UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

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The Meridian Resource Corporation

 

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THE MERIDIAN RESOURCE CORPORATION
1401 Enclave Parkway, Suite 300
Houston, Texas 77077

PROPOSED CASH MERGER — YOUR VOTE IS VERY IMPORTANT

 

To our Shareholders:

 

After careful consideration, the board of directors of The Meridian Resource Corporation, a Texas corporation, which we refer to as “Meridian,” “we,” “our,” or “us,” has unanimously approved a merger agreement providing for Meridian’s acquisition by Alta Mesa Holdings, LP, or “Alta Mesa.”

 

If the merger is completed, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Alta Mesa, Alta Mesa Acquisition Sub, LLC or any other subsidiary of Alta Mesa or held in treasury by us and other than shares held by shareholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.29 in cash, without interest and less any applicable withholding tax. Each outstanding option or warrant for Meridian common stock will be canceled in exchange for (A) the excess, if any, of $0.29 over the per share exercise price of the option or warrant, as applicable, multiplied by (B) the number of shares of common stock subject to the option or warrant, as applicable, net of any applicable withholding taxes.

 

If the merger is completed, Meridian will no longer be a publicly traded company, our stock will not be traded on the New York Stock Exchange and you will not participate in our future earnings or growth.

 

At a special meeting of our shareholders, you will be asked to vote on a proposal to adopt the merger agreement. The special meeting will be held on Tuesday, March 30, 2010, at 10:00 a.m. Houston time, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas 77010. Notice of the special meeting and the related proxy statement are enclosed.

 

The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement and the merger. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement. We encourage you to read the entire proxy statement and the merger agreement carefully. You may also obtain more information about us from documents we have filed with the Securities and Exchange Commission.

 

Our board of directors has unanimously determined that the merger agreement is advisable and in the best interests of Meridian and its shareholders and unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement. The board of directors also recommends that you vote “FOR” the approval of any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies in favor of the adoption of the merger agreement if there are not sufficient votes for approval and adoption of the merger agreement at the special meeting.

 

Your vote is very important. We cannot complete the merger without the affirmative vote in favor of the adoption of the merger agreement of the holders of at least two-thirds of the outstanding shares of Meridian common stock entitled to vote. The failure of any shareholder to vote on the proposal to adopt the merger agreement will have the same effect as a vote against the adoption of the merger agreement.

 

Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy in the accompanying reply envelope, or submit your proxy by telephone or the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

 

On behalf of your board of directors, thank you for your continued support.

 

Sincerely,

 

Paul D. Ching

Chairman and Chief Executive Officer

 

February 8, 2010

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated February 8, 2010 and is first being mailed to shareholders of Meridian on or about February 12, 2010.

 

THE MERIDIAN RESOURCE CORPORATION
1401 Enclave Parkway, Suite 300
Houston, Texas 77077

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On March 30, 2010

 

 

To the Shareholders of The Meridian Resource Corporation:

 

We will hold a special meeting of shareholders of The Meridian Resource Corporation, which we refer to as “Meridian,” “we,” “our,” or “us,” at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas 77010 on Tuesday, March 30, 2010 at 10:00 a.m. local time, for the following purposes:

 

 

These items of business are described in the attached proxy statement. Only our shareholders of record at the close of business on February 8, 2010, the record date for the special meeting, are entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting.

 

The adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock entitled to vote.

 

Your vote is very important. If you do not vote on the proposal to adopt the merger agreement, it will have the same effect as a vote against it.

 

It is important that your shares be represented and voted whether or not you plan to attend the special meeting in person. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy or submit your proxy by telephone or the Internet prior to the special meeting. If you are a shareholder of record, voting in person at the meeting will revoke any proxy previously submitted. If your shares are held in “street name,” which means shares held of record by a broker, bank or other nominee, you should check the voting form used by that firm to be sure such firm votes those shares in accordance with your instructions. Submitting a proxy over the Internet, by telephone or by mailing the enclosed proxy card in a timely manner will ensure your shares are represented at the special meeting. Please review the instructions in the accompanying proxy statement and the enclosed proxy card or the information forwarded by your broker, bank or other nominee regarding the voting of your shares.

 

Shareholders who vote against the adoption of the merger agreement will have the right to seek appraisal of the fair value of their shares of common stock if the merger is completed, but only if they deliver a written demand for appraisal before the vote is taken on the merger agreement and comply with all applicable requirements of Texas law, which are summarized in the accompanying proxy statement.

 

By Order of the Board of Directors,

 

Paul D. Ching

Chairman and Chief Executive Officer

Houston, Texas

February 8, 2010

 

TABLE OF CONTENTS

 

 

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. See “Where You Can Find More Information.”

 

References to “Meridian,” “we,” “our” or “us” in this proxy statement refer to The Meridian Resource Corporation and its subsidiaries unless the context indicates otherwise.

 

 

The Meridian Resource Corporation, a Texas corporation, is an independent oil and natural gas company that explores for, acquires and develops oil and natural gas properties. Through our wholly owned subsidiaries, we hold interests primarily in the onshore oil and natural gas regions of south Louisiana and Texas and offshore in the Gulf of Mexico. Meridian is headquartered in Houston, Texas.

 

Alta Mesa Holdings, LP, which we refer to as “Alta Mesa,” is a privately held Texas limited partnership that explores for, acquires and develops oil and natural gas properties.

 

Alta Mesa Acquisition Sub, LLC, which we refer to as “Merger Sub,” is a wholly owned subsidiary of Alta Mesa and is a Texas limited liability company. It was formed solely for the purpose of effecting the merger, has no assets, and has conducted no business operations.

 

 

You are being asked to consider and vote upon the adoption of the merger agreement. If the merger agreement is adopted by our shareholders, the other conditions to closing are satisfied or waived and the merger agreement is not terminated prior to the effective time of the merger, Meridian will merge with and into Merger Sub, Merger Sub will continue as the surviving company, we will no longer be a publicly traded company, we will not be required to file reports with the Securities and Exchange Commission, or the “SEC,” our stock will not be traded on the New York Stock Exchange, or the “NYSE,” and you will not participate in our future earnings or growth. Upon completion of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Alta Mesa, Merger Sub or any other subsidiary of Alta Mesa or held in treasury by us and other than shares held by shareholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.29 in cash, without interest and less any applicable withholding tax. In this proxy statement, we refer to the consideration to be paid per share of common stock in the merger as the “Merger Consideration.” The surviving company will be a wholly owned subsidiary of Alta Mesa.

 

The merger agreement provides that the parties will close the merger no later than the business day after the satisfaction or waiver of the conditions described under “The Merger Agreement — Conditions to the Completion of the Merger.”

 

We currently anticipate that the merger will be completed in the first half of 2010. However, there can be no assurances that the merger will be completed at all, or if completed, that it will be completed in the first half of 2010. We are currently in default under our credit facility and other lending arrangements, including a payment default under our credit facility resulting from a borrowing base redetermination that became effective on April 30, 2009 (causing a borrowing base deficiency of $35.0 million at the time of such redetermination and $26.4 million as of January 4, 2010), and are subject to forbearance agreements with our lenders that they may terminate on or after February 28, 2010 if the merger is not completed by that date. If the merger is not completed, you will remain subject to all of the risks you are currently subject to as a holder of our common stock, including the risk that the forbearance agreements with our lenders and certain others would terminate, that our lenders and other parties would then take action to enforce their rights with respect to the outstanding obligations owed to them and that we may be forced to liquidate or to otherwise seek protection under federal bankruptcy laws. We can give you no assurance that in a bankruptcy proceeding you

would receive any value for your shares. See “The Merger — Effects on Meridian if the Merger is Not Completed.”

 

Alta Mesa or Meridian may terminate the merger agreement under certain circumstances. In addition, Alta Mesa may terminate the merger agreement for any reason at any time prior to the effective time of the merger in its sole and absolute discretion. See “The Merger — Termination of the Merger Agreement.”

 

 

Time, Place and Date (page 15)

 

The special meeting of our shareholders will be held on Tuesday, March 30, 2010 at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas 77010, at 10:00 a.m. local time.

 

Purpose (page 15)

 

You will be asked

 

 

Record Date and Quorum (page 15)

 

You are entitled to vote at the special meeting if you owned shares of common stock at the close of business on February 8, 2010, the record date for the special meeting. You will have one vote for each share of common stock that you owned on the record date. As of February 8, 2010, there were 92,475,527 shares of common stock entitled to be voted.

 

A majority of the outstanding shares of our common stock entitled to vote, represented in person or by proxy, will constitute a quorum for purposes of the special meeting.

 

Vote Required to Approve the Merger Agreement (page 16)

 

The adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock entitled to vote. A failure to vote your shares of common stock, an abstention or a broker non-vote will have the same effect as voting “AGAINST” the adoption of the merger agreement.

 

Common Stock Ownership of Directors and Executive Officers; Voting Agreements (page 68)

 

Exclusive of options and warrants, our directors and executive officers beneficially owned, and had the right to vote an aggregate of 3,997,363 shares of common stock, or approximately 4.32% of our outstanding shares of common stock on the record date. Each of our directors and executive officers has entered into an agreement with Alta Mesa and Merger Sub to vote all shares of our common stock owned or controlled by them in favor of the approval of the merger agreement.

 

Voting and Proxies (page 16)

 

Any shareholder of record entitled to vote at the special meeting may submit a proxy by returning the enclosed proxy card by mail, by telephone, by the Internet or by voting in person by appearing at the special meeting. If your shares of common stock are held in “street name” by your broker, bank or other nominee, you should instruct your broker, bank or other nominee on how to vote your shares of common stock using the

instructions provided by your broker, bank or other nominee. If you do not provide your broker, bank or other nominee with instructions, your shares of common stock will not be voted and that will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

 

Revocability of Proxy (page 16)

 

You have the right to change or revoke your proxy at any time before the vote taken at the special meeting:

 

 

 

The merger agreement provides that at the effective time of the merger, each outstanding option to purchase our common stock will become fully vested pursuant to our long-term incentive plans and, pursuant to the merger agreement, will be converted into the right to receive, at the effective time of the merger, an amount in cash equal to the product of (A) the excess, if any, of the Merger Consideration over the per share exercise price of common stock subject to such option multiplied by (B) the number of shares of common stock covered by such option, the payment of which will be without interest and subject to applicable withholding tax. The per share exercise price for all of our outstanding options exceeds the Merger Consideration. Therefore, the holders of outstanding options will not receive any consideration for the cancellation of their outstanding options held by them, except that certain holders of options will receive $10 consideration in exchange for the execution of an option waiver, cancellation and release agreement.

 

Joseph A. Reeves, Jr. and Michael J. Mayell, who are directors of Meridian, each own warrants to purchase 936,499 shares of our common stock. The exercise price of the warrants is $0.10 per share. At the effective time of the merger, each such outstanding warrant will be converted into the right to receive, at the effective time of the merger, an amount in cash equal to the product of (A) the excess of the Merger Consideration over the exercise price per share of common stock subject to such warrant multiplied by (B) the number of shares of common stock covered by such warrant, the payment of which will be without interest and subject to applicable withholding tax. Mr. Reeves and Mr. Mayell will receive $355,870 in the aggregate for their warrants.

 

 

In considering the recommendation of our board of directors with respect to the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, your interests as a shareholder. These interests include:

 

 

 

 

 

 

Morgan Keegan & Company, Inc., which we refer to as “Morgan Keegan”, delivered its opinion to our board of directors that, as of December 22, 2009 and based upon and subject to the factors and assumptions set forth therein, the $0.29 per share in cash to be received by the holders of the outstanding shares of our common stock pursuant to the merger agreement was fair from a financial point of view to the holders.

 

The full text of the written opinion of Morgan Keegan, dated December 22, 2009, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B. Morgan Keegan provided its opinion for the information and assistance of our board of directors in connection with its consideration of the transaction. The Morgan Keegan opinion is not a recommendation as to how any holder of our common stock should vote with respect to the transaction. Pursuant to an engagement letter between us and Morgan Keegan, we have agreed to pay Morgan Keegan a fee of $300,000, plus reasonable out-of-pocket expenses.

 

 

Our board of directors unanimously approved the merger agreement, including the merger and the other transactions contemplated by the merger agreement, and declared the merger agreement advisable and in the best interests of Meridian and its shareholders and recommended that the shareholders adopt the merger agreement and directed that the matter be submitted for consideration of our shareholders at the special meeting. For a discussion of the material factors considered by our board of directors in reaching its conclusions, see “The Merger — Reasons for the Merger; Recommendation of Our Board of Directors.”

 

Our board of directors unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement and “FOR” the approval of any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies in favor of the adoption of the merger agreement if there are not sufficient votes for adoption of the merger agreement at the special meeting.

 

 

The amount of funds necessary to pay the aggregate merger consideration to our shareholders and holders of options and warrants is anticipated to be approximately $27.2 million, assuming:

 

 

In addition, Alta Mesa will assume our outstanding indebtedness, which was approximately $92.4 million as of January 4, 2010. Alta Mesa has informed us that it will pay for the acquisition through a combination of cash on hand and financing obtained under its credit facility or contributions from its partners. Alta Mesa’s obligation to complete the merger is not contingent on its obtaining financing.

 

 

The exchange of shares of common stock for cash in the merger will be a taxable transaction for United States federal income tax purposes, and possibly for state, local and foreign tax purposes as well. See “The Merger — Material U.S. Federal Income Tax Consequences of the Merger to Our Shareholders.” You should consult your tax advisor for a complete analysis of the effect of the merger on your federal, state, local and/or foreign taxes.

 

 

Conditions to the Obligations of Each Party.  The merger agreement contains important conditions to each party’s obligation to consummate the merger, including the following:

 

 

Conditions to Alta Mesa’s and Merger Sub’s Obligations.  The merger agreement contains important conditions to Alta Mesa’s and Merger Sub’s obligations to consummate the merger, including the following:

 

 

 

Conditions to Meridian’s Obligations.  The merger agreement contains important conditions to our obligations to consummate the merger, including the following:

 

 

 

The merger agreement provides that Meridian will not, nor will we authorize or permit any of our subsidiaries or authorize any of our directors, officers, employees, representatives or agents to, directly or indirectly:

 

 

 

Notwithstanding these restrictions, under certain circumstances, our board of directors may respond to a third party acquisition proposal or terminate the merger agreement and enter into an acquisition agreement with respect to a superior proposal, so long as we comply with certain terms of the merger agreement described under “The Merger Agreement — Covenants — No Solicitation.”

 

See “The Merger Agreement — Covenants — No Solicitation” for the definitions of the terms “acquisition proposal” and “superior proposal” as used above.

 

 

Alta Mesa has the option to terminate the merger agreement for any reason in its sole and absolute discretion at any time prior to the effective time of the merger, whether before or after approval by our shareholders, provided that, if Alta Mesa elects to exercise this option to terminate, Alta Mesa must pay a $3.0 million termination fee to Meridian concurrently with such termination. Under the terms of our forbearance agreement with our credit facility lenders, if we receive a termination fee from Alta Mesa, we would be required to use the termination fee to reduce our indebtedness under our credit facility, and we would not otherwise have the use of such fee for working capital or capital expenditures.

 

In addition, the merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after approval by our shareholders under several other circumstances including, without limitation:

 

 

 

 

If the merger agreement is terminated under specified circumstances, we may be required to pay to Alta Mesa a $3.0 million termination fee and up to $1.0 million of Alta Mesa’s expenses incurred by it in connection with the transactions contemplated by the merger agreement.

 

If the merger agreement is terminated under other specified circumstances, Alta Mesa may be required to pay to Meridian a $3.0 million termination fee. Under the terms of our forbearance agreement with our credit facility lenders, if we receive a termination fee from Alta Mesa, we would be required to use the termination fee to reduce our indebtedness under our credit facility, and we would not otherwise have the use of such fee for working capital or capital expenditures.

 

 

If you vote against adopting the merger agreement, and you otherwise comply with the applicable statutory procedures and requirements of the TBOC, summarized elsewhere in this proxy statement, you will be entitled to seek appraisal of the fair value of your shares as set forth in Chapter 10, Subchapter H of the TBOC. You must precisely follow these specific procedures to exercise and perfect your rights of dissent and appraisal, or you may lose your appraisal rights.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a Meridian shareholder. Please refer to the “Summary Term Sheet” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement, which you should read carefully. See “Where You Can Find More Information.”

 

 

 

 

 

 

 

 

 

 

 

This proxy statement contains statements that are not historical facts and that are considered “forward-looking” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. You can identify these statements by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. Further, statements that include words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negative or other words or expressions of similar meaning, may identify forward-looking statements. These forward-looking statements are found at various places throughout this proxy statement. These forward-looking statements, including without limitation, those relating to future actions, effects of the merger on us if the merger is not completed, strategies, future performance, the outcome of contingencies such as legal proceedings and future financial results, wherever they occur in this proxy statement, are necessarily estimates reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors set forth from time to time in our filings with the SEC. In addition to other factors and matters contained in this document, these statements are subject to risks, uncertainties and other factors, including, among others:

 

 

See “Where You Can Find More Information.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement.

 

THE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.

 

Meridian

 

The Meridian Resource Corporation

1401 Enclave Parkway, Suite 300

Houston, Texas 77077

(281) 597-7000

 

The Meridian Resource Corporation, a Texas corporation, is an independent oil and natural gas company that explores for, acquires and develops oil and natural gas properties. Through our wholly owned subsidiaries, we hold interests primarily in the onshore oil and natural gas regions of south Louisiana and Texas and offshore in the Gulf of Mexico.

 

For more information about us, please visit our website at www.tmrx.com. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. See also “Where You Can Find More Information.” Our common stock is publicly traded on the NYSE under the symbol “TMR.”

 

Alta Mesa

 

Alta Mesa Holdings, LP
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Telephone: (281) 530-0991

 

Alta Mesa Holdings, LP is a privately held Texas limited partnership that explores for, acquires and develops oil and natural gas properties.

 

Merger Sub

 

Alta Mesa Acquisition Sub, LLC
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Telephone: (281) 530-0991

 

Alta Mesa Acquisition Sub, LLC is a wholly owned subsidiary of Alta Mesa and is a Texas limited liability company. It was formed solely for the purpose of effecting the merger, has no assets, and has conducted no business operations.

 

This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by our board of directors for use at the special meeting to be held on Tuesday, March 30, 2010, starting at 10:00 a.m. local time, at the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas 77010, or at any postponement or adjournment thereof. The purpose of the special meeting is for our shareholders to consider and vote upon the adoption of the merger agreement (and to approve any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies in favor of the adoption of the merger agreement if there are not sufficient votes for adoption of the merger agreement at the special meeting). A copy of the merger agreement is attached as Annex A to this proxy statement. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about February 12, 2010.

 

We have fixed the close of business on February 8, 2010 as the record date for the special meeting, and only holders of record of common stock on the record date are entitled to vote at the special meeting. On

February 8, 2010, there were 92,475,527 shares of common stock entitled to be voted. Each share of common stock entitles its holder to one vote on all matters properly coming before the special meeting.

 

A majority of the outstanding shares of our common stock entitled to vote, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. Shares of common stock represented at the special meeting but not voted, including “broker non-votes” and shares of common stock for which we have received proxies indicating that the submitting shareholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.

 

The adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock entitled to vote. For the proposal to adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. If you abstain, it will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

 

Under the rules of the NYSE, brokers who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approving non-routine matters such as the adoption of the merger agreement and, as a result, absent specific instructions from the beneficial owner of the shares, brokers are not empowered to vote those shares, referred to generally as “broker non-votes.” These “broker non-votes” will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

 

Exclusive of options and warrants, our directors and executive officers beneficially owned, and had the right to vote an aggregate of 3,997,363 shares of common stock, or approximately 4.32% of our outstanding shares of common stock on the record date. Each of our directors and executive officers has entered into an agreement with Alta Mesa and Merger Sub to vote all shares of our common stock owned or controlled by them in favor of the approval of the merger agreement.

 

If you submit a proxy by telephone or the Internet or by returning a signed proxy card by mail, your shares will be voted at the special meeting as you indicate on your proxy card or by such other method. If you sign your proxy card without indicating your vote, your shares will be voted “FOR” the adoption of the merger agreement and “FOR” the approval of any adjournment or postponement of the special meeting referred to above, and in accordance with the recommendations of our board of directors on any other matters properly brought before the special meeting for a vote.

 

If you abstain, your shares of common stock will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of business; however, your shares will not be counted as votes cast or shares voting on the proposal to adopt the merger agreement. If you abstain, it will have the same effect as a vote “AGAINST” the adoption of the merger agreement.

 

If your shares of common stock are held in street name, you will receive instructions from your broker, bank or other nominee that you must follow in order to have your shares voted. If you do not instruct your broker, bank or other nominee to vote your shares, it has the same effect as a vote “AGAINST” adoption of the merger agreement.

 

Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. You have the right to change or revoke your proxy at any time before the vote taken at the special meeting:

 

 

Please do not send in your stock certificates with your proxy card. If the merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the Merger Consideration in exchange for your Meridian stock certificates.

 

If the requisite shareholder vote approving the merger proposal has not been received at the time of the special meeting, holders of our common stock may be asked to vote on a proposal to adjourn or postpone the special meeting, if necessary, to solicit additional proxies in favor of the merger proposal. The affirmative vote of the holders of the majority of the shares entitled to vote on, and who voted for, against, or expressly abstained with respect to, the adjournment proposal at the special meeting is required to approve the adjournment proposal. Our board of directors recommends that you vote “FOR” the approval of any such adjournment or postponement of the meeting, if necessary.

 

The Texas Business Organizations Code, or TBOC, provides you with rights of dissent and appraisal in connection with the merger. This means that if you are not satisfied with the amount you are receiving in the merger, you are entitled to have the fair value of your shares of common stock determined by a Texas court and to receive payment based on that valuation. The ultimate amount you receive as a dissenting shareholder in an appraisal proceeding may be more or less than, or the same as, the amount you would have received in the merger. To exercise your rights of dissent and appraisal, you must deliver a written objection to the merger before the merger agreement is voted on at the special meeting and you must vote against the approval of the merger agreement. Your failure to follow exactly the procedures specified under Texas law will result in the loss of your rights of dissent and appraisal.

 

See “Rights of Dissent and Appraisal” and the text of Subchapter H of Chapter 10 of the Texas Business Organizations Code reproduced in its entirety as Annex C to this proxy statement, which relates to your rights of dissent and appraisal. We encourage you to read these provisions carefully and in their entirety.

 

This proxy solicitation is being made and paid for by us on behalf of our board of directors. In addition, we have retained The Altman Group, Inc. to assist in the solicitation. We will pay The Altman Group, Inc. approximately $185,000 plus reasonable out-of-pocket expenses for their assistance. Our directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. We will also request brokers, banks and other nominees to forward proxy solicitation material to the beneficial owners of shares of common stock that the brokers, banks and nominees hold of record. Upon request, we will reimburse them for their reasonable out-of-pocket expenses related to forwarding the material.

 

Our board of directors does not know of any other business that will be presented at the meeting. If any other proposal properly comes up for a vote at the meeting in which your proxy has provided discretionary authority, the proxy holders will vote your shares in accordance with their best judgment.

 

If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of common stock, or need additional copies of the proxy statement or the enclosed proxy card, please contact The Altman Group, Inc., our proxy solicitor, toll-free at (877) 864-5052 or call (201) 806-7300 or e-mail questions to TMRinfo@altmangroup.com.

 

At the special meeting we will ask our shareholders to vote on a proposal to adopt the merger agreement that provides for the merger of us with and into Merger Sub, with Merger Sub being the surviving corporation. A copy of the merger agreement is attached as Annex A to this proxy statement and is incorporated into this proxy statement by reference. We urge you to read the merger agreement in its entirety because it is the legal document governing the merger.

 

Historically, our board of directors and management have periodically reviewed our long-term strategies and objectives. In mid-2008, our board again concluded that it would be in our best interests and the best interests of our shareholders to re-evaluate our business strategy and long-term prospects. The board recognized that there were many dynamic factors and uncertainties to consider, many beyond our control, that would impact any given specific strategy to attain value for our shareholders. In the past, our board and management had, from time to time, sought advice from financial advisors to help evaluate our assets, business plans and strategic alternatives relative to the economic and market conditions that affect us and the oil and gas industry. In keeping with this policy and in recognition of the uncertainties that existed in the market, including the volatility of commodities prices, at its July 22, 2008 meeting, our board agreed to engage J.P.Morgan Securities, Inc. (“JPMorgan”) to advise and assist in evaluating strategic alternatives given our financial, technical and operational aspects relative to the prevailing economic and market conditions and outlook. Our board also appointed a special committee of independent and non-independent directors comprised of Paul D. Ching, Michael J. Mayell, C. Mark Pearson and John B. Simmons to monitor, review and help the board understand the ongoing work of JPMorgan and the management team and to screen any resulting offers from third parties. Mr. Ching served as chair of the special committee.

 

We were also undergoing transitions in management during the same period. In April 2008, Joseph A. Reeves, Jr. stepped down as our Chairman of the Board, but remained as our Chief Executive Officer. Our board appointed Mr. Ching to serve as the new Chairman of the Board. Both Mr. Reeves and Mr. Mayell, then President of Meridian, had also agreed to relinquish their respective officer positions at the end of 2008 when their employment agreements ended, but would remain on the board.

 

JPMorgan advised our board that our Gulf Coast portfolio carried exploitation and exploration risks that were difficult to predict. Our acreage portfolio included mostly gas, with a low reserves-to-production ratio, while the market seemed to be giving more credit to those companies that had diversified their portfolios to include longer-lived properties, such as tight gas sands and shale gas. Our board and management believed that we might be able to take advantage of the high commodity price environment at the time and enhance shareholder value by creating a more diversified portfolio of properties with a strategic partner. JPMorgan identified a preliminary list of potential strategic partners (public, private, financial sponsors and small cap resource players) to contact and seek to engage in initial discussions regarding a strategic transaction. By late August 2008, we had entered into confidentiality agreements with several companies and we began providing them with information.

Over the next few months, there was an unprecedented and widespread deterioration in financial markets and commodities prices. By late October 2008, oil and gas prices also continued to deteriorate. Our market value had fallen more than 60% since late June 2008. Our board and JPMorgan believed that achieving a strategic transaction had become much more difficult, as many potential strategic partners were looking to preserve liquidity in order to carry out their own near term plans. The market for exploration and production properties quickly changed from a “seller’s” to a “buyer’s” market.

 

At a board meeting held on November 5, 2008, Mr. Reeves reported that, as a result of the recent price declines in commodities prices and resulting reductions in cash flow, Meridian would seek to reduce its general and administrative expenses in 2009 by approximately one-third, sell its interests in certain non-developed prospects and schedule the development of other properties in a manner intended to achieve maximum cash flow with the capital available. He also reported that about ten companies had signed confidentiality agreements with Meridian and were reviewing the data we had provided to them. Our board considered the advantages and disadvantages of asset sales, raising additional capital or a stock-for-stock transaction and indicated a preference for a stock-for-stock strategic transaction.

 

In late November 2008, we received from Company “A” a cash offer for our Turtle Bayou and Weeks Island fields. The special committee of the board and management reviewed the offer and determined that the offer price significantly undervalued the assets. Given the continued interest from other parties, we made a decision not to pursue the sale of those assets to Company A, and we informed Company A of our decision.

 

Our board met again in early December 2008 and reviewed the status of ongoing discussions with potential transaction parties. The special committee reported to the board that, although several companies were conducting due diligence reviews, management considered about six or seven of them to be seriously considering making some sort of firm offer.

 

Over the previous several years, various landowners and/or regulators had asserted claims against Meridian (along with numerous other oil companies) concerning several fields in which Meridian had operations. In those claims, the landowners or regulators sought, through litigation, injunctive and other relief, including unspecified amounts in both actual and punitive damages, for alleged breaches of mineral leases and alleged failure to restore the plaintiffs’ lands from alleged contamination and otherwise from Meridian’s oil and natural gas operations. In some of the lawsuits, Shell Oil Company and SWEPI LP (together, “Shell”) had demanded contractual indemnity and defense from Meridian based upon the terms of the two acquisition agreements related to the fields, under which Meridian had originally acquired those fields from Shell in the late 1990s. On December 9, 2008, Shell sent Meridian a letter reiterating its demand for indemnity. Shell did not at that time produce supporting documentation for its claim and Meridian denied that it owed any indemnity under the acquisition agreements; however, the amounts claimed by Shell were substantial in nature and, if adversely determined, would have had a material adverse effect on Meridian. Our board and management believed that Shell’s claim could be a substantial barrier to any successful strategic transaction with another party. Management arranged for a meeting with Shell representatives in the first week of January 2009 for Meridian to understand Shell’s position in this matter. On many occasions throughout the first half of 2009, management continued to meet with Shell representatives to try to reach a resolution satisfactory to both parties.

 

On December 19, 2008, Meridian and its lenders amended our credit facility. Among other things, the amendment redetermined our borrowing base from $110.0 million to $95.0 million, which was the amount of borrowings outstanding under the credit facility at that time, and increased the interest rates accruing on the borrowings. The borrowing base was governed by a number of factors including, but not limited to, the reserve volumes associated with our proved oil and gas properties (particularly proved developed producing reserves) and the future net cash flows associated with the reserves, determined utilizing the lenders’ assumptions regarding commodity prices. Our resulting lack of liquidity put further pressure on our ability to create cash flow by drilling oil and gas wells and turning non-producing properties into producing properties.

 

On December 22, 2008, our board met again to get updates from JPMorgan on the status of ongoing discussions with potential transaction parties. JPMorgan indicated that they expected that any further indications of interest would be forthcoming by the end of January 2009. In light of pending management

changes, our board appointed Mr. Ching to serve as interim Chief Executive Officer and President, effective December 30, 2008.

 

As of December 29, 2008, Mr. Reeves stepped down as our Chief Executive Officer and Mr. Mayell stepped down as our President. Both continued to serve on our board.

 

In early 2009, with the approval of our board, Mr. Ching and management implemented a strategy to:

 

 

Our board met again on February 3, 2009 and reviewed the status of ongoing discussions. Management reported to the board that six parties still indicated an interest in doing a transaction, but we had received no offers.

 

On February 6, 2009, Company “B” submitted a letter of intent outlining a proposal to acquire Meridian in a stock transaction. The offer was, however, subject to the agreement by our credit facility lenders to accept payment for substantially less than the full amount of our outstanding loans. Our lenders declined anything less than full repayment of our outstanding debt and we were forced to reject the offer.

 

Later in February 2009, Company “C” made an oral offer to Meridian for a stock-for-stock merger. Our board and management, with the assistance of JPMorgan, analyzed the offer and concluded that Meridian at that time was a stronger company on a stand-alone basis when compared with the combination of Company C and Meridian. Management, with agreement of the special committee, decided to terminate further discussions with Company C.

 

At the March 10, 2009 board meeting, management reported that some additional potentially interested parties had entered into confidentiality agreements with Meridian and we had provided evaluation information to them. Our board reviewed our final 2008 financial statements, 2009 strategy and projected 2009 budget and expenditures, which included reductions in both general and administrative costs and field operating costs. Management updated the board on the status of negotiations with potential acquirors and discussions with our lenders related to the April 2009 borrowing base redetermination under our credit facility. One key aspect of the discussion was that we did not have sufficient cash to continue drilling any of our oil and gas prospects and develop our reserve base, nor did we expect to have sufficient cash to repay any borrowing base deficiency that could occur if our lenders further reduced our borrowing base. Based on our December 31, 2008 balance sheet, we had financial covenant defaults under our credit facility, specifically, the requirement that the ratio of current assets to current liabilities, as adjusted in accordance with the credit facility, be one to one or higher. Management reported that our independent auditors were most likely going to issue their audit report on our 2008 financial statements with a going concern modification, which would constitute an additional covenant default under our credit facility. The going concern modification was expected to provide that the financial covenant defaults under our credit facility and other debt agreements raised substantial doubt about our ability to continue as a going concern. In addition, we had two long-term dayrate contracts with Orion Drilling Company LLC (“Orion”) to utilize two drilling rigs. Although our capital expenditure plans could no longer accommodate use of these rigs, we remained obligated for the dayrate regardless of whether the rigs were working or idle. Consequently, our obligations under the rig contracts were becoming increasingly

significant. Our board approved management’s proposed 2009 budget, subject to resolution of the borrowing base redetermination issues with our credit facility lenders and subject to resolution of issues under our drilling rig contracts.

 

In February and March 2009, Company “D” had indicated an interest in a transaction with Meridian. The companies exchanged due diligence information and the management for the companies met. Mr. Ching sent a proposal to Company D in late March 2009. Mr. Ching held further discussions with them, but Company D decided not go forward.

 

In the first part of 2009, Company “E” had indicated an interest in a merger transaction with Meridian. Company E’s chief executive officer and Mr. Ching had several conversations during that time and each exchanged due diligence materials. In early March 2009, Company E made an indicative offer to Meridian for a stock-for-stock merger between the two companies. The offer, however, was subject to Company E being able to restructure its existing credit facility and senior notes. In mid-April 2009, Company E withdrew its offer, citing prohibitive financing issues and higher potential plugging and abandonment liabilities than they had expected on the Meridian properties.

 

On April 15, 2008, our credit facility lenders notified Meridian that, effective April 30, 2009, our borrowing base would be reduced from $95.0 million to $60.0 million. The credit facility provided that the $35.0 million of outstanding borrowings in excess of the borrowing base must be repaid within 90 days after the redetermination. We did not have sufficient cash available to repay the shortfall. The value of proved reserves had been significantly reduced during the previous several months due primarily to continuing decreases in the prices of oil and natural gas. Management continued discussions with the lenders regarding alternative repayment terms, including consideration of amortization payments from cash flow, obtaining waivers for non-compliance with covenants creating events of default, providing additional security and the potential for a forbearance agreement. Management and our board also considered other options for repayment, including the sale of strategic and nonstrategic assets and attempting to obtain capital from other lenders or investors. We asked our lenders to forbear from exercising remedies under the credit facility in order to give Meridian more time to pursue a strategic transaction. Over the next four months, Meridian and its lenders negotiated a forbearance agreement. A forbearance agreement was finally agreed to between the parties on September 3, 2009.

 

On May 8, 2009, Mr. Ching provided an update to the special committee of the board on strategic alternatives. Meridian continued to discuss options with several companies who indicated an interest in our company or its assets, but had not been successful in achieving a transaction due to many factors, including the collapse of the financial markets and precipitous declines in oil and gas commodity prices. Most discussions of the significant issues with completing the transactions that had been proposed related to the interested parties’ ability to obtain appropriate financing. Mr. Ching advised the special committee that we had been forced to stop all drilling, minimize capital spending and continue to cut costs. We had been able to keep production essentially flat, had made progress in renegotiating the drilling rig contracts, but had not been able to negotiate a settlement on the Shell claim. We also believed that the Shell claim continued to have a negative impact on any potential transaction. As a precaution, Mr. Ching, another member of the board and members of management met with bankruptcy counsel to understand the bankruptcy process and the ramifications if we were eventually forced to seek protection under federal bankruptcy laws.

 

On May 11, 2009, Shell initiated formal arbitration proceedings regarding its environmental claims against us. In early June 2009, we and Shell reached an agreement in principle for a settlement. We would convey to Shell approximately 4,300 acres of fee land near Houma, Louisiana and pay $5.0 million over five years to Shell in return for Shell releasing us from all claims. The fee land had no hydrocarbon exploration or development opportunities, but it had the potential to be classified as a mitigation bank for environmental mitigation matters. By the end of August 2009, the final form of agreement was ready for execution, but restrictions under our credit facility precluded us from conveying the fee land or making any payments to Shell until we had a definitive strategic transaction, such as the merger, in place. We executed the final agreement with Shell, which is subject to the closing of the merger, on January 11, 2010.

In mid-April 2009, we held an introductory meeting with Rivington Securities LLC, a subsidiary of Rivington Capital Advisors, LLC (“Rivington”), to discuss the possibility of Rivington assisting Meridian in raising debt or equity capital. Initially, Rivington analyzed the feasibility of raising junior capital in the form of second lien debt. Proceeds would be used to repay Meridian’s borrowing base deficiency under its existing credit facility. After consultation with our management, Rivington ultimately concluded that it would be difficult for us to raise second lien debt due mainly to the continued instability of global capital markets, lower commodity prices and our other substantial long-term liabilities, including the existing credit facility, drilling rig loan and dayrate contract obligations and the Shell claim. We asked Rivington to seek other strategic alternatives.

 

On April 23, 2009, Rivington met with Company “F” about the possibility of investing capital in Meridian in the form of convertible preferred stock. On May 13, 2009, Company “F” delivered a letter to Meridian indicating an interest in making a convertible preferred equity investment in Meridian. On May 14, 2009, Meridian and Rivington executed an engagement letter. Discussions with Company F and analysis of the proposal continued for the next several weeks. On July 17, 2009, Company F held an investment committee meeting with its equity capital providers to discuss the proposed transaction. Following that review, Company F decided to not proceed further with the possible transaction.

 

On May 21, 2009, Company “G” submitted an offer to purchase all of our interest in the Weeks Island field for cash. Discussions continued for several weeks, but our board ultimately concluded that the sale of the Weeks Island field, which was one of Meridian’s most valuable assets, would help in the short run as a means to eliminate part of the borrowing base deficiency, but would be detrimental to us in the long run. Cash flow would be significantly reduced, and we would still have no liquidity for drilling additional wells. Our board decided to pursue other options.

 

On June 11, 2009, we received a proposal from Company “H”, which had conducted a preliminary review of Meridian’s data. The proposal indicated that Company H would issue 25.0 million Company H shares in exchange for all of Meridian’s common stock. Based on share prices at that time, the preliminary proposal indicated a value of approximately $0.44 per share for Meridian stock. Company H would assume all of our debt outstanding. The proposal was subject to due diligence of Meridian’s data, which Company H conducted over the following two weeks. On June 26, 2009, Company H notified Mr. Ching that the proposal would be revised such that Company H would issue only 7.5 million Company H shares in exchange for all of Meridian’s common stock, indicating a value of about $0.10 per share for Meridian stock. Company H would assume our debt and immediately pay $10.0 million to $15.0 million to reduce the borrowing base deficiency, but would expect our credit facility lenders to accept further payments only when natural gas prices increased.

 

At the June 26, 2009 board meeting, Mr. Ching reported that Meridian and its credit facility lenders had reached a tentative agreement on the terms of a forbearance agreement. The lenders would forbear from exercising remedies under the credit facility in exchange for:

 

 

Mr. Ching also reported that we were still engaged in discussions with Companies F and H and had resumed discussions with Company A. Our board supported management’s recommendations to move quickly to document the Shell agreement, finalize the forbearance agreement, sell non-core acreage and pursue

multiple avenues to a strategic transaction so as to maintain competitive tension among the potential transaction parties.

 

On June 26, 2009, JPMorgan received an e-mail with another proposal from Company B to acquire our shares and assume our debt, but the proposal was vague. Company B followed up with an e-mail to Mr. Ching on June 30, but the proposal was not significantly clarified. Mr. Ching asked Company B for a more specific proposal in writing, but did not receive one.

 

On July 7, 2009, the chief executive officer of Company H came to Meridian’s office and presented a letter proposing a merger between Company H and Meridian. The key proposed terms were:

 

 

We began work to develop a response to the Company H proposal.

 

On July 8, 2009, we received from Company “I” an indication of interest with respect to the purchase of substantially all of our assets through a proposed “pre-packaged” bankruptcy proceeding. The asset purchase agreement would be negotiated prior to any filing by Meridian under Chapter 11 of the federal bankruptcy code, and a motion requesting approval of the agreement would be filed concurrently with Meridian’s bankruptcy petition. The aggregate purchase price for our assets would be between $50.0 million and $80.0 million, subject to additional due diligence and discussions with our principal creditors. The purchase price would be paid from Company I’s cash on hand and available financing commitments. The ability of Company I to obtain such financing commitments would be a condition to consummation of the sale.

 

On July 14, 2009, we received from Company “J” an offer to purchase certain of our oil and gas properties in Texas for $14.6 million. Management analyzed the offer and determined that it undervalued the assets. Mr. Ching discussed the offer with the special committee on July 21. The committee recommended that Mr. Ching go back to Company J with the request that they improve the offer price as we would not accept the current offer. Mr. Ching also discussed the offer with the full board on July 28, who supported the committee’s recommendation. Mr. Ching called the Company J chief executive officer and requested an improved offer price. Company J indicated they would review the request with their investors, but Company J offered no further proposals.

 

On July 16, 2009, Company I notified us that, if the Shell claim and claims under the drilling rig contracts could be resolved, Company I would be interested in a transaction resulting in a substantial direct equity investment in Meridian rather than the asset purchase proposed on July 8. Restructuring of our credit facility would be a condition to such investment.

 

On July 17, 2009, we met with representatives of our credit facility lenders for a status update and to seek additional support for a forbearance period until such time as we were able to consummate a strategic transaction.

The special committee of our board met on July 21, 2009 to discuss our current situation. Among other things, Mr. Ching reported that it was increasingly clear, based on continuing analysis and advice from JPMorgan and Rivington, that a “go it alone” strategy continued to be very difficult due to cash flow and debt repayment requirements. Selling key assets would not remedy our debt problems, since the remaining assets, with a higher percentage of non-producing properties, would not generate the cash flows required to service the debt and fund a program to convert non-producing assets to producing assets.

 

On July 23, 2009, Company “K” contacted Mr. Ching and outlined the general terms of a proposal under which Company K would merge into Meridian. The proposal involved an extensive capital restructuring of the combined company, including a capital injection of between $50.0 million and $60.0 million. On July 24, the chief executive officer of Company K called Mr. Ching to withdraw the offer, citing Company K’s inability to obtain the proposed financing.

 

Our board met again on July 28, 2009. Mr. Ching had invited the chief executive officer of Company H to attend the first part of the meeting and provide to our board additional background information on Company H and the status of their due diligence review of Meridian. The Company H chief executive officer outlined for our board Company H’s proposal to acquire us. He indicated that they placed a total value on Meridian of $105.0 million and was prepared to offer 7.5 million shares of Company H stock for all of our shares (which translated to a value of about $0.10 per Meridian share) and assume Meridian’s $95.0 million of bank loans. The Company H chief executive officer said he was prepared to pay $35.0 million to our credit facility lenders, but he preferred to use that money to drill wells. He pointed out that Company H had a substantial amount of cash on its books and no debt obligations due for some years. Members of our board asked the Company H chief executive officer a number of questions regarding cash, cash flow, net asset value and other financial and operational matters. Our board also inquired further about Company H’s proposed exclusivity period with Meridian. Going forward, Company H’s chief executive officer stated that he wished to have further discussions with our credit facility lenders.

 

The Company H chief executive officer left the meeting and Mr. Ching updated the board regarding the status of our operations, production levels, cost reductions, forbearance negotiations with lenders, other potential strategic transactions, settlement negotiations with Orion on the drilling rig contracts and Shell settlement negotiations. Mr. Ching also noted that, by the end of June 2009, our efforts to reduce costs had resulted in significant reductions in general and administrative costs and field operating costs.

 

Mr. Ching summarized that to date we had executed confidentiality agreements for the exchange of data with more than 20 entities. Eleven companies had made indicative offers and nine companies had elected not to proceed beyond preliminary discussions. Three (Companies A, G and J) of the eleven were offers for specific assets. Selling the two specific assets wanted by those companies would remove greater than 30% of our reserve base, about 44% of our production and between 50% and 60% of our net operating cash flow. Mr. Ching reiterated that the management team, its advisors and the board had analyzed selling specific assets and had come to the conclusion each time that selling these key properties and then remaining independent was not viable. Being left with a smaller asset base, which had mostly non-producing gas reserves, would not allow us to borrow any additional capital and the remaining cash flow would not support the servicing of the debt plus the funding of a drilling or recompletion program that would enable Meridian to sustain itself. Therefore, we would not pursue the sale of specific assets.

 

Mr. Ching further summarized that, for reasons stated earlier, we had decided not to pursue any further discussions with Company C. Five companies (Companies B, D, E, F and K) either made a decision for various reasons not to pursue Meridian any further or had not come back to Meridian with any explicit decision. We continued to consider two proposals (Companies H and I). At the conclusion of the meeting, our board took the following actions:

 

 

 

On July 29, 2009, we and Company H entered into an exclusivity agreement for the period commencing July 29 and ending August 15, and Company H and Meridian initiated a detailed due diligence process. Several days later, Company H asked to extend the exclusivity period to August 31. Mr. Ching had ongoing discussions with individual members of the special committee and the board regarding Company H’s request. The board was not comfortable with the extension, as the offer from Company H valued Meridian at about $0.10 per share, the market price at that time was about $0.30 per share and Company H had not indicated any interest in improving their offer. Mr. Ching related this concern to the Company H chief executive officer on September 8 and requested that they re-evaluate their offer. The Company H chief executive officer agreed to re-evaluate their offer.

 

On August 17, 2009, our management and Rivington met to re-evaluate various strategic alternatives, including raising capital and potential business combinations. Due to some improvement in the credit and capital markets, management and Rivington developed a plan to approach a select group of private equity firms and private equity-backed companies who might have an interest in either merging with or investing in Meridian. Rivington contacted several private equity firms and oil and gas exploration and development companies that were backed by private equity firms. In late August, Rivington received indications of interest from two of the exploration and development companies and both signed confidentiality agreements with us and began to review our data. Representatives from one of the exploration and development companies visited Meridian’s offices on August 27, where our management presented an overview of Meridian and provided additional information to them. On September 1, representatives from the second exploration and development company, which was Alta Mesa, visited Meridian’s offices, where our management presented an overview of Meridian and provided additional information to them.

 

On September 2, 2009, the first exploration and development company notified us that it had decided not to proceed further with a transaction with us. No other private equity firm decided to explore further any possible transaction with us.

 

During August 2009, negotiations had continued with our creditors on the forbearance agreements. On September 3, 2009, we entered into forbearance agreements with certain of our creditors who agreed to forbear from exercising any right or remedy arising as a result of existing events of default for specified periods of time. Specifically, we entered into forbearance agreements with:

 

 

 

On September 3, 2009, we received another offer from Company A to acquire our Weeks Island field for cash. In light of our board’s decision not to pursue sales of individual assets, and management’s view that the offer did not reflect the value of that property, we rejected the offer.

 

Also on September 3, 2009, Mr. Ching received a letter from Mr. Reeves asserting claims relating to various amounts allegedly owed to Mr. Reeves and his affiliates under Mr. Reeves’ existing net profits interest agreements and master participation agreements with Meridian.

 

On September 11, 2009, Mr. Harlan Chappelle, chief executive officer of Alta Mesa, sent us a draft letter of intent proposing a “no shop” period while the parties negotiated a $50 million investment in Meridian by Alta Mesa in exchange for voting convertible preferred stock. The preferred stock would receive mandatory dividends equal to 7% per annum payable quarterly either in cash or in kind with additional preferred stock. The preferred stock would participate in any dividends paid on Meridian’s common stock on an “as converted” basis. At any time after closing, the preferred stock would be convertible into Meridian’s common stock at a conversion price of $0.35 per share. Each share of preferred stock would have the right to a number of votes equal to the number of shares of common stock issuable upon conversion of each such share of preferred stock. The proceeds from the sale of the preferred stock would be used for continued drilling, work-over and recompletion activities of Meridian, to pay transaction fees and expenses, and reduce outstanding borrowings under our credit facility. After closing, Meridian would be managed by Alta Mesa under a management services agreement. Over the following week, Mr. Ching and representatives of Rivington met with Mr. Chappelle and Alta Mesa’s chief financial officer to discuss the proposal and exchanged drafts of a revised letter of intent.

 

On September 21, 2009, our board met and Mr. Ching outlined the status of discussions with Company H, Company I and Alta Mesa. He provided the current draft of the Alta Mesa letter of intent to the board and informed the board that Company H was meeting with our credit facility lenders the next day. The board supported moving forward with each of the companies.

 

On September 22, 2009, Company H’s chief financial officer and other representatives, along with our management, had a teleconference call with the agent bank for our credit facility lenders, Fortis Capital Corp. The Company H chief financial officer provided some background information about Company H and outlined their proposal for restructuring our debt. They proposed reducing our debt by paying our lenders $15.0 million at the closing of the merger, requested that the lenders forgive an additional $15.0 million of debt and then standstill for one year, at which time Company H would restructure the entire debt of the combined company. Company H expressed the desire to put money into drilling Meridian’s properties to increase reserves and production. Fortis agreed to take the proposal under advisement and discuss it later that day with all the members of our bank group.

 

On September 23, 2009, Fortis advised us that the bank group was not willing to discount or forgive any of our outstanding debt. Mr. Ching informed Company H of the bank group’s decision and asked Company H if they would consider increasing their offer. Company H indicated that they would not.

 

Later on September 23, Mr. Ching met with the board to inform them of the status of discussions with Company H and Alta Mesa. The board engaged in a discussion of Alta Mesa’s proposal, including the “no shop” provision and what effect that provision would have; the effect that the letter of intent would have on Meridian’s forbearance agreements with its lenders; and the proposed conversion price of the preferred stock and the resulting dilution to Meridian’s current shareholders. Some members of the Board expressed concern

over how Meridian would be run post-closing and how conflicts of interest would be managed. Mr. Ching also reported on Company H’s discussions with the agent bank. The banks’ decision not to discount any debt also negatively affected Company I’s position, who also wanted to approach our lenders for a discount in restructuring our debt. Our board supported continuing to move forward with Alta Mesa.

 

On September 29, Alta Mesa informed us that they were withdrawing their preferred stock investment proposal, but would consider making an offer for Meridian’s stock.

 

Since July 2009, when the period to repay our borrowing base deficiency under our credit facility had expired, our credit facility lenders had continued to put increasing pressure on us to enter into a strategic transaction. On September 30, 2009, the date on which the forbearance period would have otherwise terminated without a strategic transaction in place, our credit facility lenders agreed to extend to October 2, and on October 2 agreed to extend to October 7, the date by which the forbearance period would end if we had not entered into an agreement for a strategic transaction.

 

On October 1, 2009, Meridian received a proposal from Company “L” for a capital infusion, although the exact nature of the proposal was not entirely clear. Mr. Ching contacted the president of Company L to obtain clarity on the offer but after discussions the proposal was still vague. A second proposal letter was received within a few days and again it was vague as to terms and conditions. Mr. Ching called the president of Company L and was told that Meridian should disregard Company L’s written proposals, as they only wanted to use those proposals to demonstrate their interest in Meridian. After several discussions, no clear proposal was forthcoming and Mr. Ching recommended to the board that Company L not be considered as a serious possibility for a transaction. The board supported that position.

 

On October 7, 2009, our credit facility lenders agreed to extend to October 14 the date by which the forbearance period would end if we had not entered into an agreement for a strategic transaction.

 

Also on October 7, 2009, the board met again to receive an update from Mr. Ching. He reported that:

 

 

Mr. Ching recommended that the board accept the Company H offer, as it was the best offer available. It provided for positive equity value, as opposed to bankruptcy, which Meridian’s analyses had indicated would likely wipe out any remaining equity, and a transaction with Company H would most likely convince the credit facility lenders to extend the forbearance period.

 

The board then discussed our options and our bargaining position with our lenders. At the end of the discussion, the board voted to accept the Company H offer if Alta Mesa had not made an alternative offer by 9:00 a.m. the following day.

 

Mr. Ching called the board together again on October 8. Mr. Ching reported that there was no change in the terms proposed by Company H and that Company H’s proposal would expire at the end of the day. The Company H chief executive officer had indicated that the expiration date of the offer would not be extended. Mr. Ching also reported that he had received a draft letter of intent from Alta Mesa proposing a merger transaction with Meridian, under which each share of Meridian common stock would be converted into the right to receive $0.40 in cash. The proposal included a “no shop” provision until November 15, except that

Alta Mesa would, on or before October 17, provide Meridian sufficient information to demonstrate to Meridian’s satisfaction Alta Mesa’s ability to consummate the transaction. If Alta Mesa failed to provide such information on or before October 17, or if such information was not satisfactory to Meridian, then the “no shop” period would terminate. If Meridian received any unsolicited proposals during the “no shop” period and subsequently entered into a transaction with that third party, then Meridian would pay $500,000 to Alta Mesa as liquidated damages. After discussion, the board voted unanimously in favor of accepting Alta Mesa’s letter of intent, and Mr. Ching executed the letter of intent on behalf of Meridian later that day.

 

On October 12, 2009, representatives from Meridian and its counsel, Fulbright & Jaworski L.L.P. (“Fulbright”), and representatives from Alta Mesa and its counsel, Haynes and Boone, LLP (“Haynes and Boone”) met to discuss Alta Mesa’s continuing due diligence review and assignment of responsibilities toward reaching a definitive merger agreement.

 

On October 17, 2009, Mr. Ching and Mr. Chappelle agreed to extend to October 19 the expiration of the “no shop” provision of the letter of intent, so Alta Mesa could complete the information required to demonstrate to Meridian’s satisfaction Alta Mesa’s ability to consummate the transaction. Upon satisfaction of the information requirement on October 19, the “no shop” provision was automatically extended.

 

On November 1, 2009, Haynes and Boone submitted the first draft of the definitive agreement.

 

On November 2, 2009, we engaged Morgan Keegan & Company, Inc. (“Morgan Keegan”) to render an opinion to our board as to the fairness, from a financial point of view, to our shareholders of the consideration to be received in connection with the merger, since Rivington had a policy of not rendering fairness opinions in capital raising engagements, and JPMorgan believed that rendering a fairness opinion in this transaction might limit their ability to participate in financings for other transactions.

 

From November 2, 2009 through November 8, 2009, our senior management and representatives of Rivington and Fulbright held several discussions regarding the terms proposed by Alta Mesa in its initial draft of the merger agreement. Meridian and its representatives drafted comments and proposed changes to the initial draft of the merger agreement to address terms and conditions contained in the initial draft of the merger agreement that were not acceptable to us. The comments and proposed changes were intended to:

 

 

On November 8, 2009, Mr. Chappelle informed Mr. Ching of his belief that one of the critical elements in negotiating a definitive merger agreement was whether our lenders would be willing to extend a commitment to allow for the hedging of our natural gas and oil production during a period of time following the signing of the merger agreement. Later that day, Fulbright sent a revised draft of the merger agreement to Haynes and Boone.

During this period, Mr. Ching and Mr. Reeves had been in discussions to settle certain claims that Mr. Reeves had asserted against Meridian relating to various amounts allegedly owed to Mr. Reeves and his affiliates under Mr. Reeves’ existing net profits interest agreements and master participation agreements with Meridian.

 

On November 11, 2009, Mr. Ching and other representatives from Meridian, Mr. Chappelle and other representatives from Alta Mesa, and representatives from Rivington, Haynes and Boone and Fulbright met to further negotiate the terms of the merger agreement. The material negotiated changes included the following:

 

 

During the meeting, the parties discussed the non-solicitation provisions, the provisions regarding fiduciary responsibilities to consider other offers, and the termination and remedies provisions of the merger agreement, including the size of the termination fee payable in the event that certain termination events occurred and Alta Mesa’s right to terminate the merger agreement for any reason in its sole and absolute discretion at any time prior to the effective time of the merger. Alta Mesa accepted certain proposed changes to these provisions, but did not agree to remove its option to terminate until our lenders agreed to extend a commitment to allow for the hedging of our natural gas and oil production during a period of time following the signing of the merger agreement.

 

In addition, Alta Mesa emphasized that, in order to complete the merger, the agreements to clarify and confirm certain historical records with respect to Mr. Reeves’ and Mr. Mayell’s interests under their net profits interest agreements and master participation agreements with Meridian would need to be finalized, and the claims asserted by Mr. Reeves under his net profits interest agreement and master participation agreement would need to be settled. Alta Mesa also emphasized that, in order for it to be willing to enter into a binding merger agreement, Meridian’s lenders would need to extend a commitment to allow for the hedging of Meridian’s natural gas and oil production during a period of time following the signing of the merger agreement.

 

Shortly after the November 11, 2009 meeting, Meridian engaged Gordon, Arata, McCollam, Duplantis & Eagan, L.L.P. (“Gordon Arata”) to begin preparing the documents relating to Mr. Reeves’ and Mr. Mayell’s confirmatory agreements regarding their respective net profits interest agreements and master participation agreements and to begin preparing the settlement agreement with Mr. Reeves. From November 11, 2009 until just prior to the signing of the merger agreement, representatives from Meridian and Gordon Arata continued to negotiate the terms of a settlement agreement with Mr. Reeves and his counsel. Meridian, Mr. Reeves and Mr. Mayell, and their respective counsel, also negotiated and finalized the confirmatory agreements.

 

From November 12, 2009 through November 20, 2009, the parties and their representatives had several in-person and telephonic discussions regarding the terms and provisions of the merger agreement. During that time, the parties made progress in negotiating limits on the scope of our representations and warranties and covenants in the merger agreement, including provisions relating to the conduct of our business prior to closing. In addition, a number of the closing conditions initially proposed by Alta Mesa were narrowed in scope or removed. The non-solicitation, fiduciary responsibility, termination and remedies provisions of the merger agreement were negotiated, but the parties had agreed to only limited changes.

 

On November 13, 2009, we sent a written request to its lenders requesting the additional hedge commitment support. On that same date, we and certain of our subsidiaries entered into the fourth amendment

to the credit facility forbearance agreement, which extended to November 23, 2009, the date by which the credit facility forbearance agreement would have terminated if, by such date, we had not entered into a strategic transaction, such as the merger.

 

On November 15, 2009, Mr. Ching called a telephonic meeting of our board. At the meeting Mr. Ching updated the board on the status of the proposed transaction, including the status of negotiations with Alta Mesa and remaining deal points, discussions with the lenders regarding hedging arrangements and the status of Alta Mesa’s due diligence on Meridian. The board instructed Mr. Ching to continue to negotiate with Alta Mesa. Mr. Ching and Mr. Chappelle also agreed to amend the letter of intent to extend to November 23 the expiration of the “no shop” provision.

 

On November 19, 2009, Mr. Ching and Mr. Chappelle and other members of senior management of Meridian and Alta Mesa met to discuss certain aspects of the merger agreement and Alta Mesa’s conclusions from the due diligence it conducted on Meridian. Alta Mesa informed us that Alta Mesa was reducing its original offer of $0.40 per Meridian share to $0.30 per share. Alta Mesa stated that the reduction in offer price was due to changing market conditions and additional due diligence conducted since the original offer. Our management negotiated with Alta Mesa for a revised offer price per share.

 

On November 20, 2009, Mr. Ching called a special meeting of our board with representatives from Morgan Keegan and Fulbright present at the meeting. At the special meeting Mr. Ching updated the board on the status of the proposed transaction, including the fact that our management was successful in increasing Alta Mesa’s latest offer of $0.30 per Meridian share to $0.33 per share and Mr. Ching’s belief that Alta Mesa would not be willing to further increase the merger consideration. Representatives from Morgan Keegan presented telephonically to the board its preliminary conclusions with respect to its fairness opinion. A representative from Fulbright advised our board of its fiduciary duties in connection with the potential transaction, reviewed the proposed terms of the merger agreement and presented a summary of the remaining open issues that had not yet been resolved with Alta Mesa. During the course of these discussions and presentations, our board engaged in a discussion of the terms of the transaction and the fact that the proposed transaction was probably Meridian’s only viable alternative to seeking the protection under federal bankruptcy laws. After discussion, the board instructed Mr. Ching to continue to negotiate the remaining terms of the merger agreement with Alta Mesa.

 

On November 20, 2009, we and certain of our subsidiaries entered into the fifth amendment to the credit facility forbearance agreement, which extended to November 30, 2009, the date by which the credit facility forbearance agreement would have terminated if, by such date, we had not entered into a strategic transaction, such as the merger.

 

Based on the continuing progress that was being made with respect to pursuing the proposed transaction with Alta Mesa, Meridian agreed to amend the letter of intent to extend the exclusivity agreement with Alta Mesa to the earlier of December 11, 2009 or expiration of our forbearance agreement with our credit facility lenders.

 

On November 23, 2009, Mr. Ching and Mr. DeLano, Mr. Chappelle and other representatives from Alta Mesa, and representatives from Rivington, Haynes and Boone and Fulbright agreed to meet to resolve the remaining open items in the merger agreement. During the meeting, the parties were able to resolve many of the outstanding negotiating points in the representations and warranties and the closing conditions. After negotiations and discussions, the parties agreed to make certain changes to the non-solicitation, fiduciary responsibility, termination and remedies provisions of the merger agreement. Such changes included:

 

 

However, the parties were not able to come to final agreement on the final amount of the termination fee. Alta Mesa and its representatives made clear at the end of the meeting that they were unwilling to negotiate further the remaining terms of the non-solicitation, fiduciary responsibility, termination and remedies provisions.

At a meeting with Alta Mesa representatives held on November 23, 2009, Mr. Ching reported that he was still in discussions with Mr. Reeves regarding his claims against Meridian for amounts purportedly owed to Mr. Reeves and his affiliates under existing net profits interest agreements and master participation agreements with Meridian. Meridian and Alta Mesa agreed that the settlement agreement with Mr. Reeves for such claims and the agreements to clarify and confirm certain historical records with respect to Mr. Reeves’ and Mr. Mayell’s interests under net profits interest agreements and master participation agreements would need to be executed prior to signing the merger agreement. Alta Mesa indicated that in addition to the previously requested extension of hedging commitments, it would expect that the forbearance agreements with the credit facility lenders and other creditors would be extended until at least 30 days after the closing of the merger. The following day we requested from our credit facility lenders the extension of hedging commitments and forbearance extension.

 

On November 30, 2009, we and certain of our subsidiaries entered into the sixth amendment to the credit facility forbearance agreement, which extended to December 4, 2009, the date by which the credit facility forbearance agreement would have terminated if, by such date, we had not entered into a strategic transaction, such as the merger.

 

On December 1, 2009, the bank group responded to our November 24^th request and informed us that they were unwilling to provide any additional hedging commitments. The bank group also indicated that it would be unwilling to agree to the requested extension of the forbearance period without a demonstration by Alta Mesa of its ability to assume or pay in full the amounts outstanding under our credit facility. Over the following two weeks, representatives from Alta Mesa provided the information to the bank group that it requested.

 

On December 2, 2009, we and certain of our subsidiaries entered into the seventh amendment to the credit facility forbearance agreement, which extended to December 4, 2009, the date by which the credit facility forbearance agreement would have terminated if, by such date, we had not entered into a strategic transaction, such as the merger.

 

On December 4, 2009, Mr. Ching and Mr. Chappelle discussed the remaining material terms of the merger agreement. Mr. Chappelle made clear that, given the banks unwillingness to provide hedging commitments, the parties needed to restore the provisions in the merger agreement that permit Alta Mesa to terminate the merger agreement for any reason in its sole and absolute discretion at any time prior to the effective time of the merger, and that this provision was not subject to negotiation. The parties agreed to a $3.0 million termination fee to be paid by us to Alta Mesa under certain circumstances specified in the merger agreement and a $3.0 million reverse termination fee to be paid by Alta Mesa to us under certain specified circumstances, including if Alta Mesa exercises its option to terminate the merger agreement at any time including after shareholder approval. In addition, Alta Mesa agreed to cap our expense reimbursement obligations at $1.0 million.

 

On December 3, 2009 and December 4, 2009, Mr. Ching updated the board on the status of the proposed transaction, including Alta Mesa’s final terms relating to its option to terminate and the final proposed amount of the termination fee, and the banks response to our November 23^rd request.

 

On December 4, 2009 and December 14, 2009, we and certain of our subsidiaries entered into further amendments to the credit facility forbearance agreement, which extended through December 21, 2009, the date by which the credit facility forbearance agreement would have terminated if, by such date, we had not entered into a transaction agreement, such as the merger. Also on these dates, we obtained forbearance extensions through December 21 for the forbearance agreements relating to hedging agreements with affiliates of Fortis Capital Corp. and Scotia Bank (each a lender under our credit facility) and the drilling rig financing with CIT Group/Equipment Finance, Inc.

 

Early in the afternoon of December 16, 2009, Mr. Chappelle contacted Mr. Ching to tell him that Alta Mesa has reduced its offer of $0.33 per share to $0.28 per share. Mr. Chappelle indicated that Alta Mesa would be able to increase its offer one or two cents per share if we could negotiate a decrease in the advisory fees payable to JPMorgan and Rivington.

 

On December 16, our board met telephonically to consider the proposed transaction. Fulbright and Morgan Keegan participated by telephone. Our senior management reviewed the proposed transaction with the board. Mr. Ching also updated the board regarding Alta Mesa’s further reduction to the merger consideration, our business and recent results of operations, and the fact that our creditors had verbally agreed to consent to the transaction and provide forbearance extensions through the completion of the merger. The board also reviewed with Fulbright the material terms of the merger agreement, including Alta Mesa’s final proposals regarding the

deal protection provisions. During the meeting, Morgan Keegan reviewed its analysis of the proposed transaction, and delivered its oral opinion that, as of the date of the meeting and based upon and subject to the factors, assumptions, matters, procedures, limitations and qualifications it summarized and as would be set forth in its written opinion, the merger consideration of $0.28 per share to be received by the holders of Meridian’s common stock in the transaction was fair, from a financial point of view, to such holders.

 

Our board had a discussion as to the alternatives available to us and concluded that, due to our lack of liquidity and indications from our lenders that they would be unwilling to continue to forbear, our only alternative to accepting Alta Mesa’s $0.28 per share offer was to seek the protection under federal bankruptcy laws. Our board then considered the proposed merger and the transactions contemplated thereby, including the positive and negative factors described below in the section entitled “— Reasons for the Merger; Recommendation of Our Board of Directors.” Following further discussion and based on the totality of the information presented and the fairness opinion presentation by Morgan Keegan, our board, among other things, unanimously approved the terms of the proposed merger agreement, authorized Mr. Ching to execute the proposed merger agreement with merger consideration of $0.28 per share or higher, and declared the transaction to be in the best interests of Meridian’s shareholders, and instructed management to undertake to finalize and execute the definitive merger agreement and related documentation.

 

During the course of the next several business days, Mr. Ching spoke to representatives from JPMorgan and Rivington regarding a potential reduction in their advisory fees. Rivington was amenable to a lower fee in exchange for amending its engagement letter with Meridian to include a provision that Rivington would be paid on any transaction that closed. Absent this amendment, Rivington felt that the terms of its engagement entitled them to the full amount of advisory fees. JPMorgan also would not agree to any reduction in advisory fees based on its existing engagement. Mr. Ching and Mr. Chappelle engaged in further discussions regarding the merger consideration and ultimately agreed on the final Merger Consideration of $0.29 per share.

 

From December 16 through the evening of December 22, management of Meridian and Alta Mesa together with Haynes and Boone and Fulbright continued to work to finalize the merger agreement. The parties also continued to work with our creditors to extend the forbearance agreements through the earlier of (x) May 31, 2010, (y) the effective time of the merger, or (z) the termination of the merger agreement. During this time, we also finalized the settlement agreement with Mr. Reeves and the agreements to clarify and confirm certain historical records with respect to Mr. Reeves’ and Mr. Mayell’s interests under net profits interest agreements and master participation agreements. By the evening of December 22, the merger agreement and such other documents were finalized and executed and Morgan Keegan delivered its final written opinion to our board stating that, as of December 22, 2009 and based upon and subject to the factors and assumptions set forth therein, the $0.29 per share in cash to be received by the holders of the outstanding shares of our common stock pursuant to the merger agreement was fair from a financial point of view to the holders.

 

On December 23, 2009, we issued a press release announcing the merger.

 

On February 4, 2010, our board received an unsolicited, non-binding preliminary indication of interest from a third party. The preliminary indication of interest contemplated the acquisition of all of our common stock at a purchase price of not less than $.30 per share, subject to, among other things, confirmatory due diligence. Our board is evaluating this preliminary indication of interest and plans to engage in discussions with this potentially interested party and will consider all of our alternatives with respect to this preliminary indication of interest consistent with our board’s fiduciary duties under applicable law and subject to the terms and conditions of the merger agreement. At this time, however, our board continues to recommend that our shareholders vote to adopt the merger agreement with Alta Mesa.

 

Our board of directors unanimously determined to approve the merger agreement and recommended that our shareholders vote to adopt the merger agreement. In reaching the foregoing determination, our board of directors consulted with our senior management, financial advisors and legal counsel, reviewed a significant

amount of information and considered the following material factors in support of its decision to enter into the merger agreement:

 

 

 

 

 

Our board of directors also considered a number of countervailing risks and factors concerning the proposed transaction. These countervailing risks and factors included the following:

 

 

 

The discussion of the information, risks and factors that our board of directors considered in arriving at its decision to approve the merger agreement and recommend that our shareholders vote to adopt the merger agreement is not intended to be exhaustive, but includes all material factors considered by our board of directors. In view of the wide variety of factors and risks considered in connection with its evaluation of the proposed transaction, our board of directors did not believe it necessary to, and did not attempt to, rank or quantify the risks and factors although individual members of our board of directors may have assigned different weights to the factors and risks in their individual assessments of the proposed transaction. The overall analysis of the factors described above by our board of directors included multiple discussions with and questioning of our management, financial advisors and legal counsel. Our board of directors carefully considered the risks and uncertainties associated with our remaining an independent publicly traded company. Many of those risks and uncertainties are described in our Annual Report on Form 10-K, as amended, any updates to those risks and uncertainties set forth in our subsequent Quarterly Reports on Form 10-Q and the factors described below in “— Effects on Meridian if the Merger is Not Completed.”

 

Our board of directors unanimously approved the merger agreement. Our board of directors unanimously believes that the merger is advisable and recommends that our shareholders vote “FOR” adoption of the merger agreement.

 

Morgan Keegan rendered its opinion to our board of directors that, as of December 22, 2009 and based upon and subject to the factors and assumptions set forth therein, the $0.29 per share in cash to be received by holders of the outstanding shares of our common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of Morgan Keegan’s written opinion, which sets forth the assumptions made, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Keegan, is attached as Annex B and is incorporated into this proxy statement by reference. This description of Morgan Keegan’s opinion should be reviewed together with, the full text of the opinion. You are urged to read the opinion and consider it carefully. Morgan Keegan provided its opinion for the information and assistance of Meridian’s board of directors in connection with its consideration of the merger. Morgan Keegan’s opinion was addressed to the our board of directors and assessed only the fairness,

from a financial point of view, of the merger consideration to holders of our common stock. Morgan Keegan’s opinion was only one of many factors considered by our board of directors in its evaluation of the merger and should not be viewed as determinative of the views of our board of directors or senior management with respect to the merger or the Merger Consideration. The terms of the merger, including the Merger Consideration, were determined through negotiations between Meridian and Alta Mesa and were not determined or recommended by Morgan Keegan. Morgan Keegan’s opinion did not address the merits of the underlying decision of Meridian to engage in the transaction and did not constitute, nor should it be construed as, a recommendation to any Meridian shareholder as to how to vote on any matter related to the merger. Additionally, Morgan Keegan expressed no opinion as to the prices at which the shares of our common stock will trade following the announcement of the merger.

 

In rendering its opinion, Morgan Keegan:

 

 

In rendering its opinion, Morgan Keegan has assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information reviewed by Morgan Keegan. At the direction of Meridian, Morgan Keegan has assumed, without independent verification, that the Company Forecasts have been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of Meridian’s management as to Meridian’s future financial performance. Morgan Keegan has not made any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Meridian, nor has Morgan Keegan been furnished with any such evaluations or appraisals. Morgan Keegan has assumed that the merger will be consummated as provided in the merger agreement with full satisfaction of all covenants and conditions set forth in the merger agreement and without any waivers thereof.

 

Morgan Keegan expresses no view or opinion as to any terms or aspects of the merger (other than the Merger Consideration to the extent expressly specified in this proxy statement), including, without limitation, the form or structure of the merger or the Merger Consideration and the tax treatment of the merger to various constituencies. Morgan Keegan expresses no view or opinion as to the fairness of the amount or nature of the compensation, if any, to any of Meridian’s officers, directors or employees, or class of such persons, relative to the compensation to Meridian’s shareholders. In addition, Morgan Keegan expresses no view or opinion as to the relative merits of the merger in comparison to other transactions available to Meridian or in which Meridian might engage or as to whether any transaction might be more favorable to Meridian as an alternative to the merger, nor is Morgan

Keegan expressing any opinion as to the underlying business decision of Meridian’s board of directors to recommend the merger to Meridian’s shareholders or its decision to proceed with or effect the merger. This opinion is not a recommendation to any shareholder as to how such shareholder should vote with respect to the merger.

 

The following is a summary of the material financial analyses used by Morgan Keegan in connection with its presentation to Meridian’s board of directors, and the preparation of its opinion delivered to our board of directors. The following summary, however, does not purport to be a complete description of the financial analyses performed by Morgan Keegan, nor does the order of presentation of the analyses described represent relative importance or weight given to those analyses by Morgan Keegan. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Morgan Keegan’s financial analyses. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Morgan Keegan. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before December 21, 2009, and is not necessarily indicative of current market conditions. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Each of the analyses conducted by Morgan Keegan was carried out in order to provide a different perspective on the merger and add to the total mix of information supporting the opinion. Morgan Keegan did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support its opinion. Rather, in reaching its conclusions and delivering its opinion, Morgan Keegan considered the results of the analyses in light of each other and did not place particular reliance or weight on any individual analysis, but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate factors summarized above, Morgan Keegan believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete or misleading view of the evaluation process underlying its opinion. In performing its analyses, Morgan Keegan made numerous assumptions with respect to industry performance, business and economic conditions and other matters. The analyses performed by Morgan Keegan are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses.

 

Historical Stock Price Analysis.  Using publicly available trading data, Morgan Keegan reviewed historical trading prices and volumes for Meridian common stock and compared such trading prices to the proposed Merger Consideration of $0.29 per share. Morgan Keegan analyzed the volume-weighted average price, or VWAP, as well

as the average price for various periods prior to, and including, December 21, 2009. The following table summarizes the premium of the Merger Consideration relative to prices for various measurement periods or dates:

 

 

Premium Analysis.  Morgan Keegan analyzed the premiums paid for selected mergers and acquisitions of publicly traded companies since January 1, 2008. Morgan Keegan analyzed the premiums paid for non-technology and non-financial institution mergers and acquisitions of publicly traded companies with equity values between $0 and $300 million since January 1, 2008, irrespective of the type of consideration paid to the target. Morgan Keegan also analyzed the premiums paid for mergers and acquisitions of publicly traded oil and gas exploration and production companies with the same equity value and time horizon parameters, irrespective of the type of consideration paid to the target. Morgan Keegan analyzed the premiums paid over the target’s stock price one day prior and average closing prices five days, 30 days, 60 days and 180 days prior to the date of the letter of intent and compared these premiums offered in the proposed transaction. The following tables summarize the median premiums paid for the aforementioned mergers and acquisitions and the implied equity value per share of Meridian common stock.

 

 

Transaction premiums vary for many reasons including: (i) differences in pre-transaction operating performance; (ii) other hidden or intangible assets not apparent in historical operating performance; (iii) non-disclosed pro forma adjustments and other deal-specific factors; and (iv) differences in asset and geographical mix. Transaction premiums of the selected transactions as a whole were deemed more meaningful than the premiums of any particular transaction. No selected transaction analyzed in the premium analysis was identical to the proposed transaction. Mathematical analysis, such as determining the mean and median, is not in itself a meaningful method of using comparable transaction data.

 

Peer Group Analysis.  Morgan Keegan analyzed certain publicly traded companies that were deemed comparable to Meridian in scope of business operation, market capitalization and/or geographic location of reserves (the “Peer Group”). Morgan Keegan compared our financial performance with the performance of our Peer Group for the latest twelve months of publicly available data and certain consensus projections. Morgan Keegan derived

base valuation multiples by analyzing the specific Peer Group’s financial information. Morgan Keegan then applied these valuation multiples to our results of operations for the latest twelve months ended September 30, 2009 and for the projected calendar years 2009 and 2010. Morgan Keegan used estimates provided by our management as well as publicly available analyst estimates in conducting the Peer Group analysis. The Peer Group consisted of:

 

 

For each of the companies identified above, Morgan Keegan calculated various valuation multiples after excluding any non-recurring, extraordinary gains or expenses and non-cash, stock-based compensation, including:

 

 

The following table summarizes the derived relevant ranges of multiples for the companies identified above and the ranges of prices per Meridian share implied by such multiples:

 

 

No company analyzed in the Peer Group has operations or reserves that are identical to those of Meridian. Trading multiples of the Peer Group as a whole were deemed more meaningful than multiples of any particular company. Mathematical analysis, such as determining the mean and median, is not in itself a meaningful method of using comparable company data. A complete analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading values of the companies to which Meridian was compared. In conducting the Peer Group analysis, Morgan Keegan examined both historical and projected valuation multiples in order to determine the relevant range of multiples. In some cases, these relevant ranges were narrower than the full range of such multiples.

 

Precedent Transactions Analysis.  Using publicly available information, including SEC filings and press releases, Morgan Keegan compared various valuation metrics from (i) corporate transactions and (ii) asset and

property sales announced on or after January 1, 2009 with available reserve and production information that Morgan Keegan deemed to be relevant (herein referred to in the aggregate as “Precedent Transactions”). The comparable corporate transactions that Morgan Keegan deemed to be relevant were:

 

 

The comparable asset and property sale transactions that Morgan Keegan deemed to be relevant were:

 

 

Morgan Keegan focused on multiples of total enterprise value to proved reserves and total enterprise value to average daily production.

 

Morgan Keegan applied certain median multiples of these Precedent Transactions to Meridian’s most recent reserve and production data to derive an implied range of enterprise and equity values for Meridian. The following table summarizes the median multiples paid for the Precedent Transactions and the implied equity value per share of Meridian common stock.

 

 

Precedent Transactions metrics vary for many reasons, including, but not limited to: (i) differences in pre-transaction operating performance; (ii) other hidden or intangible assets not apparent in historical operating performance; (iii) non-disclosed pro forma adjustments and other deal-specific factors; and (iv) differences in asset and geographical mix. Multiples of the selected Precedent Transactions as a whole were deemed more meaningful than the multiples of any particular transaction. No selected transaction analyzed in the Precedent Transactions analysis was identical to the proposed transaction. Mathematical analysis, such as determining the median, is not by itself a meaningful method of using the Precedent Transactions data. A complete analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies, as well as differences in geographies and development and production costs, involved in the Precedent Transactions and other factors that could affect the valuation multiples in the Precedent Transactions to which the proposed transaction was compared.

 

Net Asset Value Analysis.  Morgan Keegan performed a Net Asset Value analysis, including calculating the present value of the field-level before-tax future cash flows that Meridian could expect to generate from its existing base of proved reserves as detailed in our third quarter 2009 engineering report. Three cases have been included in the analysis: PV-10, future net revenue (herein referred to in all tables as “FNR”) divided by 1.5, and future net revenue divided by 2.

 

Key assumptions used in the Net Asset Value analysis include:

 

 

Gross asset value was adjusted in each case for working capital, cash, debt and selected other commitments and liabilities in order to calculate a net asset value for each case, which was then used to imply

a net asset value per share of Meridian common stock. The following table summarizes the gross asset value as well as the risked gross asset value for each case.

 

 

Assuming a sale of its oil and natural gas properties, Meridian would have certain liabilities, commitments and other obligations to satisfy prior to distributing any proceeds to shareholders. It should be noted that these liabilities, commitments and other obligations significantly impair the equity value available to shareholders. The following table summarizes the implied net asset value per share of Meridian common stock based assuming the range of gross asset values previously detailed.

 

 

The Net Asset Value analysis is dependent upon a number of factors, including but not limited to:

 

 

Conclusion.  In arriving at its opinion, Morgan Keegan did not attribute any particular weight to any analysis or factor considered, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. However, due to factors specific to Meridian, Morgan Keegan considered the results of certain analyses, namely the Peer Group Analysis and the Precedent Transaction Analysis, to be less relevant to its overall analysis than those of other valuation methodologies employed. These factors include, but are not limited to:

 

 

Accordingly, Morgan Keegan believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all analyses and factors, would create an incomplete view of the process underlying Morgan Keegan’s opinion. Based upon and subject to the foregoing analysis, Morgan Keegan’s experience as investment bankers, Morgan Keegan’s work as described above and other factors Morgan Keegan deemed relevant, Morgan Keegan is of the opinion, as of the date hereof, that the merger of Meridian is fair, from a financial point of view, to Meridian’s shareholders.

 

Meridian’s board of directors selected Morgan Keegan to deliver its opinion because of Morgan Keegan’s reputation as a nationally recognized investment banking and advisory firm with substantial experience in transactions similar to the merger.

 

Pursuant to a letter agreement, dated November 2, 2009, Meridian engaged Morgan Keegan to act as our financial advisor in connection with the merger. Pursuant to the terms of this engagement letter, we have agreed to pay Morgan Keegan a fee of $300,000. In addition, we have agreed to reimburse Morgan Keegan for

its reasonable out-of-pocket expenses, such expenses not to exceed $10,000 without our prior consent, and to indemnify Morgan Keegan and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

At the closing of the merger, Rivington will be paid a fee of $2.4 million and JPMorgan will be paid a fee of $1.8 million for their financial advisory services to us in connection with the merger.

 

If the merger is approved by our shareholders, the other conditions to the closing of the merger are either satisfied or waived and Alta Mesa does not exercise its option to terminate the merger agreement, Meridian will be merged with and into Merger Sub, and Merger Sub will be the surviving company. After the merger, the surviving company will be a wholly owned subsidiary of Alta Mesa.

 

If the merger is completed, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Alta Mesa, Merger Sub or any other subsidiary of Alta Mesa or held in treasury by us and other than shares held by shareholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.29 in cash, without interest and less any applicable withholding tax. Each outstanding option or warrant for Meridian common stock will be canceled in exchange for (A) the excess, if any, of $0.29 over the per share exercise price of the option or warrant, as applicable, multiplied by (B) the number of shares of common stock subject to the option or warrant, as applicable, net of any applicable withholding taxes.

 

At the effective time of the merger, our shareholders will cease to have ownership interests in us or rights as our shareholders. Therefore, you will not participate in any of our future earnings and will not benefit from any appreciation in Meridian’s value.

 

Our common stock is currently registered under the Exchange Act and is quoted on the NYSE under the symbol “TMR”. As a result of the merger, we will be a privately held corporation, and there will be no public market for our common stock. After the merger, our common stock will cease to be listed on the NYSE. In addition, registration of our common stock under the Exchange Act will be terminated.

 

If any condition to the merger is not satisfied or waived or if Alta Mesa exercises its right to terminate the merger agreement, the merger will not be consummated. In that event, you will not receive any cash or other consideration as a result of these transactions. Alta Mesa has the option to terminate the merger agreement for any reason in its sole and absolute discretion at any time prior to the effective time of the merger, whether before or after approval by our shareholders, provided that, if Alta Mesa elects to exercise this option to terminate, Alta Mesa must pay a $3.0 million termination fee to Meridian concurrently with such termination. See “The Merger Agreement- Termination of the Merger Agreement.” Under the terms of our forbearance agreement with our credit facility lenders, if we receive a termination fee from Alta Mesa, we would be required to use the termination fee to reduce our indebtedness under our credit facility, and we would not otherwise have the use of such fee for working capital or capital expenditures.

 

If the merger is not consummated for any reason, our shareholders will not receive the Merger Consideration and our current management under the direction of our board of directors, will continue to manage us as a stand-alone, independent business and the value of shares of our common stock will continue to be subject to the risks and uncertainties identified in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended, and any updates to those risks and uncertainties set forth in our subsequent Quarterly Reports on Form 10-Q. In addition, for the reasons described below, if the merger is not completed, the forbearance agreements with our lenders and certain others would terminate, allowing them to take action to enforce their rights with respect to the outstanding obligations. Because substantially all of our assets are pledged as collateral under our credit facility, if our lenders declare an event of default, they would be entitled

to foreclose on and take possession of our assets, including our cash balances. In such an event, we may be forced to liquidate or to otherwise seek protection under federal bankruptcy laws, and we can give you no assurance that in a bankruptcy proceeding you would receive any value for your shares.

 

Credit Facility Forbearance Agreement.  On September 3, 2009, Meridian entered into a Forbearance and Amendment Agreement (“Credit Facility Forbearance Agreement”) with the lenders party to its credit facility. The Credit Facility Forbearance Agreement provided that the lenders would forbear from exercising any right or remedy arising as a result of certain existing events of default under the credit facility. Currently, the defaults under our credit facility include payment default as a result of the borrowing base redetermination, which became effective on April 30, 2009, and a financial covenant default associated with one of the financial ratios prescribed in the credit facility. Default remedies available to the lenders under the credit facility include acceleration of all principal and interest amounts due under the credit facility. Meridian and its lenders have amended the Credit Facility Forbearance Agreement a number of times to, among other things, extend the termination date of the forbearance period, which is currently until the earlier of (i) 5:00 p.m. (Central Time) on the earlier of (x) May 31, 2010, (y) the effective time of the merger, or (z) the termination of the merger agreement (ii) or the date that any default occurs under the Credit Facility Forbearance Agreement. In addition, our credit facility lenders have the right, upon unanimous written consent of all of the lenders party to our credit facility, to terminate the forbearance period under our credit facility forbearance agreement without cause on or after February 28, 2010.

 

The borrowing base under Meridian’s credit facility is subject to semi-annual redetermination. The borrowing base is governed by a number of factors including, but not limited to, the reserve volumes associated with Meridian’s proved oil and gas properties (particularly proved developed producing reserves) and the future net cash flows associated with the reserves, determined utilizing the lenders’ assumptions regarding commodity prices. Effective April 30, 2009, the lenders notified Meridian that the new borrowing base under the facility would be $60.0 million, down from $95.0 million, resulting in a borrowing base deficiency of $35.0 million. As of January 4, 2010, Meridian has outstanding indebtedness under the credit facility of $86.4 million and a borrowing base deficiency of $26.4 million. Meridian has made all principal reduction and interest payments required under the Credit Facility Forbearance Agreement. Meridian does not, however, currently have sufficient cash available to repay the borrowing base deficiency. As part of the Credit Facility Forbearance Agreement, and the subsequent amendments thereto, the lenders have agreed to waive the scheduled redetermination of the borrowing base until such date that the Credit Facility Forbearance Agreement terminates. Due to the limited nature of Meridian’s drilling activities during 2009 and the runoff of Meridian’s proved developed producing reserves as a result of its ongoing production operations, Meridian can give no assurance as to what its redetermined borrowing base would be should the lenders undertake a borrowing base redetermination.

 

CIT Forbearance Agreement.  On September 3, 2009, Meridian also entered into a forbearance agreement with CIT Group/Equipment Finance, Inc. (“CIT Forbearance Agreement”) related to defaults under an agreement with CIT Group/Equipment Finance, Inc. due to cross-default provisions contained therein. The CIT Forbearance Agreement, as amended, runs in tandem with the Credit Facility Forbearance Agreement and will terminate if there is any default under either forbearance agreement. Default remedies available to CIT Group/Equipment Finance, Inc. include acceleration of all principal and interest amounts due under the financing agreement. As of January 4, 2010, Meridian owes approximately $6.0 million to CIT under this drilling rig financing.

 

Hedge Party Forbearance Agreement.  On September 3, 2009, Meridian also entered into a forbearance agreement (“Hedge Party Forbearance Agreement”) with certain affiliates of Fortis Capital Corp. and Scotia Bank, lenders under the credit facility, related to defaults under hedging agreements due to cross-default provisions contained therein. The Hedge Party Forbearance Agreement, as amended, runs in tandem with the Credit Facility Forbearance Agreement and will terminate if there is any default under the Credit Facility Forbearance Agreement. We do not currently have any hedge contracts outstanding under the hedge agreements.

Orion Forbearance Agreement.  Meridian has a long-term dayrate contract to utilize a drilling rig from an unaffiliated service company, Orion Drilling Company LLC (“Orion”). Although Meridian’s capital expenditure plans no longer accommodate use of this rig, Meridian is obligated for the dayrate regardless of whether the rig is working or idle. When the contracted rig is not in use on Meridian-operated wells, Orion may contract it to third parties, or the rig may be idled. Meridian is obligated for the difference between the contracted dayrate and the lesser dayrate if the rig is utilized by a third party. The contracted rig was utilized drilling a Meridian-operated well through the end of the first quarter of 2009, and contracted to a third party during the second and third quarters at a lower dayrate than Meridian’s contracted dayrate.

 

In addition, we own a rig that was also intended primarily to drill wells operated by us. In April 2008, Orion began leasing the rig from us, and operating it under a dayrate contract with Meridian. Meridian is obligated for the difference between the contracted dayrate and the lesser dayrate if the rig is utilized by a third party. Beginning January 2009, the rig has been contracted to a third party operator at a rate which is less than the dayrate contract for which Meridian is obligated.

 

On September 3, 2009, Meridian also entered into a forbearance agreement with Orion (“Orion Forbearance Agreement”) related to Meridian’s payment obligations under the dayrate contracts. The Orion Forbearance Agreement, as amended, runs in tandem with the CIT Forbearance Agreement and will terminate if there is any default under the CIT Forbearance Agreement. Obligations under the dayrate contracts accrue over the life of the dayrate contracts. The dayrate contracts related to the two rigs terminate in March 2010 and February 2011.

 

Although Meridian has obtained short-term forbearance agreements for each of the aforementioned agreements in default, we may not be able to comply with the conditions and covenants set forth in those forbearance agreements. There can be no assurance that these forbearance agreements provide us the time to resolve the deficiencies and forestall further default. If we are unable to comply with the terms of the forbearance agreements, we will be subject to the exercise of remedies by such parties on account of such defaults. The exercise of such remedies would likely result in us seeking protection under federal bankruptcy laws.

 

New York Stock Exchange.  On December 4, 2008, we received notification from the NYSE that we had fallen below certain continued listing criteria that require a minimum average closing price of $1.00 per share over 30 consecutive trading days. The NYSE temporarily suspended the minimum average closing price requirement during part of the first half of 2009. We received notification from the NYSE that our common stock would potentially be delisted if we were not in compliance with that requirement by November 9, 2009. To date we have not been delisted from the NYSE.

 

In addition, we are currently monitoring our compliance with another listing criterion. This criterion requires that average market capital over 30 consecutive trading days must be at least $15 million. Based on shares outstanding at January 1, 2010, our average market capital decreases below this level when the stock price drops below approximately $0.16 per share. Some closing prices in the first half of 2009 have been below this price. If we become non-compliant with this criterion, our common stock would be subject to the NYSE’s delisting procedures.

 

In our communications with the NYSE they noted that we have not held a shareholders’ meeting in more than twelve months, since August 6, 2008, and are not in compliance with NYSE rules in that respect.

 

Finally, the NYSE also noted that it can take accelerated listing action in the event that our common stock trades at levels viewed to be “abnormally low” over a sustained period of time, and that it is continuing to evaluate the trading levels of our stock, including the price per share.

 

There can be no assurance that our common stock will continue to be listed on the NYSE. Also, there can be no assurance that we will obtain listing on an alternate stock exchange or automated quotation service in the event we are delisted from the NYSE. A delisting of our common stock could materially and adversely affect, among other things, the liquidity and market price of our common stock; the number of investors willing to hold or acquire our common stock; and our access to capital markets to raise capital in the future.

 

The amount of funds necessary to pay the aggregate merger consideration to our shareholders and holders of options and warrants is anticipated to be approximately $27.2 million, assuming:

 

 

In addition, Alta Mesa will assume our outstanding indebtedness, which was approximately $92.4 million as of January 4, 2010. Alta Mesa has informed us that it will pay for the acquisition through a combination of cash on hand and financing obtained under its credit facility or contributions from its partners. Alta Mesa’s obligation to complete the merger is not contingent on its obtaining financing.

 

General

 

The following discussion summarizes the material U.S. federal income tax consequences of the merger that may be relevant to our shareholders who hold shares of our common stock as a capital asset for U.S. federal income tax purposes (generally, assets held for investment) and who, or that, are for U.S. federal income tax purposes:

 

 

This discussion is based on the Code, Treasury regulations promulgated thereunder, court decisions, published rulings of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect on the date of this proxy statement and all of which are subject to change or differing interpretations, possibly with retroactive effect.

 

This discussion does not address all of the U.S. federal income tax consequences that may be relevant to our shareholders in light of their particular circumstances or to our shareholders who may be subject to special treatment under U.S. federal income tax laws, such as tax-exempt organizations, foreign persons or entities, S corporations or other pass-through entities, financial institutions, insurance companies, broker-dealers, persons who hold Meridian shares as part of a hedge, straddle, wash sale, synthetic security, conversion transaction, or other integrated investment comprised of Meridian shares and one or more investments, persons whose “functional currency” (as defined in the Code) is not the U.S. dollar, persons who exercise appraisal rights, and persons who acquired Meridian shares in compensatory transactions. Further, this discussion does not address any aspect of state, local, or foreign taxation.

 

If a partnership (or other entity classified as a partnership for U.S. federal tax purposes) is a beneficial owner of Meridian shares, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Meridian shareholders that are partnerships and partners in these partnerships are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the merger to them.

 

THIS SUMMARY IS NOT A SUBSTITUTE FOR AN INDIVIDUAL ANALYSIS OF THE TAX CONSEQUENCES OF THE MERGER TO YOU. WE URGE YOU TO CONSULT YOUR TAX

ADVISOR REGARDING THE PARTICULAR FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN LIGHT OF YOUR OWN SITUATION.

 

Tax Consequences of the Merger to Meridian Shareholders

 

The Merger.  The exchange of Meridian shares for cash in the merger will be a taxable transaction for United States federal income tax purposes, and possibly for state, local and foreign tax purposes as well.

 

A holder of our stock generally will recognize capital gain or capital loss equal to the difference, if any, between the amount of cash received by the shareholder pursuant to the merger and the shareholder’s adjusted tax basis in the shares of our stock surrendered. Gain or loss will be calculated separately for each block of shares (that is, shares acquired at the same cost in a single transaction) exchanged in the merger. Holders of separate blocks of our stock should consult their tax advisors with respect to these rules.

 

If at the time of the merger a non-corporate shareholder’s holding period for the shares of our stock is more than one year, any gain recognized will be long term capital gain. If the non-corporate shareholder’s holding period for the shares of our stock is one year or less at the time of the merger, any gain will be subject to United States federal income tax at the same graduated rates as ordinary income. The use of capital losses is generally subject to limitations.

 

For corporations, capital gain is taxed at the same rates as ordinary income, and the use of capital losses is subject to limitations.

 

Appraisal Rights.  Holders of our common shares are entitled to appraisal rights under Texas law in connection with the merger. If a United States holder receives cash pursuant to the exercise of appraisal rights, that United States holder generally will recognize gain or loss equal to the difference between the amount of cash received and the adjusted tax basis in their shares of our common stock. This gain should be long-term capital gain or loss if the United States holder held our common stock for more than one year. Any holder of our common stock that plans to exercise appraisal rights in connection with the merger is urged to consult a tax advisor to determine the related tax consequences.

 

Information Reporting and Backup Withholding.  Under U.S. federal income tax laws, the exchange agent will generally be required to report to a Meridian shareholder and to the IRS any reportable payments made to such Meridian shareholder in the merger. Additionally, a Meridian shareholder may be subject to a backup withholding tax with respect to the cash received in the merger, unless the Meridian shareholder provides the exchange agent with his correct taxpayer identification number, which in the case of an individual is his social security number, or, in the alternative, establishes a basis for exemption from backup withholding. If the correct taxpayer identification number or an adequate basis for exemption is not provided, a Meridian shareholder will be subject to backup withholding on any reportable payment.

 

To prevent backup withholding, each Meridian shareholder must complete the IRS Form W-9 or a substitute Form W-9 that will be provided by the exchange agent with the transmittal letter. Any amounts withheld under the backup withholding rules from a payment to a Meridian shareholder will be allowed as a credit against his U.S. federal income tax liability and may entitle him to a refund, if the required information is furnished to the IRS.

 

The foregoing discussion is for general information only and not intended to be legal or tax advice to any particular Meridian shareholder. Tax matters regarding the merger are very complicated, and the tax consequences of the merger to any particular Meridian shareholder will depend on that shareholder’s particular situation. Meridian shareholders should consult their own tax advisor to determine the specific tax consequences of the merger, including tax return reporting requirements, the applicability of U.S. federal, state, local, and foreign tax laws, and the effect of any proposed change in the tax laws to them.

 

In considering the recommendation of our board of directors with respect to the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, your interests as a shareholder. These interests include:

 

 

 

 

 

 

Our board of directors was aware of, and considered, the interests of our directors and executive officers in approving the merger agreement and the merger. For the reasons, among others, described below, these additional interests did not affect the ability of our board of directors to exercise its judgment solely for the benefit of us and our shareholders:

 

 

 

Directors and Officers.  There may be potential employment arrangements between Alta Mesa or any of its affiliates, on the one hand, and one or more executive officers of Meridian, on the other hand, although there are no such arrangements as of the date of this proxy statement.

 

Employment Agreement with Paul D. Ching.  We have an employment agreement, effective as of December 30, 2008 with Paul D. Ching, our interim Chairman of the Board and Chief Executive Officer. The employment agreement was for an initial term of six months and was subsequently extended through March 31, 2010. The employment agreement is renewable only by mutual agreement and in writing. The employment agreement provides for a base salary of $41,667 per month, which equates to an annual rate of $500,000. The agreement specifies that Mr. Ching will not be entitled to participate in any of our employee benefit plans.

 

If we or the surviving company terminate Mr. Ching’s employment after the merger, we will pay him (a) all accrued but unpaid salary through the date of termination and (b) his monthly salary for the remainder of the term of his employment agreement. If we had terminated Mr. Ching’s employment on January 1, 2010 after a change of control, we estimate the value of the payments he would have been eligible to receive was $125,000.

 

Change in Control and Severance Plan.  In February 2009, Messrs. DeLano, Breaux, Ives and Pennington, who are officers of Meridian, became participants in The Meridian Resource & Exploration LLC Change in Control and Severance Plan. If the employment of any of Messrs. DeLano, Breaux, Ives and Pennington is terminated under specified circumstances in connection with a change of control, such as the proposed merger, then such person will be entitled to (a) all accrued but unpaid salary, vacation and sick leave benefits through the date of termination; (b) his monthly salary for 36 months after the date of termination (including termination payments under their respective employment agreements); (c) his medical insurance benefits for a period of 18 months after his termination of employment at no cost to him; and (d) a single lump sum amount representing 18 months’ premiums for the basic life insurance provided by us on his date of termination.

 

If Mr. DeLano’s employment had been terminated on January 1, 2010 after a change of control, we estimate the value of the payments and benefits described in clauses (a), (b), (c), and (d) above he would have been eligible to receive is (a) $20,058; (b) $782,250, (c) $25,197, and (d) $2,584, with an aggregate value of $830,089.

 

If Mr. Breaux’s employment had been terminated on January 1, 2010 after a change of control, we estimate the value of the payments and benefits described in clauses (a), (b), (c), and (d) above he would have been eligible to receive is (a) $10,154; (b) $704,025, (c) $1,689, and (d) $2,490, with an aggregate value of $718,358.

 

If Mr. Ives’ employment had been terminated on January 1, 2010 after a change of control, we estimate the value of the payments and benefits described in clauses (a), (b), (c), and (d) above he would have been eligible to receive is (a) $13,378; (b) $521,760, (c) $11,666, and (d) $2,134, with an aggregate value of $548,938.

 

If Mr. Pennington’s employment had been terminated on January 1, 2010 after a change of control, we estimate the value of the payments and benefits described in clauses (a), (b), (c), and (d) above he would have

been eligible to receive is (a) $-0-; (b) $735,336, (c) $25,197, and (d) $2,530, with an aggregate value of $763,063.

 

We entered into these change in control and severance plan arrangements as a result of the determination of our board of directors and compensation committee that it was imperative for us to be able to rely upon these individuals to continue in their respective positions with us without concern that such employees might be distracted by the personal uncertainties and risks created by any proposed change of control of Meridian.

 

Total Consideration for Our Common Stock.  Our directors and executive officers will receive the same per share consideration for their shares of our common stock in the merger as all of our other shareholders. The table below sets forth the estimated aggregate amount of consideration that will be received in the merger by our directors and executive officers on account of their ownership of our common stock as of January 1, 2010:

 

 

Stock Options and Warrants.  The merger agreement provides that at the effective time of the merger, each outstanding option to purchase our common stock will become fully vested pursuant to our long-term incentive plans and, pursuant to the merger agreement, will be converted into the right to receive, at the effective time of the merger, an amount in cash equal to the product of (A) the excess, if any, of the Merger Consideration over the per share exercise price of common stock subject to such option multiplied by (B) the number of shares of common stock covered by such option, the payment of which will be without interest and subject to applicable withholding tax. The per share exercise price for all of our outstanding options, including options held by our executive officers and directors, exceeds the Merger Consideration. Therefore, our executive officers and directors will not receive any consideration for the cancellation of their outstanding options, except that Mr. Ching will receive $10 consideration in exchange for his execution of an option waiver, cancellation and release agreement for 250,000 options that he holds.

 

Joseph A. Reeves, Jr. and Michael J. Mayell, who are directors of Meridian, each own warrants to purchase 936,499 shares of our common stock. The exercise price of the warrants is $0.10 per share. At the effective time of the merger, each such outstanding warrant will be converted into the right to receive, at the effective time of the merger, an amount in cash equal to the product of (A) the excess of the Merger Consideration over the exercise price per share of common stock subject to such warrant multiplied by (B) the number of shares of common stock covered by such warrant, the payment of which will be without interest and subject to applicable withholding tax. Mr. Reeves and Mr. Mayell will receive $355,870 in the aggregate for their warrants.

 

Directors’ and Officers’ Indemnification and Insurance.  The merger agreements contains indemnification provisions in favor of our directors and officers and provides for the maintenance of a six-year “tail” directors’ and officers’ liability insurance policy to cover directors and officers currently covered by our

directors’ and officers’ liability insurance policy, see “The Merger Agreement — Covenants — Directors’ and Officers’ Indemnification and Insurance.”

 

Following announcement of the merger transaction with Alta Mesa on December 23, 2009, putative derivative and class action lawsuits were filed in state district court in Harris County, Texas challenging the proposed transaction. The plaintiffs in these stockholder actions allege that the members of Meridian’s board of directors breached their fiduciary duty by: (i) permitting Alta Mesa to purchase Meridian for an unfair price; (ii) utilizing a purportedly defective sales process; and (iii) agreeing to certain provisions in the merger agreement that plaintiffs deem overly restrictive. The stockholder actions also allege that Alta Mesa and, in some cases, Meridian, aided and abetted the alleged breaches of fiduciary duty. The plaintiffs seek various remedies, including an injunction preventing the transaction from being consummated in accordance with the agreed-upon terms.

 

The following summary of the terms of the merger agreement is qualified in its entirety by reference to the merger agreement, a copy of which is attached to this proxy statement as Annex A. This summary may not contain all of the information about the merger that is important to you. We encourage you to read carefully the merger agreement in its entirety.

 

The descriptions of the merger agreement in this proxy statement have been included to provide you with information regarding its terms. Except for its status as the contractual document between the parties with respect to the merger, it is not intended to provide factual information about Alta Mesa, Merger Sub or us. The merger agreement contains representations and warranties made by and to Alta Mesa, Merger Sub and us as of specific dates. The representations and warranties were made for purposes of the merger agreement and are subject to qualifications and limitations agreed to by the parties in connection with negotiating the terms of the merger agreement, including qualifications in disclosures exchanged between the parties. In addition, some representations and warranties were made as of a specified date, may be subject to contractual standards of materiality different from those generally applicable to shareholders, and have been made solely for purposes of risk allocation and to provide contractual rights and other remedies to Alta Mesa, Merger Sub and us. You should not rely upon the representations and warranties set forth in the merger agreement as statements of factual information.

 

The merger agreement provides that Meridian will merge with and into Merger Sub, a wholly owned subsidiary of Alta Mesa. Merger Sub will be the surviving company in the merger, which we sometimes refer to as the surviving company, and will continue to exist after the merger as a wholly owned subsidiary of Alta Mesa.

 

The closing date for the merger will be no later than the first business day following the day on which all conditions to closing in the merger agreement have been satisfied or waived or on another date as agreed between Alta Mesa, Merger Sub and us. We currently expect to complete the merger during the first half of 2010. However, we cannot assure you when, or if, all the conditions to completion of the merger will be satisfied or waived or whether the merger agreement will terminate prior to closing. See “— Conditions to the Merger” and “— Termination of the Merger Agreement” below.

 

The merger will be effective on the date of filing of a properly executed certificate of merger with the Secretary of State of Texas (or at such later time as agreed to by the parties and specified in such certificate of merger).

 

The merger agreement provides that each share of our common stock outstanding immediately prior to the effective time of the merger (other than shares owned by Alta Mesa, Merger Sub or any other subsidiary of Alta Mesa or held in treasury by us and other than shares held by shareholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted at the effective time of the merger into the right to receive $0.29 in cash, without interest and less any applicable withholding of taxes. In this proxy statement, we refer to the consideration to be paid per share of common stock in the merger as the “Merger Consideration.”

 

If any of our shareholders properly exercises and perfects appraisal rights with respect to any of their shares of our common stock, then we will treat those shares as described below in “Rights of Dissent and Appraisal.”

 

Prior to the effective time of the merger, Alta Mesa or Merger Sub will deposit with an exchange agent agreed upon between Alta Mesa and us an amount in cash sufficient to pay the aggregate Merger Consideration payable to all holders of our common stock. The exchange agent will deliver the Merger Consideration in exchange for surrendered stock certificates or book entry shares.

 

Promptly after the effective time of the merger, and in any event within five business days after the closing date, Merger Sub will cause the exchange agent to send to each holder of record of our shares a letter of transmittal and instructions disclosing the procedure for exchanging shares of our common stock for the Merger Consideration. After the effective time of the merger, each holder of shares of our common stock which have been converted into the right to receive the Merger Consideration shall, upon either surrender to the paying agent of a certificate together with a properly completed letter of transmittal or receipt of an agent’s message by the paying agent, be entitled to receive the Merger Consideration for each share of common stock held (less any applicable withholding of taxes). No interest will be paid or accrued on the Merger Consideration.

 

Any cash remaining in the possession of the exchange agent one year after the effective time of the merger will be returned to Merger Sub, upon demand, and any holder who has not exchanged such holder’s common stock prior to that time may look only to the surviving company to exchange such shares of common stock or to pay the Merger Consideration. If outstanding shares of our common stock are not surrendered prior to six years after the effective time of the merger (or, in any particular case, prior to such earlier date on which any Merger Consideration issuable or payable upon the surrender of shares of our common stock would otherwise escheat to or become the property of any governmental authority), the Merger Consideration issuable or payable upon the surrender of our common stock shall, to the extent permitted by applicable law, become the property of Merger Sub, free and clear of all claims or interest of our shareholders.

 

You should not return your stock certificates representing shares of our common stock with the enclosed proxy card, and you should not forward your stock certificates to the disbursing agent without a transmittal letter. In all cases, the Merger Consideration will be paid only in accordance with the procedures set forth in the merger agreement and the transmittal letter.

 

If payment of the Merger Consideration is to be made to a person other than the registered holder of our common stock, it will be a condition of payment that the person requesting such payment either pay any applicable taxes required or establish, to the reasonable satisfaction of the exchange agent, that the tax has been paid or is not applicable.

 

If any share certificate is lost, stolen or destroyed, the exchange agent will pay the Merger Consideration for the number of shares represented by such certificate upon delivery by the person seeking payment of an affidavit in lieu of the certificate, and if required by the surviving company, an indemnity bond in form and substance and with surety reasonably satisfactory to the surviving company.

 

The merger agreement provides that at the effective time of the merger, each outstanding option to purchase our common stock will become fully vested pursuant to our long-term incentive plans and, pursuant to the merger agreement, will be converted into the right to receive, at the effective time of the merger, an amount in cash equal to the product of (A) the excess, if any, of the Merger Consideration over the per share exercise price of common stock subject to such option multiplied by (B) the number of shares of common stock covered by such option, the payment of which will be without interest and subject to applicable withholding tax. The per share exercise price for all of our outstanding options exceeds the Merger Consideration. Therefore, the holders of outstanding options will not receive any consideration for the cancellation of their outstanding options held by them, except that certain holders of options will receive $10 consideration in exchange for the execution of an option waiver, cancellation and release agreement.

 

Joseph A. Reeves, Jr. and Michael J. Mayell, who are directors of Meridian, each own warrants to purchase 936,499 shares of our common stock. The exercise price of the warrants is $0.10 per share. At the effective time of the merger, each such outstanding warrant will be converted into the right to receive, at the effective time of the merger, an amount in cash equal to the product of (A) the excess of the Merger Consideration over the exercise price per share of common stock subject to such warrant multiplied by (B) the number of shares of common stock covered by such warrant, the payment of which will be without interest and subject to applicable withholding tax. Mr. Reeves and Mr. Mayell will receive $355,870 in the aggregate for their warrants.

 

When the merger becomes effective, the certificate of formation of Merger Sub, as in effect immediately before the effective time of the merger, will be the certificate of formation of the surviving company. The company agreement of Merger Sub, as in effect immediately prior to the effective time of the merger, will be the company agreement of the surviving company.

 

The directors and officers of Merger Sub immediately prior to the effective time of the merger will be the directors and officers of the surviving company following the merger until their respective successors are duly elected or appointed and qualified.

 

Meridian made various representations and warranties in the merger agreement with respect to us and our subsidiaries that are subject, in some cases, to disclosures and specified exceptions and qualifications. Our representations and warranties relate to, among other things:

 

 

 

You should be aware that these representations and warranties made by Meridian to Alta Mesa and Merger Sub may be subject to important limitations, disclosures and qualifications set forth in the merger agreement and the disclosure schedules thereto, and do not purport to be accurate as of the date of this proxy statement or provide factual information about us to our shareholders. Certain of our representations and warranties are qualified by a material adverse effect standard, which is defined in the section labeled “— Material Adverse Effect Definition” below.

In addition, Alta Mesa and Merger Sub made certain representations and warranties to us, including representations and warranties relating to:

 

 

All of the representations and warranties contained in the merger agreement will expire at the effective time of the merger.

 

A material adverse effect means any event, circumstance, condition, development or occurrence causing, resulting in or having (or with the passage of time likely to cause, result in or have) a material adverse effect on the financial condition, business, assets, properties or results of operations of Meridian and our subsidiaries, taken as a whole, including but not limited to any of the following:

 

 

The following events, circumstances, conditions, developments and occurrences are not deemed to constitute and are not to be taken into account in determining whether there is a material adverse effect to Meridian’s business, assets, properties or results of operations:

 

 

 

Conduct of Business Pending the Merger.  From the date of the merger agreement to the effective time of the merger, and unless otherwise contemplated or permitted in the merger agreement, as required by applicable law or consented to in writing by Alta Mesa, Meridian has agreed to conduct our business in the ordinary course, and to use our commercially reasonable efforts to preserve intact our business organizations and relationships with third parties and to keep available the services of our present officers and key employees.

 

From the date of the merger agreement to the effective time of the merger, Meridian has agreed, with limited exceptions, that we will not (and we will not permit any of our subsidiaries to) do any of the following, except as expressly contemplated or permitted by the merger agreement, as required by applicable law or consented to in writing by Alta Mesa:

 

 

 

 

No Solicitation.  Meridian has agreed that we will not, nor will we authorize or permit any of our subsidiaries or authorize any of our directors, officers, employees representatives or agents to, directly or indirectly:

 

 

 

The merger agreement defines “acquisition proposal” to mean any offer or proposal by any third party concerning any

 

 

The merger agreement defines “superior proposal” to mean a bona fide written acquisition proposal that our board of directors determines in good faith (after consultation with our financial advisor and outside legal counsel) to be more favorable to the our shareholders than the merger, and reasonably expected to be consummated, taking into consideration the timing, conditionality, legal, regulatory and other aspects of such acquisition proposal.

 

Notwithstanding the restrictions described above, at any time prior to the adoption of the merger agreement by our shareholders, our board of directors, directly or indirectly through representatives, may take the following actions if our board of directors determines in good faith, after consultation with outside legal counsel, that its failure to take such action would likely be inconsistent with its fiduciary duties to our shareholders:

 

 

 

In the merger agreement Meridian agreed that we will not take any of the actions referred to in the preceding paragraph unless we deliver to Alta Mesa one business day’s prior written notice advising Alta Mesa that we intend to take such action, and we have agreed to continue to advise Alta Mesa after taking such action, on a current basis, of the status and terms of any discussions and negotiations with the third party. In addition, we have agreed to notify Alta Mesa promptly (but in no event later than one business day) after receipt by us of any acquisition proposal, or any amendment or modification to any acquisition proposal, for us or of any request for information relating to us or any of our subsidiaries or for access to business, properties, assets, books or records of Meridian or any of our subsidiaries by any third party that, to the our knowledge, is considering making, or has made, an acquisition proposal for Meridian. We have agreed to keep Alta Mesa informed, on a current basis, of the status and details of any such acquisition proposal for Meridian, indication or request and have agreed to promptly (but in no event later than one business day after receipt) provide to Alta Mesa copies of all drafts of the definitive documents relating to any acquisition proposal.

 

We have agreed that our board of directors will not make any change to its recommendation that the merger agreement be approved by our shareholders or terminate the merger agreement prior to approval of the merger agreement by our shareholders if our board of directors determines to enter into a definitive agreement with respect to a superior proposal unless and until

 

 

Directors’ and Officers’ Indemnification and Insurance.  The merger agreement provides that the organizational documents of Merger Sub and the surviving company shall, with respect to indemnification of directors, officers, employees and agents, not be amended, repealed or otherwise modified after the date of the merger agreement in any manner that would adversely affect the rights of the directors, officers, employees and agents who at any time prior to the effective time of the merger were identified as prospective indemnitees under our articles of incorporation or the bylaws in respect of actions or omissions occurring at or prior to the effective time of the merger.

 

The merger agreement provides that the surviving company shall indemnify, defend and hold harmless our and our subsidiaries’ current and former directors and officers against all liability arising out of actions or omissions before or at the effective time of the merger to the fullest extent permitted by law. The merger agreement also provides that the surviving company will advance all reasonable out-of-pocket expenses of each indemnified party under certain circumstances.

Under the merger agreement, the surviving company will maintain our existing officers’ and directors’ liability insurance policy for a period of six years after the effective time of the merger, but only to the extent related to actions or omissions prior to the effective time of the merger. The surviving company may substitute for our existing policy a policy of substantially similar coverage and amounts containing terms no less advantageous to our directors or officers, provided that the surviving company is not required to pay, in the aggregate, an amount of annual premiums with respect to the maintenance of such insurance for such six-year period in excess of 175% of the aggregate amount of annual premiums currently paid by Meridian for such insurance.

 

Employee Matters.  The merger agreement provides that after the effective time of the merger the surviving company will perform Meridian’s obligations under our well bonus plans and severance agreements and severance plans. To the extent that service is relevant for purposes of eligibility, participation or vesting under any employee benefit plan, program or arrangement established or maintained by the surviving company or its affiliates in which our employees may participate, our employees will be credited for service accrued as of the effective time of the merger with Meridian and our subsidiaries to the extent such service was credited under a similar plan, program or arrangement of ours or of our subsidiaries.

 

To the extent our employees and their dependents enroll in any health plan sponsored by the surviving company or its affiliates, the surviving company will waive any preexisting condition limitation applicable to our employees to the extent that the employee’s or dependent’s condition would not have operated as a preexisting condition under the group health plan maintained by Meridian.

 

With respect to the 401(k) accounts of our employees who become eligible to participate in the surviving company’s 401(k) Plan after the effective time of the merger, Merger Sub agrees to take one or more of the following actions:

 

 

Financing.  Prior to the effective time of the merger, we agreed to cooperate with Alta Mesa and Merger Sub, their financing sources, auditors and attorneys in connection with the Alta Mesa’s and Merger Sub’s financing efforts with respect to the transactions contemplated by the merger agreement, including without limitation any refinancing of existing credit facilities of Alta Mesa, Merger Sub or us. We also agreed not to take any actions that would terminate or otherwise invalidate the agreement to extend the forbearance agreement relating to our credit facility.

 

Shell Settlement.  Meridian agreed that we would use reasonable best efforts to enter into a settlement agreement to be effective at the effective time of the merger, on terms that are materially similar to the terms previously disclosed to Alta Mesa, with Shell Oil Company and SWEPI LP (together, “Shell”) relating to the pending arbitration proceeding in which Shell has demanded contractual indemnity and defense from Meridian arising from environmental claims. Meridian entered into a settlement agreement on such terms with Shell on January 11, 2010.

 

Other Covenants.  The merger agreement contains additional agreements between Meridian and Alta Mesa relating to, among other things:

 

 

 

Conditions to the Obligations of Each Party.  The merger agreement contains important conditions to each party’s obligation to consummate the merger, including the following:

 

 

Conditions to the Obligations of Alta Mesa and Merger Sub.  The merger agreement contains important conditions to Alta Mesa’s and Merger Sub’s obligations to consummate the merger, including the following:

 

 

 

Conditions to Meridian’s Obligations.  The merger agreement contains important conditions to Meridian’s obligations to consummate the merger, including the following:

 

 

Alta Mesa has the option to terminate the merger agreement for any reason in its sole and absolute discretion at any time prior to the effective time of the merger, whether before or after approval by our shareholders, provided that, if Alta Mesa elects to exercise this option to terminate, Alta Mesa must pay a $3.0 million termination fee to Meridian concurrently with such termination. Under the terms of our forbearance agreement with our credit facility lenders, if we receive a termination fee from Alta Mesa, we would be required to use the termination fee to reduce our indebtedness under our credit facility, and we would not otherwise have the use of such fee for working capital or capital expenditures.

 

In addition, the merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after approval by our shareholders:

 

 

 

(i) a change in our board’s recommendation that the merger agreement be approved by our shareholders shall have occurred;

 

(ii) following the date of any bona fide acquisition proposal by a third party for Meridian or any material modification thereto is first publicly announced, disclosed or otherwise made known prior to the time at which we receive the approval of our shareholders, we fail to issue a press release that expressly reaffirms our board’s recommendation that the merger agreement be approved by our shareholders within ten business days following Alta Mesa’s written request to do so;

 

(iii) any tender offer or exchange offer constituting an acquisition proposal for Meridian is commenced or materially modified by any third party with respect to our outstanding common stock prior to the time at which we receive the approval of our shareholders, and our board of directors shall not have recommended that our shareholders reject such tender offer or exchange offer and not tender their common stock into such tender offer or exchange offer within ten business days after commencement or material modification of such tender offer or exchange offer, unless we have issued a press release that expressly reaffirms our board’s recommendation that the merger agreement be approved by our shareholders within such ten business day period;

 

(iv) Meridian or our board of directors approves, endorses, recommends, adopts or enters into any acquisition proposal by a third party for Meridian or any agreement relating to an acquisition proposal for Meridian (other than a confidentiality agreement permitted by the no solicitation provisions described above); or

 

(v) Meridian shall have materially breached our obligations under the no solicitation provisions described under “— Covenants — No Solicitation”;

 

provided, however, that Alta Mesa’s right to terminate the merger agreement shall only be available for a ten business day period following the applicable triggering event set forth in (i) through (iv); and

 

 

If the merger agreement is terminated pursuant to the circumstances described in the second, sixth, seventh or eighth bullet point above under the heading “— Termination of the Merger Agreement,” then we have agreed to reimburse Alta Mesa in cash for Alta Mesa’s expenses incurred in connection with the transactions contemplated by the merger agreement (such reimbursement amount not to exceed $1.0 million) no later than two business days after receipt by us of an invoice from Alta Mesa of such expenses.

 

In addition to payment of expenses, we have agreed to pay Alta Mesa a termination fee of $3.0 million if the termination agreement is terminated in the following circumstances:

 

 

 

 

 

 

Alta Mesa has agreed to pay us a termination fee of $3.0 million if the termination agreement is terminated in the following circumstances:

 

 

 

Under the terms of our forbearance agreement with our credit facility lenders, if we receive a termination fee from Alta Mesa, we would be required to use the termination fee to reduce our indebtedness under our credit facility, and we would not otherwise have the use of such fee for working capital or capital expenditures.

 

At any time before or after approval of the matters presented in connection with the merger by our shareholders and prior to the effective time of the merger, the merger agreement may be amended or supplemented in writing by Meridian, Alta Mesa and Merger Sub with respect to any of the terms contained in the merger agreement, except as otherwise provided by law; provided, however, that following approval of the merger agreement by our shareholders, there shall be no amendment or change to the provisions hereof unless permitted by the applicable Texas statutes, without further approval by our shareholders.

 

Under the TBOC, you have the right to demand appraisal of your shares of common stock in connection with the merger and to receive, in lieu of the Merger Consideration, payment in cash, for the fair value of your shares of common stock as determined by an appraiser selected in a Texas state court proceeding. Our shareholders electing to exercise appraisal rights must comply with the provisions of Section 10.356 of the TBOC in order to perfect their rights of dissent and appraisal. We will require strict compliance with the statutory procedures.

 

The following is intended as a brief summary of the material provisions of the Texas statutory procedures required to be followed by a shareholder in order to demand and perfect appraisal rights. This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Subchapter H of Chapter 10, and specifically Sections 10.354 to 10.361 of the TBOC. The full text of Subchapter H of Chapter 10 appears in Annex C to this proxy statement.

 

This proxy statement constitutes our notice to our shareholders of the availability of appraisal rights in connection with the merger in compliance with the requirements of Section 10.355 of the TBOC. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 10.356 of the TBOC contained in Annex C since failure to timely and properly comply with the requirements of Section 10.356 of the TBOC will result in the loss of your appraisal rights under Texas law.

 

If you elect to demand appraisal of your shares of common stock, you must satisfy each of the following conditions:

 

 

 

If you fail to comply with any of these conditions and the merger is completed, you will be entitled to receive the Merger Consideration for your shares of common stock as provided for in the merger agreement, but you will have no appraisal rights with respect to your shares of common stock. A proxy card which is signed and does not contain voting instructions will, unless revoked, be voted “FOR” the approval of the merger agreement, will constitute a waiver of your right of appraisal, and will nullify any previous written demand for appraisal.

 

All written objections should be addressed to The Meridian Resource Corporation, 1401 Enclave Parkway, Suite 300, Houston, Texas 77077, Attention President and Corporate Secretary, and should be executed by, or on behalf of, the record holder of the shares of common stock in respect of which appraisal is being demanded. The written objection must reasonably inform Meridian of the identity of the shareholder and the intention of the shareholder to demand appraisal of such shareholder’s shares of common stock.

 

To be effective, a written objection must be made by or on behalf of, the shareholder of record. The written objection should set forth, fully and correctly, the shareholder of record’s name as it appears on his or her common stock certificate(s) and should specify the holder’s mailing address and the number of shares of common stock registered in the holder’s name and the fair value of the common stock as estimated by the shareholder. The written objection must state that the person intends to exercise their right to dissent under Texas law in connection with the merger. Beneficial owners who do not also hold the shares of common stock of record may not directly make appraisal demands to Meridian. The beneficial holder must, in such cases, have the record owner submit the required demand in respect of those shares of common stock. If shares of common stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a written objection must be made in that capacity; and if the shares of common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the written objection must be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the written objection for appraisal for a shareholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the written objection, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares of common stock as a nominee for others, may exercise his or her right of appraisal with respect to the shares of common stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written objection should state the number of shares of common stock as to which appraisal is sought. Where no number of shares of common stock is expressly mentioned, the written objection will be presumed to cover all shares of common stock held in the name of the record owner.

 

If you hold your shares of common stock in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for making a demand for appraisal by the nominee.

 

Within 10 days after the effective time of the merger, the surviving company must give written notice that the merger has become effective to each shareholder of Meridian who has properly filed a written objection and who voted against the approval of the merger agreement. Any shareholder making a written demand for payment must submit to the surviving company for notation any certificated shares held by that shareholder which are subject to the demand within 20 days after making the written demand. The failure by any shareholder making a written demand to submit its certificates may result in the termination of the shareholder’s appraisal rights.

 

The surviving company has 20 days after its receipt of a demand for payment to provide notice that the surviving company (i) accepts the amount claimed in the written demand and agrees to pay the amount claimed within 90 days from effective time of the merger, or (ii) offer to pay its estimated fair value of the shares of common stock not later than 60 days after the date the offer is accepted.

If, within 60 days after the date the surviving company first delivered its offer to pay its estimated fair value of the shares of common stock to the shareholder, the offer is not accepted, and the surviving company and a shareholder who has delivered written demand in accordance with Section 10.356 of the TBOC do not reach agreement as to the fair value of the shares of common stock, either the surviving company or the shareholder may, within 60 days after the expiration of the 60-day demand period, file a petition in a court in Harris County, Texas, with a copy served on the surviving company in the case of a petition filed by a shareholder, requesting a finding and a determination of the fair value of the shares of common stock held by the shareholder. The surviving company has no obligation and has no present intention to file such a petition if there are objecting shareholders. Accordingly, it is the obligation of Meridian’s shareholders to initiate all necessary action to perfect their appraisal rights in respect of shares of common stock within the time prescribed in Sections 10.361 of the TBOC. The failure of a shareholder to file such a petition within the period specified could nullify the shareholder’s previously written demand for appraisal.

 

If a petition for appraisal is duly filed by a shareholder and a copy of the petition is delivered to the surviving company, the surviving company will then be obligated, within 10 days after receiving service of a copy of the petition, to provide the office of the clerk of the court in which the petition was filed with a list containing the names and addresses of all shareholders who have demanded an appraisal of their shares of common stock and with whom agreements as to the value of their shares of common stock have not been reached.

 

After notice to dissenting shareholders, the court will conduct a hearing upon the petition, and determine those shareholders who have complied with Sections 10.354 to 10.361 and who have become entitled to the appraisal rights provided thereby.

 

After determination of the shareholders entitled to appraisal of their shares of common stock, the court will appraise the shares of common stock, determining their fair value. When the value is determined, the court will direct the payment of such value to the shareholders entitled to receive the same, immediately to the holders of uncertificated shares of common stock and upon surrender by holders of the certificates representing shares of common stock.

 

You should be aware that the fair value of your shares of common stock as determined under Section 10.362 of the TBOC could be more, the same, or less than the Merger Consideration. You should also be aware that the opinions of our financial advisors as to the fairness, from a financial point of view, of the Merger Consideration do not purport to be appraisals.

 

Costs of the appraisal proceeding may be imposed upon the surviving company and the shareholders participating in the appraisal proceeding by the court as the court deems equitable in the circumstances. Any shareholder who had demanded appraisal rights will not, after the effective time of the merger, be entitled to vote shares of common stock subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares of common stock, other than with respect to payment as of a record date prior to the effective time of the merger; however, if no petition for appraisal is filed within 120 days after the date Meridian first delivered its offer to pay its estimated fair value of the shares of common stock to the shareholder, or if the shareholder delivers a written withdrawal of such shareholder’s demand for appraisal and an acceptance of the terms of the merger prior to the filing of a petition for appraisal or if the court adjudges that the shareholder is not entitled to elect to dissent, then the right of that shareholder to appraisal will cease and that shareholder will be entitled to receive the Merger Consideration. Any withdrawal of a demand for appraisal made after the filing of a petition for appraisal may only be made with the written approval of the surviving company.

 

Failure to comply with all of the procedures set forth in Sections 10.354 to 10.361 of the TBOC will result in the loss of a shareholder’s statutory appraisal rights. In view of the complexity of Sections 10.354 to 10.361 of the TBOC, our shareholders who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.

 

The following table sets forth information, as of January 1, 2010, with respect to the number and percentage of shares of our common stock beneficially owned by each of our directors and executive officers, and all of our executive officers and directors as a group.

 

 

 

 

The following table sets forth information, as of January 31, 2010, with respect to each shareholder, other than directors and executive officers, known by us to beneficially own more than 5% of our common stock.

 

 

 

 

 

 

If the merger is completed, we will have no public shareholders and no public participation in any of our future shareholder meetings. We intend to hold an annual meeting of shareholders in 2010 only if the merger is not completed. Shareholder proposals for consideration at the 2010 Annual Meeting of Shareholders (“2010 Annual Meeting”) must be received by us a reasonable time before we begin to print and send our proxy materials for the 2010 Annual Meeting in order to be eligible for inclusion in our proxy statement and proxy used in connection with the 2010 Annual Meeting. Shareholder proposals as to which we receive notice that are proposed to be brought before the 2010 Annual Meeting (outside the process of the SEC’s rule on shareholder proposals) will be considered not properly brought before the meeting, and will be out of order, unless we receive the notice as to that matter not later than the close of business on the tenth day following the day on which notice of the date of the 2010 Annual Meeting is mailed or public disclosure of the 2010 Annual Meeting date is made.

 

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., 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 website at www.sec.gov. You also may obtain free copies of the documents we file with the SEC by going to the “SEC Filings” section of our website at www.tmrx.com. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference.

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements and any of the documents incorporated by reference in this document or other information concerning us, without charge, by written or telephonic request directed to The Meridian Resource Corporation, 1401 Enclave Parkway, Suite 300, Houston, Texas 77077, Attn: Lloyd V. DeLano, Corporate Secretary, telephone: (281) 597-7000, on our website at www.tmrx.com or from the SEC through the SEC’s website at http://www.sec.gov.

 

Alta Mesa has supplied all information pertaining to Alta Mesa and Merger Sub, and we have supplied all information pertaining to us.

THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE YOUR SHARES AT THE SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT.

 

THIS PROXY STATEMENT IS DATED FEBRUARY 8, 2010. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.

 

Execution Version

 

AGREEMENT AND PLAN OF MERGER
By and Among
ALTA MESA HOLDINGS, LP,
ALTA MESA ACQUISITION SUB, LLC
and
THE MERIDIAN RESOURCE CORPORATION
Dated December 22, 2009

 

 

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