Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction — Form S-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-4/A Texas Standard Oil Company - Amendment #1 102 478K
2: EX-4.1 Form of Common Stock Certificate 2 12K
3: EX-5.1 Opinion of Haynes and Boone, LLP 3 10K
4: EX-8.1 Tax Opinion of Haynes and Boone, LLP 2 9K
5: EX-23.2 Consent of Hein + Associates LLP 1 5K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 2002
REGISTRATION NO. 333-76552
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
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. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
CALCULATION OF REGISTRATION FEE
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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(2)
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Common Stock, par value $0.01 per share(1)... 748,770 $1.20 $898,524 $82.66
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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.
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) A filing fee of $222.47 has been previously paid.
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 MARCH 1, 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.
Exchange Ratio. We will issue one share of our common stock in exchange
for every 20 units of the Freeport-McMoRan Oil and Gas Royalty Trust tendered to
us by holders of record of units of the Trust.
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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THESE ARE SPECULATIVE SECURITIES. YOU SHOULD PARTICIPATE IN THE EXCHANGE
OFFER ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
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
Our Plans for the Future.................................. 2
Risk Factors.............................................. 2
Method of Determining Exchange Values..................... 3
Appraisal Rights; Investor Lists.......................... 3
Shareholder Approval and Regulatory Requirements.......... 3
Accounting Treatment...................................... 3
Tax Consequences.......................................... 4
Recommendation of the Trustee............................. 4
Comparative Rights of Security Holders.................... 4
Unaudited Pro Forma Financial Data........................ 4
Market Price Information.................................. 4
Comparative Per Share Data................................ 4
FORWARD-LOOKING STATEMENTS.................................. 6
RISK FACTORS................................................ 7
Risks Related to the Transaction.......................... 7
Risk Factors Relating to Our Business..................... 8
Risk Factors Related to Our Common Stock.................. 14
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER............... 16
Background of the Trust................................... 16
Background of the Exchange Offer.......................... 16
Reasons for the Exchange Offer............................ 21
Other Transactions and Relationships...................... 21
Alternatives to the Exchange Offer........................ 21
THE EXCHANGE OFFER.......................................... 21
Terms of the Exchange Offer............................... 21
Issuance of Shares; Fractional Shares..................... 22
Expiration Date; Extensions; Amendments................... 22
Procedures for Tendering.................................. 23
Withdrawal Of Tenders..................................... 25
Conditions................................................ 25
Exchange Agent............................................ 26
Solicitation of Tenders; Fees and Expenses................ 27
Accounting Treatment...................................... 27
No Consents or Authorizations............................. 27
Regulatory Requirements................................... 28
No Independent Representative or Fairness Opinion......... 28
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................... 28
General................................................... 28
Assumptions and Representations........................... 28
No Tax Rulings............................................ 29
Royalty Partnership....................................... 30
Royalty Trust............................................. 30
RIGHTS OF DISSENTING SHAREHOLDERS........................... 31
Access to Investor List................................... 31
METHOD OF DETERMINING EXCHANGE VALUES....................... 31
RECOMMENDATION OF THE TRUSTEE............................... 32
PLAN OF OPERATION........................................... 32
Results of Operations..................................... 32
Liquidity and Capital Resources........................... 33
BUSINESS AND PROPERTIES..................................... 34
Properties................................................ 34
Oil and Gas Reserves...................................... 35
Productive Wells.......................................... 36
Leasehold Acreage......................................... 37
Major Customers........................................... 37
Title to Properties....................................... 37
Competition............................................... 37
Markets................................................... 38
Corporate Offices......................................... 38
Employees................................................. 39
Legal Proceedings......................................... 39
Environmental Regulations................................. 39
MANAGEMENT.................................................. 42
Officers and Directors.................................... 42
EXECUTIVE COMPENSATION...................................... 43
Summary Compensation Table................................ 43
Employment Agreements, Termination of Employment and
Change-in-Control Arrangements......................... 43
Stock-Based Plans......................................... 43
Option/SAR Grants In Last Fiscal Year..................... 43
Aggregate Option/SAR Exercise in Last Fiscal Year and
Fiscal Year-End Option/SAR Values...................... 44
Long Term Incentive Plan Awards........................... 44
BENEFICIAL OWNERSHIP OF OUR COMMON STOCK.................... 44
CERTAIN TRANSACTIONS........................................ 45
Working Capital Loans..................................... 45
Services Agreements and Purchase of Assets................ 45
Goliad County Well........................................ 45
COMPARISON OF SECURITY HOLDER RIGHTS AND CERTAIN CHANGES IN
THE RIGHTS OF UNITHOLDERS................................. 46
ii
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DESCRIPTION OF CAPITAL STOCK................................ 56
Preferred Stock........................................... 56
Common Stock.............................................. 56
Texas Anti-Takeover Law and Articles of Incorporation
Bylaw Provisions....................................... 57
Limitation of Liability; Indemnification.................. 57
Transfer Agent and Registrar.............................. 58
MARKET FOR THE TRUST'S UNITS................................ 58
MARKET FOR OUR COMMON STOCK................................. 58
LEGAL MATTERS............................................... 59
INDEPENDENT AUDITORS........................................ 59
RESERVE ENGINEERS........................................... 59
WHERE YOU CAN FIND MORE INFORMATION ABOUT TEXAS STANDARD.... 59
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE TRUST......... 59
GLOSSARY OF OIL AND GAS TERMS............................... 61
INDEX TO FINANCIAL STATEMENTS............................... F-1
THE EXCHANGE OFFER IS EXPECTED TO EXPIRE ON , 2002. YOU MUST MAKE
YOUR EXCHANGE DECISION BY THIS 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.
The common stock of Texas Standard may not be sold to residents of the
state of Florida because Texas Standard is unable to qualify under the Florida
Securities and Investor Protection Act (the Florida blue sky laws). Accordingly,
the offer is not being made to residents of the state of Florida, and Florida
residents may not participate in the offer.
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 Florida or any other 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.
iii
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
of units of the Trust.
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.
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.
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 issued a press release stating that it will not terminate the Trust
until the earlier of the completion of our exchange offer or the depletion of
the Trust's expense reserve. The Trustee stated that it did not expect to
make a liquidating distribution to unitholders when the Trust is liquidated.
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 the Depository Trust Company's (DTC) 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
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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.
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 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: 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.
v
SUMMARY
The following summary highlights material information from this prospectus.
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 three
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 which is currently not producing
and is scheduled to be plugged and abandoned. 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 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.
1
Because of the substantial production costs incurred, the Trust has not
receive any royalty payments or made any distributions to holders of units 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
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 21-28)
We are offering to exchange one share of our common stock for every 20
units of the Trust tendered by record holders of units of the Trust. Assuming
all unitholders participate in the exchange offer, we will issue 748,770 shares
of our common stock, representing 37% of our outstanding shares immediately
following consummation of 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 will be delivered promptly
following the expiration date. If we do not close the exchange offer, we will
promptly return any units tendered.
OUR PLANS FOR THE FUTURE (SEE PAGES 32-34)
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 7-15)
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, which
would substantially reduce the availability of information about us to
you.
- Because the number of shares of our common stock to be exchanged for
Trust units was determined by our existing shareholders, and was not based
on the relative values of the common stock and Trust units, it is
difficult to evaluate whether or not the consideration offered by us in
the exchange offer is adequate.
- It is impossible to objectively compare the consideration paid for our
common stock by our existing shareholders and that to be paid by holders
of units who accept the exchange offer.
RISKS RELATED TO OUR BUSINESS
- We have limited operating history, which makes it difficult to assess our
ability to successfully operate our company.
- As a consequence of our management's lack of technical training in the
oil and gas industry, we may miss business opportunities that technically
trained managers would recognize.
- 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.
2
- 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.
- 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.
- 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.
- Because our common stock will trade 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.
METHOD OF DETERMINING EXCHANGE VALUES (SEE PAGE 31)
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 use
any valuation formula to determine the number of shares of common stock to be
offered to unitholders. The exchange ratio of one share of our common stock for
every 20 units tendered was selected primarily because it would result in the
issuance of approximately one-third of the shares of our common stock to
unitholders, if all unitholders accepted the offer. Our decision was not based
on an analysis of the relative value of our stock and the Trust's units or of
the value of our assets and the Trust's assets. Therefore, the exchange ratio
could be deemed arbitrary.
APPRAISAL RIGHTS; INVESTOR LISTS (SEE PAGE 31)
Under Texas law, unitholders are not entitled to any appraisal or
dissenters' rights.
A unitholder may inspect the list of unitholders of 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 PAGES 27-28)
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 27)
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.
3
TAX CONSEQUENCES (SEE PAGES 28-31)
We believe that, for federal income tax purposes, the shares we are issuing
pursuant to the exchange offer are, in substance, part of the consideration for
the royalty we purchased from the partnership on October 5, 2001. The
partnership is the entity that held the royalty for the Trust. The shares we are
issuing in the exchange offer should be treated as if they were issued to the
partnership and ultimately distributed to the unitholders in liquidation of the
partnership. As a result, the partnership, and ultimately the unitholders,
should recognize any gain or loss upon the transfer of the royalty to us. Any
gain or loss recognized by the unitholders should be treated as long-term
capital gain or loss. However, the unitholders must treat a portion of such
gain, if any, as ordinary income to recapture prior depletion. Based upon
treating the shares received in the exchange offer as consideration paid to the
partnership for the royalty, a unitholder should not recognize any gain or loss
upon the exchange of such holder's units for our common stock. 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 32)
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.
COMPARATIVE RIGHTS OF SECURITY HOLDERS (SEE PAGES 46-55)
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-14 - F-18)
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-14 through F-18. 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 PAGES 58-59)
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.
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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.
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NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 DECEMBER 31, 2001
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Pro Forma -- Texas Standard Earnings (Loss) Per
Share:
Basic........................................ $ 22.05 $ .09
Diluted...................................... $ 22.05 $ .09
Book Value Per Share -- Diluted................. $(14.66) $(1.41)
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YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
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Historical -- Freeport-McMoRan Oil and Gas Royalty
Trust Earnings (Loss) Per Unit:
Basic.......................................... $ (.02) $ (.04)
Diluted........................................ $ (.02) $ (.04)
Book Value Per Unit -- Diluted.................... $ .04 $ *
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NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 DECEMBER 31, 2001
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Pro Forma Combined -- Texas Standard Earnings
(Loss) Per Share:
Basic........................................ $ 1.84 $ (.15)
Diluted...................................... $ 1.84 $ (.15)
Book Value Per Share -- Diluted................. $ .99 $ 1.91
---------------
* less than $.01
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 WHICH WOULD
SUBSTANTIALLY REDUCE THE INFORMATION AVAILABLE TO YOU ABOUT US.
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. If all of the Trust's
unitholders participate in the exchange offer, we expect to have more than 8,000
shareholders following the consummation of the exchange offer. If our reporting
obligations cease, you will have little or no access to information about us and
our financial condition and will lose legal remedies available to you under the
Exchange Act of 1934.
BECAUSE THE NUMBER OF SHARES OF OUR COMMON STOCK TO BE EXCHANGED FOR TRUST
UNITS WAS DETERMINED BY OUR EXISTING SHAREHOLDERS, AND WAS NOT BASED ON THE
RELATIVE VALUES OF THE COMMON STOCK AND TRUST UNITS, IT IS DIFFICULT TO
EVALUATE WHETHER OR NOT THE CONSIDERATION OFFERED BY US IN THE EXCHANGE OFFER
IS ADEQUATE.
As described under "Background and Reasons for the Exchange
Offer -- Background of the Exchange Offer", in March 2001, the Trustee agreed to
submit our offer to purchase the net profits royalty interest owned by the Trust
to unitholders for approval. To induce unitholders to approve the sale of the
royalty to us, we offered to exchange our common stock for units of the Trust.
We did not use any valuation formula to determine the number of shares of common
stock to be offered to unitholders. The decision to offer one share of common
stock for every 20 units tendered was made primarily because it would result in
the issuance of approximately one-third of the shares of our common stock to
unitholders, if all unitholders accepted the offer. We believed that this was a
sufficient interest in the company to induce unitholders to approve the sale of
the royalty to us.
We did not employ a more objective valuation criteria for the following
reasons:
- Based on its reserve reports, the Trust was not expected to receive any
additional payments with respect to the royalty, and was not expected to
make any material distributions to unitholders. This made it difficult to
evaluate the value of the royalty and the Trust units.
- We are a newly formed private company, with no history of operations, and
very little likelihood of liquidity in our common stock. We did not
believe it was practical to place a meaningful value on our common stock
for purposes of establishing an exchange ratio for Trust units.
As a result, it is difficult for you to objectively evaluate whether the
exchange ratio of one share of common stock for 20 Trust units is an appropriate
exchange ratio.
IT IS IMPOSSIBLE TO OBJECTIVELY COMPARE THE CONSIDERATION PAID FOR COMMON STOCK
BY OUR EXISTING SHAREHOLDERS AND THAT TO BE PAID BY HOLDERS OF UNITS WHO ACCEPT
THE EXCHANGE OFFER.
Neither our existing shareholders nor unitholders who tender their units
will have paid material cash consideration for our common stock. Our existing
shareholders paid an immaterial amount for their common stock. Similarly,
because it is unlikely that unitholders will receive any additional
distributions from the Trust, the units tendered by unitholders in exchange for
our common stock have no value to us.
7
It is therefore impossible to objectively determine whether unitholders are
paying more or less for their common stock than was paid by our initial
shareholders.
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IF DIFFICULT TO ASSESS OUR
ABILITY TO SUCCESSFULLY OPERATE OUR COMPANY.
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. As of September 30, 2001, we had an accumulated shareholder's deficit of
$381,006. 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.
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.
AS A CONSEQUENCE OF OUR MANAGEMENT'S LACK OF TECHNICAL TRAINING IN THE OIL AND
GAS INDUSTRY, WE MAY MISS BUSINESS OPPORTUNITIES THAT TECHNICALLY TRAINED
MANAGERS WOULD RECOGNIZE.
None of the members of our management team possess technical training in
the oil and gas industry. This lack of technical training may cause them to fail
to recognize the full potential of prospects or other opportunities that
technically trained managers would recognize. Because our management team lacks
technical training, they will be forced to rely on the opinions of operators of
our properties or to pay consultants that may not be completely familiar with
our properties. The lack of our management's technical training may negatively
impact our operations and financial success.
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. For example based on
Koch's Crude Oil Postings, the price for West Texas intermediate crude oil has
decreased from approximately $26.40 per barrel in January 2001 to approximately
$16.52 per barrel in January 2002. Over the same time period, the spot price for
natural gas delivered to Texas Eastern Transmission Corp.'s West Louisiana zone
has decreased from approximately $9.80 per Mcf to approximately $2.52 per Mcf.
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;
8
- 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.
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. 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 offshore operations.
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
9
less than our estimated reserves, our results of operations and financial
condition could be adversely affected.
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. In addition, our oil and
gas properties are mature properties that do not have significant development
opportunities. Therefore, our current properties will decline in production and
revenues. Without successful exploration or acquisition activities, our
reserves, production and revenues will decline rapidly.
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. The costs of exploitation and development may materially exceed initial
estimates. 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.
We intend to finance any capital expenditures necessary to develop our
existing reserves and the capital expenditures necessary to discover new oil and
gas reserves primarily with cash from operations, proceeds from bank borrowings
and proceeds from the sale of debt and equity securities. 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.
10
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;
- 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 our operating results may be adversely
affected.
11
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.
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. Based on March nominations, we have currently
hedged approximately 60% of our estimated oil production and approximately 47%
of our estimated gas production for 2002. We do not currently anticipate hedging
any further 2002 production at this time. 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.
12
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. For a
discussion of the environmental regulations applicable to us, see "Business and
Properties -- Environmental Regulations." 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.
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
13
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 2,005,241 shares of
common stock outstanding if all 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.
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 participate in the
exchange offer, Mr. Roberson will own 37.3% of our outstanding common stock and
Mr. Langston will own 25.4% 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.
BECAUSE OUR COMMON STOCK WILL TRADE 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
14
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 since it will be a penny stock. Because of these extra requirements, many
broker-dealers are unwilling to sell penny stocks at all. As a result of our
common stock being deemed a penny stock, you may be unable to resell our stock
and could lose your entire investment.
15
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 from Freeport-McMoRan. 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 owner 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
16
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.
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
17
Oil and IMC Global indicated that the two companies had entered into a
non-binding letter of intent relating to the acquisition of 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, 2000.
18
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.
19
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 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. However, in order to comply with Exchange
Act Rule 14d-10, we have elected to offer to exchange shares of our common stock
for units tendered by any unitholder, regardless of the number of units held of
record by such tendering holder. We have not decreased the percentage of shares
to be issued to unitholders of record of 2,000 or more units. As a result, if
all unitholders participate in the exchange offer, we will issue approximately
37% of our outstanding common stock to unitholders of the Trust.
20
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. On December 26, 2001, the Trustee
issued a press release stating that it will not terminate the Trust until the
earlier of the completion of our exchange offer or the depletion of the Trust's
expense reserve.
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.
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 liquidating or other 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 of units of the Trust. 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
Regulation 14D and 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;
21
- 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 the Depository Trust Company
(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.
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; 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
from us and delivering certificates representing shares of our common stock 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 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 in the exchange offer. We will
determine the number of 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
22
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 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 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
LETTERS 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
23
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.
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
24
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
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 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.
25
- 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 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
will determine whether or not all of the conditions have been met, and whether
or not to waive any conditions on the expiration date. 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.
26
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 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
27
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 and 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
In the opinion of Haynes and Boone, LLP, our counsel, the following is a
summary of the material federal income tax consequences of the exchange offer
that generally should 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
Revenues Code. This summary is based on certain assumptions, representations and
reasoning, which are described below. The federal income tax consequences of the
exchange offer could differ substantially from those described herein if such
assumptions and representations are not true, accurate and complete in all
respects or if the Internal Revenue Service rejects the reasoning below. In
addition, 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. Finally, 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 AND REPRESENTATIONS
This summary is based on the following assumptions and representations:
- On October 5, 2001, we became obligated to acquire the royalty interest
and make the exchange offer.
- On October 5, 2001, the approximate fair market value of the outstanding
Trust units was $1,048,277 based on the closing sales price of $0.07 then
reported for such units.
- On October 5, 2001, the approximate amount of the Trust's cash reserves
was $217,000.
- On October 5, 2001, the only assets of the Trust were the partnership
interest and cash reserves.
- On October 5, 2001, the only asset of the partnership was the royalty
interest.
- On October 5, 2001, starting with the $1,048,277 market value of the
outstanding Trust units and subtracting the cash reserves of $217,000,
there is a difference of $831,277.
28
- On October 5, 2001, the estimated liquidating distribution from the
Trust, expected to occur on December 31, 2001, was approximately $75,000
to $150,000, or approximately $0.005 to $.01 per unit (including the
Trust's share of the proceeds from the sale of the royalty interest to
us).
- The $831,277 difference between market value of the outstanding Trust
units and the cash reserves logically reflects value attributable to the
Trust's partnership interest. The partnership held a single asset, the
royalty interest.
- The value of the royalty interest on October 5, 2001 substantially
exceeded $1,000.
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.
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.
SUBSTANCE OVER FORM PRINCIPLES
The unitholders hold the right to exchange Trust units for our shares.
However, the partnership, not the unitholders, transferred value (the royalty
interest) to us for the right to exchange Trust units for our shares. We would
not have agreed to exchange our shares to the unitholders for Trust units unless
the partnership first transferred the royalty interest to us. The imputed value
of the royalty interest (Trust market value less cash reserves) was far greater
than the $1,000 of cash that we paid to the partnership. The value that we
received for our agreement to exchange our shares for units of the Trust was the
transfer of ownership of the royalty interest, a partnership asset. For federal
income tax purposes, there is substantial authority for treating the
unitholders' right to exchange Trust units for our shares pursuant to the
exchange offer as part of the consideration we paid for the royalty, under
assignment of income and substance-over-form principles, because:
- The unitholders were the ultimate beneficial owners of 99.9% of the
partnership and its assets.
- The imputed value of the royalty interest on October 5, 2001, when the
unitholders approved the amendment to require the Trustee to sell or
cause the sale of the royalty interest to us for $1,000, was
substantially greater than $1,000.
- The unitholders received exchange rights worth substantially more than
the estimated liquidating distribution from the Trust following the sale
of the royalty interest to us.
- The partnership could not avoid a taxable event by assigning to the
unitholders the right to receive proceeds from partnership property
because prevention of the assignment of income is a basic principle of
the federal income tax system.
- The exchange rights are options to acquire our shares. In general, for
federal income tax purposes, the recipient of an option to acquire shares
that is reasonably certain to be exercised is treated as receiving the
underlying shares. Unitholders who do not exchange their Trust units for
our shares are not expected to receive any consideration for their units
when the Trust liquidates. Unitholders who do exchange their Trust units
for our shares will own those shares. This economic difference in outcome
indicates that the exchange rights are options to acquire shares that are
reasonably certain to be exercised. As a result, the shares are treated
as following the same ownership path, through the partnership to the
unitholders, as the exchange rights.
Based on these general principles, for federal income tax purposes, the
right to acquire our shares pursuant to the exchange offer should be
characterized, to reflect economic substance and not just form, as paid to the
partnership. The exchange offer should be characterized as most of the
consideration that we
29
paid for the royalty interest that we purchased from the partnership on October
5, 2001. As a consequence, share received upon exercise of the exchange rights
should be treated for federal income tax purposes as if they were granted to the
partnership, distributed to the Trust upon liquidation of the partnership and
then distributed by the Trust to the unitholders.
ROYALTY PARTNERSHIP
The partnership should recognize gain or loss equal to the difference
between (1) the consideration we paid to the partnership for the royalty (i.e.,
the sum of $1,000 plus the fair market value of the shares received upon
exercise of the exchange rights, which the partnership should be treated as
having received), less (2) the partnership's adjusted tax basis in the royalty
interest.
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 from the partnership is equal to
its percentage interest in the partnership, or 99.9%.
The partnership should not recognize any gain or loss upon distributing the
proceeds from the royalty transfer to the Trust and the Managing General Partner
in liquidation of the partnership.
The partnership's holding period with respect to the shares received upon
exercise of the exchange rights it is treated as having received should begin on
October 12, 2001, the day after the closing of the sale of the royalty interest
to us.
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's 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's assets, including
the Trust's interest in the partnership, when computing its taxable income.
UNITHOLDERS
A unitholder should include in income its distributive share of the
partnership's gain or loss upon the sale of the royalty to us. Except to the
extent of the depletion recapture amount described below, any such gain or loss
should be a long-term capital gain or loss. If the unitholder is an individual,
a long-term capital gain should be taxable at a maximum rate of 20%. The
unitholder's ability to use long-term capital losses is subject to substantial
restrictions.
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. If the
unitholder is an individual, the depletion recapture amount should be taxable at
a maximum rate of 39.6%.
A unitholder should recognize gain upon the partnership's liquidating
distribution to the Trust of the proceeds from the royalty transfer only to the
extent that the unitholder's share of the amount of any money distributed, or
deemed distributed, exceeds the unitholder's tax basis in the unitholder's units
immediately before the distribution, but after adjustment to reflect the
unitholder's distributive share of the partnership's gain or loss upon the sale
of the royalty to us. If the unitholder is an individual and has held his units
for at least 12 months, such gain should be a long-term capital gain taxable at
a maximum rate of 20%. No unitholder may recognize any loss upon the
partnership's liquidating distribution to the Trust of the proceeds from the
royalty transfer because such proceeds should be treated as including property
(i.e., the shares received upon exercise of the exchange rights) in addition to
money.
30
Based upon treating the shares received upon exercise of the exchange
rights as consideration paid to the partnership for the royalty interest, for
the reasons given above, and except as described above, a unitholder should not
recognize any gain or loss upon the exchange of such unitholder's units for
shares of our common stock because the unitholder should be treated for federal
income tax purposes as if the unitholder received those shares in a liquidating
distribution from the partnership. The unitholder's tax basis in such shares
should equal the unitholder's tax basis in the unitholder's units, after
adjustment to reflect the unitholder's distributive share of the partnership's
gain or loss upon the sale of the royalty to us, and after subtracting the
amount of any money distributed, or deemed distributed, to the unitholder in
liquidation of the partnership. The unitholder's holding period for such shares
should include the partnership's holding period for such shares, which began on
October 12, 2001 as described above.
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
The terms of the royalty held by the Trust required the owner of the
working interests to have an investment grade bond rating. Since we do not have
such a rating, this provision of the royalty prevented us from acquiring the
working interests. Therefore, it was necessary for us to acquire the royalty in
order to waive this prohibition. In addition, acquiring the royalty allows us to
save the administrative, reporting and computational burdens associated with the
royalty. To induce unitholders to approve the sale of the royalty to us, we
offered to exchange our common stock for units of the Trust. We did not use any
valuation formula to determine the number of shares of common stock to be
offered to unitholders. The exchange ratio of one share of common stock for
every 20 units tendered was selected primarily because it would result in the
issuance of approximately one-third of the shares of our common stock to
unitholders, if all unitholders accepted the offer. We believed that this was a
sufficient interest in the company to induce unitholders to approve the sale of
the royalty to us. Our decision was not based on an analysis of the relative
value of our stock and the Trust units or of the value of our units and the
Trust's assets. Therefore, the exchange ratio of one share of our common stock
for 20 Trust units could be deemed arbitrary.
We did not employ a more objective valuation criteria to determine the
exchange ratio for the following reasons:
- The working interest owner was not expected to make any additional
payments with respect to the royalty, and the Trust was not expected to
make any material distributions to unitholders. This made it difficult to
evaluate the value of the royalty and the Trust units.
- We are a newly formed private company, with no history of operations, and
very little likelihood of liquidity in our common stock. We did not
believe it was practical to place a meaningful value on our common stock
for purposes of establishing an exchange ratio for Trust units.
The Trust's sole remaining asset consists of cash that will be used to pay
the Trustee's fees and expenses. To our knowledge, the Trustee does not hold any
units and therefore, will not be participating in the exchange offer.
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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.
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,
which is currently not producing and is scheduled to be plugged and abandoned.
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. Prior to October 2001, we did not have any revenues. Our net
loss is attributable to general and administrative expenses, consisting
primarily of $300,000 in bonuses paid to executive officers in 2001. For the
year ended September 30, 2001, we did not have any revenues from operations. We
had net operating income from operations of $524,894 for the period ended
December 31, 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. As of February 22, 2002, we had approximately $4.9 million of cash
and other liquid investments. We intend to reserve approximately 40% of this
amount and 40% of future net revenues to pay future plugging and abandonment
liabilities associated with the acquired working interests. Currently, we intend
to fund the exploration and development of our recently acquired properties
using cash flows from current production. We currently anticipate development
expenses of $2 million and plugging and abandonment expenses of $1.2 million for
fiscal 2002. We do not currently plan to drill any wells in 2002. To the extent
that these cash flows are insufficient to fund exploration and development
expenses, 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. We have not
budgeted any amounts for property acquisitions during 2002. We plan to
continually review acquisition opportunities in light of existing and
anticipated oil and gas prices, economic conditions, prevailing costs, available
financing and other matters. We are not currently engaged in material
negotiations to purchase oil and gas properties.
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
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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
adjustment in connection with the purchase of our three properties on October
12, 2001. We received $3.8 million of additional amounts representing purchase
price adjustments on January 11, 2002. 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. Mr. Roberson
and Mr. Langston oversee our hedging program. Mr. Roberson and Mr. Langston
periodically consult oil and gas analyst, traders and marketers and review daily
and weekly market reports and updates on both oil and gas futures and physical
markets activities. Our policy is to mitigate downward price risk by execution
of relatively small hedge volumes when we deem market conditions to be
favorable. We do not anticipate hedging any further 2002 production at this
time. However, we may elect to increase or decrease our currently hedged
positions if market conditions or production volumes change. 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
33
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 February 15, 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 200 Bbls per day at a price of $21.01 for the six month period beginning
March 1, 2002. In addition we purchased options to sell 2,000 Mcfe of gas per
day at a price of $2.00 per Mcfe for the six month period beginning February 1,
2002. For the month of February we have hedged approximately 16% of our
estimated oil production and 76% of our estimated gas production, based on
February nominations. Based on our March nomination, for 2002 we have hedged
approximately 60% of our estimated oil production and 47% of our estimated gas
production. None of our hedging contracts are with Enron related entities.
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.
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
ENDED ESTIMATED NET PROVED RESERVES
SEPTEMBER 30, -----------------------------
AREA NAME PRIMARY OPERATOR 2001 OIL GAS TOTAL
--------- ------------------ ------------- -------- ------- --------
(BOE) (BBLS) (MMCF) (BOE)
GULF OF MEXICO OFFSHORE:
West Cameron Area Block 498......... El Paso Production 295,100 342,730 2,904 826,730
Company
West Delta Area Block 34............ Forest Oil 19,374 1,738 658 111,405
Corporation
---------------
(1) Represents the present value of future net cash flows, 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 February 15, 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
34
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 average daily volumes
that vary over the term of the agreement, we are required to pay the pipeline
company a deficiency payment. During 2001, the minimum average daily volume was
5,167 Bbls per day. The estimated average daily production from this property
was 3,400 gross (653 net) Bbls per day for our fiscal year ended September 30,
2001. 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 of approximately $281,592, or $.35 per net Bbl
produced in 2001, being assessed for 2001. This property has never met the
minimum volume requirements in the purchase agreement. We anticipate that
penalties will continue to be assessed in future years. 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.
While the operator has control of the timing of when this property will be
plugged and abandoned, we have budgeted for the plugging and abandonment of this
property in 2002.
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. As of February 15, 2002, this
well is scheduled to be plugged and abandoned. We do not anticipate incurring
any additional costs in connection with the plugging and abandonment of this
well. 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
35
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
Total (BOE) (000s).......................... 1,027 1,036 938
Proved undeveloped:
Oil (MBbls)...................................... -- -- --
Gas (MMcf)....................................... -- -- --
Total proved:
Oil (MBbls)...................................... 518 452 344
Gas (MMcf)....................................... 3,053 3,501 3,562
Total (BOE) (000s).......................... 1,027 1,036 938
Estimated future net cash flows before income taxes... $6,561 $16,436 $3,491
Standardized measure of discounted future net cash
flows (000s)........................................ 3,790 10,143 2,786
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.
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.
36
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.
We do not have any contracts to sell or hedge our production with Enron
Corp. or its subsidiaries. However, Progas, Inc. a purchaser of our gas produced
from West Cameron Area Block 498 failed to pay us in full for our November 2001
gas sales because Progas had been selling such gas to an Enron subsidiary and
did not receive payment for November 2001 sales. The purchaser owed us $183,202
as of February 15, 2002. We are in negotiations with this purchaser regarding
their payment of the amount due by June 2002 in four monthly installments.
TITLE TO PROPERTIES
We have performed title checks of our oil and gas properties that we
believe are in accordance with industry standards. These reviews included
searching the Minerals Management Service files for the lease assignments to
Freeport-McMoRan, Inc. and any subsequent assignments, examining the merger
documents between Freeport-McMoRan, Inc. and IMC Global, examining the history
of payments for production, reviewing operating agreements and other contracts
affecting production and transportation of oil and gas, and obtaining a special
warranty of title from IMC Global. 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
37
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;
- 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.
38
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.
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
39
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.
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.
The federal National Pollutant Discharge Elimination System permits applicable
to our properties 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.
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
40
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 provide protection to animal and plant species and which
may apply to our 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 our 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. We
believe that we are currently in substantial compliance with these permitting
requirements.
Wildlife Refuges/Bird Sanctuaries. Portions of our properties are located
in or adjacent to federal and state wildlife refuges and bird sanctuaries. Our
operations in such area must comply with regulations governing air and water
discharge which are more stringent than in our other areas of operations. We
have not been, and do not anticipate that we will be, materially affected by any
such requirements.
Abandonment Costs. We are typically responsible for payment of abandonment
costs on the oil and gas properties we own. As of December 31, 2001, total
future abandonment costs on our 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.
41
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 assisted with the negotiation of the acquisition of the
working interests and the royalty prior to, and after, the formation of Texas
Standard. Mr. Langston was appointed to his current positions in October 2001.
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, an operator of an internet site for commercial real estate
professionals, 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
42
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 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 do not currently have employment agreements with any of our executive
officers.
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. We do not intend
to issue to officers, directors, employees, 5% shareholders, or affiliates
non-qualified options with an exercise price of less than 85% of the fair market
value of our common stock on the date of grant of such options. We will not
issue options to purchase more than 12% of our outstanding common stock prior to
the consummation of the exchange offer.
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
43
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.
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 February 15, 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 37.3%
Joseph F. Langston, Jr. .................. 508,871 40.5% 508,871 25.4%
All Directors and Executive Officers as a
Group (two persons)..................... 1,256,471 100% 1,256,471 62.7%
---------------
* 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.
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CERTAIN TRANSACTIONS
Our prior transactions with affiliates were not approved by independent,
non-management, directors. At this time, our board of directors does not have,
and we do not anticipate appointing any independent directors. All future
transactions with persons and entities affiliated with us will be on terms that
are no less favorable than those that could be obtained by unaffiliated third
parties. All future transactions with affiliated persons and entities and any
forgiveness of indebtedness will be approved by a majority of the disinterested
members of our board of directors. We do not intend to make loans to officers,
directors, or other controlling persons.
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.
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. This well is currently
scheduled to be plugged and abandoned. We do not anticipate incurring any
additional costs in connection with the plugging and abandonment of this well.
45
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 is a summary of the material rights
of our shareholders as compared with the rights of the Trust unitholders.
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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 call
for or demand or secure any parti-
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tion 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 holders
of at least two-thirds of all out-
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standing 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 the shares entitled
to vote on, and that
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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 present at any
meeting, the vote of the holders
of a majority of the shares enti-
tled 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 voting shares held
by such shareholder
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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 by election at an successor trustee meeting the
annual or special meet- requirements set forth in
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ing of the shareholders called for the indenture. In the event that a
that purpose. The Board of vacancy in the position of trustee
Directors is limited to filling no continues for 60 days, a successor
more than two vacancies per year. trustee may be appointed by any
Any director appointed holds State or Federal District Court
office for the unexpired term of holding terms in Houston, Harris
his predecessor in office. County, Texas, upon the
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 be authorized in
the articles of
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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 February 15, 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 February 15, 2002, we had two shareholders of record of our
common stock. We summarize below the key terms and provisions of our capital
stock. 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
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.
In addition, the voting and conversion rights of a series of preferred stock
issued by our board of directors could adversely affect the voting power of our
common shareholders. Unless the issuance of a series of preferred stock is
approved by the majority of our disinterested directors, we will only issue
preferred stock to promoters on the same terms as such series of preferred stock
is offered to other offerees of preferred stock. 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.
56
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;
57
- 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 February 15, 2002, we had two shareholders of
record. If all unitholders participate in the exchange offer, we will have a
total of 2,005,241 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 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 Mr. Roberson and Mr. Langston may sell and the manner in which
they may sell their stock while they are our affiliates.
58
As of February 15, 2002, 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 offered hereby 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
59
file 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.
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 (File No. 001-08581) for the year
ended December 31, 2000;
- the Trust's Quarterly Reports on Form 10-Q (File No. 001-08581) for the
quarters ended March 31, 2001, June 30, 2001 and September 30, 2001; and
- the Trust's Current Reports on Form 8-K (File No. 001-08581) filed on
October 26, 2001 and December 26, 2001.
60
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.
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 4-10(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., 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.
61
(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 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.
62
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.
63
TEXAS STANDARD OIL COMPANY
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
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FINANCIAL STATES OF TEXAS STANDARD OIL COMPANY
Independent Auditor's Report.............................. F-2
Balance Sheet as of September 30, 2001 and December 31,
2001 (unaudited)....................................... F-3
Statement of Operations for the Period from March 27, 2001
to September 30, 2001 and for the Three Months Ended
December 31, 2001 (unaudited).......................... F-4
Statement of Stockholders' Deficit for the Period from
March 27, 2001 to September 30, 2001 and for the Three
Months Ended December 31, 2001 (unaudited)............. F-5
Statement of Cash Flows for the Period from March 27, 2001
to September 30, 2001 and for the Three Months Ended
December 31, 2001 (unaudited).......................... F-6
Notes to Financial Statements............................. F-7
REVENUES AND DIRECT OPERATING EXPENSES OF PROPERTIES
ACQUIRED IN OCTOBER 2001
Independent Auditor's Report.............................. F-10
Historical Summaries of Revenues and Direct Operating
Expenses of Properties Acquired in October 2001........ F-11
Notes to Historical Summaries of Revenues and Direct
Operating Expenses of Properties Acquired in October
2001................................................... F-12
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Financial Information................. F-14
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 2001...................................... F-15
Unaudited Pro Forma Consolidated Statement of Income for
the Three Months Ended December 31, 2001 and the Nine
Months Ended September 30, 2001........................ F-16
Unaudited Pro Forma Consolidated Statement of Income for
the Year Ended December 31, 2000....................... F-17
Notes to Unaudited Pro Forma Financial Information........ F-18
FINANCIAL STATEMENTS OF THE FREEPORT-MCMORAN OIL AND GAS
ROYALTY TRUST
Independent Auditor's Report.............................. F-19
Statements Of Assets, Liabilities and Trust Equity as of
December 31, 2000 and September 30, 2001 (unaudited)... F-20
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-21
Statement of Changes in Trust Equity...................... F-22
Statements of Cash Flows.................................. F-23
Notes to Financial Statements............................. F-24
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 SHEETS
[Enlarge/Download Table]
DECEMBER 31, SEPTEMBER 30,
2001 2001
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 777,779 $ 6,659
Restricted cash........................................... 160,000 --
Marketable securities, at fair market value............... 605,220 --
Oil and gas sales receivable.............................. 422,599 --
Receivable from purchase and sale agreement............... 3,243,000 --
Note receivable........................................... 227,092 --
------------ ---------
TOTAL CURRENT ASSETS.............................. 5,435,690 6,659
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method)................. 111,966 --
Furniture and equipment................................... 20,000 --
Less accumulated depletion and depreciation............... (12,320) --
------------ ---------
Net property and equipment................................ 119,646 --
DEFERRED TAX ASSET.......................................... 115,000 --
DEPOSIT ON PURCHASE AND SALE AGREEMENT...................... -- 110,000
------------ ---------
TOTAL ASSETS...................................... $ 5,670,336 $ 116,659
============ =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 1,577,143 $ 381,745
Note payable -- related party............................. -- 115,000
Income tax payable........................................ 115,000 --
Deferred revenue.......................................... 11,553 --
------------ ---------
TOTAL CURRENT LIABILITIES......................... 1,703,696 496,745
PLUG AND ABANDONMENT LIABILITY.............................. 4,200,000 --
COMMITMENTS (Note 5)........................................ -- --
STOCKHOLDERS' DEFICIT:
Preferred stock, 10,000,000 shares authorized, no shares
issued................................................. -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 168,067 and 100,000 shares issued and
outstanding, respectively.............................. 1,681 1,000
Additional paid in capital................................ 131,976 --
Accumulated deficit....................................... (367,017) (381,086)
------------ ---------
TOTAL STOCKHOLDERS' DEFICIT....................... (233,360) (380,086)
------------ ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 5,670,336 $ 116,659
============ =========
See accompanying notes to these financial statements.
F-3
TEXAS STANDARD OIL COMPANY
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
FOR THE PERIOD FROM
THREE MONTHS INCEPTION
ENDED (MARCH 27, 2001)
DECEMBER 31, TO SEPTEMBER 30,
2001 2001
------------ ----------------
(UNAUDITED)
OIL AND GAS REVENUE......................................... $1,327,247 $ --
COSTS AND EXPENSES:
Production expense........................................ 584,451 --
Well insurance expense.................................... 133,687 --
Depletion and depreciation................................ 12,320
General and administrative................................ 284,772 380,171
---------- ---------
Total expenses.................................... 1,015,230 380,171
OPERATING INCOME (LOSS)..................................... 312,017 (380,171)
OTHER INCOME (EXPENSE):
Non-recurring offering costs.............................. (244,240) --
Unrealized loss on marketable securities.................. (71,555) --
Interest income........................................... 17,847 830
Interest expense.......................................... -- (1,745)
---------- ---------
(297,948) (915)
---------- ---------
INCOME TAX PROVISION:
Current expense........................................... (115,000) --
Deferred benefit.......................................... 115,000 --
---------- ---------
NET INCOME (LOSS)........................................... $ 14,069 $(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 DECEMBER 31, 2001 (UNAUDITED)
[Enlarge/Download Table]
COMMON STOCK ADDITIONAL
---------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ----------- ---------
(UNAUDITED)
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)
Issuance of common stock (unaudited)... 68,067 681 131,976 -- 132,657
Net income (unaudited)................. -- -- 14,069 14,069
------- ------ -------- --------- ---------
BALANCES:
December 31, 2001 (unaudited).......... 168,067 $1,681 $131,976 $(367,017) $(233,360)
======= ====== ======== ========= =========
See accompanying notes to these financial statements.
F-5
TEXAS STANDARD OIL COMPANY
STATEMENT OF CASH FLOWS
[Enlarge/Download Table]
FOR THE FOR THE PERIOD
THREE MONTHS FROM INCEPTION
ENDED (MARCH 27, 2001)
DECEMBER 31, TO SEPTEMBER 30,
2001 2001
------------ -------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 14,069 $(381,086)
Depletion, depreciation and amortization.................. 12,320 --
Unrealized loss on marketable securities.................. 71,555 --
Deferred tax benefit...................................... (115,000) --
Purchase of trading securities............................ (676,775) --
Stock compensation........................................ 131,976 --
Changes in assets and liabilities:
Accounts receivable and accrued income................. (649,691) --
Accounts payable and accrued expenses.................. 735,789 381,745
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES...................................... (475,757) 659
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit on purchase and sale agreement.................... -- (110,000)
Restricted cash........................................... (160,000) --
Cash received in oil and gas property purchase............ 1,500,000 --
Additions to property and equipment....................... 21,196 --
---------- ---------
NET CASH (PROVIDED BY) USED IN INVESTING
ACTIVITIES...................................... 1,361,196 (110,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) related party note.......... (115,000) 115,000
Proceeds from sale of common stock........................ 681 1,000
---------- ---------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES...................................... (114,319) 116,000
---------- ---------
NET CHANGE IN CASH.......................................... 771,120 6,659
CASH:
Beginning of year......................................... 6,659 --
---------- ---------
CASH:
End of year............................................... $ 777,779 $ 6,659
========== =========
See accompanying notes to these financial statements.
F-6
TEXAS STANDARD OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
(THE PERIOD SUBSEQUENT TO SEPTEMBER 30, 2001 IS UNAUDITED)
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 both onshore and 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 a deferred tax asset of
approximately $130,000, which was fully reserved, and no material deferred tax
liabilities, at September 30, 2001. At December 31, 2001, the Company had a net
deferred tax asset of $700,000, of which $585,000 is reserved as it cannot be
ascertained that it is more likely than not such asset will be realized.
F-7
TEXAS STANDARD OIL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED INFORMATION
The balance sheet as of December 31, 2001 and the statement of operations
for the three months ended December 31, 2001 were taken from the Company's books
and records without audit. However, in the opinion of management, such
information includes all adjustments (consisting only of normal recurring
accruals) which are necessary to properly reflect the financial position of the
Company as of December 31, 2001 and the results of operations for the three
months ended December 31, 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 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, 2001, 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 of December 31, 2001, the Company had received
payment for $1,500,000 of the receivable. 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
In October 2001, the Company issued 68,067 shares of its $.001 par value
common stock with an estimated fair value of $132,657 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 December 2001, the Company's board of directors adopted the 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.
F-8
TEXAS STANDARD OIL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has proposed to offer shares of 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 executed a
forward split of its common stock resulting in the issuance of an additional
1,088,404 shares to its existing stockholders subsequent to December 31, 2001.
5. COMMITMENTS AND CONTINGENCIES
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.
In February 2002, suit was filed against the Company relating to certain
rights to proceeds from the acquisition of the working and royalty interests
(Note 2). The suit was settled by the Company agreeing to pay the claimant a sum
of $250,000 which is reflected in accrued liabilities at December 31, 2001.
F-9
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-10
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-11
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-12
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-13
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 IMG
Global, Inc. and the Freeport-McMoRan Oil and Gas Royalty Trust (the "Trust")
for consideration of $1,101,000. The Company has also proposed to offer shares
of its common stock to the unitholders of the Trust in exchange for the units in
the Trust. 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 with the Trust unitholders was
completed as of December 31, 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 acquisition of the property interests are included in the pro forma
statement of income for the nine months ended September 30, 2001 as if it had
occurred at the beginning of the period. 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-14
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
[Enlarge/Download Table]
EXCHANGE
OFFER PRO
TEXAS FORMA
STANDARD ADJUSTMENTS PRO FORMA
---------- ----------- ----------
ASSETS
CURRENT ASSETS:
Cash................................................. $ 777,779 $ -- $ 777,779
Restricted cash...................................... 160,000 -- 160,000
Marketable securities, at fair market value.......... 605,220 -- 605,220
Oil and gas sales receivable......................... 422,599 -- 422,599
Receivable from purchase and sale agreement.......... 3,243,000 -- 3,243,000
Note receivable...................................... 227,092 -- 227,092
---------- ---------- ----------
TOTAL CURRENT ASSETS......................... 5,435,690 -- 5,435,690
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method)............ 111,966 3,798,000(1) 3,909,966
Furniture and equipment.............................. 20,000 -- 20,000
Less accumulated depletion and depreciation.......... (12,320) -- (12,320)
---------- ---------- ----------
Net property and equipment...................... 119,646 3,798,000 3,917,646
Deferred tax asset................................... 115,000 -- 115,000
---------- ---------- ----------
TOTAL ASSETS................................. $5,670,336 $3,798,000 $9,468,336
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $1,327,143 $ -- $1,327,143
Income tax payable................................... 115,000 -- 115,000
Deferred revenue..................................... 261,553 (261,553)(1) --
---------- ---------- ----------
TOTAL CURRENT LIABILITIES.................... 1,703,696 (261,553) 1,442,143
PLUG AND ABANDONMENT LIABILITY......................... 4,200,000 -- 4,200,000
STOCKHOLDERS' EQUITY (DEFICIT):........................ (233,360) 4,059,553(1) 3,826,193
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT).................................. $5,670,336 $3,798,000 $9,468,336
========== ========== ==========
See accompanying notes to pro forma financial statements.
F-15
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED DECEMBER 31, 2001
[Enlarge/Download Table]
TEXAS PRO FORMA
STANDARD ADJUSTMENTS PRO FORMA
---------- ----------- ----------
REVENUE:
Oil and gas sales.................................... $1,327,247 $ -- $1,327,247
COSTS AND EXPENSES:
Production expense................................... 718,138 -- 718,138
Depletion and depreciation........................... 12,320 563,000(2) 575,320
General and administrative........................... 284,772 -- 284,772
---------- ---------- ----------
Total costs and expenses..................... 1,015,230 563,000 1,578,230
OPERATING INCOME (LOSS)................................ 312,017 (563,000) (250,983)
OTHER INCOME (EXPENSE)................................. (297,948) 244,240(4) (53,708)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................... 14,069 (318,760) (304,691)
INCOME TAX PROVISION................................... -- -- --
---------- ---------- ----------
NET INCOME (LOSS)...................................... $ 14,069 $ (318,760) $ (304,691)
========== ========== ==========
BASIC EARNINGS PER SHARE............................... $ .09 $ (.17)(6) $ (.15)
========== ========== ==========
DILUTED EARNINGS PER SHARE............................. $ .09 $ (.17)(6) $ (.15)
========== ========== ==========
WEIGHTED AVERAGE SHARES BASIC.......................... 165,042 1,840,199(6) 2,005,241
========== ========== ==========
WEIGHTED AVERAGE SHARES DILUTED........................ 165,042 1,840,199(6) 2,005,241
========== ========== ==========
See accompanying notes to pro forma financial statements.
F-16
TEXAS STANDARD OIL COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2001
[Enlarge/Download Table]
(5)
TEXAS ACQUIRED PRO FORMA
STANDARD PROPERTIES ADJUSTMENTS PRO FORMA
--------- ---------- ----------- -----------
REVENUE:
Oil and gas sales..................... $ -- $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) $ 1.68(6) $ 1.84
========= =========== ===========
DILUTED EARNINGS PER SHARE.............. $ (3.81) $ 1.68(6) $ 1.84
========= =========== ===========
WEIGHTED AVERAGE SHARES BASIC........... 100,000 1,905,241(6) 2,005,241
========= =========== ===========
WEIGHTED AVERAGE SHARES DILUTED......... 100,000 1,905,241(6) 2,005,241
========= =========== ===========
See accompanying notes to pro forma financial statements.
F-17
TEXAS STANDARD OIL COMPANY
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) 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.
(2) Adjustment to reflect depletion as if the properties had been acquired
and exchange offer occurred at the beginning of the period.
(3) Adjustment to reflect estimated general and administrative expenses as
if the properties had been acquired and exchange offer occurred at the beginning
of the period.
(4) Adjustment to remove non-recurring costs related to this exchange
transaction that are included in the Company's statement of operations.
(5) Oil and gas sales and direct operating expenses of the acquired
properties for the period.
(6) Adjustment assumes exchange of all unitholders at a ratio of 1 share of
common stock for each 20 units (748,770 shares). The adjustment also includes
the effect of the 68,067 shares issued by the Company in October 2001 and the
issuance of 1,088,404 shares to existing shareholders on January 4, 2002. The
adjustments are as if all the shares were issued at the beginning of the
respective periods.
F-18
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, 2001,
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, 2001.
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 of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2001, and the net
loss and distributable income, and changes in trust equity for each of the two
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 1, the Trust has sold its interest in the royalty
during October 2001.
HEIN + ASSOCIATES LLP
Dallas, Texas
February 27, 2002
F-19
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST EQUITY
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -------------
ASSETS
Cash and cash equivalents................................... $22,691 $ 615,459
Net overriding royalty interest in oil and gas properties... -- 189,875,741
Less accumulated amortization and impairment of net
overriding royalty interest............................... -- (189,875,741)
------- -------------
Total assets...................................... $22,691 $ 615,459
======= =============
LIABILITIES AND TRUST EQUITY
Accrued liabilities......................................... $ -- $ 27,461
Trust Equity:
Reserve for future Trust expenses........................... 22,691 587,998
Trust corpus (14,975,390 Units of Beneficial Interest
authorized, issued and outstanding)....................... -- --
------- -------------
22,691 587,998
------- -------------
Total liabilities and trust equity................ $22,691 $ 615,459
======= =============
The accompanying notes are an integral part of these financial statements.
F-20
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF NET LOSS AND DISTRIBUTABLE INCOME
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000
----------- -----------
INCOME:
Oil and gas royalty proceeds.............................. $ -- $ --
Interest income........................................... 15,936 41,414
----------- -----------
TOTAL INCOME...................................... 15,936 41,414
EXPENSES:
Trust administrative expenses............................. (581,243) (339,992)
----------- -----------
Net loss.......................................... $ (565,307) $ (298,578)
=========== ===========
Net loss per unit................................. $ (.04) $ (.02)
=========== ===========
Distributable income........................................ $ -- $ --
=========== ===========
Distributable income per Unit............................... $ -- $ --
=========== ===========
Units outstanding........................................... 14,975,390 14,975,390
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-21
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, 2000.......................................... $ 886,576 $ -- $ 886,576
NET LOSS............................................ (298,578) -- (298,578)
--------- ----- ---------
December 31, 2000........................................ 587,998 -- 587,998
NET LOSS............................................ (565,307) -- (565,307)
--------- ----- ---------
December 31, 2001........................................ $ 22,691 $ -- $ 22,691
========= ===== =========
The accompanying notes are an integral part of these financial statements.
F-22
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
NET LOSS............................................... $(565,307) $(298,578)
Change in accrued liabilities............................... (27,461) 17,417
--------- ---------
Net change in cash from operating activities................ (592,768) (281,161)
Cash and cash equivalents, beginning of period.............. 615,459 896,620
--------- ---------
Cash and cash equivalents, end of period.................... $ 22,691 $ 615,459
========= =========
The accompanying notes are an integral part of these financial statements.
F-23
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
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
F-24
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for 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 Unitholders 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-25
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
F-26
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
net cash flows attributable to the combined interests of the Working Interest
Owner and the Partnership, and a formula based upon 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-27
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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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
8.1 Tax Opinion of Haynes and Boone, LLP
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*
II-1
[Download Table]
EXHIBIT
ITEM NUMBER EXHIBIT DESCRIPTION
---- ------- -------------------
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
+ Previously filed
ITEM 22. UNDERTAKINGS
(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 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-2
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 March 1, 2002.
TEXAS STANDARD OIL COMPANY
(Registrant)
By: /s/ TIMOTHY M. ROBERSON
------------------------------------
Timothy M. Roberson
Chief Executive
Officer and President
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 Officer March 1, 2002
------------------------------------------------ and Chairman
Timothy M. Roberson (principal executive officer)
/s/ JOSEPH F. LANGSTON, JR.* Chief Financial Officer and March 1, 2002
------------------------------------------------ Director (principal financial and
Joseph F. Langston, Jr. accounting officer)
/s/ CHARLES A. SHARMAN* Director March 1, 2002
------------------------------------------------
Charles A. Sharman
*By: /s/ TIMOTHY M. ROBERSON
------------------------------------------
Timothy M. Roberson,
pursuant to a power of attorney
II-3
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
8.1 Tax Opinion of Haynes and Boone, LLP
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
+ Previously filed
Dates Referenced Herein and Documents Incorporated by Reference
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