we acquired a 21% working interest in a gas well onshore Texas in October, 2001.
Prior to acquiring the working interests and the royalty, we had less than
$150,000 in assets. We had a net loss of $381,086 for our fiscal year ended
September 30, 2001.
We intend to participate in any exploration conducted on and in the
development of the properties that we acquired. However, we have a limited
amount of funds with which to participate in the development of these
properties. Currently, we intend to fund the exploration and development of our
recently acquired properties using cash flows from current production. To the
extent that these cash flows are insufficient, we may choose, or be required, to
elect not to participate in the drilling of wells proposed by the operators of
these properties. If this occurs, our working interests could be reduced or
forfeited if we choose not to participate in an exploratory well or other
operation and our right to receive production may be forfeited or suspended
until the other working interest owners recover a specified multiple of their
costs if we choose not to participate in the drilling of, or other operation on,
a well.
In addition to exploring and developing our existing properties, we may
review potential property acquisitions. At this time, we have not reviewed any
available properties, other than those properties that we have already acquired,
that we intend to acquire. Currently, we intend to limit any additional
acquisitions to properties that can be acquired using funds from current
operations. However, we may choose to seek other financing alternatives, such as
obtaining a credit agreement or a private debt or equity offering.
RESULTS OF OPERATIONS
Our results of operations are primarily influenced by the prices we receive
for oil and gas production and the costs we incur to produce oil and gas. The
following table shows information about our prices and costs as well as
production volumes. We did not have any significant assets until October 11,
2001. All of the information provided below is on a pro forma basis assuming we
had acquired the working interests and royalty as of the indicated date. Prices
shown below include the effects of our hedging activities.
[Enlarge/Download Table]
PRO FORMA PRO FORMA
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
2000 2001
------------ -------------------
PRODUCTION:
Oil (Bbls)........................................... 292,345 198,068
Gas (Mcf)............................................ 926,945 699,978
Total production (Mcfe).............................. 2,681,015 1,888,386
AVERAGE SALES PRICE:
Oil (per Bbl)........................................ $ 30.69 $ 27.79
Gas (per Mcf)........................................ 4.02 5.07
Total production (per Mcfe).......................... 4.76 4.80
AVERAGE COSTS (PER MCFE):
Lease operating expenses (excluding severance
taxes)............................................ $ 1.05 $ .94
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL SOURCES AND EXPENDITURES
We agreed to acquire the working interests from IMC for $1.1 million. Our
agreement to acquire the working interests from IMC provided that we would be
entitled to the net proceeds of production from January 1, 2001 to the closing
date, as a purchase price adjustment. We received a $1.5 million purchase price
30
adjustment in connection with the purchase of our three properties on October
12, 2001. We expect to receive approximately $3 million of additional amounts
representing purchase price adjustments on January 11, 2002. The actual amount
of this adjustment will depend upon the final outcome of purchase price
adjustment determinations and account reconciliations. We believe that our cash
flows from operations and cash on hand will be sufficient to fund our current
operations for the next 12 months. Projected cash flows from operations and cash
on hand should be sufficient to fund our anticipated drilling and property
acquisition programs for the next 12 months. However, we may obtain a credit
facility or utilize conventional debt and equity offerings to finance our
capital expenditure program. In addition, other financing options may be
considered for future property acquisitions.
FINANCIAL INSTRUMENTS
Our revenues are derived from the sale of oil and natural gas. The prices
of oil and natural gas are extremely volatile and experience large fluctuations
as a result of relatively small changes in supplies. We may periodically use
derivative financial instruments to hedge oil and gas price risks. In a typical
hedge transaction, we have the right to receive from the counterparties to the
hedge the excess of the fixed price specified in the hedge over a floating price
based on a market index, multiplied by the quantity hedged. If the floating
price exceeds the fixed price, we must pay the counterparties the difference
multiplied by the quantity hedged. We must pay the difference between the
floating price and the fixed price when the floating price exceeds the fixed
price regardless of whether we have sufficient production to cover the
quantities specified in the hedge. If there are significant reductions in our
production at times when the floating price exceeds the fixed price, we could be
required to make payments under the hedge agreements even though these payments
are not offset by sales of production. Hedging will also prevent us from
receiving the full advantage of increases in oil or gas prices above the amount
specified in the hedge. We may also enter into price "collars" to reduce the
risk of changes in oil and gas prices. Under a collar, no payments are due by
either party so long as the market price is above a floor set in the collar and
below a ceiling. If the price falls below the floor, the counterparty to the
collar pays the difference to us and if the price is above the ceiling, we pay
the counterparty the difference.
As of January 8, 2002, we have hedged approximately 150 Bbls of oil per day
at a price of $20.28 for the twelve month period beginning January 1, 2002 and
1,000 Mcfe of gas per day at a price of $2.00 per Mcfe for the six month period
beginning February 1, 2002.
BUSINESS AND PROPERTIES
Texas Standard Oil Company was incorporated in Texas in March 2001. We were
formed to acquire and consolidate the working interests and net overriding
royalty interest on three properties located in federal waters, offshore
Louisiana and offshore Texas. We acquired the royalty on October 11, 2001 and
the working interests on October 12, 2001. Prior to October 11, 2001, we had
less than $150,000 in assets. All of the information provided below is on a pro
forma basis assuming we had acquired the working interests and royalty as of the
indicated date.
As of September 30, 2001, on a pro forma basis, there were eight gross (1.8
net) productive oil wells and five gross (1.4 net) productive gas wells on two
properties. We intend to develop these properties and pursue further
acquisitions of oil and gas properties. As of September 30, 2001, on a pro forma
basis, our estimated net proved reserves were 938,134 BOE, all of which were
proved developed.
31
The following table provides information about our estimated net proved
reserves and production, on a pro forma basis, as of September 30, 2001.
[Enlarge/Download Table]
PRODUCTION
FOR THE NINE
MONTHS PRE-TAX
ENDED ESTIMATED NET PROVED RESERVES DISCOUNTED
SEPTEMBER 30, ----------------------------- PRESENT
AREA NAME PRIMARY OPERATOR 2001 OIL GAS TOTAL VALUE(1)
--------- ------------------ ------------- -------- ------- -------- ----------
(BOE) (BBLS) (MMCF) (BOE) ($000)
GULF OF MEXICO OFFSHORE:
West Cameron Area Block
498.................... El Paso Production 295,100 342,730 2,904 826,730 $5,224
Company
West Delta Area Block
34..................... Forest Oil 19,374 1,738 658 111,405 $ (265)
Corporation
---------------
(1) Represents the present value of future net cash flows before deduction of
federal income taxes, discounted at 10%, attributable to estimated proved
reserves, on a pro forma basis, as of September 30, 2001, as set forth in
our independent reserve reports prepared by Ryder Scott Company, L.P.,
Independent Petroleum Engineers.
PROPERTIES
As of December 31, 2001, we owned 7,500 gross (1,587 net) acres in two
federal block located offshore Louisiana and 100 gross (21 net) acres onshore
Texas. As of September 30, 2001, on a pro forma basis, we had an average working
interest of 24.7% in thirteen producing wells. As of December 31, 2001, we did
not have any wells in the process of being drilled.
West Cameron Area Block 498. West Cameron Block 498 is located offshore
Louisiana in federal waters. We own a 23.1% working interest and a 19.2% net
revenue interest in ten producing wells. This property consists of 5,000 gross
(962 net) acres. This property has two existing platforms; however, all of the
wells on one platform are currently shut-in and there is no production. The
second platform consists of ten actively producing wells with 14 completions.
Net average daily production for these ten wells during the nine month period
ended September 30, 2001 was 1,085 BOE per day. All oil production from this
platform is subject to a purchase agreement with a pipeline company. We are
required to pay a transportation fee to the pipeline company that is based on
the average daily volume of oil produced. If oil production from this area does
not meet specified minimum annual and average daily volumes, we are required to
pay the pipeline company a deficiency payment. During 2000, IMC Global, the
prior owner of our working interest, paid the pipeline company a deficiency
payment of approximately $500,000. We currently anticipate a deficiency penalty
being assessed for 2001. El Paso Production Company operates this block.
West Delta Area Block 34. West Delta Area Block 34 is located offshore
Louisiana in federal waters. We own a 30.0% working interest and a 25.0% net
revenue interest in three producing wells. This property consists of 2,500 gross
(625 net) acres. The net average daily production for the three actively
producing wells located on this property during the nine month period ended
September 30, 2001 was 71 BOE per day. Forest Oil Corporation operates this
block.
High Island Area Block A552. High Island Area Block A552 is located
offshore Texas in federal waters. We own a 35% working interest and a 29.2% net
revenue interest in this property. This property is currently producing
immaterial quantities of oil and does not have any proved reserves attributed to
it. The platform on this property is currently being used to process third-party
liquids which are being produced from a nearby property. While this processing
income serves to offset a portion of the operating costs of this platform, the
overall costs of operating the platform still exceed such processing income. The
estimated plugging and abandonment costs of this property are $1.3 million.
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Coles #1. In October, 2001, we acquired a 21% working interest in an
exploratory gas well located in Goliad County, Texas. This well was completed in
November 2001 and produced limited quantities of gas until it was shut-in on
January 7, 2001 in preparation for re-completion. We acquired our working
interest from Roberson Oil Company and an unrelated third party for $55,000. The
purchase price included the prepayment of estimated dry hole costs. Our share of
the completion costs, which are estimated at $34,000, has also been prepaid.
Roberson Oil Company, which is wholly-owned by Timothy Roberson, our CEO, has a
16% carried working interest in this well. Roberson Oil Company is the operator
of this well. As of December 31, 2001, there were no proved reserves
attributable to this well.
OIL AND GAS RESERVES
Our only assets are the three properties we acquired in October 2001 and
the gas well we acquired in October 2001. The following table sets forth
information about our pro forma estimated net proved reserves as of the dates
set forth below. Ryder Scott Company, L.P., our independent petroleum engineers,
prepared these estimates.
[Enlarge/Download Table]
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1999 2000 2001
------ ------- -------------
Proved developed:
Oil (MBbls)...................................... 518 452 344
Gas (MMcf)....................................... 3,053 3,501 3,562
Proved undeveloped:
Oil (MBbls)...................................... -- -- --
Gas (MMcf)....................................... -- -- --
Total proved:
Oil (MBbls)...................................... 518 452 344
Gas (MMcf)....................................... 3,053 3,501 3,562
Estimated future net cash flows before income taxes... $6,561 $16,436 $3,491
Pre-Tax discounted present value (000s)(1)............ 6,018 15,367 4,220
Standardized measure of discounted future net cash
flows (000s)........................................ 3,790 10,143 2,786
---------------
(1) Represents the present value of future net cash flows before deduction of
federal income taxes, discounted at 10%, attributable to pro forma estimated
proved reserves as of December 31, 1999 and 2000 and September 30, 2001, as
set forth in our independent reserve reports prepared by Ryder Scott
Company, L.P., Independent Petroleum Engineers.
Our independent reserve engineers prepared the estimates of the proved
reserves and the future net cash flows, and the present value and standardized
measure thereof, attributable to these proved reserves. There are numerous
uncertainties inherent in estimating quantities of proved reserves, including
many factors beyond our control or the control of the reserve engineers. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner, and the accuracy of any
reserve or cash flow estimate is a function of the quality of available data and
of engineering and geological interpretation and judgment. Estimates by
different engineers often vary, sometimes significantly. In addition, physical
factors, including the results of drilling, testing and production subsequent to
the date of an estimate, as well as economic factors, such as an increase or
decrease in product prices that renders production of such reserves more or less
economic, may justify revision of such estimates. Accordingly, reserve estimates
are different from the quantities of oil and gas that are ultimately recovered.
We have not filed any reports with other federal agencies which contain an
estimate of total proved net oil and gas reserves.
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PRODUCTIVE WELLS
On a pro forma basis, we did not drill any development or exploratory wells
during the years ended December 31, 2000 and 1999 and the nine months ended
September 30, 2001.
On a pro forma basis, we owned working interests in eight gross (1.8 net)
producing oil and five gross (1.4 net) producing gas wells as of September 30,
2001. A well is categorized as an oil well or a natural gas well based upon the
ratio of oil to gas reserves on a Mcfe basis. However, some of our wells produce
both oil and gas. At September 30, 2001, we did not have any wells in the
process of being drilled. One of our wells has two oil completions and one well
has one oil and one gas completion. A well with at least one oil completion is
classified as an oil well.
LEASEHOLD ACREAGE
The following table show our approximate developed and undeveloped gross
and net leasehold acreage as of September 30, 2001, on a pro forma basis.
[Download Table]
DEVELOPED UNDEVELOPED
------------- -----------
LOCATION GROSS NET GROSS NET
-------- ----- ----- ----- ---
FEDERAL WATERS:
Texas............................................... 5,760 1,680 0 0
Louisiana........................................... 7,500 1,587 0 0
MAJOR CUSTOMERS
Our production is sold on month-to-month contracts at prevailing prices.
The following table identifies, on a pro forma basis, customers to whom we sold
a significant percentage of our total oil and gas production during each of the
following periods:
[Enlarge/Download Table]
YEAR ENDED
DECEMBER 31,
------------ NINE MONTHS ENDED
1999 2000 SEPTEMBER 30, 2001
---- ---- ------------------
EOTT Energy Operating L.P............................. -- 67% 47%
Plains Marketing, L.P................................. 46% 6% --
Coast Energy, Inc. ................................... 54% 26% 46%
Pro Gas Inc. ......................................... -- -- 7%
Because alternative purchasers of oil and gas are readily available, we
believe that the loss of any of these purchasers would not result in a material
adverse effect on our ability to market future oil and gas production.
TITLE TO PROPERTIES
We believe that we own our oil and gas properties in accordance with
standards generally accepted in the oil and gas industry, subject to such
exceptions which, in our opinion, are not so material as to detract
substantially from the use or value of such properties. To the extent that such
burdens and obligations affect our rights to production revenues, they have been
taken into account in calculating our net revenue interests and in estimating
the quantity and value of our reserves. We believe that the burdens and
obligations affecting our properties are typical in the industry for properties
of the kind owned by us.
COMPETITION
We operate in the highly competitive areas of oil and gas exploration,
development and production. We compete for the purchase of leases in the Gulf of
Mexico from the U.S. government and from other oil and gas companies, and from
private mineral owners and other oil and gas companies onshore. These leases
include
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exploration prospects as well as properties with proved reserves. Factors that
affect our ability to compete in the marketplace include:
- our access to the capital necessary to drill wells and acquire
properties;
- technology and our ability to acquire and analyze seismic, geological and
other information relating to a property;
- our ability to retain the personnel necessary to properly evaluate
seismic and other information relating to a property;
- the location of, and our ability to access, platforms, pipelines and
other facilities used to produce and transport oil and gas production;
- the standards we establish for the minimum projected return on an
investment of our capital; and
- the availability of alternate fuel sources.
Our competitors include major integrated oil companies, substantial
independent energy companies, affiliates of major interstate and intrastate
pipelines and national and local gas gatherers, many of which possess greater
financial, technological and other resources than we do.
MARKETS
Our ability to market oil and gas from our wells depends upon numerous
factors beyond our control, including:
- the extent of domestic production and imports of oil and gas;
- the proximity of gas production to gas pipelines;
- the availability of capacity in such pipelines;
- the demand for oil and gas by utilities and other end users;
- the availability of alternative fuel sources;
- the effects of inclement weather; and
- state and federal regulation of oil and gas production and federal
regulation of gas sold or transported in interstate commerce.
The exact effects of these factors cannot be accurately predicted. No assurance
can be given that we will be able to market all of the oil and gas produced by
us or that favorable prices can be obtained for the oil and gas we produce.
In view of the many uncertainties affecting the supply and demand for oil,
gas and refined petroleum products, we are unable to predict future oil and gas
prices and demand or the overall effect such prices and demand will have on us.
We do not believe that the loss of any of our oil purchasers would have a
material adverse effect on our operations. Additionally, since substantially all
of our gas sales are on the spot market, the loss of one or more gas purchasers
should not materially and adversely affect our financial condition.
CORPORATE OFFICES
Our headquarters are located in Houston, Texas, in approximately 1,000
square feet of leased space. Replacement of our leased offices would not result
in material expenditures by us as alternative locations to our leased space are
anticipated to be readily available.
EMPLOYEES
We had five full-time and no part-time employees as of December 31, 2001. A
union does not represent any of our employees. We believe that our relations
with our employees are good.
35
LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings that arise in
the ordinary course of business. As of the date of this prospectus, we are not a
party to any pending legal proceedings that we believe could reasonably be
expected to have a material effect on our financial position or results of
operations.
ENVIRONMENTAL REGULATIONS
General. Our activities are subject to federal, state and local laws and
regulations governing environmental quality and pollution control. Although no
assurances can be made, we believe that, absent the occurrence of an
extraordinary event, compliance with existing federal, state and local laws,
rules and regulations regulating the release of materials in the environment or
otherwise relating to the protection of the environment will not have a material
effect upon our capital expenditures, earnings or competitive position with
respect to our existing assets and operations. We cannot predict what effect
additional regulation or legislation, enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from our operations could have on our activities.
Our activities with respect to natural gas facilities are subject to
stringent environmental regulation by state and federal authorities, including
the United States Environmental Protection Agency. Such regulation can increase
the cost of planning, designing, installing and operating such facilities. In
most instances, the regulatory requirements relate to water and air pollution
control measures. Although we believe that compliance with environmental
regulations will not have a material adverse effect on us, risks of substantial
costs and liabilities are inherent in oil and gas production operations, and
there can be no assurance that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as stricter
environmental laws and regulations, and claims for damages to property or
persons resulting from oil and gas production, would result in us incurring
substantial costs and liabilities.
Solid and Hazardous Waste. We own or lease numerous properties that have
been used for the production of oil and gas for many years. Although we have
utilized operating and disposal practices standard in the industry at the time,
hydrocarbons or other solid wastes may have been disposed or released on or
under these properties. In addition, many of these properties have been operated
by third parties. We had no control over such entities' treatment of
hydrocarbons or other solid wastes and the manner in which such substances may
have been disposed or released. State and federal laws applicable to oil and gas
wastes and properties have gradually become stricter over time. Under these new
laws, we could be required to remove or remediate previously disposed wastes,
including wastes disposed or released by prior owners or operators, or property
contamination, or to perform remedial plugging operations to prevent future
contamination.
We generate wastes, including hazardous wastes, that are subject to the
Federal Resource Conservation and Recovery Act and comparable state statutes.
The Environmental Protection Agency has limited the disposal options for certain
hazardous wastes and is considering adoption of stricter disposal standards for
nonhazardous wastes. Furthermore, it is possible that certain wastes currently
exempt from treatment as "hazardous wastes" generated by our oil and gas
operations may in the future be designated as "hazardous wastes" under the
Federal Resource Conservation and Recovery Act or other applicable statutes and,
therefore, may be subject to more rigorous and costly disposal requirements.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act, also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons with respect to the release of a "hazardous substance" into the
environment. These persons include the owner and operator of a site and persons
that disposed or arranged for the disposal of the hazardous substances found at
a site. Superfund also authorizes the Environmental Protection Agency and, in
some cases, third parties to take actions in response to threats to the public
health or the environment and to seek to recover from the responsible classes of
persons the costs of such action. Neither we nor our predecessors has been
designated as a potentially responsible party by the Environmental Protection
Agency under Superfund with respect to any of our leases.
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Oil Pollution Act. The Oil Pollution Act of 1990 and regulations
thereunder impose a variety of regulations on "responsible parties" related to
the prevention of oil spills and liability for damages resulting from such
spills in United States waters. A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The Oil Pollution Act assigns liability
to each responsible party for oil removal costs and a variety of public and
private damages. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to
cooperate fully in the cleanup, liability limits likewise do not apply. Few
defenses exist to the liability imposed by the Oil Pollution Act.
The Oil Pollution Act also imposes ongoing requirements on a responsible
party, including proof of financial responsibility to cover at least some costs
in a potential spill. Amendments to the Oil Pollution Act that were enacted in
1996 require owners and operators of offshore facilities that have a worst case
oil spill potential of more than 1,000 barrels to demonstrate financial
responsibility in amounts ranging from $10 million in specified state waters and
$35 million in federal Outer Continental Shelf waters up to $150 million, based
upon worst case oil-spill discharge volume calculations. We believe that we
currently have established adequate proof of financial responsibility for our
offshore facilities.
Air Emissions. Our operations are subject to state and federal regulations
for the control of emissions from sources of air pollution. Administrative
enforcement actions for failure to comply strictly with air regulations or
permits are generally resolved by payment of monetary fines and correction of
any identified deficiencies. Alternatively, regulatory agencies could require us
to forego construction or operation of certain air emission sources. We believe
that in such case we would have enough permitted or permittable capacity to
continue our operations without a material adverse effect on any particular
producing field.
OSHA. We are subject to the requirements of the Federal Occupational
Safety and Health Act and comparable state statutes. The Federal Occupational
Safety and Health Act hazard communication standard, the Environmental
Protection Agency community right-to-know regulations under Title III of the
Federal Superfund Amendment and Reauthorization Act and similar state statutes
require us to organize and/or disclose information about hazardous materials
used or produced in our operations. This information must be provided to
employees, state and local governmental authorities and local citizens.
Water. The Federal Water Pollution Contract Act, or Clean Water Act,
imposes restrictions and strict controls regarding the discharge of produced
waters and other oil and gas wastes into navigable waters. Such discharges are
typically authorized by National Pollutant Discharge Elimination System permits.
The Federal Water Pollution Control Act provides for civil, criminal and
administrative penalties for any unauthorized discharges and along with the Oil
Pollution Act of 1990, imposes substantial potential liability for the costs of
removal, remediation and damages. State laws for the control of water pollution
also provide varying civil, criminal and administrative penalties and
liabilities in the case of a discharge of petroleum, its derivatives or
hazardous substances into state waters. In addition, the Coastal Zone Management
Act authorizes state implementation and development of programs of management
measures for non-point source pollution to restore and protect coastal waters.
As of January 1, 1997, the Company's federal National Pollutant Discharge
Elimination System permits prohibit the discharge of produced water, and other
substances generated by the oil and gas industry, from wells located in the
coastal waters of Louisiana. The Louisiana Department of Environmental Quality,
as administrator of the National Pollutant Discharge Elimination System permits
in Louisiana, issued on December 30, 1996, and reissued on February 28, 1997, an
emergency rule to allow continued discharge of produced waters in the coastal
area, subject to a zero discharge requirement by no later than December 31, 1999
for produced water being currently discharged into major deltaic passes of the
Mississippi River.
Protected Species. The Endangered Species Act seeks to ensure that
activities do no jeopardize endangered or threatened animal, fish and plant
species, nor destroy or modify the critical habitat of such species. Under the
Endangered Species Act, exploration and production operations, as well as
actions by federal agencies, may not significantly impair or jeopardize the
species or its habitat. The Endangered Species Act provides for criminal
penalties for willful violations of the Endangered Species Act. Other statutes
which
37
provide protection to animal and plant species and which may apply to the
Company's operations include, but are not necessarily limited to, the Marine
Mammal Protection Act, the Marine Protection, Research and Sanctuaries Act, the
Fish and Wildlife Coordination Act, the fishery Conservation and Management Act,
the Migratory Bird Treaty Act and the National Historic Preservation Act.
Wetlands. Pursuant to the Federal Water Pollution Contract Act, The United
States Corps of Engineers, with oversight by the EPA, administers a complex
program that regulates activities in wetland areas. Some of the Company's
operations are in areas that have been designated as wetlands and, as such, are
subject to permitting requirements. Failure to properly obtain a permit or
violation of permit terms could result in the issuance of compliance orders,
restorative injunctions and a host of civil, criminal and administrative
penalties. The Company believes that it is currently in substantial compliance
with these permitting requirements.
Wildlife Refuges/Bird Sanctuaries. Portions of the Company's properties
are located in or adjacent to federal and state wildlife refuges and bird
sanctuaries. The Company's operations in such area must comply with regulations
governing air and water discharge which are more stringent than in its other
areas of operations. The Company has not been, and does not anticipate that it
will be, materially affected by any such requirements.
Abandonment Costs. The Company is typically responsible for payment of
abandonment costs on the oil and gas properties it operates. As of December 31,
2001, total future abandonment costs on the Company's oil and gas properties
estimated to be incurred were approximately $4.2 million. Estimates of
abandonment costs and their timing may change due to many factors including
actual production results, inflation rates and changes in environmental laws and
regulations.
We believe that we are in substantial compliance with current applicable
environmental laws and regulations and that continued compliance with existing
requirements would not have a material adverse impact on us.
38
MANAGEMENT
OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
[Enlarge/Download Table]
POSITION DIRECTORS TERMS
NAME AGE SINCE POSITION EXPIRES IN
---- --- -------- --------------------------- ---------------
Timothy M. Roberson........ 44 2001 Chief Executive Officer, 2002
President and Chairman of
the Board of Directors
Joseph F. Langston, Jr. ... 49 2001 Chief Financial Officer and 2002
Director
Charles A. Sharman......... 47 2001 General Counsel, Vice 2002
President of Land and Legal
and Director
The following is a brief description of the background and principal
occupation of each director and executive officer.
Timothy M. Roberson is our Chief Executive Officer, President and Chairman
of our Board of Directors. Mr. Roberson formed Texas Standard in March 2001. Mr.
Roberson is sole owner and president of Roberson Oil Company, an independent
exploration and production company which he formed in 1998. Roberson Oil Company
is the successor operator to Pecos Petroleum Company, an independent exploration
and production company. Mr. Roberson co-founded Pecos Petroleum Company in
October 1987 and has served as President of the company since its inception. Mr.
Roberson is the sole owner of Pecos which is currently in the process of being
liquidated. Prior to forming Pecos, Mr. Roberson had managed an exploration team
of several geologists and consultants for Edge Petroleum Corporation, an
independent exploration and production company, from 1984 to 1987. Mr. Roberson
gained major oil company experience as a staff landman with Gulf Oil Company
from 1982 to 1983 and as a contract landman for ARCO during 1981. Mr. Roberson
received a B.B.A. from the University of Texas at Austin in 1980 and conducted
post-graduate work at the University of Texas in Petroleum Land Management and
Geology. Mr. Roberson is a member of the American Association of Professional
Landmen, the Houston Geological Society, the Houston Producers' Forum and the
Houston Petroleum Club.
Joseph F. "Chip" Langston, Jr. is our Chief Financial Officer and a
Director. Mr. Langston has served as President of Langston Investments, Inc.,
which provides corporate financial advisory services primarily to small
exploration and development companies, since he formed Langston Investments in
1984. Mr. Langston served as Vice-President of Corporate Finance and Director of
Photonics Corporation from November 2000 to June 2001. From July 2001 to October
2001, Mr. Langston served as Vice-President of Corporate Finance and Director of
International Cavitation Technologies, Inc., an oilfield services company. In
1989, Mr. Langston formed Search Exploration Inc., an independent exploration
and production company, by consolidating 33 limited partnerships. Mr. Langston
served as the President and Chairman of the Board of Search until it was merged
with Harken Energy Corporation in May 1995. Prior to forming Search, Mr.
Langston had served as Vice President of Corporate Finance and a Director of
Trans-Western Exploration Inc., an independent exploration and production
company, from 1977 until 1983. Mr. Langston received a B.B.A. in Accounting/
Finance from the University of Texas at Arlington in 1974. Mr. Langston is a
Certified Public Accountant.
Charles A. Sharman is our Vice President of Land and Legal, General Counsel
and a Director. Mr. Sharman has been engaged in the private practice of law
since August 1999. Mr. Sharman co-founded Allied Natural Gas Corporation in
February 1996 to acquire offshore oil and gas properties for redevelopment. Mr.
Sharman served as President of Allied until the company ceased doing business in
July 1999. Allied filed for bankruptcy in April 1999. Mr. Sharman filed a
personal bankruptcy petition in September 1999. Prior to forming Allied, Mr.
Sharman had been engaged in the private practice of law specializing in oil and
gas and energy transactions and financing since 1982. Mr. Sharman served as an
Assistant Attorney General of Texas from 1979 until he entered private practice
in 1981. Mr. Sharman received a B.A., cum laude, from Vanderbilt
39
University in 1975, and a J.D. from the University of Texas School of Law in
1978. He is a member of the State Bar of Texas, the United States District Court
for the Southern District of Texas and the United States Court of Appeals for
the Fifth Circuit.
All of our officers and directors are United States citizens.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to our Chief
Executive Officer and four most highly compensated executive officers whose
salary and bonus exceeded $100,000 for our year ended September 30, 2001.
[Enlarge/Download Table]
ANNUAL COMPENSATION
--------------------------------
OTHER ANNUAL ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
----------------- ---- ------ -------- ------------ ------------
Timothy M. Roberson............... 2001 $0 $150,000 $0 $0
Chief Executive Officer,
President and Chairman of
the Board
Joseph F. Langston, Jr. .......... 2001 0 150,000 0 0
Chief Financial Officer
and Director
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We are currently in the process of negotiating an employment agreement with
Mr. Roberson and a consulting agreement with Mr. Langston. We anticipate
completing these agreements prior to consummating the exchange offer.
STOCK-BASED PLANS
On January 4, 2002 our board of directors and shareholders approved our
2002 Equity Incentive Plan. Pursuant to this plan, 300,000 shares of common
stock were reserved for issuance upon the exercise of options or grants of
restricted stock. The plan is administered by our board of directors. As of
January 7, 2002, no awards had been made pursuant to the plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
We did not grant any options to purchase our common stock during our fiscal
year ended September 30, 2001 to our Chief Executive Officer or any other
executive officer listed in the summary compensation table above.
AGGREGATE OPTION/SAR EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR
VALUES
As of September 30, 2001, we did not have any outstanding options to
purchase our common stock. No options to purchase our common stock were
exercised by our Chief Executive Officer or any other executive officer listed
in the summary compensation table above during our fiscal year ended September
30, 2001.
LONG TERM INCENTIVE PLAN AWARDS
Other than our 2002 Equity Incentive Plan, we do not have any long-term
incentive plans for our employees.
40
BENEFICIAL OWNERSHIP OF OUR COMMON STOCK
The following table shows the ownership of our common stock, and the pro
forma ownership of our common stock immediately after completion of the exchange
offer assuming that all eligible unitholders tender their units, by:
- our chief executive officer;
- all of our directors;
- all of our executive officers and directors as a group; and
- anyone who is known by us to beneficially own 5% or more of our
outstanding common stock.
Based on SEC rules, shares of common stock which an individual or group has
the right to acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group. These shares are not deemed to
be outstanding for the purpose of computing the percentage ownership of any
other person shown on this table.
Unless otherwise indicated, each person named in the following table has
the sole power to vote and dispose of the shares listed next to their name. The
address of each of our executive officers and directors is 6371 Richmond Avenue,
Suite 100, Houston, Texas 77057, unless otherwise indicated. Information in the
tables and accompanying text has been provided to us by our directors, executive
officers and 5% shareholders. The information provided below is based on
information available to us as of January 7, 2002.
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PRO FORMA ESTIMATED
CURRENT BENEFICIAL BENEFICIAL
---------------------- ----------------------
OWNERSHIP OWNERSHIP
---------------------- ----------------------
NAME AND ADDRESS NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
OF BENEFICIAL OWNERS SHARES OF TOTAL SHARES OF TOTAL
-------------------- --------- ---------- --------- ----------
Timothy M. Roberson....................... 747,600 59.5% 747,600 38.1%
Joseph F. Langston, Jr. .................. 508,871 40.5% 508,871 25.9%
All Directors and Executive Officers as a
Group (two persons)..................... 1,256,471 100% 1,256,471 64%
---------------
* Less than 1%.
Timothy M. Roberson. The shares beneficially owned by Mr. Roberson include
747,600 shares held by Roberson LP-1. Mr. Roberson holds a 96% limited partner
interest in Roberson LP-1. Roberson GP, Inc. is wholly-owned by Mr. Roberson and
owns a 1% general partner interest in Roberson LP-1. The Roberson Children's
Trust, the beneficiaries of which are Mr. Roberson's three children, owns a 3%
limited partner interest in Roberson LP.
Joseph F. Langston, Jr. The shares beneficially owned by Mr. Langston
include 508,871 shares held by the Langston Family Limited Partnership. Mr.
Langston is the sole managing partner of the Langston Family Limited
Partnership.
CERTAIN TRANSACTIONS
WORKING CAPITAL LOANS
On July 13, 2001 we executed a $115,000 promissory note payable to Roberson
Oil Company. This loan bore interest at 7% and was repaid in October 2001.
Roberson Oil Company is wholly owned by Timothy M. Roberson, our Chief Executive
Officer and President. Roberson Oil Company provided us with these funds in
order for us to pay a $110,000 deposit to IMC Global in connection with the
acquisition of the working interests from IMC Global. We repaid the loan when we
received funds as a result of the purchase price adjustment paid to us upon the
closing of our acquisition of the working interests.
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SERVICES AGREEMENTS AND PURCHASE OF ASSETS
We have entered into an agreement with Roberson Oil Company whereby we will
provide accounting and administrative services to Roberson Oil Company for a fee
of $3,000 per month. The services we are providing consist of accounting, legal
and administrative services. In addition, on November 27, 2001, we purchased
furniture, computers, other office equipment and supplies from Roberson Oil
Company for $20,000.
GOLIAD COUNTY WELL
In October 2001, we purchased a 16.8% working interest in an exploratory
gas well located in Goliad County, Texas from Roberson Oil Company for $44,000.
We later purchased an additional 4.2% working interest in this well from Sook
Chung, an unrelated third party for $11,000. The purchase price of $55,000
included the prepayment of estimated dry hole costs. This prospect was assembled
and promoted by Roberson Oil Company. Roberson Oil Company received a 16%
working interest that did not require Roberson Oil Company to carry any of the
costs of the well associated with the wells drilling and evaluation. We acquired
our working interest from Roberson Oil Company under the same basic terms and
conditions as other participants in the project.
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COMPARISON OF SECURITY HOLDER RIGHTS AND
CERTAIN CHANGES IN THE RIGHTS OF UNITHOLDERS
We are incorporated under the laws of the State of Texas, and the Trust is
subject to the laws of the state of Texas. The Trust's unitholders who tender
their units in the exchange offer, whose rights are currently governed by Texas
law and the Trust Agreement, will, upon consummation of the exchange offer,
become shareholders whose rights will be governed by Texas law and our articles
of incorporation and bylaws. The following summary does not purport to be a
complete statement of the rights of our shareholders as compared with the rights
of the Trust unitholders and is qualified in its entirety by the Texas Business
Corporation Act, to which unitholders are referred.
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BOARD OF DIRECTORS/ Under Texas law, the powers of a The trustee is authorized to take
TRUSTEE corporation are exercised by or any action that, in its judgment,
under the authority of the board is necessary or advisable to best
of directors. Texas law permits achieve the purposes of the Trust,
any Texas corporation to classify so long as such modifications or
its board of directors into as settlements do not alter the
many as three classes with nature of the royalty interest or
staggered terms of office. Our alter the partnership agreement in
articles do not provide for a a way that changes the purposes or
staggered board. scope of activities of the
partnership.
PURPOSE The purpose of the corporation is The purposes of the Trust are: to
to transact any or all lawful protect and conserve, for the
business for which a corporation benefit of the unitholders, the
may be organized by the Texas Trust estate; to receive the
Business Corporation Act. Trust's share of any distributions
from the partnership; and to pay,
or provide for the payment of, any
liabilities incurred in carrying
out the purposes of the Trust, and
thereafter to distribute the
remaining amounts of cash received
by the Trust pro rata to the
unitholders.
OWNERSHIP INTEREST OF Under Texas law, a common share- The unitholders own, pro rata, the
SHAREHOLDERS AND holder owns legal and beneficial beneficial interest in the Trust
UNITHOLDERS title to an ownership interest in described in the Trust Agreement
the corporation. The rights and are entitled to participate
appurtenant to that interest are pro rata in the rights and
determined by the Texas Business benefits of the unitholders under
Corporation Act and the articles the Trust Agreement. No unitholder
and bylaws of the corporation, has any title in any real property
which rights, in our case, are interest that may be considered a
described more fully in this part of the Trust estate,
section. including the royalty interest or
any part of the royalty interest,
or in any asset of the Trust
estate to the extent that an
interest in such asset would cause
the interest of a unitholder to be
treated as other than an
intangible personal property
interest. The sole interest of
each unitholder is this benefi-
cial interest and the obligation
of the trustee to hold, manage and
dispose of the Trust estate and to
account for the Trust estate as
the Trust Agreement provides. No
unitholder has the right to
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call for or demand or secure any
partition during the continuance
of the Trust or during the period
of liquidation and winding up.
CHARTER AMENDMENTS Articles: Under Texas law, unless No amendment may be made to any
a different amount, not less than provision of the Trust Agreement
a majority, is specified in the that would increase the power of
articles of incorporation, an the trustee to engage in business
amendment to the articles of or investment activities or alter
incorporation requires the the rights of the unitholders. All
approval of the holders of at other amendments to the provisions
least two-thirds of the of the Trust Agreement may be made
outstanding shares of the only by a vote of the unitholders
corporation. Texas does not present or represented by proxy at
require shareholder approval for a meeting, provided that no
the board of directors of a amendment shall be effective
corporation to fix the voting without the express written
powers, designation, preferences, approval of the trustee.
limitations, restrictions and
rights of a class of stock
provided that the corporation's
charter documents grant such power
to its board of directors. Our
articles grant such authority with
respect to the issuance of
preferred stock. The holders of
the outstanding shares of a
particular class are entitled to
vote as a class on a proposed
amendment if the amendment would
alter or change the power,
preferences or special rights of
one or more series of any class so
to affect them adversely. Our
articles may only be amended by a
two-thirds vote.
Bylaws: Texas law provides that
the board of directors has the
power to adopt, amend or repeal
the bylaws, unless this power is
reserved exclusively to the
shareholders in the articles of
incorporation. Our bylaws may be
amended by our board of directors.
MERGERS AND OTHER Under Texas law, shareholders have Not applicable to the Trust.
CORPORATE the right to vote on all mergers
REORGANIZATIONS to which the corporation is a
party, except for certain
parent-subsidiary mergers in which
the parent owns at least 90% of
the subsidiary and certain mergers
in which the corporation is the
surviving entity and the
shareholders voting power is not
diluted by more than 20%. In
certain circumstances, different
classes of securities may be
entitled to vote separately as
classes with respect to such
transactions. Unless the articles
of incorporation provide
otherwise, approval of the
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holders of at least two-thirds of
all outstanding shares entitled to
vote is required by Texas law to
approve a merger. Our articles
provide that a merger requires the
approval of two-thirds of our
outstanding shares.
BUSINESS COMBINATIONS We will continue to be subject to There is no comparable provision
the provisions of Part Thirteen of under the Texas Trust Code.
the Texas Business Corporation Act
until June 2003. That section
prohibits business combinations
with a person that has acquired
beneficial ownership of 20 per-
cent or more of our outstanding
voting stock during the past three
years unless the transaction is
approved by the board of directors
or shareholders. For a more
detailed description of Part
Thirteen of the Texas Business
Corporation Act, see "Description
of Capital Stock -- Texas
Anti-Takeover Law and Article of
Incorporation and Bylaw
Provisions".
SALES, LEASES, EXCHANGES Unless otherwise provided in a If approved by the unitholders
OR OTHER DISPOSITIONS corporation's articles of present or represented at a
incorporation, the sale, lease, meeting, the trustee shall sell
exchange or other disposition of that portion of the Trust estate
all, or substantially all, of the as directed by the unitholders at
property and assets of a Texas such meeting. The trustee is also
corporation not made in the authorized to cause the
regular course of business partnership to sell the part-
requires the approval of the nership's interest in an oil and
holders of at least two-thirds of gas lease or a portion of such
the outstanding shares of the interest, if, absent such sale,
corporation. Approval by the partnership's interest in the
two-thirds of our shares is lease would, in the opinion of the
required. managing general partner of the
partnership, be lost through
abandonment.
VOTING RIGHTS Under Texas law, unless otherwise The presence in person or by proxy
provided in the articles of of unitholders holding a majority
incorporation, with respect to any of the units outstanding as of the
meeting of shareholders, a quorum record date for determining the
is deemed to be present for any right to receive notice of a
matter to be presented at that meeting constitutes a quorum, and
meeting if the holders of a any matter is deemed to have been
majority of the shares entitled to approved by the unitholders if it
vote at the meeting are is approved by the vote of
represented at the meeting in unitholders holding a majority of
person or by proxy. the units represented at a
meeting. Each unitholder is
With respect to any matter, other entitled to one vote for each unit
than the election of directors or owned by him, and any unitholder
a matter for which the affirmative may vote in person or by duly
vote of the holders of a specified executed written proxy. No
portion of the shares entitled to provision is made in the Trust
vote is required by the Texas Agreement for action by written
Business Corporation Act, the consent of the unitholders.
affirmative vote of the holders of
a majority of
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the shares entitled to vote on,
and that voted or abstained with
respect to that matter at a
meeting of shareholders at which a
quorum is present, shall be the
act of the shareholders, unless
otherwise provided in the articles
of incorporation or the bylaws of
the corporation. Our bylaws
provide that if a quorum is pre-
sent at any meeting, the vote of
the holders of a majority of the
shares entitled to vote, present
in person or represented by proxy,
shall decide any question brought
before such meeting, unless the
question is one upon which a
different vote is required by law.
Any action required by the Texas
Business Corporation Act to be
taken at any annual or special
meeting of shareholders, or any
action which may be taken at any
annual or special meeting of
shareholders, may be taken without
a meeting, without prior notice,
and without a vote, if a consent
or consents in writing, setting
forth the action so taken, shall
have been signed by the holder or
holders of all the shares entitled
to vote with respect to the action
that is the subject of the
consent. The articles of
incorporation may provide that any
action required by the Texas
Business Corporation Act to be
taken at any annual or special
meeting of shareholders, or any
action which may be taken at any
annual or special meeting of
shareholders, may be taken without
a meeting, without prior notice,
and without a vote, if a consent
or consents in writing, setting
forth the action so taken, shall
be signed by the holder or holders
or shares having not less than the
minimum number of votes that would
be necessary to take such action
at a meeting at which the holders
of all shares entitled to vote on
the action were present and voted.
Our articles of incorporation
provide that such written consent
must be signed by a majority of
the shareholders entitled to vote
on the matter.
CUMULATIVE VOTING Cumulative voting for directors Not applicable.
entitles each shareholder to cast
a number of votes that is equal to
the number of
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voting shares held by such
shareholder multiplied by the
number of directors to be elected
and to cast all such votes for one
nominee or distribute such votes
among up to as many candidates as
there are positions to be filled.
Cumulative voting may enable a
minority shareholder or group of
shareholders to elect at least one
representative to the Board of
Directors where such shareholders
would not be able to elect any
directors without cumulative
voting. Texas law grants
cumulative voting unless the cor-
poration expressly denies the
right to vote cumulatively in the
corporation's articles of
incorporation. Our articles
expressly deny cumulative voting.
PREEMPTIVE RIGHTS Under Texas law, except to the No additional units may be created
extent limited or denied by under the documents creating the
statute or by the articles of Trust; therefore, preemptive
incorporation, shareholders have a rights are not applicable to the
preemptive right to acquire addi- Trust.
tional, unissued, or treasury
shares of the corporation, or
securities of the corporation
convertible into or carrying a
right to subscribe to or acquire
shares, whenever the corporation
issues such shares in sufficient
numbers so that the shareholder
may maintain its ownership
percentage in the corporation. Our
articles expressly deny preemptive
rights.
CLASS VOTING Under Texas law, class voting is Not applicable to the Trust.
required in connection with
- certain amendments of a corpora-
tion's articles of
incorporation;
- a merger or consolidation
requiring shareholder approval if
the plan of merger or
consolidation contains any
provision which, if contained in
a proposed amendment to a
corporation's articles of
incorporation, would require
class voting; or
- certain sales of all or
substantially all of the assets of
a corporation.
BOARD/TRUSTEE VACANCIES Under Texas law, vacancies on the In the event of a vacancy in the
Board of Directors during the year position of the trustee or if a
may be filled by the affirmative trustee has given notice of its
vote of a majority of the intention to resign, the
remaining directors then in unitholders present or represented
office, even if less than a at a meeting may appoint a
quorum, or successor trustee
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by election at an annual or meeting the requirements set forth
special meeting of the in the indenture. In the event
shareholders called for that that a vacancy in the position of
purpose. The Board of Directors is trustee continues for 60 days, a
limited to filling no more than successor trustee may be appointed
two vacancies per year. Any by any State or Federal District
director appointed holds office Court holding terms in Houston,
for the unexpired term of his Harris County, Texas, upon the
predecessor in office. application of any unitholder,
and, in the event any such
application is filed, such court
may appoint a temporary trustee at
any time after such application is
filed with it which shall, pending
the final appointment of a
trustee, have such powers and
duties as the court appointing
such temporary trustee shall
provide in its order of
appointment, consistent with the
provisions of the Trust Agreement.
REMOVAL OF Under Texas law, the articles of The trustee may be removed by the
DIRECTORS/TRUSTEE incorporation or bylaws may affirmative vote of a majority of
provide that holders of a number, the unitholders present or
but not less than a majority, of represented at a properly called
voting shares of each class meeting.
entitled to vote at an election of
directors may vote to remove any
director or the entire board with
or without cause, unless:
- the board is a classified board,
in which case, unless the articles
of incorporation provide
otherwise, directors may be
removed only for cause;
- the corporation has cumulative
voting in which case, if less than
the entire board is to be
removed, no director may be
removed if the vote cast against
his removal would be enough to
elect him; or
- a class or series of shares is
entitled by the articles of
incorporation to elect one or
more directors, in which case
only the holders of that class
or series shall be entitled to
vote on removal of any director
elected by such holders.
Our bylaws allow for the removal
of directors by majority vote with
or without cause.
RIGHT TO CALL SPECIAL Under Texas law, a special A meeting of the unitholders may
MEETINGS OF shareholders' meeting may be be called by the trustee or by
SHAREHOLDERS/ called by: unitholders owning not less than
UNITHOLDERS 10% of the then outstanding units.
- the president, the board of
directors, or any other person or
persons as may
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be authorized in the articles of
incorporation; or
- the holders of at least 10% of
all of the shares entitled to
vote, unless the articles of
incorporation provide for a
number of shares greater than or
less than 10%, in which event,
special meetings of the
shareholders may be called by
the holders of at least the
percentage of shares so
specified in the articles of
incorporation, but in no event
may the articles of incorpora-
tion provide for a number of
shares greater than 50% that
would be required to call a
special meeting.
Our articles and bylaws provide
that a special meeting may be
called by our president, a
majority of our board of directors
or holders of 50% of our out-
standing shares.
DISSENTERS' RIGHTS Under Texas law, dissenting No corresponding right.
shareholders of a corporation
engaged in certain major corporate
transactions are entitled to
appraisal rights. Appraisal rights
permit a shareholder to receive
cash equal to the fair market
value of the shareholder's shares,
in lieu of the consideration such
shareholder would otherwise
receive in any such transaction.
DERIVATIVE SUITS Under Texas law, a shareholder may No corresponding provision.
bring a derivative action on
behalf of the corporation if the
shareholder was a shareholder of
the corporation at the time of the
transaction in question or became
a shareholder by operation of law
from a person that was a share-
holder at that time.
DIVIDENDS AND Texas law prohibits distributions There is no comparable limitation
DISTRIBUTIONS to shareholders if: on distributions under the Texas
Trust Code. The trustee determines
- after giving effect to the the monthly distribution amount
distribution, the corporation based on the excess of proceeds
would be insolvent; or from distributions by the
partnership over the Trust's
- the distribution exceeds the liabilities for each month. The
surplus of the corporation. trustee distributes the monthly
Surplus is defined under Texas distribution amount, if any,
law as the excess of total quarterly.
assets over total debts and
stated capital, as such stated
capital may be adjusted by the
corporation's board of
directors.
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We do not anticipate paying
dividends in the foreseeable
future.
INVESTMENT POLICIES Our Articles of Incorporation The trustee is prohibited by the
permit us to engage in any lawful Trust Agreement from acquiring any
business activity. We intend to assets other than the Trust's
invest in oil and gas properties interest in the partnership or
and related assets. We have not engaging in any business or
identified any assets for purchase investment activity.
or sale at this time. However, we
may sell assets in the future. In
addition, we may borrow funds or
seek other forms of financing to
acquire assets or fund operations.
SCOPE OF INDEMNIFICATION Under Texas law, a corporation is The trustee is indemnified by, and
OF DIRECTORS AND permitted to provide receives reimbursement from, the
OFFICERS indemnification or advancement of Trust estate against any and all
expenses, through a bylaw liabilities, expenses, claims,
provision, agreement, security damages or losses incurred by it
arrangement or otherwise, against individually or as trustee in the
judgments, penalties, fines, administration of the Trust and
settlements and reasonable the Trust estate, or in the
expenses actually incurred by the performance or omission of any act
person in connection with a occurring on account of its being
proceeding. However, if the person trustee. The trustee is personally
is found liable to the liable only for fraud or acts or
corporation, or if the person is omissions in bad faith or which
found liable on the basis that he constitute gross negligence.
received an improper personal Neither the trustee nor any agent
benefit, indemnification under or employee of the trustee is
Texas law is limited to the entitled to any reimbursement or
reimbursement of reasonable indemnification from any
expenses. No indemnification is unitholder for any liability,
available if the person is found expense, claims, damages or loss
liable for willful or in- incurred by the trustee or any
tentional misconduct. Our such agent or employee. The right
directors and officers are of reimbursement and
indemnified to the fullest extent indemnification, if any, of the
permitted by law. trustee and its agents and
employees is limited solely to the
Trust estate, whether or not the
Trust estate is exhausted without
full reimbursement or
indemnification of the trustee or
any such agent or employee.
REIMBURSEMENT AND Under Texas law, reasonable court If any claim is made against the
ADVANCEMENT OF EXPENSES costs and attorneys' fees incurred trustee for which it may be
by a director who was, is, or is entitled to reimbursement from or
threatened to be made, a named indemnification by the Trust
defendant or respondent in a estate, it may cause its ex-
proceeding because the person is penses incurred in defense of such
or was a director of such claim to be paid out of the Trust
corporation may be paid or estate; provided that if it is
reimbursed by the corporation in later determined not to be
advance of the final disposition entitled to reimbursement or
of the proceeding after the indemnification hereunder it shall
corporation receives a written reimburse the Trust estate for all
affirmation by the director of his of its expenses so paid, together
good faith belief that he has met with interest thereon at the prime
the standard of conduct necessary rate. The trustee shall have a
for indemnification under Texas lien upon the Trust estate to
law and secure it for
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a written undertaking by or on such indemnification and
behalf of the director to repay reimbursement and for compensation
the amount paid or reimbursed if to be paid to the trustee.
it is ultimately determined that
he has not met those requirements
or indemnification for such
expenses is precluded under Texas
law.
PROCEDURE FOR Texas law provides that a The Trust Agreement requires the
INDEMNIFICATION determination that indemnification indemnification of the trustee
is appropriate under Texas law from the Trust estate, which is
shall be made: managed and administered by the
trustee.
- by a majority vote of a quorum
consisting of directors who are
not party to the proceeding;
- if such a quorum cannot be
obtained, by a special committee
of the board of directors
consisting of at least two
directors not party to the
proceeding;
- by special legal counsel; or
- by shareholder vote.
Our officers and directors are
automatically indemnified under
our bylaws. We may indemnify
others upon a resolution by a
majority of the board of
directors.
MANDATORY Under Texas law, indemnification The Trust Agreement requires the
INDEMNIFICATION by the corporation is mandatory indemnification of the trustee as
for a director only if the discussed above.
director is wholly successful on
the merits or otherwise, in the
defense of the proceeding.
However, our bylaws provide for
our officers and directors to be
indemnified in every case unless
the Texas Business Corporation Act
prohibits indemnification.
INSURANCE Texas law allows a corporation to No corresponding provision.
purchase and maintain insurance on
behalf of any person who is or was
a director, officer, employee or
agent of the corporation against
any liability asserted against
such person and incurred by such
person in such a capacity or
arising out of his status as such
a person whether or not the
corporation would have the power
to indemnify him against that
liability. In addition, a cor-
poration may also establish and
maintain arrangements, other than
insurance, to protect these
individuals, including a trust
fund or surety arrangement.
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STANDARD OF CARE In general, directors are charged The trustee may act in its
with the duty in their discretion and shall be personally
decision-making process and or individually liable only for
oversight responsibilities to act fraud or acts or omissions in bad
as would a reasonably prudent faith or which constitute gross
person in the conduct of such negligence.
person's own affairs. However, we
limit our directors' liability in
our bylaws. See "Limited Liability
of Directors/Trustee."
SHAREHOLDER/ UNITHOLDER Texas law requires a report to the No corresponding provision.
REPORTS shareholders upon indemnification
or advancement of expenses.
LIMITED LIABILITY OF Texas law permits a corporation to No corresponding provision.
DIRECTORS/TRUSTEE eliminate in its charter all
monetary liability of a director
to the corporation or its
shareholders for conduct in the
performance of such director's
duties. However, Texas law does
not permit any limitation of the
liability of a director for:
- breaching the duty of loyalty to
the corporation or its
shareholders;
- failing to act in good faith;
- engaging in intentional
misconduct or a known violation of
law;
- engaging in a transaction from
which the director obtains an
improper benefit; or
- violating applicable statutes
which expressly provide for the
liability of a director.
Our articles contain such a
limitation on director liability.
COMPENSATION PAYABLE TO By resolution of the board of The trustee receives an annual fee
THE BOARD/TRUSTEE directors, our directors may be based on distributions from the
paid their expenses for attending partnership to the trustee and the
a meeting of the board and a fixed number of unitholders of record.
sum for attendance at each meeting The Trustee received $58,225 in
or a fixed salary. fees from the Trust during the
period ended September 30, 2001.
For the years ended December 31,
2000 and 1999, the Trustee
received $69,540 and $77,564 in
fees.
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DESCRIPTION OF CAPITAL STOCK
As of January 7, 2002, our authorized capital stock consisted of
100,000,000 shares of common stock, par value $0.01 per share, and 10,000,000
shares of preferred stock, par value $.001 per share. As of that date, we had
1,256,471 shares of common stock outstanding and no shares of preferred stock
outstanding. As of December 31, 2001, we had two shareholders of record of our
common stock. We summarize below the key terms and provisions of our capital
stock. The descriptions are not complete. You should read the actual provisions
of our articles of incorporation, as amended, and our bylaws, as amended, that
relate to your individual investment strategy. We are filing our articles of
incorporation and bylaws with the SEC with this registration statement.
PREFERRED STOCK
The following description of the terms of the preferred stock sets forth
certain general terms and provisions of the preferred stock we may offer. If we
offer preferred stock, we will describe the specific designations and rights in
the prospectus supplement and we will file a description with the SEC.
Issuance. Our Articles authorize us to issue up to ten million shares of
preferred stock. Currently, we do not have any issued or outstanding shares of
preferred stock. Our board of directors can, without approval of shareholders,
issue a series of preferred stock. The board of directors can also determine the
number of shares of each series and the rights, preferences and limitations of
each series including the dividend rights, voting rights, conversion rights,
redemption rights and any liquidation preferences of any wholly unissued series
of preferred stock, the number of shares constituting each series and the terms
and conditions of issue. In some cases, the issuance of preferred stock could
delay a change in our control and make it harder to remove present management.
Under certain circumstances, preferred stock could also restrict dividend
payments to holders of our common stock.
Fully Paid. The preferred stock will, when issued, be fully paid and
non-assessable.
COMMON STOCK
Voting Rights. Each share of our common stock is entitled to one vote in
the election of directors and other matters. A majority of the issued and
outstanding common stock constitutes a quorum at any meeting of shareholders.
The vote by the holders of two-thirds of the outstanding shares is required to
effect certain fundamental corporate changes such as liquidation, merger or
amendment of our articles of incorporation. Common shareholders are not entitled
to cumulative voting rights.
Dividends. Common shareholders may receive dividends if the board of
directors declares them out of legally available funds. We may pay dividends in
cash, stock or another form.
Liquidation. If we liquidate, dissolve or wind-up our business, either
voluntarily or not, common shareholders will share equally in the assets
remaining after we pay our creditors and any preferred shareholders.
Fully Paid. All outstanding shares of common stock are fully paid and
non-assessable. Any additional common stock we issue will also be fully paid and
non-assessable.
Preemption Rights. The holders of common stock have no preemptive rights
to purchase shares of stock.
Other Rights. We will notify common shareholders of any shareholders'
meetings according to applicable law.
Listing. There is not an active trading market for our common stock. Upon
completion of the exchange offer, we anticipate that our common stock will be
traded on the OTC Bulletin Board.
53
TEXAS ANTI-TAKEOVER LAW AND ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
We are a Texas corporation. The Texas Business Corporation Act and our
articles of incorporation and bylaws contains certain provisions that could
discourage potential takeover attempts and make it more difficult for our
shareholders to change management or receive a premium for their shares.
TEXAS LAW
Although we have amended our articles of incorporation to elect not to be
subject to the provisions of Part Thirteen of the Texas Business Corporation
Act, we will remain subject to such provisions until June 2003. That section
provides that we may not, directly or indirectly, enter into or engage in a
merger, sale of assets, issuance of shares or similar transaction with a person
that has beneficially owned during the past three years, 20 percent or more of
our outstanding voting shares, or any affiliate or associate of such affiliated
shareholder, during the three-year period immediately following the date such
affiliated shareholder first acquired 20 percent or more of our shares unless:
- the business combination or the purchase or acquisition of shares that
resulted in the affiliated shareholder acquiring 20 percent or more of
our shares is approved by our board of directors before such acquisition;
or
- the business combination is approved, by the affirmative vote of the
holders of at least two-thirds of our outstanding voting shares not
beneficially owned by the affiliated shareholder or an affiliate or
associate of the affiliated shareholder, at a meeting of shareholders and
not by written consent, duly called for that purpose at least six months
after the date that the affiliated shareholder first acquired 20 percent
or more of our shares.
CHARTER AND BYLAW PROVISIONS
Our articles of incorporation and bylaws provide that any action required
or permitted to be taken by our shareholders may be effected either at a duly
called annual or special meeting of the shareholders or by a written consent of
the shareholders executed by the number of shareholders required to approve the
action assuming all shareholders entitled to vote on the matter were present and
voted at a duly called meeting of shareholders. Special meetings of shareholders
may be called by our president, our board of directors or by 50% of our
shareholders.
Our articles of incorporation do not provide for the division of our board
of directors into classes. Each year at the annual meeting of shareholders, all
directors are elected to hold office until the next succeeding annual meeting of
shareholders. The number of directors is fixed by resolution of our board, but
is required under the bylaws to be at least one. The size of the board is
currently fixed at three members.
Directors may be removed with the approval of the holders of a majority of
the shares entitled to vote at a meeting of shareholders. Directors may be
removed by shareholders with or without cause. Vacancies and newly-created
directorships resulting from any increase in the number of directors may be
filled by a majority of the directors then in office, a sole remaining director,
or the holders of a majority of the shares entitled to vote at a meeting of
shareholders.
LIMITATION OF LIABILITY; INDEMNIFICATION
Our articles of incorporation contain provisions permitted under the Texas
Business Corporation Act relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty. A director will continue to be
personally liable for:
- breaching the duty of loyalty to the corporation or its shareholders;
- failing to act in good faith;
- engaging in intentional misconduct or a known violation of law;
54
- engaging in a transaction from which the director obtains an improper
benefit; or
- violating applicable statutes which expressly provide for the liability
of a director.
These provisions do not limit or eliminate our rights or those of any
shareholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws.
Our bylaws also contain provisions indemnifying our directors and officers
to the fullest extent permitted by the Texas Business Corporation Act. The
indemnification provisions may require us, among other things, to indemnify the
officers and directors against certain liabilities, other than liabilities
arising from willful misconduct, that may arise by reason of their status or
service as directors or officers. These provisions also may require us to
advance the expenses incurred by the officers and directors as a result of any
proceeding against them as to which they could be indemnified. We believe that
these indemnification arrangements are necessary to attract and retain qualified
individuals to serve as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Securities
Transfer Corporation.
MARKET FOR THE TRUST'S UNITS
The Trust's units are traded on the over-the-counter market under the
symbol "FMOLS." As of December 17, 2001, 14,975,390 units were outstanding and
held of record by, 8,081 unitholders. The high and low sales prices of the units
as reported on the OTC Bulletin Board for each quarterly period of 2001 and 2000
were:
[Download Table]
UNITS OF
BENEFICIAL
INTEREST
-----------
QUARTER ENDED HIGH LOW
------------- ---- ----
December 31, 2001........................................... $.10 $.05
September 30, 2001.......................................... .10 .05
June 30, 2001............................................... .11 .05
March 31, 2001.............................................. .13 .06
December 31, 2000........................................... .07 .03
September 30, 2000.......................................... .13 .05
June 30, 2000............................................... .25 .11
March 31, 2000.............................................. .5 .07
MARKET FOR OUR COMMON STOCK
AND SHARES ELIGIBLE FOR FUTURE SALE
Our common stock is not currently listed on any national securities
exchange or the NASDAQ National Market and there is not an established trading
market for our common stock. As of December 31, 2001, we had two shareholders of
record. If all unitholders who hold of record 2,000 or more units participate in
the exchange offer, we will have a total of 1,963,236 shares of common stock
outstanding following the exchange offer. The shares issued in exchange for
units of the Trust will be freely tradable unless they are issued to our
"affiliates," as defined in Rule 144 under the Securities Act. In addition, if
all unitholders who own fewer than 2,000 units of record participate in the
exchange offer and elect to exercise their warrants, we will issue an additional
42,003 shares of common stock that will be freely tradable. In January 2003,
647,600 shares of common stock held by Timothy M. Roberson and 440,804 shares
held by Joseph F. Langston, Jr. will be eligible for resale pursuant to Rule 144
under the Securities Act. In March 2002, 100,000 of the shares held by Mr.
Roberson will be eligible for resale pursuant to Rule 144. In October 2002,
68,067 of the shares held by Mr. Langston will be eligible for resale pursuant
to Rule 144. Rule 144 will limit the amount of stock that
55
Mr. Roberson and Mr. Langston may sell and the manner in which they may sell
their stock while they are our affiliates.
As of December 31, 2001, we did not have any outstanding options or
warrants to purchase, or securities convertible into, our common stock.
We have not paid dividends since our incorporation in March 2001 and do not
anticipate paying cash dividends in the foreseeable future. Any future payment
of cash dividends will depend upon our results of operations, financial
condition, cash requirements and other factors deemed relevant by our board of
directors.
LEGAL MATTERS
The validity of our common stock and the warrants offered hereby and the
common stock to be issued upon exercise of the warrants will be passed upon by
Haynes and Boone, LLP.
INDEPENDENT AUDITORS
The audited financial statements of Texas Standard as of September 30, 2001
and for the year then ended, the historical summaries of revenues and direct
operating expenses of the working interests purchased by Texas Standard from IMC
Global, Inc. for the nine months ended September 30, 2001 and the year ended
December 31, 2000, and the financial statements of the Freeport-McMoRan Oil and
Gas royalty Trust are included in this prospectus in reliance upon the report of
Hein + Associates LLP, independent public accountants, included herein, and upon
the authority of said firm as experts in accounting and auditing.
RESERVE ENGINEERS
Information about our estimated net proved reserves and the future net cash
flows attributable to these reserves was prepared by Ryder Scott Company, L.P.,
Independent Petroleum Engineers, and are included in this prospectus in reliance
upon their authority as experts in reserves and present values.
WHERE YOU CAN FIND MORE INFORMATION ABOUT TEXAS STANDARD
We have filed a registration on Form S-4 with the SEC in connection with
this exchange offer. In addition, on December 10, 2001, we also filed with the
SEC a statement on Schedule TO pursuant to Rule 14d-3 under the Exchange Act to
furnish information about our offer. Upon consummation of the exchange offer, we
will be required to file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy the registration
statement, the Schedule TO and any other documents we have filed at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC- 0330 for further information on the Public Reference
Room. Our SEC filings are also available to the public at the SEC's Internet
site at "http://www.sec.gov."
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. Whenever a
reference is made in this prospectus to any of our contracts or other documents,
the reference may not be complete and, for a copy of the contract or document,
you should refer to the exhibits that are a part of the registration statement.
Upon consummation of the exchange offer, we expect to provide annual
reports to our stockholders that include financial information examined and
reported on by our independent public accountants.
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE TRUST
The Freeport-McMoRan Oil and Gas Royalty Trust files annual, quarterly and
special reports, proxy statements and other information with the SEC. The
Trust's SEC filings are available to the public over the Internet at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at
56
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC- 0330 for further information on the
Public Reference Room.
The SEC allows us to "incorporate by reference" information from the
documents the Trust files with them, which means that we can disclose important
information about the Trust to you by referring you to these documents. The
information incorporated by reference is considered to be part of this
prospectus, and information that the Trust later files with the SEC will
automatically update and supersede this information. Specifically, we
incorporate by reference the documents listed below and any future filings the
Trust makes with the SEC, including any filings the Trust makes prior to the
consummation of the exchange offer under Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 until the offering is terminated:
- the Trust's Annual Report on Form 10-K for the year ended December 31,
2000;
- the Trust's Quarterly Reports on Form 10-Q for the quarters ended March
31, 2001, June 30, 2001 and September 30, 2001; and
- the Trust's Current Reports on Form 8-K filed on October 26, 2001 and
December 26, 2001.
57
GLOSSARY OF OIL AND GAS TERMS
TERMS USED TO DESCRIBE QUANTITIES OF OIL AND NATURAL GAS
- Bbl -- One stock tank barrel, or 42 US gallons liquid volume, of crude
oil or other liquid hydrocarbons.
- Bcf -- One billion cubic feet of natural gas.
- BOE -- One barrel of oil equivalent, converting gas to oil at the ratio
of 6 Mcf of gas to 1 Bbl of oil.
- MBbl -- One thousand Bbl.
- Mcf -- One thousand cubic feet of natural gas.
- Mcfe -- One thousand cubic feet of natural gas equivalent, converting oil
to gas at the ratio of 1 Bbl of oil to 6 Mcf of gas.
- MMcf -- One million cubic feet of natural gas.
TERMS USED TO DESCRIBE OUR INTERESTS IN WELLS AND ACREAGE
- Gross oil and gas wells or acres -- Our gross wells or gross acres
represents the total number of wells or acres in which we own a working
interest.
- Net oil and gas wells or acres -- Determined by multiplying "gross" oil
and natural gas wells or acres by the working interest that we own in
such wells or acres represented by the underlying properties.
TERMS USED TO ASSIGN A PRESENT VALUE TO OUR RESERVES
- Standardized measure of proved reserves -- The present value, discounted
at 10%, of the pre-tax future net cash flows attributable to estimated
net proved reserves. We calculate this amount by assuming that we will
sell the oil and gas production attributable to the proved reserves
estimated in our independent engineer's reserve report for the prices we
received for the production on the date of the report, unless we had a
contract to sell the production for a different price. We also assume
that the cost to produce the reserves will remain constant at the costs
prevailing on the date of the report. The assumed costs are subtracted
from the assumed revenues resulting in a stream of future net cash flows.
Estimated future income taxes using rates in effect on the date of the
report are deducted from the net cash flow stream. The after-tax cash
flows are discounted at 10% to result in the standardized measure of our
proved reserves. The standardized measure of our proved reserves is
disclosed in our financial statements as supplemental data.
- Pre-tax PV-10 Value -- The pre-tax PV-10 Value of proved reserves is
identical to the standardized measure, except that estimated future
income taxes are not deducted in calculating future net cash flows. We
disclose the discounted present value without deducting estimated income
taxes to provide what we believe is a better basis for comparison of our
reserves to other producers who may have different tax rates.
TERMS USED TO CLASSIFY OUR RESERVE QUANTITIES
- Proved reserves -- The estimated quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geological and engineering
data, appear with reasonable certainty to be recoverable in the future
from known oil and natural gas reservoirs under existing economic and
operating conditions. The SEC definition of proved oil and gas reserves,
per Article 4-l0(a) (2) of Regulation S-X, is as follows:
Proved oil and gas reserves. Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas, and natural gas liquids which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e.,
58
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
(a) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
(b) Reserves which can be produced economically through application of
improved recovery, techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
(c) Estimates of proved reserves do not include the following: (1) oil
that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (2) crude oil, natural gas,
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (3) crude oil, natural gas, and natural gas liquids, that
may occur in undrilled prospects; and (4) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil shales, coal, gilsonite
and other such sources.
- Proved developed reserves -- Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
- Proved undeveloped reserves -- Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required.
TERMS WHICH DESCRIBE THE COST TO ACQUIRE OUR RESERVES
- Finding costs -- Our finding costs compare the amount we spent to
acquire, explore and develop our oil and gas properties, explore for oil
and gas and to drill and complete wells during a period, with the
increases in reserves during the period. This amount is calculated by
dividing the net change in our evaluated oil and property costs during a
period by the change in proved reserves plus production over the same
period.
TERMS WHICH DESCRIBE THE PRODUCTIVE LIFE OF A PROPERTY OR GROUP OF PROPERTIES
- Reserve life -- A measure of the productive life of an oil and gas
property or a group of oil and gas properties, expressed in years.
Reserve life equals the estimated net proved reserves attributable to a
property or group of properties divided by production from the property
or group of properties for the four fiscal quarters preceding the date as
of which the proved reserves were estimated.
TERMS USED TO DESCRIBE THE LEGAL OWNERSHIP OF OUR OIL AND GAS PROPERTIES
- Royalty interest -- A real property interest entitling the owner to
receive a specified portion of the gross proceeds of the sale of oil and
natural gas production or, if the conveyance creating the interest
provides, a specific portion of oil and natural gas produced, without any
deduction for the costs to explore for, develop or produce the oil and
natural gas. A royalty interest owner has no right to consent to or
approve the operation and development of the property, while the owners
of the working interest have the exclusive right to exploit the mineral
on the land.
- Working interest -- A real property interest entitling the owner to
receive a specified percentage of the proceeds of the sale of oil and
natural gas production or a percentage of the production, but requiring
the owner of the working interest to bear the cost to explore for,
develop and produce such oil and natural gas. Aworking interest owner who
owns a portion of the working interest may participate either
59
as operator or by voting his percentage interest to approve or disapprove
the appointment of an operator and drilling and other major activities in
connection with the development and operation of a property.
TERMS USED TO DESCRIBE SEISMIC OPERATIONS
- Seismic data -- Oil and gas companies use seismic data as their principal
source of information to locate oil and gas deposits, both to aid in
exploration for new deposits and to manage or enhance production from
known reservoirs. To gather seismic data, an energy source is used to
send sound waves into the subsurface strata. These waves are reflected
back to the surface by underground formations, where they are detected by
geophones which digitize and record the reflected waves. Computers are
then used to process the raw data to develop an image of underground
formations.
60
TEXAS STANDARD OIL COMPANY
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
-----
FINANCIAL STATES OF TEXAS STANDARD OIL COMPANY
Independent Auditor's Report.............................. F-2
Balance Sheet as of September 30, 2001.................... F-3
Statement of Operations for the Period from March 27, 2001
to September 30, 2001.................................. F-4
Statement of Stockholders' Deficit for the Period from
March 27, 2001 to September 30, 2001................... F-5
Statement of Cash Flows for the Period from March 27, 2001
to September 30, 2001.................................. F-6
Notes to Financial Statements............................. F-7
REVENUES AND DIRECT OPERATING EXPENSES OF PROPERTIES
ACQUIRED IN OCTOBER 2001
Independent Auditor's Report.............................. F-9
Historical Summaries of Revenues and Direct Operating
Expenses of Properties Acquired in October 2001........ F-10
Notes to Historical Summaries of Revenues and Direct
Operating Expenses of Properties Acquired in October
2001................................................... F-11
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Form Financial Information.................. F-13
Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 2001..................................... F-14
Unaudited Pro Forma Consolidated Statement of Income for
the Nine Months Ended September 30, 2001............... F-15
Unaudited Pro Forma Consolidated Statement of Income for
the Year Ended December 31, 2000....................... F-16
Notes to Unaudited Pro Forma Financial Information........ F-17
FINANCIAL STATEMENTS OF THE FREEPORT-MCMORAN OIL AND GAS
ROYALTY TRUST
Independent Auditor's Report.............................. F-18
Statements Of Assets, Liabilities and Trust Equity as of
December 31, 2000 and September 30, 2001 (unaudited)... F-19
Statements of Net Loss and Distributable Income for the
Years Ended December 31, 2000 and 1999 and Unaudited
Nine Months Ended September 30, 2001 and 2000.......... F-20
Statement of Changes in Trust Equity...................... F-21
Statements of Cash Flows.................................. F-22
Notes to Financial Statements............................. F-23
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Texas Standard Oil Company
Houston, Texas
We have audited the accompanying balance sheet of Texas Standard Oil
Company as of September 30, 2001, and the related statements of operations,
changes in stockholders' deficit and cash flows for the period from inception
(March 27, 2001) to September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texas Standard Oil Company
as of September 30, 2001, and the results of its operations and its cash flows
for the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
HEIN + ASSOCIATES LLP
Dallas, Texas
November 30, 2001
F-2
TEXAS STANDARD OIL COMPANY
BALANCE SHEET
SEPTEMBER 30, 2001
[Download Table]
ASSETS
CURRENT ASSETS -- CASH...................................... $ 6,659
DEPOSIT ON PURCHASE AND SALE AGREEMENT...................... 110,000
---------
TOTAL ASSETS...................................... $ 116,659
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 381,745
Note payable -- related party............................. 115,000
---------
TOTAL CURRENT LIABILITIES......................... 496,745
COMMITMENT (Note 5)
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 100,000,000 shares authorized;
100,000 shares issued and outstanding..................... 1,000
Accumulated deficit......................................... (381,006)
---------
TOTAL STOCKHOLDERS' DEFICIT....................... (380,006)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 116,659
=========
See accompanying notes to these financial statements.
F-3
TEXAS STANDARD OIL COMPANY
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MARCH 27, 2001) TO SEPTEMBER 30, 2001
[Download Table]
REVENUE:.................................................... $ --
COSTS AND EXPENSES:
General and administrative................................ 380,171
OTHER INCOME (EXPENSE):
Interest income........................................... 830
Interest expense.......................................... (1,745)
---------
(915)
---------
NET LOSS:................................................... $(381,086)
=========
See accompanying notes to these financial statements.
F-4
TEXAS STANDARD OIL COMPANY
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MARCH 27, 2001) TO SEPTEMBER 30, 2001
[Enlarge/Download Table]
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ----------- ---------
BALANCES:
March 27, 2001......................... -- $ -- $ -- $ -- $ --
Issuance of common stock............... 100,000 1,000 -- -- 1,000
Net loss............................ (381,086) (381,086)
------- ------ ----- --------- ---------
BALANCES:
September 30, 2001..................... 100,000 $1,000 $ -- $(381,086) $(380,086)
======= ====== ===== ========= =========
See accompanying notes to these financial statements.
F-5
TEXAS STANDARD OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 27, 2001) TO SEPTEMBER 30, 2001
[Download Table]
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(381,086)
Changes in assets and liabilities:
Accounts payable and accrued expenses.................. 381,745
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 659
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on purchase and sale agreement.................... (110,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party note.......................... 115,000
Proceeds from sale of common stock........................ 1,000
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 116,000
---------
NET CHANGE IN CASH:......................................... 6,659
CASH:
Beginning of year......................................... --
---------
CASH:
End of year............................................... $ 6,659
=========
See accompanying notes to these financial statements.
F-6
TEXAS STANDARD OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Texas Standard Oil Company (the "Company") was incorporated in Texas in
March 2001. The Company is engaged in the acquisition and development of oil and
gas properties in federal waters offshore Texas and Louisiana.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents.
OIL AND GAS PROPERTIES
The Company uses the full cost method of accounting for its oil and gas
properties. The Company's properties are all located in the United States
federal waters offshore Texas and Louisiana, and therefore its costs are
capitalized in one cost center. Under the full cost method, all costs related to
the acquisition, exploration or development of oil and gas properties are
capitalized into the "full cost pool". Such costs include those related to lease
acquisitions, drilling and equipping of productive and non-productive wells,
delay rentals, geological and geophysical work and certain internal costs
directly associated with the acquisition, exploration or development of oil and
gas properties. Upon the sale or disposition of oil and gas properties, no gain
or loss is recognized, unless such adjustments of the full cost pool would
significantly alter the relationship between capitalized costs and proved
reserves.
Under the full cost method of accounting, a "full cost ceiling test" is
required wherein net capitalized costs of oil and gas properties cannot exceed
the present value of estimated future net revenues from proved oil and gas
reserves, discounted at 10%, less any related income tax effects.
Amortization of oil and gas properties is computed using the
unit-of-production method based on estimated proved oil and gas reserves.
Amortizable costs include estimated future development costs of proved reserves
and estimated dismantlement and abandonment costs, and exclude the costs of
unevaluated oil and gas properties.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due, if any, plus net
deferred taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets include recognition of operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances
may be reversed when circumstances provide evidence that the deferred tax assets
will more likely than not be realized. The Company had no material deferred tax
assets or liabilities at September 30, 2001.
USE OF ESTIMATES AND CERTAIN SIGNIFICANT ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as
F-7
TEXAS STANDARD OIL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
described above may affect the amount at which oil and gas properties are
recorded. It is at least reasonably possible those estimates could be revised in
the near term and those revisions could be material.
2. ACQUISITION OF OIL AND GAS PROPERTIES
In October 2001, the Company acquired interests in certain producing
properties in federal waters offshore Texas and Louisiana for consideration of
$1,101,000. The effective date of the transaction was January 1, 2000, and
pre-closing net revenue from the properties after the effective date was about
$6,000,000. Therefore, the Company had a receivable from the seller of
approximately $4,900,000 (subject to final negotiated purchase price
adjustments) upon closing. As part of the Agreement, the Company assumes all
future abandonment costs associated with the properties, which were estimated at
closing to be approximately $4,200,000, and all contracts associated with the
properties, including the transportation agreement discussed at Note 5.
3. RELATED PARTY TRANSACTIONS
In July 2001, the Company received proceeds of $115,000 in exchange for a
note payable from a stockholder. The note carries interest at 7% and was paid
with accrued interest at final maturity November 1, 2001.
In October 2001, the Company acquired a 21% interest in the Coles No. 1
prospect for approximately $89,000 which includes prepayment of its share of
estimated drilling and completion costs. The Company is responsible for paying
its share of additional drilling and completion costs, as billed by the
operator, Roberson Oil Company, a company controlled by a Company stockholder.
4. STOCKHOLDERS' EQUITY
Subsequent to September 30, 2001, the Company issued 68,067 shares of its
$.001 par value common stock for cash consideration of $681, increasing total
outstanding shares to 168,067.
Also subsequent to September 30, 2001, the Company amended its articles of
incorporation to authorize the issuance of up to 10,000,000 shares of preferred
stock. Preferred shares may be issued in series and with rights and preferences
as determined by the Company's board of directors.
In January 2002, the Company's board of directors adopted the 2002 Equity
Incentive Plan (the "Plan"), under which 300,000 shares of stock were reserved
for issuance upon the exercise of options or grant of restricted stock. No
options had been granted under the Plan as of the date of this report.
The Company has proposed to offer shares of its common stock and warrants
to purchase its common stock to unitholders of the Freeport-McMoRan Oil & Gas
Royalty Trust in exchange for the units in the Trust. In connection with this
proposed transaction, the Company issued an additional 1,088,404 shares to its
existing shareholders.
5. COMMITMENT
As part of the property acquisition discussed at Note 2, the Company
assumed an obligation under an agreement with an oil pipeline company to deliver
on a daily basis specified quantities of crude oil from West Cameron 498. Under
the terms of the agreement, the Company is required to pay a transportation fee
calculated at a sliding monthly rate based upon the total average daily volumes
delivered from West Cameron 498 during the month. Should the annual minimum
delivery volume not be met, a deficiency payment is assessed by the pipeline.
During 2000, the Working Interest Owner did not deliver the minimum volume under
the agreement; therefore, in February 2001, the pipeline company billed the
Working Interest Owner approximately $500,000 for the 2000 deficiency. Based on
2001 projected production, the minimum delivery volumes will not be met in 2001.
However, should production exceed the 2001 minimum, the Company is entitled to
receive transportation without cost up to the cumulative prior undelivered
volumes.
F-8
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Texas Standard Oil Company
Houston, Texas
We have audited the accompanying historical summaries of revenue and direct
operating expenses of properties acquired in October 2001, for the nine months
ended September 30, 2001 and the year ended December 31, 2000. The historical
summaries are the responsibility of the Company's management. Our responsibility
is to express an opinion on the historical summaries based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the historical summaries
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the historical summaries. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall historical
summaries presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying historical summaries were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form S-4 of Texas Standard Oil Company) as
described in Note 1 and are not intended to be a complete presentation of the
properties' revenues and expenses.
In our opinion, the historical summaries referred to above present fairly,
in all material respects, the revenue and direct operating expenses of the
properties acquired in October 2001, in conformity with accounting principles
generally accepted in the United States.
HEIN + ASSOCIATES LLP
November 20, 2001
Dallas, Texas
F-9
TEXAS STANDARD OIL COMPANY
HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING EXPENSES
OF PROPERTIES ACQUIRED IN OCTOBER 2001
[Enlarge/Download Table]
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
2000 2001
------------------ -------------------
Oil and gas sales......................................... $12,769,000 $9,056,000
Direct operating expenses................................. 2,820,000 1,774,000
----------- ----------
Net revenue.......................................... $ 9,949,000 $7,282,000
=========== ==========
See accompanying notes to historical summaries.
F-10
TEXAS STANDARD OIL COMPANY
NOTES TO HISTORICAL SUMMARIES OF REVENUES AND DIRECT
OPERATING EXPENSES OF PROPERTIES ACQUIRED IN OCTOBER 2001
1. BASIS OF PREPARATION
The accompanying historical summaries of revenues and direct operating
expenses relate to the operations of the oil and gas properties acquired by
Texas Standard Oil Company (the "Company") in October 2001 from IMC Global, Inc.
The properties were acquired for approximately $1,100,000, before purchase
adjustments.
Revenues are recorded when the Company's share of oil or natural gas and
related liquids are sold. Direct operating expenses are recorded when the
related liability is incurred. Direct operating expenses include lease operating
expenses, transportation, ad valorem taxes and production taxes. Depreciation
and amortization of oil and gas properties, general and administrative expenses
and income taxes have been excluded from operating expenses in the accompanying
historical summaries because the amounts would not be comparable to those
resulting from proposed future operations.
The historical summaries presented herein were prepared for the purpose of
complying with the financial statement requirements of a business acquisition to
be filed on Form S-4 as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.
2. SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)
Proved oil and gas reserves consist of those estimated quantities of crude
oil, natural gas, and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
The following estimates of proved reserves have been made by independent
engineers. The estimated net interest in proved reserves are based upon
subjective engineering judgments and may be affected by the limitations inherent
in such estimation. The process of estimating reserves is subject to continual
revision as additional information becomes available as a result of drilling,
testing, reservoir studies and production history. There can be no assurance
that such estimates will not be materially revised in subsequent periods.
The changes in proved reserves of the properties acquired in October 2001
for the year ended December 31, 2000 and the nine months ended September 30,
2001 are summarized as follows:
[Download Table]
OIL NATURAL GAS
--------- -----------
(THOUSAND
(BARRELS) CUBIC FEET)
Reserves at January 1, 2000................................. 518,000 3,053,000
Revisions and other......................................... 226,000 1,375,000
Production.................................................. (292,000) (927,000)
-------- ---------
Reserves at December 31, 2000............................... 452,000 3,501,000
Revisions and other......................................... 90,000 761,000
Production.................................................. (198,000) (700,000)
-------- ---------
Reserves at September 30, 2001.............................. 344,000 3,562,000
======== =========
F-11
TEXAS STANDARD OIL COMPANY
NOTES TO HISTORICAL SUMMARIES OF REVENUES
AND DIRECT OPERATING EXPENSES OF PROPERTIES
ACQUIRED IN OCTOBER 2001 -- (CONTINUED)
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 2000 and September 30,
2001 is as follows:
[Enlarge/Download Table]
2000 2001
------------ ------------
Future cash inflows...................................... $ 30,596,000 $ 15,849,000
Future production and development costs.................. (14,160,000) (12,358,000)
------------ ------------
Future net cash flows, before income tax................. 16,436,000 3,491,000
Future income taxes...................................... (5,588,000) (1,187,000)
------------ ------------
Future net cash flows.................................... 10,848,000 2,304,000
10% annual discount...................................... (705,000) 482,000
------------ ------------
Standardized measure of discounted future net cash
flows.................................................. $ 10,143,000 $ 2,786,000
============ ============
The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 2000 and the nine months
ended September 30, 2001, were as follows:
[Enlarge/Download Table]
2000 2001
----------- ------------
Beginning of period....................................... $ 3,970,000 $ 10,143,000
Sales of oil and gas produced, net of production costs.... (9,949,000) (7,282,000)
Effect of change in prices................................ 11,266,000 (15,693,000)
Accretion of discount..................................... 397,000 1,014,000
Net change in income taxes................................ (3,139,000) 5,320,000
Revision of estimates and other........................... 7,598,000 9,284,000
----------- ------------
End of period............................................. $10,143,000 $ 2,786,000
=========== ============
Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is calculated
by applying year-end statutory tax rates to estimated future pre-tax net cash
flows related to proved oil and gas reserves, less the tax basis of the
properties involved.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process.
F-12
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA FINANCIAL INFORMATION
In October 2001, Texas Standard Oil Company (the "Company") acquired
working and net overriding royalty interests in certain producing properties
located in federal waters, offshore Louisiana and offshore Texas from IMC
Global, Inc. and the Freeport-McMoRan Oil and Gas Royalty Trust (the "Trust")
for consideration of $1,101,000. The following unaudited pro forma financial
statements have been prepared to demonstrate the effect on the Company's
financial position and results of operations as if the exchange offer was
completed and the properties had been acquired on September 30, 2001 (with
respect to the pro forma balance sheet) and at the beginning of the periods
(with respect to the pro forma statements of income). The pro forma financial
statements should be read in conjunction with the historical summaries of
revenues and direct operating expenses of the acquired properties and with the
financial statements of the Company included herein. The financial statements of
the Trust have not been included in the pro forma financial statements because
the net assets and operations included in those financial statements will not
have an impact on the ongoing operations of the Company. The pro forma financial
statements should not be construed as a reflection of the financial position or
results of operations that actually would have occurred if the acquisition would
have occurred on the above dates.
F-13
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
[Enlarge/Download Table]
PRO FORMA
BALANCES EXCHANGE
ADJUSTMENTS BEFORE OFFER PRO
TEXAS FOR ACQUIRED EXCHANGE FORMA
STANDARD PROPERTIES OFFER ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ----------- ----------
ASSETS
CURRENT ASSETS:
Cash....................... $ 6,659 $ (1,000)(1) $ 5,659 $ -- $ 5,659
Accounts receivable........ -- 4,853,000(1) 4,853,000 -- 4,853,000
--------- ----------- ----------- ---------- ----------
TOTAL CURRENT
ASSETS........... 6,659 4,852,000 4,858,659 -- 4,858,659
PROPERTY AND EQUIPMENT:
Oil and gas properties,
full cost method........ -- -- -- 3,798,000(5) 3,798,000
Deposit on purchase and
sale agreement.......... 110,000 (110,000)(1) -- --
--------- ----------- ----------- ---------- ----------
Net property and
equipment.......... -- 3,798,000
TOTAL ASSETS....... $ 116,659 $ 4,742,000 $ 4,858,659 $3,798,000 $8,656,659
========= =========== =========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and
accrued expenses........ $ 381,745 $ -- $ 381,745 $ 381,745
Note payable -- related
party................... 115,000 -- 115,000 115,000
Current income taxes
payable................. -- 2,084,000(4) 2,084,000 2,084,000
Deferred revenue........... -- 542,000(1) 542,000 (542,000)(5) --
--------- ----------- ----------- ---------- ----------
TOTAL CURRENT
LIABILITIES...... 496,745 2,626,000 3,122,745 (542,000) 2,580,745
PLUG AND ABANDONMENT
LIABILITY.................. 4,200,000(1) 4,200,000 -- 4,200,000
STOCKHOLDERS' EQUITY......... (380,086) (2,084,000) (2,464,086) 4,340,000(5) 1,875,914
--------- ----------- ----------- ---------- ----------
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY........... $ 116,659 $ 4,742,000 $ 4,858,659 $3,798,000 $8,656,659
========= =========== =========== ========== ==========
See accompanying notes to pro forma financial statements.
F-14
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001
[Enlarge/Download Table]
(6)
TEXAS ACQUIRED PRO FORMA
STANDARD PROPERTIES ADJUSTMENTS PRO FORMA
--------- ---------- ----------- -----------
REVENUE:
Oil and gas sales.................... $ $9,056,000 $ -- $ 9,056,000
--------- ---------- ----------- -----------
Total revenue................ 9,056,000 -- 9,056,000
COSTS AND EXPENSES:
Production expense................... -- 1,774,000 -- 1,774,000
Depletion and depreciation........... -- -- 955,000(2) 955,000
General and administrative........... 380,171 -- 300,000(3) 680,171
--------- ---------- ----------- -----------
Total costs and expenses..... 380,171 1,774,000 1,255,000 3,409,171
OTHER INCOME (EXPENSE):
Interest income (expense), net....... (915) -- -- (915)
Miscellaneous........................ -- -- -- --
--------- ---------- ----------- -----------
Total other income
(expense).................. (915) -- -- (915)
--------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES...... (381,086) 7,282,000 (1,255,000) 5,645,914
INCOME TAX PROVISION................... -- -- (1,940,000)(4) (1,940,000)
--------- ---------- ----------- -----------
NET INCOME (LOSS)...................... $(381,086) $7,282,000 $(3,195,000) $ 3,705,914
========= ========== =========== ===========
Basic earnings per share............... $ (3.81) $ 5.70(7) $ 1.89
DILUTED EARNINGS PER SHARE............. $ (3.81) $ 5.67(7) $ 1.86
WEIGHTED AVERAGE SHARES -- BASIC....... 100,000 1,863,236(7) 1,963,236
WEIGHTED AVERAGE SHARES -- DILUTED..... 100,000 1,895,389(7) 1,995,389
See accompanying notes to pro forma financial statements.
F-15
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
[Enlarge/Download Table]
(6)
TEXAS ACQUIRED PRO FORMA
STANDARD PROPERTIES ADJUSTMENTS PRO FORMA
-------- ----------- ----------- -----------
REVENUE:
Oil and gas sales.......................... $ -- $12,769,000 $ -- $12,769,000
----- ----------- ----------- -----------
COSTS AND EXPENSES:
Production expense......................... -- 2,820,000 -- 2,820,000
Depletion and depreciation................. -- -- 1,145,000(2) 1,145,000
General and administrative................. -- -- 750,000(3) 750,000
----- ----------- ----------- -----------
Total costs and expenses........... -- 2,820,000 1,895,000 4,715,000
INCOME (LOSS) BEFORE INCOME TAXES............ -- 9,949,000 (1,895,000) 8,054,000
INCOME TAX PROVISION......................... -- -- (2,750,000)(4) (2,750,000)
----- ----------- ----------- -----------
NET INCOME (LOSS)............................ $ -- $ 9,949,000 $(4,645,000) $ 5,304,000
===== =========== =========== ===========
BASIC EARNINGS PER SHARE..................... $ -- $ 2.70(7) $ 2.70
DILUTED EARNINGS PER SHARE................... $ -- $ 2.66(7) $ 2.66
WEIGHTED AVERAGE SHARES -- BASIC............. -- 1,963,236(7) 1,963,236
WEIGHTED AVERAGE SHARES -- DILUTED........... -- 1,995,389(7) 1,995,389
See accompanying notes to pro forma financial statements.
F-16
TEXAS STANDARD OIL COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) Adjustment to reflect the acquisition cost of properties acquired, net
of net revenues receivable at closing and assumed plug and abandonment
liability.
(2) Adjustment to reflect depletion as if the properties had been acquired
and the exchange offer had occurred at the beginning of the respective periods.
(3) Adjustment to reflect estimated general and administrative expenses as
if the properties had been acquired and the exchange offer had occurred at the
beginning of the respective periods.
(4) Adjustment to reflect income tax expense as if the properties had been
acquired and the exchange offer had occurred at the beginning of the respective
periods and income tax payable at acquisition related to the pre-closing net
revenues.
(5) Adjustment to reflect completion of the acquisition transaction in
exchange for the stock of Texas Standard, recorded at estimated fair market
value of the interests acquired.
(6) Oil and gas sales and direct operating expenses of the acquired
properties for the respective periods.
(7) Adjustment assumes exchange of all unitholders with greater than 2,000
trust units at a ratio of 1 share of common stock for each 20 units (706,765
shares) and 32,153 dilutive shares from assumed exercise of 42,003 warrants at a
price of $.77 per share. The adjustment also includes the 68,067 shares issued
by the Company after September 30, 2001 and the issuance of 1,088,404 shares to
existing shareholders on January 4, 2002. The adjustment for the year ended
December 31, 2000 includes the 100,000 shares issued by the Company during the
year ended September 30, 2001. The adjustments are as if all the shares were
issued at the beginning of the respective periods.
F-17
INDEPENDENT AUDITOR'S REPORT
The Trustee and Unitholders
Freeport-McMoRan Oil & Gas Royalty Trust
We have audited the accompanying statement of assets, liabilities and trust
equity of Freeport-McMoRan Oil and Gas Royalty Trust as of December 31, 2000,
and the related statements of net loss and distributable income, and changes in
trust equity for each of the two years in the period ended December 31, 2000.
These financial statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and trust equity of
Freeport-McMoRan Oil and Gas Royalty Trust as of December 31, 2000, and the net
loss and distributable income, and changes in trust equity for each of the two
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 1, the Trust sold its interest in the royalty during
October 2001.
HEIN + ASSOCIATES LLP
Dallas, Texas
December 21, 2001
F-18
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST EQUITY
[Enlarge/Download Table]
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------- -------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 615,459 $ 217,043
Net overriding royalty interest in oil and gas properties... 189,875,741 189,875,741
Less accumulated amortization and impairment of net
overriding royalty interest............................... (189,875,741) (189,875,741)
------------- -------------
Total assets...................................... $ 615,459 $ 217,043
============= =============
LIABILITIES AND TRUST EQUITY
Accrued liabilities......................................... $ 27,461 $ 23,028
Trust Equity:
Reserve for future Trust expenses........................... 587,998 194,015
Trust corpus (14,975,390 Units of Beneficial Interest
authorized, issued and outstanding)....................... -- --
------------- -------------
587,998 194,015
------------- -------------
Total liabilities and trust equity................ $ 615,459 $ 217,043
============= =============
See accompanying notes are an integral part of these financial statements.
F-19
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF NET LOSS AND DISTRIBUTABLE INCOME
[Enlarge/Download Table]
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1999 2000 2000 2001
----------- ----------- ----------- -----------
(UNAUDITED)
INCOME:
Oil and gas royalty proceeds........... $ -- $ -- $ -- $ --
Interest income........................ 50,013 41,414 31,926 13,734
----------- ----------- ----------- -----------
TOTAL INCOME................... 50,013 41,414 31,926 13,734
EXPENSES:
Trust administrative expenses.......... (559,996) (339,992) (232,290) (407,717)
----------- ----------- ----------- -----------
Net loss....................... $ (509,983) $ (298,578) $ (200,364) $ (393,983)
=========== =========== =========== ===========
Net loss per unit.............. $ (.04) $ (.02) $ (.02) $ (.03)
=========== =========== =========== ===========
Distributable income..................... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Distributable income per Unit............ $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Units outstanding........................ 14,975,390 14,975,390 14,975,390 14,975,390
=========== =========== =========== ===========
See accompanying notes are an integral part of these financial statements.
F-20
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST EQUITY
[Enlarge/Download Table]
RESERVE FOR
FUTURE TRUST TOTAL TRUST
EXPENSES TRUST CORPUS EQUITY
------------ ------------ -----------
January 1,1999........................................... $1,396,559 $ -- $1,396,559
NET LOSS............................................ (509,983) -- (509,983)
---------- ----- ----------
December 31, 1999........................................ 886,576 -- 886,576
NET LOSS............................................ (298,578) -- (298,578)
---------- ----- ----------
December 31, 2000........................................ 587,998 -- 587,998
NET LOSS (UNAUDITED)................................ (393,983) -- (393,983)
---------- ----- ----------
September 30, 2001 (unaudited)........................... $ 194,015 $ -- $ 194,015
========== ===== ==========
See accompanying notes are an integral part of these financial statements.
F-21
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, 2000
------------------------ ---------------------
1999 2000 2000 2001
----------- ---------- --------- ---------
(UNAUDITED)
Cash flows from operating activities:
NET LOSS................................. $ (509,983) $(298,578) $(200,364) $(393,983)
Change in accrued liabilities................. -- 17,417 -- (4,433)
---------- --------- --------- ---------
Net change in cash from operating
activities.................................. (509,983) (281,161) (200,364) (398,416)
Cash and cash equivalents, beginning of
period...................................... 1,406,603 896,620 896,620 615,459
---------- --------- --------- ---------
Cash and cash equivalents, end of period...... $ 896,620 $ 615,459 $ 696,256 $ 217,043
========== ========= ========= =========
See accompanying notes are an integral part of these financial statements.
F-22
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000)
1. BACKGROUND AND STATUS
Freeport-McMoRan Oil and Gas Royalty Trust (the "Trust") was created
effective September 30, 1983. On that date, Freeport-McMoRan Inc. ("FTX")
transferred to a Partnership (the "Partnership") a net overriding royalty
interest in certain offshore oil and gas properties equal to 90 percent of the
Net Proceeds (as defined in the Conveyance referred to below) from FTX's working
interests in such properties and conveyed a 99.9 percent general partnership
interest in the Partnership to the Trust. Such net overriding royalty interest
is referred to herein as the "Royalty". The Overriding Royalty Conveyance which
created the Royalty is referred to herein as the "Conveyance". IMC Global Inc.
("IMC") succeeded to FTX effective December 22, 1997, following the merger of
FTX into IMC. Until October 12, 2001, IMC was the working interest owner in the
properties. However, on October 21, 2001, IMC sold the oil and gas interests
burdened by the Royalty to Texas Standard Oil Company, a Texas corporation
("TXS"). TXS is the owner of the oil and gas interests burdened by the Royalty
as of the date of this report.
The Conveyance provides that the owner of the interests burdened by the
Royalty will calculate and pay monthly to the Partnership an amount equal to 90
percent of the net proceeds for the preceding month. Net proceeds generally
consist of the excess of gross revenues received from the Royalty Properties
(Gross Proceeds), on a cash basis, over operating costs, capital expenditures
and other charges, on an accrual basis (Net Proceeds). The Trust is passive,
with JP Morgan Chase Bank as Trustee. The Trustee has only such powers as are
necessary for the collection and distribution of revenues attributable to the
Royalty, the payment of Trust liabilities and the protection of Trust assets.
The Trust Indenture provides generally that the Trust shall terminate upon
the first to occur of: (i) the sale of all the Trust's interest in the
Partnership, or the sale by the Partnership of all the assets of the Partnership
including the Royalty, or (ii) a decision to terminate the Trust by the
affirmative vote of Unit holders representing a majority of the Units. The Trust
Indenture originally stated that the Trust must also terminate if the amount of
cash per year received by the Trust for each of three successive years
commencing after December 31, 1990 is less than $3 million. The Trust's cash
receipts were less than $3 million in 1996, 1997 and 1998. However, at a special
meeting of the Unit holders held on March 12, 1999, the Unit holders approved a
shareholder proposal to amend the Trust Indenture to extend the life of the
Trust for at least two years. This extension expired on December 31, 2000, as
there were no payments in respect of the Royalty during 1999 and 2000.
Therefore, the Trust Indenture provides the Trustee must sell the Trust's
interest in the Partnership or cause the Partnership to sell the Royalty.
On October 11, 2001, in accordance with a shareholder proposal approved at
a special meeting of the Unitholders held on October 5, 2001, the Trustee caused
the Partnership to sell the Royalty to TXS for $1,000 in cash. The Trust's
remaining assets are the proceeds from the sale to TXS and cash resulting from
the expense reserve established by the Trust to pay its ongoing administrative
expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Trust considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents. The Trust's funds are invested
in certificates of deposits which mature every thirty days.
ROYALTY INTEREST IN OIL AND GAS PROPERTIES
The initial carrying amount of the Royalty represented the Working Interest
Owner's net book value applicable to the interest in the properties conveyed to
the Trust on the date of creation of the Trust. Amortization of the Royalty has
been recorded using the future net revenue method. This method provides for
F-23
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
calculating amortization by dividing the unamortized portion of the Royalty by
estimated future net revenues from proved reserves and applying the resulting
rate to the Trust's share of royalty proceeds.
The carrying value of the Royalty is limited to the discounted present
value (at 10 percent) of estimated future net cash flows. Any excess carrying
value is reduced and the adjustment is charged to expense. The carrying value of
the Royalty was $0 at September 30, 2001 and December 31, 2000. The carrying
value is not necessarily indicative of the fair market value of the Royalty held
by the Trust.
INCOME TAXES
Because the Trust is a grantor trust which is not a taxable entity, no
income taxes are reported in the Trust's financial statements. The tax
consequences of owning Units are included in the federal, state and local income
tax returns of the individual Unit holders.
3. COST CARRYFORWARD
As a result of the capital costs incurred in recent years, a cumulative
excess Class A cost carryforward of $13.7 million and $19.8 million existed as
of September 30, 2001 and December 31, 2000, respectively. The cost carryforward
is subject to and includes an interest amount at the prime rate, which totaled
$7.8 million and $6.8 million net to the Trust at September 30, 2001 and
December 31, 2000, respectively. This excess Class A cost carryforward must be
recouped by the Working Interest Owner out of future Gross Proceeds before
distributions to the Unit holders can be resumed. See Note 1. This recoupment is
not likely to occur before the Trust completes the liquidation procedures.
4. GAS BALANCING ARRANGEMENTS
As a result of past curtailments in gas takes by the principal purchaser of
production from the Royalty Properties, certain quantities of gas have been sold
by other parties with interests in the Royalty Properties pursuant to gas
balancing arrangements. Proceeds from gas produced from the Royalty Properties
but sold by other parties pursuant to such balancing arrangements
(underproduction) are not included in Gross Proceeds for purposes of calculating
the Royalty. In the future, the Working Interest Owner will be entitled to sell
volumes equal to such underproduction or receive cash settlements. On certain of
the Royalty Properties, a cash settlement may be required, depending on future
results, due to the lack of sufficient remaining reserves from which to makeup
any underproduction. As of September 30, 2001 and December 31, 2000, the
unrecovered quantity of gas sold by third parties pursuant to such gas balancing
arrangements since inception of the Trust was approximately .2 billion cubic
feet (Bcf), net to the Trust. Because the Trustee has caused the Partnership to
sell the Royalty, the Unitholders will have no rights to these future proceeds.
5. GAS CONTRACT SETTLEMENT
The Working Interest Owner has brought suit against a prior gas purchaser,
seeking reimbursement as excess royalty of a portion of amounts paid to the
Minerals Management Service ("MMS") by the Working Interest Owner to settle
claims made by the MMS for additional royalty resulting from the Working
Interest Owner's compromise of claims against the gas purchaser. The Trust's
interest in the proceeds of the gas contract settlement were included in the
Trust's Gross Proceeds and the funds paid to the MMS reduced the Trust's Gross
Proceeds. Discovery in this suit is proceeding and the trial date which was set
for August 28, 2001 has been postponed with no firm date set. The amount of any
recovery with respect to this claim is presently indeterminable. Because the
Trust has caused the Partnership to sell the Royalty, the Trust will not benefit
from any recovery in the lawsuit.
F-24
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ESTABLISHMENT OF AN EXPENSE RESERVE
Because of the decline in Royalty income, at certain times since late 1993
the Trust was unable to pay its ongoing administrative expenses. To permit the
Trust to pay its routine administrative expenses, the Trustee, in accordance
with the Trust Indenture, established an expense reserve of $2.4 million of
which $.2 million and $.6 million remained as of September 30, 2001 and December
31, 2000, respectively. During the first nine months of 2001, $.4 million was
withdrawn from the expense reserve to pay Trust administrative expenses,
including expenses related to the shareholder proposal and the special meeting
of Unitholders at which the proposal was approved, and $.3 million was withdrawn
from the expense reserve during 2000 to pay Trust administrative expenses.
The funding for this reserve is deposited with JP Morgan Chase Bank and
invested in JP Morgan Chase Bank collateralized certificates of deposit. The
average interest rate earned on these funds was 5.5 percent for 2000.
The expense reserve is established at the Trust level and is unrelated to
the items, including the cost carryforward, that are taken into account by the
Working Interest Owner in determining whether amounts are payable pursuant to
the Royalty.
7. RESERVE FOR FUTURE ESTIMATED ABANDONMENT COSTS
Estimated future abandonment costs are accrued over the life of the Trust's
properties based on current laws and regulations. Such costs are by their nature
imprecise and can be expected to be revised over time because of changes in
general and specific cost levels, government regulations, operations or
technology. As of September 30, 2001 and December 31, 2000, the estimated
remaining aggregate abandonment costs to be incurred for all of the Trust's
properties totaled $4.2 million net to the Trust, all of which has been taken
into account in computing the Class A cost carryforward.
8. TRANSPORTATION AGREEMENT
In December 1997 the Working Interest Owner entered into a crude oil
agreement with an oil pipeline company to deliver on a daily basis specified
quantities of crude oil from West Cameron 498. Under the terms of the agreement
the Working Interest Owner agreed to pay a transportation fee calculated at a
sliding monthly rate based upon the total average daily volumes delivered from
West Cameron 498 during the month. Should the annual minimum delivery volume not
be met, a deficiency payment is assessed by the pipeline.
During 2000 and 1999, the Working Interest Owner did not deliver the
minimum volume under the agreement, therefore, the pipeline company billed the
Working Interest Owner for the deficiencies. In 2001 the pipeline company billed
the Working Interest Owner approximately $.5 million for the 2000 deficiency.
This amount was taken into account in computing the cost carryforward of $19.8
million at December 31, 2000. Based on 2001 projected production, the minimum
delivery volumes will not be met in 2001 and the Working Interest Owner expects
a deficiency assessment in 2001. However, should production exceed the 2001
minimum, the Working Interest Owner is entitled to receive transportation
without cost up to the cumulative prior undelivered volumes.
9. SUPPLEMENTARY PROVED OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Pursuant to the Financial Accounting Standards Board's ("FASB") and SEC's
disclosure standards for oil and gas producing activities, the Trust is required
to include, as supplementary information, estimates of quantities of proved oil
and gas reserves attributable to the Trust. Since the Royalty is a net profits
interest, the Partnership does not own and is not entitled to receive any
specific volume of reserves. Reserves attributable to the Partnership have been
estimated based on projections of reserves and future net cash flows
attributable to the combined interests of the Working Interest Owner and the
Partnership, and a formula based upon
F-25
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimates of future net cash flows. As a result of estimating reserve volumes by
using a formula based upon estimates of future net cash flows, such reserves are
affected by changes in various economic factors including prices, costs and the
level and timing of capital expenditures on the properties. Therefore, the
reserve volume estimates are hypothetical and are not comparable to estimates of
reserves attributable to a working interest.
The reserve volume and cash flow amounts are for the interest in the
Royalty attributable to the Trust, based on the Trust's 99.9 percent interest in
the Partnership. Estimates of proved oil and gas reserves attributable to the
Trust's interest are based on a report of Ryder Scott Company L.P. ("Ryder
Scott"). In accordance with the requirements of the FASB, the reserve estimates
were calculated using year-end oil and gas prices being received and current
operating and abandonment cost levels. In preparing its estimates, Ryder Scott
did not take into account (a) revenues received after November 30 attributable
to production during the fourth quarter of the respective year, (b) as of
December 31, 2000 and 1999, approximately .2 billion cubic feet of natural gas
at each date, sold by other parties pursuant to certain gas balancing
arrangements and (c) an excess cost carryforward of $19.8 million and $22.4
million at December 31, 2000 and 1999, respectively. For purposes of the reserve
volume and cash flow amounts, the estimates of Ryder Scott were adjusted to take
into account the foregoing factors, based on calculations supplied by the
Working Interest Owner. In making such adjustment, the Working Interest Owner
subtracted amounts attributable to the items referred to in (a), (b) and (c) of
the preceding sentence. Based on the estimates of Ryder Scott, as adjusted for
the effect of the cost carryforward and as calculated in accordance with the
FASB's and SEC's standards, at December 31, 2000 and 1999 there were no proved
reserves and no estimated future net cash flow attributable to the Royalty.
It is emphasized that this supplementary information represents estimates
which may be imprecise, and extreme caution should accompany its use and
interpretation. The estimates were based on various assumptions, many of which
are subject to uncertainties, and therefore, the estimates should not be
considered to be a prediction of actual amounts to be received. Additionally, as
required under FASB's and SEC's standards, the supplementary information
excludes consideration of anticipated future oil and gas prices and costs and
does not consider additional potentially recoverable oil and gas reserves not
currently classified as proved. Such factors should be considered in estimating
the cash flows which ultimately could be derived from production of the related
oil and gas reserves or sale of the reserves in-place.
F-26
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TEXAS STANDARD OIL COMPANY
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2002, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE COMMON
STOCK OF TEXAS STANDARD OIL COMPANY, WHETHER OR NOT PARTICIPATING IN THIS
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act provides that any
director or officer of a Texas corporation may be indemnified against judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable expenses actually incurred by him in connection with or in defending
any action, suit or proceeding in which he was, is, or is threatened to be made
a named defendant or respondent by reason of his position as director or
officer, provided that he conducted himself in good faith and reasonably
believed that, in the case of conduct in his official capacity as a director or
officer of the corporation, such conduct was in the corporation's best
interests; and, in all other cases, that such conduct was at least not opposed
to the corporation's best interests. In the case of any criminal proceeding, a
director or officer may be indemnified only if he had no reasonable cause to
believe his conduct was unlawful. If a director or officer is found liable to
the corporation, or is found liable on the basis that he received an improper
personal benefit, indemnification is limited to the reimbursement of reasonable
expenses actually incurred. No indemnification is available if the officer or
director is found liable for willful or intentional misconduct in the
performance of his duty to the corporation. If a director or officer is wholly
successful, on the merits or otherwise, in connection with such a proceeding,
such indemnification is mandatory.
Our certificate of incorporation and bylaws allows us to indemnify each of
our directors and our officers to the fullest extent permitted by applicable
law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
[Download Table]
EXHIBIT
ITEM NUMBER EXHIBIT DESCRIPTION
---- ------- -------------------
1 Underwriting agreement*
2 Plan of acquisition, reorganization, arrangement,
liquidation, or succession
2.1 Purchase and Sale Agreement dated August 7, 2001 between IMC
Global, Inc. and Texas Standard Oil Company
3 Articles of Incorporation and By-laws
3.1 Articles of Incorporation of Texas Standard Oil Company
3.2 Articles of Amendment of Articles of Incorporation of Texas
Standard Oil Company
3.3 Bylaws of Texas Standard Oil Company
4 Instruments defining the rights of holders, including
indentures
4.1 Form of common stock certificate*
5 Opinion regarding legality
5.1 Opinion of Haynes and Boone, LLP
8 Opinion regarding tax matters*
9 Voting trust agreement*
10 Material contracts
10.1 Promissory Note payable to Roberson Oil Company dated July
31, 2001
10.2 Purchase and Sale Agreement dated August 27, 2001 between
IMC Global, Inc. and Texas Standard Oil Company (included in
exhibit 2.1)
10.3 Texas Standard Oil Company 2002 Equity Incentive Plan
11 Statement regarding computation of per share earnings*
13 Annual or Quarterly Reports*
15 Letter regarding unaudited interim financial information*
16 Letter on change in certifying accountant*
II-1
[Download Table]
EXHIBIT
ITEM NUMBER EXHIBIT DESCRIPTION
---- ------- -------------------
21 Subsidiaries of the registrant*
23 Consent of experts and counsel
23.1 Consent of Haynes and Boone, LLP (included in Exhibit 5.1)
23.2 Consent of Hein + Associates LLP
23.3 Consent of Ryder Scott Company, L.P.
24 Power of attorney
24.2 Power of Attorney (included on the signature page of this
Registration Statement)
25 Statement of eligibility of Trustee*
26 Invitations for competitive bids*
99 Additional exhibits
99.1 Form of Letter to Record Holders
99.2 Form of Letter to Clients
99.3 Form of Letter of Transmittal
---------------
* Inapplicable to this filing
ITEM 22. UNDERTAKINGS
(a) We hereby undertake that we will:
(1) File, during any period in which we offer or sell securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of a
prospectus filed with the Securities and Exchange Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
II-2
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant undertakes to respond to requests for
information that is incorporated by reference into the prospectus under Items 4,
10(b), 11, or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned Registrant undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Houston, state of Texas,
on January 10, 2002.
TEXAS STANDARD OIL COMPANY
(Registrant)
By: /s/ TIMOTHY M. ROBERSON
------------------------------------
Timothy M. Roberson
Chief Executive
Officer and President
II-4
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Timothy
M. Roberson and Joseph F. Langston, Jr., and each of them, as attorneys-in-fact,
each with the power of substitution, for him or her in any and all capacities,
to sign any amendment to this Registration Statement (including Post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
said attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURE CAPACITIES DATE
--------- ---------- ----
/s/ TIMOTHY M. ROBERSON President, Chief Executive January 10, 2002
------------------------------------------------ Officer and Chairman
Timothy M. Roberson (principal executive officer)
/s/ JOSEPH F. LANGSTON, JR. Chief Financial Officer and January 10, 2002
------------------------------------------------ Director (principal financial and
Joseph F. Langston, Jr. accounting officer)
/s/ CHARLES A. SHARMAN Director January 10, 2002
------------------------------------------------
Charles A. Sharman
II-5
EXHIBIT INDEX
[Download Table]
EXHIBIT
ITEM NUMBER EXHIBIT DESCRIPTION
---- ------- -------------------
1 Underwriting agreement*
2 Plan of acquisition, reorganization, arrangement,
liquidation, or succession
2.1 Purchase and Sale Agreement dated August 7, 2001 between IMC
Global, Inc. and Texas Standard Oil Company
3 Articles of Incorporation and By-laws
3.1 Articles of Incorporation of Texas Standard Oil Company
3.2 Articles of Amendment of Articles of Incorporation of Texas
Standard Oil Company
3.3 Bylaws of Texas Standard Oil Company
4 Instruments defining the rights of holders, including
indentures
4.1 Form of common stock certificate*
5 Opinion regarding legality
5.1 Opinion of Haynes and Boone, LLP
8 Opinion regarding tax matters*
9 Voting trust agreement*
10 Material contracts
10.1 Promissory Note payable to Roberson Oil Company dated July
31, 2001
10.2 Purchase and Sale Agreement dated August 27, 2001 between
IMC Global, Inc. and Texas Standard Oil Company (included in
exhibit 2.1)
10.3 Texas Standard Oil Company 2002 Equity Incentive Plan
11 Statement regarding computation of per share earnings*
13 Annual or Quarterly Reports*
15 Letter regarding unaudited interim financial information*
16 Letter on change in certifying accountant*
21 Subsidiaries of the registrant*
23 Consent of experts and counsel
23.1 Consent of Haynes and Boone, LLP (included in Exhibit 5.1)
23.2 Consent of Hein + Associates LLP
23.3 Consent of Ryder Scott Company, L.P.
24 Power of attorney
24.2 Power of Attorney (included on the signature page of this
Registration Statement)
25 Statement of eligibility of Trustee*
26 Invitations for competitive bids*
99 Additional exhibits
99.1 Form of Letter to Record Holders
99.2 Form of Letter to Clients
99.3 Form of Letter of Transmittal
---------------
* Inapplicable to this filing
Dates Referenced Herein and Documents Incorporated by Reference
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