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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

o

 

Preliminary Proxy Statement

o

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

ý

 

Definitive Proxy Statement

o

 

Definitive Additional Materials

o

 

Soliciting Material under §240.14a-12

 

CREDO PETROLEUM CORPORATION

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o

 

No fee required.

o

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
    (1)   Title of each class of securities to which transaction applies:
        Common stock, par value $0.10 per share, of CREDO Petroleum Corporation
 
    (2)   Aggregate number of securities to which transaction applies:
        10,170,217 shares of CREDO Petroleum Corporation's common stock (includes 129,053 shares of common stock underlying options to purchase common stock with an exercise price below $14.50 per share)
 
    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
        The filing fee was determined based upon the sum of (a) the product of 10,041,164 shares of common stock and the merger consideration of $14.50 per share of common stock and (b) the product of options to purchase 129,053 shares of common stock and $6.45 (which is the difference between $14.50 and $8.05, the weighted average exercise price per share of the options to purchase common stock with an exercise price below $14.50). In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by calculating a fee of $114.60 per $1,000,000 of the aggregate value of the transaction.
 
    (4)   Proposed maximum aggregate value of transaction:
        $146,429,269.85
 
    (5)   Total fee paid:
        $16,780.79
 

ý

 

Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

 

Amount Previously Paid:
        
 
    (2)   Form, Schedule or Registration Statement No.:
        
 
    (3)   Filing Party:
        
 
    (4)   Date Filed:
        
 

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CREDO PETROLEUM CORPORATION
1801 Broadway, Suite 900
Denver, Colorado 80202
303-297-2200


August 10, 2012

Dear Fellow Stockholder:

        You are cordially invited to attend a special meeting of the stockholders of CREDO Petroleum Corporation (the "Company") to be held on September 25, 2012 at 10:00 a.m., local time, at the offices of Davis Graham & Stubbs LLP located at 1550 17th Street, Suite 500, Denver, Colorado 80202.

        At the special meeting, you will be asked to consider and vote upon a proposal to adopt the Agreement and Plan of Merger (the "Merger Agreement"), dated as of June 3, 2012, by and among the Company, Forestar Group Inc. ("Forestar") and Longhorn Acquisition Inc., a wholly owned subsidiary of Forestar ("Merger Sub").

        If the Merger is completed, you will be entitled to receive $14.50 in cash, without interest and less any applicable withholding tax, for each share of the Company's common stock you own, unless you have properly exercised and perfected your appraisal rights. The Merger Agreement provides for, among other things, the merger of Merger Sub with and into the Company, with the Company surviving as a wholly owned subsidiary of Forestar (the "Merger").

        After careful consideration, by unanimous vote the Company's Board of Directors determined that the transactions contemplated by the Merger Agreement are advisable, fair to, and in the best interests of, the Company's stockholders. The determination was made at a Board meeting duly called and held, where the Board unanimously approved and declared advisable the execution, delivery and performance of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. Accordingly, the Board of Directors unanimously recommends that you vote "FOR" the adoption of the Merger Agreement.

        The accompanying Notice of Special Meeting of Stockholders and proxy statement provides you with information about the Merger and the special meeting in further detail. We urge you to review this information carefully and in its entirety because it explains the Merger, the documents relating to the Merger and other related matters, including the conditions to the completion of the Merger. You may also obtain additional information about the Company from documents previously filed by the Company with the U.S. Securities and Exchange Commission.

        It is important that your shares be represented and voted at the special meeting. Your vote is important regardless of the number of shares of common stock that you own. The Merger cannot be completed unless the Merger Agreement is adopted by the affirmative vote of the holders of at least a majority of the outstanding shares of the Company's common stock entitled to vote. Whether or not you plan to attend the special meeting, we request that you authorize your proxy by either completing and returning the enclosed proxy card as promptly as possible or submitting your proxy or voting instructions by Internet. The enclosed proxy card contains instructions regarding voting. If you attend the special meeting, you may continue to have your shares voted as instructed in the proxy, or, if you are a holder of record of shares of common stock, you may withdraw your proxy at the special meeting and vote your shares in person. If you fail to vote by proxy or in person, or fail to instruct your broker on how to vote, it will have the same effect as a vote "AGAINST" the adoption of the Merger Agreement.

        Thank you for your continued support.

    Sincerely,

 

 

/s/ JAMES T. HUFFMAN

James T. Huffman
Chairman of the Board of Directors

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        THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE U.S. SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

        This proxy statement is dated August 10, 2012 and is first being mailed, along with the enclosed proxy card, to CREDO Petroleum Corporation's stockholders on or about August 10, 2012.


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CREDO PETROLEUM CORPORATION
1801 Broadway, Suite 900
Denver, Colorado 80202
303-297-2200

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To be held on September 25, 2012

        You are cordially invited to attend a special meeting of the stockholders of CREDO Petroleum Corporation (the "Company") to be held on September 25, 2012 at 10:00 a.m., local time, at the offices of Davis Graham & Stubbs LLP located at 1550 17th Street, Suite 500, Denver, Colorado 80202.

        The special meeting is being held for the purpose of acting on the following matters:

        A copy of the Merger Agreement is attached as Annex A to the accompanying proxy statement. If the Merger contemplated by the Merger Agreement (the "Merger") is completed, you, as a holder of shares of our common stock, will be entitled to receive $14.50 in cash in exchange for each share you own, as more fully described therein and subject to the terms thereof.

        After careful consideration, by unanimous vote the Company's Board of Directors determined that the transactions contemplated by the Merger Agreement are advisable, fair to, and in the best interests of, the Company's stockholders. The determination was made at a Board meeting duly called and held, where the Board unanimously approved and declared advisable the execution, delivery and performance of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. Accordingly, our Board of Directors unanimously recommends that you vote "FOR" the adoption of the Merger Agreement.

        Our Board of Directors has fixed the close of business on August 10, 2012 as the record date for the determination of stockholders entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof.

        Your vote is important regardless of the number of shares of the Company's common stock that you own. The adoption of the Merger Agreement requires the affirmative vote of the holders of at least a majority of the outstanding shares of the Company's common stock that are entitled to vote. The proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of at least a majority of the shares present in person or by proxy at the special meeting and entitled to vote thereon. The special meeting may be adjourned for any other purpose, whether or not a quorum is present, by a majority of the shares of common stock present in person or by proxy at the special meeting. The vote to approve the compensation that may be paid or become payable to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement requires the affirmative vote of holders of at least a majority of the shares present in person or by proxy at the special meeting and entitled to vote thereon. Such vote is non-binding but the results of such vote will be considered by the Company's Board of Directors. We currently are not aware of any other business or matter to come


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before the special meeting. If, however, any other matter properly comes before the special meeting, the persons named as proxies in the accompanying proxy will, in their discretion, vote thereon in accordance with their best judgment.

        We urge you to carefully read the accompanying proxy statement, along with its annexes and the documents incorporated therein, in their entirety. Whether or not you plan to attend the special meeting, please vote by promptly completing the enclosed proxy card and then signing, dating and returning it in the envelope provided so that your shares may be represented at the special meeting.

        Alternatively, you may submit a proxy to vote your shares of common stock through the Internet, as indicated on the proxy card. Prior to the taking of the vote at the special meeting, you may revoke your proxy in the manner described in the proxy statement. Your failure to submit a proxy or voting instructions or to vote in person at the special meeting will have the same effect as a vote "AGAINST" the adoption of the Merger Agreement.

        Stockholders of the Company who do not vote in favor of 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 perfect their appraisal rights by complying with all of the required procedures under Delaware law. See "Appraisal Rights" beginning on page 81 of the accompanying proxy statement and Annex D thereto.

        If you have any questions or need assistance voting your shares or authorizing your proxy, please call our proxy solicitor, Alliance Advisors, LLC in writing at Alliance Advisors, LLC, 200 Broadacres Drive, 3rd Floor, Bloomfield, NJ 07003, or by telephone at (877) 777-4575 (stockholders) or (973) 873-7721 (banks and brokers). In addition, you may obtain information about the Company from certain documents that the Company has filed with the U.S. Securities and Exchange Commission. Information contained on our Internet site is not part of, or incorporated in, this notice or the accompanying proxy statement. See "Where You Can Find Additional Information" on page 89 of the accompanying proxy statement.

  By Order of the Board of Directors,

 

/s/ JAMES T. HUFFMAN


James T. Huffman
Chairman of the Board of Directors

Denver, Colorado

August 10, 2012


IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 25, 2012:

This Notice of Special Meeting of Stockholders and the accompanying Proxy Statement may be viewed, printed and downloaded from the Internet at www.proxyvote.com.


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TABLE OF CONTENTS

SUMMARY     1  

The Parties to the Merger (page 23)

    1  

The Merger Agreement (page 63)

    2  

Certain Effects of the Merger (page 58)

    3  

The Special Meeting (page 19)

    3  

Reasons for the Merger; Recommendation of Our Board of Directors (page 32)

    4  

Fairness Opinions (page 37 and Annexes B and C)

    5  

Financing of the Merger Consideration (page 75)

    6  

Activities During the "Go-Shop" and "No-Shop" Periods (page 71)

    7  

Termination of the Merger Agreement (page 77)

    8  

Termination Fee and Expenses (page 78)

    8  

Regulatory and Other Approvals (page 58)

    8  

Material U.S. Federal Income Tax Consequences of the Merger (page 59)

    9  

Litigation Relating to the Merger (page 78)

    9  

Interests of Certain Persons in the Merger (page 61)

    10  

Golden Parachute Compensation (page 62)

    11  

Exchange and Payment Procedures (page 64)

    11  

Market Prices of Common Stock (page 81)

    11  

Appraisal Rights (page 81 and Annex D)

    12  

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

 

 

12

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

 

 

18

 

THE SPECIAL MEETING

 

 

19

 

General

    19  

Solicitation

    20  

Voting Rights and Outstanding Shares

    20  

Revocability of Proxies

    21  

Householding of Proxy Materials

    21  

Adjournments and Postponements

    22  

Other Business at Special Meeting

    22  

THE PARTIES TO THE MERGER

 

 

23

 

CREDO Petroleum Corporation

    23  

Forestar Group Inc. 

    23  

Merger Sub

    23  

THE MERGER

 

 

24

 

Background of the Merger

    24  

Reasons for the Merger; Recommendation of Our Board of Directors

    32  

Certain Unaudited Prospective Information of the Company

    35  

Fairness Opinions

    37  

Opinion of Northland Capital Markets to the Company's Board of Directors

    38  

Opinion of Houlihan Lokey Financial Advisors, Inc. to the Company's Board of Directors

    50  

Certain Effects of the Merger

    58  

Regulatory and Other Approvals

    58  

Material U.S. Federal Income Tax Consequences of the Merger

    59  

Interests of Certain Persons in the Merger

    61  

Golden Parachute Compensation

    62  

Delisting and Deregistration of Common Stock

    63  

THE MERGER AGREEMENT

 

 

63

 

The Merger

    63  

Treatment of Stock and Other Awards

    64  

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Exchange and Payment Procedures

    64  

Certificate of Incorporation, Bylaws, Directors and Officers

    65  

Representations and Warranties

    65  

Conduct of Our Business Prior to Closing

    68  

Stockholders Meeting

    71  

Activities During the "Go-Shop" and "No-Shop" Periods

    71  

D&O Indemnification and Insurance

    74  

Agreement to Take Appropriate Action

    75  

Financing of the Merger Consideration

    75  

Other Covenants

    75  

Conditions to the Merger

    75  

Termination of the Merger Agreement

    77  

Termination Fee and Expenses

    78  

Litigation Relating to the Merger

    78  

Miscellaneous

    79  

FEES AND EXPENSES

 

 

80

 

AGREEMENTS INVOLVING COMMON STOCK

 

 

80

 

Voting Agreement

    80  

MARKET PRICES OF COMMON STOCK

 

 

81

 

APPRAISAL RIGHTS

 

 

81

 

BENEFICIAL OWNERSHIP OF COMMON STOCK

 

 

85

 

VOTE ON ADJOURNMENT

 

 

88

 

ADVISORY VOTE ON NAMED EXECUTIVE OFFICER MERGER-RELATED COMPENSATION ARRANGEMENTS

   
88
 

STOCKHOLDER PROPOSALS

 

 

89

 

OTHER MATTERS

 

 

89

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

 

89

 

 

ANNEXES            

Annex A

 

Agreement and Plan of Merger, by and among Forestar Group Inc., Longhorn Acquisition Inc. and CREDO Petroleum Corporation, dated as of June 3, 2012

 

 

 

 

Annex B

 

Fairness Opinion of Northland Capital Markets

 

 

 

 

Annex C

 

Fairness Opinion of Houlihan Lokey Financial Advisors, Inc.

 

 

 

 

Annex D

 

Section 262 of the General Corporation Law of the State of Delaware

 

 

 

 

Annex E

 

Voting Agreement

 

 

 

 

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CREDO PETROLEUM CORPORATION
1801 Broadway, Suite 900
Denver, Colorado 80202
303-297-2200

PROXY STATEMENT FOR THE SPECIAL MEETING OF STOCKHOLDERS

To be held on September 25, 2012


SUMMARY

        The following summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. Accordingly, we encourage you to read this proxy statement, its annexes and the documents incorporated in this proxy statement carefully and in their entirety. Each item in this summary includes a page reference directing you to a more complete description of that item in this proxy statement.

        Unless we otherwise indicate or unless the context otherwise requires: all references in this document to the "Company," "CREDO", "CREDO Petroleum Corporation," "we," "our" and "us" refer to CREDO Petroleum Corporation and its subsidiaries; all references to "Parent," "Forestar Group Inc." and "Forestar" refer to Forestar Group Inc.; all references to "Merger Sub" refer to Longhorn Acquisition Inc., a wholly owned subsidiary of Forestar Group Inc.; all references to "Merger Agreement" refer to the Agreement and Plan of Merger, dated as of June 3, 2012, by and among the Company, Forestar and Merger Sub, as it may be amended from time to time, a copy of which is attached as Annex A to this proxy statement; all references to the "Merger" refer to the merger contemplated by the Merger Agreement; all references to "merger consideration" refer to the per share merger consideration of $14.50 in cash, without interest, contemplated to be received by the holders of our common stock pursuant to the Merger Agreement. All other capitalized terms used but not defined in this summary have the meanings ascribed to such terms in the Merger Agreement. The information contained herein with respect to Forestar and Merger Sub was provided by Forestar to the Company for inclusion in this proxy statement.


The Parties to the Merger (page 23)

CREDO Petroleum Corporation

        CREDO Petroleum Corporation was incorporated in Colorado in 1978 and reincorporated in Delaware in 2009. The Company and its wholly owned subsidiaries, SECO Energy Corporation and United Oil Corporation, are headquartered in Denver, Colorado. The Company is engaged in the exploration for and the acquisition, development and marketing of, crude oil and natural gas in the Mid-Continent and Rocky Mountain regions. The Company is currently conducting oil-focused drilling projects in the North Dakota Bakken and Three Forks, Kansas and Nebraska and the Texas Panhandle. The Company uses advanced technologies to systematically explore for oil and gas and, through its patented Calliope Gas Recovery System, to recover stranded reserves from depleted gas reservoirs. The Company acts as the "operator" of oil and gas properties in Kansas, Nebraska, Wyoming, Colorado and Texas. United Oil Corporation is an active operator doing business primarily in Oklahoma and SECO Energy Corporation primarily owns royalty interests in the Rocky Mountain region. The Company has operating activities in nine states and has 15 employees.

        The address of the Company's principal executive office is 1801 Broadway, Suite 900, Denver, Colorado 80202-3837 and the Company's telephone number is (303) 297-2200.

Forestar Group Inc.

        Forestar Group Inc. is a real estate and natural resources company which operates in three business segments: real estate, mineral resources and fiber resources. At year-end 2011, the real estate

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segment owns directly or through ventures almost 147,000 acres of real estate located in nine states and 12 markets in the United States. The real estate segment has 16 projects representing about 28,000 acres currently in the entitlement process, and 75 entitled, developed and under development projects in seven states and 11 markets encompassing over 16,000 acres, comprised of over 27,000 residential lots and about 2,500 commercial acres, principally in the major markets of Texas. The mineral resources segment manages about 595,000 net acres of oil and gas mineral interests located principally in Texas, Louisiana, Alabama and Georgia. Also included in the mineral resources segment is a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 17,800 acres of groundwater leases in Central Texas. The fiber resources segment includes the sale of wood fiber and management of Forestar's recreational leases.

        Prior to December 28, 2007, Forestar was a wholly-owned subsidiary of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributed all of the issued and outstanding shares of Forestar common stock to its shareholders in a transaction commonly referred to as a spin-off. Forestar's real estate origins date back to 1955 with a decades-long legacy of residential and commercial real estate development operations, primarily in Texas. Forestar's mineral resources origins date back to the mid-1940s when it began leasing oil and gas mineral interests to third-party exploration and production companies.

        The address of Forestar's principal executive office is 6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746-5149 and Forestar's telephone number is (512) 433-5200.

Merger Sub

        Merger Sub is a Delaware corporation, and wholly owned subsidiary of Forestar, formed for the sole purpose of completing the Merger. Pursuant to the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Forestar.


The Merger Agreement (page 63)

        On June 3, 2012, the Company entered into the Merger Agreement with Forestar and Merger Sub. Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Forestar. You will have no equity interest in the Company or Forestar after the effective time of the Merger. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, among other things:

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Certain Effects of the Merger (page 58)

        If the Merger is completed, and you hold shares of Common Stock immediately prior to the effective time of the Merger, you will be entitled to receive $14.50 in cash, without interest and less any applicable withholding tax, for each share of Common Stock then owned by you, unless you have properly exercised and perfected, and not withdrawn, your statutory appraisal rights with respect to the Merger. As a result of the Merger, the Company will cease to be an independent, publicly traded company, and the Common Stock will be deregistered under the Securities Exchange Act of 1934, as amended, referred to herein as the "Exchange Act." After the effective time of the Merger, you will not own any shares of the surviving corporation.


The Special Meeting (page 19)

General (page 19)

        The special meeting will be held on September 25, 2012 starting at 10:00 a.m., local time, at the offices of Davis Graham & Stubbs LLP located at 1550 17th Street, Suite 500, Denver, Colorado 80202. At the special meeting, you will be asked to adopt the Merger Agreement.

        The persons named in the accompanying proxy will also have discretionary authority to vote upon other business, if any, that properly comes before the special meeting and any adjournments or postponements of the special meeting, including any adjournments for the purpose of soliciting additional proxies to adopt the Merger Agreement.

Voting Rights and Outstanding Shares (page 20)

        Stockholders of record at the close of business on August 10, 2012 are entitled to notice of, and to vote at, the special meeting. On August 10, 2012, the outstanding voting securities of the Company consisted of 10,041,164 shares of Common Stock. The presence at the special meeting, in person or by proxy, of the holders of at least a majority of shares of our Common Stock issued and outstanding on the record date will constitute a quorum for the purpose of considering the proposals. The holders of the Common Stock have one vote per share on all matters on which they are entitled to vote.

        The adoption of the Merger Agreement requires the affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock entitled to vote. Because the vote required to adopt the Merger Agreement is based on the total number of votes entitled to be cast by the holders of our outstanding Common Stock rather than on the number of votes cast, failure to vote your shares of our Common Stock (including as a result of broker non-votes) and abstentions will have the same effect as voting "AGAINST" the proposal to adopt the Merger Agreement.

        Approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of at least a majority of the shares of Common Stock present in person or by proxy at the special meeting and entitled to vote on the matter. The special meeting may be adjourned for any other purpose, whether or not a quorum is present, by the affirmative vote of at least a majority of the shares of Common Stock present in person or by proxy at the special meeting or by the presiding officer of the meeting which will be the Chairman of the Board of Directors or, if he is not in attendance at the special meeting, the most senior officer of the Company present at the special meeting.

        The vote to approve the compensation that may be paid or become payable to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement requires the affirmative vote of holders of at least a majority of the shares present in person or by proxy at the special meeting and entitled to vote thereon. Such vote is non-binding but the results of such vote will be considered by the Company's Board of Directors, sometimes referred to herein as the "Board".

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        Failure to vote your shares of our Common Stock (including as a result of broker non-votes) will have no effect on the proposal to adjourn the special meeting or the proposal to approve the compensation that may be paid or become payable to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement. Abstentions will have the same effect as a vote "AGAINST" the proposal to adjourn the special meeting and a vote "AGAINST" the proposal to approve such compensation.

        Certain stockholders, who collectively own 21.1% of the outstanding shares of Common Stock, have agreed to vote all shares of Common Stock they beneficially own in favor of adopting the Merger Agreement pursuant to an agreement referred to as the "Voting Agreement." See "Voting Agreement" beginning on page 80.

Certain Voting Procedures and Revocability of Proxies (page 21)

        Any of our stockholders of record entitled to vote at the special meeting may authorize a proxy to have their shares represented and voted at the special meeting by returning the enclosed proxy or by submitting a proxy or voting instructions by Internet (at the Internet address provided on each proxy card) or may appear at the special meeting and vote their shares in person. If the shares of our Common Stock that you own are held in "street name" by a broker, bank or other nominee, you should instruct your broker, bank or other nominee on how to vote your shares using the instructions it provides.

        Any proxy may be revoked at any time prior to its use by your delivery of a properly executed, later-dated proxy card, by your submitting your proxy or voting instructions by Internet at a later date than your previously submitted proxy, by your filing a written revocation of your proxy with our Secretary or by your voting in person at the special meeting. Attendance at the special meeting will not, in itself, constitute revocation of a previously granted proxy. Please note that if you hold your shares in "street name" and you have instructed a broker, bank or other nominee to vote your shares, the above-described options for revoking your voting instructions do not apply, and instead you must follow the instructions received from your broker, bank or other nominee to revoke your voting instructions.


Reasons for the Merger; Recommendation of Our Board of Directors (page 32)

        The Merger will enable our stockholders to:

        For these reasons, and the reasons discussed under "The Merger—Reasons for the Merger; Recommendation of Our Board of Directors" beginning on page 32, our Board of Directors has

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determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and fair to, and in the best interests of, the Company's stockholders.

        After careful consideration, our Board of Directors, by unanimous vote at a meeting duly called and held on June 1, 2012:

        After careful consideration, our Board of Directors, by unanimous written consent on July 26, 2012, recommended that our stockholders vote "FOR" the proposal to approve, on a non-binding, advisory basis, compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement (the "named executive officer merger-related compensation proposal").

        For a discussion of the material factors considered by our Board of Directors in reaching their conclusions, see "The Merger—Reasons for the Merger; Recommendation of Our Board of Directors" beginning on page 32.


Fairness Opinions (page 37 and Annexes B and C)

        Each of Houlihan Lokey Financial Advisors, Inc., referred to as "Houlihan Lokey," and Northland Securities, Inc., referred to as "Northland Capital Markets," the Company's financial advisors, delivered to our Board of Directors a written opinion dated June 1, 2012 as to the fairness, from a financial point of view, of the $14.50 per share cash merger consideration contemplated to be received by holders of our Common Stock pursuant to the Merger Agreement. Neither the Houlihan Lokey opinion nor the Northland Capital Markets opinion constitutes a recommendation to any stockholder as to how to vote in connection with the Merger or otherwise. These opinions are limited to the transactions described therein and have no bearing on any other transactions in which we might engage. The Company engaged Northland Capital Markets to provide its fairness opinion to our Board of Directors and to act as financial advisor to the Company in connection with a post-signing market check during the go shop period. The Company has agreed to pay Northland Capital Markets a monthly retainer of $10,000 up to a maximum of $60,000. In addition, fees of $250,000 and $150,000 (less any retainer fees paid to Northland Capital Markets) were payable to Houlihan Lokey and Northland Capital Markets, respectively, upon the rendering of their respective fairness opinions.

Opinion of Northland Capital Markets.

        On June 1, 2012, Northland Capital Markets rendered an oral opinion to our Board of Directors (which was confirmed in writing by delivery of Northland Capital Markets' written opinion dated June 1, 2012), as to the fairness, from a financial point of view, of the merger consideration to be received by the holders of our Common Stock other than the Company, Forestar, the surviving company or any of their affiliates, collectively referred to herein as the "Independent Holders," in the Merger, as of June 1, 2012, based upon and subject to the procedures followed, assumptions made,

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qualifications and limitations on the review undertaken and other matters considered by Northland Capital Markets in preparing its opinion.

        Northland Capital Markets' opinion was directed to our Board of Directors and only addressed the fairness from a financial point of view of the merger consideration to be received by the Independent Holders in the Merger and does not address any other aspect or implication of the Merger. The summary of Northland Capital Markets' opinion in this proxy statement is qualified in its entirety by reference to the full text of Northland Capital Markets' written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Northland Capital Markets in preparing its opinion. However, neither Northland Capital Markets' opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute advice or a recommendation to our Board of Directors or any stockholder or any other party as to how to act or vote with respect to the Merger or related matters. See "The Merger—Opinion of Northland Capital Markets to the Company's Board of Directors."

Opinion of Houlihan Lokey Financial Advisors, Inc.

        On June 1, 2012, Houlihan Lokey rendered an oral opinion to our Board of Directors (which was confirmed in writing by delivery of Houlihan Lokey's written opinion dated June 1, 2012), as to the fairness, from a financial point of view, as of June 1, 2012, of the merger consideration to be received by the holders of our Common Stock other than the parties to the Voting Agreement, referred to herein as the "Unaffiliated Holders," in the Merger, based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion.

        Houlihan Lokey's opinion was addressed to our Board of Directors and only addressed the fairness from a financial point of view of the merger consideration to be received by the Unaffiliated Holders in the Merger and does not address any other aspect or implication of the Merger. The summary of Houlihan Lokey's opinion in this proxy statement is qualified in its entirety by reference to the full text of Houlihan Lokey's written opinion, which is included as Annex C to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey's opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute advice or a recommendation to our Board of Directors or any stockholder or any other party as to how to act or vote with respect to the Merger or related matters. See "The Merger—Opinion of Houlihan Lokey Financial Advisors, Inc. to the Company's Board of Directors"


Financing of the Merger Consideration (page 75)

        The obligations of Forestar Group Inc. and Merger Sub under the Merger Agreement are not subject to any conditions regarding their or any other person's ability to obtain financing for the consummation of the Merger and related transactions.

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Activities During the "Go-Shop" and "No-Shop" Periods (page 71)

        During the period beginning on the date of the Merger Agreement and continuing through July 3, 2012, such period being referred to as the "go-shop" period, the Company and its subsidiaries and their respective officers, directors, advisors, affiliates and other representatives, which are referred to herein as "representatives," were able to, subject to some limitations:

        Except as expressly permitted in the Merger Agreement, beginning on July 4, 2012, such period being referred to as the "no-shop" period, the Company and its subsidiaries and their respective officers, directors, advisors, affiliates and other representatives will:

        However, the Company may continue to engage with, and provide information to a "qualified go-shop bidder" (generally, a person from whom the Company receives an acquisition proposal during the go-shop period that the Board concludes is or is reasonably expected to lead to a "superior proposal" (as that term is defined in the Merger Agreement)) through July 17, 2012, including any amended or revised acquisition proposal submitted by such a bidder.

        In addition, the Company and its Board may participate or engage in discussions or negotiations with, and provide information to, a third party if at any time on or after the commencement of the no-shop period, and prior to the Company obtaining the required vote from its stockholders to adopt the Merger Agreement, (i) the Company receives an unsolicited bona fide written acquisition proposal from such third party, (ii) the Company's Board determines in good faith that such proposal constitutes, or is reasonably likely to result in, a superior proposal after receiving advice from its financial advisors, and (iii) the Company's Board determines in good faith, after consultation with its outside counsel, that the failure to participate in such negotiations or discussions or to furnish such information to such third party would be reasonably expected to result in a breach of the Board's fiduciary duties under applicable law. The Company may not deliver any information to such third party without entering into an "acceptable confidentiality agreement" (as that term is defined in the Merger Agreement) with that party.

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Termination of the Merger Agreement (page 77)

        The Merger Agreement may be terminated by Forestar or the Company (i) by mutual written consent, (ii) if the Merger is not consummated by December 31, 2012, (iii) if our stockholders do not adopt the Merger Agreement at the special meeting or any adjournment or postponement of the special meeting, (iv) if there is a non-appealable governmental order, decree or ruling restraining, enjoining or otherwise prohibiting the Merger or (v) in the event of certain uncured material breaches of the representations, warranties and covenants of the other party. The Merger Agreement may be terminated by Forestar if (i) we enter into or approve an agreement with respect to an acquisition proposal, as defined in "The Merger Agreement—Activities During the "Go-Shop" and "No-Shop" Periods," or resolve to do so, (ii) an adverse recommendation, as defined in "The Merger Agreement—Activities During the "Go-Shop" and "No-Shop" Periods," occurs, (iii) we are in material breach of any of our obligations contained in the Merger Agreement with respect to solicitations or acquisition proposals, (iv) at any time following receipt of an acquisition proposal, our Board of Directors fails to reaffirm its approval or recommendation of the Merger Agreement within ten business days after receipt of a written request to do so from Forestar or (v) a tender or exchange offer for 20% or more of the outstanding shares of Common Stock (other than by Forestar or its affiliates) is commenced and our Board of Directors fails to recommend against such offer within ten business days after the commencement of such tender or exchange offer. We may terminate the Merger agreement if prior to obtaining the required stockholder vote, we desire to enter into an agreement with respect to a superior proposal after having complied with certain provisions of the Merger Agreement (including our obligation to negotiate with Forestar after its receipt of notification of our intent to enter into an agreement with respect to such superior proposal).


Termination Fee and Expenses (page 78)

        In certain circumstances, we will be required to pay to Forestar a termination fee if the Merger Agreement is terminated because we enter into a definitive agreement with respect to a superior proposal. A termination fee will also be payable in certain other circumstances specified in the Merger Agreement. Subject to certain conditions described more fully herein, the termination fee will be $3.0 million if the termination is related to a superior proposal submitted by any person during the go-shop period and it will be $5.2 million if the termination occurs for any other reason. For additional information on the termination fees and the circumstances to which each applies, see "The Merger Agreement—Termination Fee and Expenses" beginning on page 78.

        All expenses incurred in connection with the Merger Agreement will be paid by the party incurring such expenses, except that we will generally be required to reimburse Forestar for up to $1.25 million of its expenses if a third party makes an acquisition proposal and the Merger Agreement is subsequently terminated because our stockholders do not adopt the Merger Agreement at the special meeting or the Merger fails to close by December 31, 2012.

        See "The Merger Agreement—Termination Fee and Expenses" beginning on page 78 for additional information regarding the circumstances in which we may be required to pay the termination fee and/or reimburse Forestar's expenses and related information.


Regulatory and Other Approvals (page 58)

        No filing or registration with, declaration or notification to, or order, authorization, consent or approval of, any federal, state, local or foreign court, arbitral, legislative, executive or regulatory authority or agency is required in connection with the execution, delivery and performance of the Merger Agreement, or any other transactions contemplated thereby, except for the (i) the filing of a definitive proxy statement with the U.S. Securities and Exchange Commission, referred to herein as the "SEC," relating to the Merger Agreement and the transactions contemplated thereby, (ii) the filing of

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a Certificate of Merger with the Delaware Secretary of State, and (iii) certain filings in connection with compliance with the rules of Nasdaq.


Material U.S. Federal Income Tax Consequences of the Merger (page 59)

        The Merger will generally be a taxable transaction to U.S. holders (as defined in "The Merger—Material U.S. Federal Income Tax Consequences of the Merger"). The receipt of cash in exchange for shares of our Common Stock by a U.S. holder generally will cause the U.S. holder to recognize a gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the cash received in the Merger and the U.S. holder's adjusted tax basis in such U.S. holder's shares of Common Stock surrendered.

        The U.S. federal income tax consequences described above may not apply to certain U.S. holders of shares of our Common Stock. You should read "The Merger—Material U.S. Federal Income Tax Consequences of the Merger" on page 59 for a more complete discussion of the material U.S. federal income tax consequences of the Merger. You are urged to consult your tax advisor as to the particular tax consequences of the Merger to you, including the tax consequences under federal, state, local, non-U.S. and other tax laws.


Litigation Relating to the Merger (page 78)

        On June 13, 2012, a lawsuit titled Schatz v. Credo Petroleum Corp., Forestar Group Inc., Brown, et al., C.A. No. 12-CV-01538-REB-MEH (D. Colo.), was filed in the U.S. District Court for the District of Colorado against the Company, Forestar, and each of the Company's directors by a purported stockholder alleging that the Company and the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Forestar had aided and abetted the alleged breaches. The plaintiff seeks certification of the suit as a class action. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders. On July 9, 2012, Credo and its directors, joined by Forestar, filed a Motion to Dismiss the Schatz action for failure to state a claim upon which relief could be granted. Also on July 9, 2012, Credo and its directors, joined by Forestar, filed a Motion to Stay the Schatz action in favor of parallel proceedings in the Delaware Court of Chancery. On August 2, 2012, plaintiff Schatz voluntarily dismissed her action.

        On June 19, 2012, a purported class action lawsuit, titled Farley v. Huffman, Credo Petroleum Corp., Forestar Group Inc., et al., C.A. No. 7638-VCP (Del. Ch.), was filed in the Court of Chancery of the State of Delaware against the Company, Forestar, Merger Sub and each of the Company's directors by a purported stockholder, on behalf of the public stockholders of the Company, alleging that the Company and the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Credo, Forestar and Merger Sub had aided and abetted the alleged breaches. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders. On July 16, 2012, plaintiff in the Farley action voluntarily dismissed her complaint.

        On June 21, 2012, a purported class action lawsuit, titled Franklin v. Brown, Credo Petroleum Corp., Forestar Group Inc., et al., C.A. No. 7641-VCP (Del. Ch.), was filed in the Court of Chancery of the State of Delaware against the Company, Forestar, Merger Sub and each of the Company's directors by a purported stockholder, on behalf of the public stockholders of the Company, alleging that the Company's directors had breached their fiduciary duties to the stockholders in connection with the

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Merger Agreement and that Forestar and Merger Sub had aided and abetted the alleged breaches. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders.

        On June 22, 2012, a purported class action lawsuit, titled Newton v. Huffman, Credo Petroleum Corp., Forestar Group Inc., et al., C.A. No. 7648-VCP (Del. Ch.), was filed in the Court of Chancery of the State of Delaware against the Company, Forestar, Merger Sub and each of the Company's directors by a purported stockholder, on behalf of the public stockholders of the Company, alleging that the Company and the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Credo, Forestar and Merger Sub had aided and abetted the alleged breaches. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders.

        On July 18, 2012, plaintiff Franklin filed an amended complaint in the Delaware Court of Chancery, additionally claiming that Credo and its directors breached their fiduciary duties by issuing a materially misleading preliminary proxy statement. Also on July 18, 2012, the Delaware Court of Chancery consolidated the Franklin and Newton actions, captioning the consolidated case In re Credo Petroleum Corporation Shareholder Litigation, Consolidated C.A. No. 7641-VCP. Also on July 18, 2012, plaintiffs in the consolidated Delaware action filed their Motion for Expedited Proceedings and Motion for Preliminary Injunction. On July 26, 2012, the Court of Chancery denied plaintiffs' Motion for Expedited Proceedings without prejudice.

        On July 27, 2012, a lawsuit titled Gavrilas v. Huffman, Skewes, Hall, et al., File No. 45601011, was filed in the Denver County District Court 2nd JD against the Company, Forestar and each of the Company's directors by a purported stockholder. The complaint alleges, among other things, that the Company's directors breached their fiduciary duties to the Credo stockholders by agreeing to an inadequate price and issuing a materially misleading proxy statement, and that Forestar aided and abetted those breaches. The complaint seeks an injunction, damages and attorneys' fees.

        The Company, Forestar, and the Company's Board of Directors believe that the claims in the above complaints are entirely without merit and intend to defend the actions vigorously.


Interests of Certain Persons in the Merger (page 61)

        In considering the recommendation of our Board of Directors with respect to the Merger, you should be aware that certain of our directors and executive officers have interests in the Merger that may be different from, or in addition to, your interests generally. These interests include:

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        These interests may present our directors and executive officers with interests that are different from or in addition to those of our stockholders generally. Members of our Board of Directors were aware of these differing or additional interests and considered them, among other matters, in reaching their decision to adopt the Merger Agreement and approve the Merger and to recommend that you vote in favor of adopting the Merger Agreement.


Golden Parachute Compensation (page 62)

        The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Rule 14a-21(c) under the Exchange Act require the Company to provide its stockholders with the opportunity to vote to approve, on a non-binding, advisory basis, the compensation that may be paid or become payable to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement (also known as "golden parachute" compensation). Approval of this proposal is not a condition to completion of the Merger. As this is an advisory vote, although the result of this vote will be considered by the Company's Board of Directors, the result will not be binding on the Company or on Forestar or the Boards of Directors or the compensation committees of the Company or Forestar. Accordingly, such compensation, including any amounts that the Company is contractually obligated to pay, would still be payable regardless of the outcome of this advisory vote, subject only to the conditions applicable thereto. See "Golden Parachute Compensation" beginning on page 62.


Exchange and Payment Procedures (page 64)

        As soon as practicable after the effective time of the Merger, a paying agent selected by Forestar will mail a letter of transmittal and instructions to all Company stockholders. The letter of transmittal and instructions will tell our stockholders how to surrender their Common Stock certificates or book-entry shares in exchange for the merger consideration, without interest and less any applicable withholding tax. The paying agent will provide stockholders with the merger consideration due to them pursuant to the Merger Agreement as soon as practicable following the receipt of Common Stock certificates or an "agent's message" with respect to book-entry shares in accordance with the instructions set forth in the letter of transmittal. You should not return any stock certificates you hold with the enclosed proxy card and you should not forward your stock certificates to the paying agent without a letter of transmittal.


Market Prices of Common Stock (page 81)

        Our Common Stock is listed on Nasdaq under the trading symbol "CRED". The closing sale price of our Common Stock on June 1, 2012, the last trading day before the announcement of the execution of the Merger Agreement, was $10.86 per share. On August 9, 2012, which was the last trading day before the date of this proxy statement, the Common Stock closed at $14.47 per share.

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Appraisal Rights (page 81 and Annex D)

        You are entitled to appraisal rights in connection with the Merger under Delaware law if you take or refrain from taking certain specific actions. You will have the right, under and in full compliance with Delaware law, to have the fair value of your shares of our Common Stock determined by the Court of Chancery of the State of Delaware. This appraisal amount could be more than, the same as or less than the merger consideration. Your rights to appraisal are subject to a number of restrictions and technical requirements. Generally, in order to exercise your appraisal rights you must:

        Merely voting against the Merger, or abstaining or failing to vote on the Merger, will not preserve your right to an appraisal, which requires you to follow all the steps provided under Delaware law. Requirements under Delaware law for exercising appraisal rights are described in further detail beginning on page 81. The relevant section of Delaware law, Section 262 of the Delaware General Corporation Law, regarding appraisal rights is reproduced and attached as Annex D to this proxy statement.

        If you vote to adopt the Merger Agreement, you will waive your right to seek appraisal of your shares of Common Stock under Delaware law. If you fail to properly exercise your appraisal rights in accordance with Section 262 of the Delaware General Corporation Law, upon surrendering your certificates or book-entry shares in accordance with the instructions set forth in the letter of transmittal, you will receive the merger consideration of $14.50 per share, without interest and less applicable withholding tax. This proxy statement constitutes the Company's notice to our stockholders of the availability of appraisal rights in connection with the Merger in compliance with the requirements of Section 262 of the Delaware General Corporation Law, a copy of which is attached as Annex D to this proxy statement.

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

        The following questions and answers summarily address some commonly asked questions you may have regarding the special meeting and the Merger. These questions and answers may not address all questions that may be important to you as a stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, as well as the additional documents to which it refers or which it incorporates by reference, including the Merger Agreement, a copy of which is attached to this proxy statement as Annex A. We encourage you to read this proxy statement, its annexes and the documents incorporated in this proxy statement carefully and in their entirety.

Q:
What is the proposed transaction?

A:
The proposed transaction is the acquisition of the Company by Forestar pursuant to the Merger Agreement. Once the Merger Agreement has been adopted by our stockholders and other closing conditions under the Merger Agreement have been satisfied or waived, Merger Sub, a wholly owned subsidiary of Forestar, will merge with and into the Company. The Company will be the surviving corporation and become a wholly owned subsidiary of Forestar.

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Q:
As a holder of Common Stock, what will I receive as a result of the Merger?

A:
If the Merger is completed and you do not properly exercise and perfect your appraisal rights, you will be entitled to receive $14.50 in cash, without interest and less any applicable withholding taxes, for each share of our Common Stock that you own. You will not be entitled to receive shares in the surviving corporation.

Q:
How does the merger consideration compare to the market price of the Common Stock?

A:
The cash consideration of $14.50 per share of Common Stock represents a premium of approximately 36.0% to the volume-weighted average price of our Common Stock during the 90-day period ending on June 1, 2012; (ii) a premium of approximately 35.8% to the volume-weighted average price of our Common Stock during the 30-day period ending on June 1, 2012; and (iii) a premium of approximately 33.5% to the closing price of $10.86 of our Common Stock on June 1, 2012, the last trading day prior to public announcement of the Merger, each as quoted on Nasdaq.

Q:
Is the Merger expected to be taxable to me?

A:
Yes. For U.S. holders (as defined in "The Merger—Material U.S. Federal Income Tax Consequences of the Merger"), the receipt of the merger consideration for each share of our Common Stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes, and may also be a taxable transaction under applicable state, local, non-U.S. and other income tax laws. Generally, for U.S. federal income tax purposes, a U.S. holder will recognize gain or loss measured by the difference, if any, between the merger consideration per share of Common Stock and the U.S. holder's adjusted tax basis in that share. You should read "The Merger—Material U.S. Federal Income Tax Consequences of the Merger" on page 59 for a more complete discussion of the material U.S. federal income tax consequences of the Merger. Tax matters can be complicated and the tax consequences of the Merger to you will depend on your particular tax situation. We encourage you to consult your tax advisor regarding the tax consequences of the Merger to you.

Q:
What will happen to shares of Common Stock that I currently own after completion of the Merger?

A:
Following the completion of the Merger, your shares will be canceled and will represent only the right to receive the merger consideration. Trading in shares of our Common Stock on Nasdaq will cease. Price quotations for our Common Stock will no longer be available and we will cease filing periodic and other reports with the SEC.

Q:
How does the Company's Board of Directors recommend that I vote on the proposals?

A:
Our Board of Directors unanimously recommends that you vote:

"FOR" the proposal to adopt the Merger Agreement;

"FOR" the approval, on a non-binding, advisory basis, of the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement; and

"FOR" adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the Merger Agreement.

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Q:
When and where is the special meeting of the Company's stockholders?

A:
The special meeting of the Company's stockholders will be held at the offices of Davis Graham & Stubbs LLP located at 1550 17th Street, Suite 500, Denver, Colorado 80202 on September 25, 2012 at 10:00 a.m., local time.

Q:
What matters am I entitled to vote on at the special meeting of the Company's stockholders?

A:
You are entitled to vote:

"FOR" or "AGAINST" the adoption of the Merger Agreement;

"FOR" or "AGAINST" the approval, on a non-binding, advisory basis, of the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement;

"FOR" or "AGAINST" the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the Merger Agreement; and

on such other business as may properly come before the special meeting or any adjournment or postponement thereof.

Q:
Who can vote and attend the special meeting?

A:
Stockholders as of the close of business on August 10, 2012, the record date for the special meeting, are entitled to receive notice of, attend and vote at the special meeting. On the record date, approximately 10,041,164 shares of Common Stock, held by approximately 2,104 stockholders of record, were outstanding and entitled to vote. You may vote all shares you owned as of the record date. You are entitled to one vote per share.

Q:
What vote of the stockholders is required to adopt the Merger Agreement?

A:
For the Company to complete the Merger, stockholders as of the close of business on the record date for the special meeting holding at least a majority of the outstanding shares of our Common Stock entitled to vote must vote "FOR" the adoption of the Merger Agreement. A failure to vote your shares of Common Stock, or broker non-votes, as defined herein, or an abstention from voting will have the same effect as a vote against the adoption of the Merger Agreement.

Q:
What vote of stockholders is required to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies at the special meeting of the stockholders?

A:
Any proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the approval of holders of at least a majority of the Common Stock present, in person or by proxy at the special meeting and entitled to vote on the matter. The special meeting may be adjourned for any other purpose, whether or not a quorum is present, by a majority of the shares of Common Stock present or represented at the special meeting. A failure to vote your shares of Common Stock, or broker non-votes, as defined herein, will not have an effect on the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. An abstention from voting will have the same effect as a vote against such proposal.

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Q:
What vote of stockholders is required to approve the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement?

A:
The vote to approve the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement requires the affirmative vote of holders of at least a majority of the shares present in person or by proxy at the special meeting and entitled to vote on the matter. The vote to approve such compensation is non-binding on the Company but the results of such vote will be considered by the Company's Board of Directors. A failure to vote your shares of Common Stock, or broker non-votes, as defined herein, will not have an effect on the proposal to approve the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement. An abstention from voting will have the same effect as a vote against such proposal.

Q:
What does it mean if I get more than one proxy card?

A:
If you have shares of our Common Stock that are registered differently and are in more than one account, you will receive more than one proxy card. Please follow the directions for voting on each of the proxy cards you receive to ensure that all of your shares are voted.

Q:
How do I vote without attending the special meeting of the stockholders?

A:
If you are a registered stockholder (that is, if you hold shares of our Common Stock of record in your name), you may submit your proxy and cause your shares to be voted at the special meeting by returning the enclosed proxy card, marked, signed and dated, in the postage-paid envelope provided, or through the Internet by following the instructions included with the enclosed proxy card.
Q:
How do I vote in person at the special meeting of the stockholders?

A:
If you are a registered stockholder, you may attend the special meeting and vote your shares in person at the special meeting by giving the secretary of the special meeting a signed proxy card or ballot before voting is closed. If you plan to attend the special meeting, please bring proof of identification with you. Even if you plan to attend the special meeting, we recommend that you submit a proxy to vote your shares in advance as described above, so your vote will be counted even if you later decide not to attend.

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Q:
Can I change my vote?

A:
You may revoke or change your proxy at any time before it is voted, except as otherwise described below. If you have not voted through your broker, bank or other nominee because you are the registered stockholder, you may revoke or change your proxy in the following ways:

You may deliver a written notice to our secretary bearing a date later than the proxy you previously delivered stating that you are revoking your proxy;

You may attend the special meeting in person and revoke your proxy by either giving notice of revocation to the inspectors of election at the special meeting or by voting at the special meeting in person; or

You may submit another proxy bearing a later date.
Q:
If my shares are held in "street name" by my broker, bank or other nominee, will my nominee vote my shares for me?

A:
Yes, but only if you provide instructions to your broker, bank or other nominee on how to vote. You should follow the directions provided by your broker, bank or other nominee regarding how to instruct your broker, bank or other nominee to vote your shares. Without those instructions, your shares will not be voted and, accordingly, will have the effect of votes "AGAINST" the adoption of the Merger Agreement.

Q:
Is it important for me to vote?

A:
Yes, because we cannot complete the Merger without the affirmative vote of at least a majority of the outstanding shares of our Common Stock that are entitled to vote. Your failure to vote will have the same effect as a vote "AGAINST" the adoption of the Merger Agreement.

Q:
Will I have appraisal rights as a result of the Merger?

A:
Yes, but only if you comply with the requirements of Delaware law. A copy of the applicable Delaware statutory provision is included as Annex D to this proxy statement and a summary of this provision can be found under "Appraisal Rights" beginning on page 81 of this proxy statement. You will only be entitled to appraisal rights if you do not vote in favor of the adoption of the Merger Agreement and comply fully with certain other requirements of Delaware law, including submitting a notice of your intention to seek appraisal to our Secretary prior to the taking of the vote on that proposal at the special meeting.

Q:
What happens if I sell my shares before the special meeting?

A:
The record date of the special meeting is earlier than the special meeting and the date that the Merger is expected to be completed. If you transfer your shares of Common Stock after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will have transferred the right to receive $14.50 per share in cash to be received by our stockholders in the Merger. In order to receive the merger consideration for a share, you must hold that share at the effective time of the Merger.

Q:
Will a proxy solicitor be used?

A:
Yes. The Company has engaged Alliance Advisors, LLC to assist in the solicitation of proxies for the special meeting. The Company estimates it will pay Alliance Advisors, LLC a fee of $10,000,

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Q:
Should I send in my stock certificates now?

A:
No. Assuming the Merger is completed, you will receive a letter of transmittal with instructions informing you how to send your stock certificates to the paying agent, shortly thereafter, in order to receive the merger consideration, without interest and less any applicable withholding tax. You should use the letter of transmittal to exchange the Company stock certificates for the merger consideration to which you are entitled as a result of the Merger. Please do not send any stock certificates with your proxy.

Q:
When do you expect the Merger to be completed?

A:
We are working to complete the Merger as quickly as possible. In addition to obtaining stockholder approval, all of the conditions to the Merger must have been satisfied or waived. Subject to the satisfaction or waiver of all the conditions to the Merger, we currently expect to complete the Merger by the end of 2012.

Q:
Where can I find more information about the Company?

A:
We file certain information with the SEC. You may read and copy this information at the SEC's public reference facilities. You may call the SEC at 1-800-SEC-0330 for information about these facilities. This information is also available at the Internet site the SEC maintains at www.sec.gov. You can also request copies of the documents we file with the SEC from us. See "Where You Can Find Additional Information" on page 89.

Q:
Why am I being asked to consider and vote upon a proposal to approve, on a non-binding, advisory basis, the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement?

A:
Under SEC rules, the Company is required to seek a non-binding, advisory vote with respect to the compensation that may be paid or become payable to the Company's named executive officers that is based on or otherwise relates to the Merger, or "golden parachute" compensation.

Q:
What will happen if the Company's stockholders do not approve the golden parachute compensation?

A:
Approval of the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement is not a condition to completion of the Merger. Although the results of the vote will be considered by our Board of Directors, the vote is an advisory vote and will not be binding on the Company. Therefore, if the Merger Agreement is adopted by the Company's stockholders and the Merger is completed, this compensation, including amounts that the Company is contractually obligated to pay, would still be payable regardless of the outcome of the advisory vote, subject only to the conditions applicable thereto.

Q:
Who can help answer my other questions?

A:
If you (i) have more questions about the Merger or the special meeting, (ii) require assistance in submitting your proxy or voting your shares or (iii) need additional copies of the proxy statement or the enclosed proxy card, please contact Alliance Advisors, LLC, our proxy solicitor, in writing at Alliance Advisors, LLC, 200 Broadacres Drive, 3rd Floor, Bloomfield, NJ 07003, or by telephone at (877) 777-4575 (stockholders) or (973) 873-7721 (banks and brokers). If your broker, bank or other nominee holds your shares, you should also call your broker, bank or other nominee for additional information.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

        This proxy statement, its annexes and the documents referred to in this proxy statement, contain "forward-looking statements", within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, based on estimates and assumptions. Forward-looking statements include information concerning possible or assumed future results of operations of the Company, the expected completion and timing of the Merger and other information relating to the Merger and the parties thereto. There are forward-looking statements throughout this proxy statement, including, among others, under the headings "Summary," "The Merger," "Certain Unaudited Prospective Information of the Company" and in statements containing the words "may," "should," "would," "will," "expect," "could," "anticipate," "believe," "estimate," "plan," "intend," "continue," "contemplate" and similar expressions and references to future periods. You are cautioned not to place undue reliance on these forward-looking statements. You should be aware that forward-looking statements involve known and unknown risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the actual results or developments we anticipate will be realized, or even if realized, that they will have the expected effects on the business or operations of the Company. These forward-looking statements speak only as of the date on which the statements were made and are based on the Company's current expectations and are subject to certain assumptions, risks, uncertainties and changes in circumstances due to future events, as well as changes in economic, competitive, regulatory and/or technological factors affecting the Company's business. We undertake no obligation to publicly update or revise any forward-looking statements made in this proxy statement or elsewhere as a result of new information, future events or otherwise. In addition to other factors and matters contained or incorporated in this document, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

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        The foregoing sets forth some, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. A more complete description of the risks applicable to us is provided in our filings with the SEC available at the SEC's Internet site at www.sec.gov, including our most recent filings on Forms 10-Q and 10-K. You also should understand that it is not possible to predict or identify all risk factors and that neither this list nor the factors identified in our SEC filings should be considered a complete statement of all potential risks and uncertainties.


THE SPECIAL MEETING

General

Date, Time and Location of the Special Meeting

        This proxy statement is being furnished in connection with the solicitation of proxies to be voted at the special meeting of stockholders, or the special meeting, of the Company to be held on September 25, 2012 at 10:00 a.m., local time, at the offices of Davis Graham & Stubbs LLP located at 1550 17th Street, Suite 500, Denver, Colorado 80202.

Purpose of the Special Meeting

        The purpose of the special meeting is (i) to consider and vote on a proposal to adopt the Merger Agreement, (ii) to vote on the adjournment of the special meeting to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the Merger Agreement, (iii) to consider and vote upon a non-binding, advisory proposal to approve the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement, and (iv) the transaction of such other business as may properly come before the special meeting or any adjournment or postponement thereof. We currently are not aware of any other business or matter to come before the special meeting. If, however, any other matter properly comes before the special meeting, the persons named as proxies in the accompanying proxy will, in their discretion, vote thereon in accordance with their best judgment. This proxy statement and the enclosed proxy card are being mailed to stockholders on or about August 10, 2012. The enclosed proxy card is solicited by our Board of Directors and will

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be voted at the special meeting and any adjournments or postponements thereof. Shares of Common Stock represented by a properly executed proxy card in the accompanying form will be voted at the special meeting in accordance with any instructions specified by the stockholder. If you return your proxy card but no instructions are given, the stockholder's shares will be voted in accordance with the recommendations of our Board of Directors "FOR" each of the proposals presented in this proxy statement. Those proposals and the Board of Directors' recommendations are described later in this proxy statement.


Solicitation

        The Company will bear the expenses in connection with the solicitation of proxies. Solicitation will be made by mail, but may also be made by telephone, personal interview, facsimile or personal calls by our officers, directors or employees who will not be specially compensated for such solicitation. We may request brokerage houses and other nominees or fiduciaries to forward copies of this proxy statement to beneficial owners of Common Stock, and we may reimburse them for reasonable out-of-pocket expenses incurred in doing so.


Voting Rights and Outstanding Shares

        Our Board of Directors has fixed the close of business on August 10, 2012 as the record date for the determination of stockholders entitled to notice of and to vote at the special meeting, or any adjournment or postponement thereof. All holders of record of our Common Stock on that date will be eligible to vote at the special meeting. The presence at the special meeting, in person or by proxy, of at least a majority of the outstanding shares of Common Stock entitled to vote at the special meeting will constitute a quorum for the transaction of business at the special meeting. Votes cast in person or by proxy through the enclosed proxy card or via the Internet at the Internet address provided on each proxy card, and abstentions and broker non-votes (which we define below), will be tabulated by the inspectors of election and will be considered in the determination of whether a quorum is present at the special meeting. Ballots marked "abstain" will be counted as present and entitled to vote for purposes of determining whether a quorum exists for matters subject to a vote by the stockholders. If, with respect to any shares, a broker, bank or other nominee submits a proxy card indicating that instructions have not been received from the beneficial owners or the persons entitled to vote, and if that broker, bank or other nominee does not have discretionary authority to vote such shares (such votes referred to herein as "broker non-votes") on the proposals brought before the special meeting, such shares will be treated as present and entitled to vote for purposes of determining whether a quorum exists for matters subject to a vote by the stockholders. As of August 10, 2012, we had 10,041,164 shares of Common Stock issued and outstanding. Each share of Common Stock is entitled to one vote.

        The adoption of the Merger Agreement requires the affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock entitled to vote. Because the vote required to adopt the Merger Agreement is based on the total number of votes entitled to be cast by the holders of our outstanding Common Stock rather than on the number of votes cast, failure to vote your shares of our Common Stock (including as a result of broker non-votes) and abstentions will have the same effect as voting "AGAINST" the proposal to adopt the Merger Agreement.

        The vote to approve the compensation that may be paid or become payable to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement requires the affirmative vote of holders of at least a majority of the shares present in person or by proxy at the special meeting and entitled to vote thereon. Such vote is non-binding but the results of such vote will be considered by our Board of Directors. Failure to vote your shares of our Common Stock (including as a result of broker non-votes) will have no effect on the proposal to

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approve such compensation and abstentions will have the same effect as a vote "AGAINST" the proposal to approve such compensation.

        Approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of at least a majority of the shares of Common Stock present in person or by proxy at the special meeting and entitled to vote on the matter. The special meeting may be adjourned for any other purpose, whether or not a quorum is present, by the affirmative vote of at least a majority of the shares of Common Stock present in person or by proxy at the special meeting or by the presiding officer of the meeting which will be the Chairman of the Board of Directors or, if he is not in attendance at the special meeting, the most senior officer of the Company present at the special meeting.

        ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE SUBMIT A PROXY TO VOTE BY INTERNET AS INDICATED ON THE ENCLOSED PROXY CARD OR COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.

        IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE, AND YOU WISH TO VOTE AT THE SPECIAL MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.

        YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED. IF YOU ARE PRESENT AT THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON AND THE PROXY WILL NOT BE USED.

        PLEASE READ THIS PROXY STATEMENT FOR FURTHER INFORMATION CONCERNING THE MATTERS TO BE ACTED UPON AT THE SPECIAL MEETING AND THE USE OF THE PROXY.


Revocability of Proxies

        You may revoke the proxy at any time before it is used in the following ways:

        If you hold your shares in "street name," you must contact your broker, bank or other nominee to determine how to revoke your original proxy.

        All written notices of revocation or other communications with respect to revocation of proxies should be addressed to our Secretary at our principal executive offices as follows: CREDO Petroleum Corporation, 1801 Broadway, Suite 900, Denver, Colorado 80202 Attention: Secretary.


Householding of Proxy Materials

        The SEC has adopted rules that permit companies and intermediaries (such as brokers) to satisfy delivery requirements for proxy statements with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, known as

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"householding," potentially means extra convenience for stockholders and cost savings for companies. Some intermediaries with customers who are our stockholders will be "householding" our proxy materials, unless contrary instructions have been received from the customers. We will promptly deliver, upon oral or written request, a separate copy of the proxy statement to any stockholder sharing an address to which only one copy was mailed. Requests for additional copies should be directed to Alliance Advisors, LLC, our proxy solicitor, in writing at Alliance Advisors, LLC, 200 Broadacres Drive, 3rd Floor, Bloomfield, NJ 07003, or by telephone at (877) 777-4575 (stockholders) or (973) 873-7721 (banks and brokers), or to the Company at 1801 Broadway, Suite 900, Denver, Colorado 80202, Attention: Secretary, or by telephone at (303) 326-2200.

        Once a stockholder has received notice from such stockholder's broker that the broker will be "householding" communications to the stockholder's address, "householding" will continue until the stockholder is notified otherwise or until the stockholder revokes such stockholder's consent. If, at any time, a stockholder no longer wishes to participate in "householding" and would prefer to receive separate copies of the proxy statement, the stockholder should so notify such stockholder's broker. Any stockholder who currently receives multiple copies of the proxy statement at such stockholder's address and would like to request "householding" of communications should contact such stockholder's broker. If you hold shares of Common Stock in your own name as a holder of record, "householding" will not apply to your shares because the Company does not utilize householding.


Adjournments and Postponements

        Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice, other than an announcement made at the special meeting, unless the adjournment is for more than 30 days or if after the adjournment a new record date is fixed for the adjourned meeting. If a quorum exists, the special meeting may be adjourned for the purpose of soliciting additional proxies in favor of the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the votes of Common Stock present in person or represented by proxy at the special meeting and entitled to vote on the matter. In addition, holders of a majority of the shares of Common Stock present at the special meeting in person or represented by proxy or the presiding officer of the meeting, which will be the Chairman of the Board of Directors or, if he is not in attendance at the special meeting, the most senior officer of the Company present at the special meeting, may adjourn the special meeting for any purpose, whether or not a quorum is present. Any signed proxies received by the Company will be voted in accordance with the instructions therein or, if not marked, in favor of an adjournment in these circumstances, and a proxy voted "AGAINST" the proposal for the adjournment of the special meeting will not be voted in favor of an adjournment for the purpose of soliciting additional proxies. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow the Company stockholders who have already sent in their proxies to revoke them prior to their use at the special meeting, reconvened following such adjournment, in the manner described above. Broker non-votes, if any, will not have any effect on the adjournment of the special meeting, and abstentions, if any, will have the same effect as a vote "AGAINST" the adjournment of the special meeting.


Other Business at Special Meeting

        The only items of business that our Board of Directors intends to present or knows will be presented at the special meeting are the items discussed in this proxy statement. The proxy confers discretionary authority upon the persons named in it, or their substitutes, to vote on any other items of business that may properly come before the special meeting.

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THE PARTIES TO THE MERGER

CREDO Petroleum Corporation

        The Company was incorporated in Colorado in 1978 and reincorporated in Delaware in 2009. The Company and its wholly owned subsidiaries, SECO Energy Corporation and United Oil Corporation, are headquartered in Denver, Colorado. The Company is engaged in the exploration for and the acquisition, development and marketing of, crude oil and natural gas in the Mid-Continent and Rocky Mountain regions. The Company is currently conducting oil-focused drilling projects in the North Dakota Bakken and Three Forks, Kansas and Nebraska and in the Texas Panhandle. The Company uses advanced technologies to systematically explore for oil and gas and, through its patented Calliope Gas Recovery System, to recover stranded reserves from depleted gas reservoirs. The Company acts as the "operator" of oil and gas properties in Kansas, Nebraska, Wyoming, Colorado and Texas. United Oil Corporation is an active operator doing business primarily in Oklahoma and SECO Energy Corporation primarily owns royalty interests in the Rocky Mountain region. The Company has operating activities in nine states and has 15 employees.

        The address of the Company's principal executive office is 1801 Broadway, Suite 900, Denver, Colorado 80202-3837 and the Company's telephone number is (303) 297-2200.


Forestar Group Inc.

        Forestar Group Inc. is a real estate and natural resources company which operates in three business segments: real estate, mineral resources and fiber resources. At year-end 2011, the real estate segment owns directly or through ventures almost 147,000 acres of real estate located in nine states and 12 markets in the United States. The real estate segment has 16 projects representing about 28,000 acres currently in the entitlement process, and 75 entitled, developed and under development projects in seven states and 11 markets encompassing over 16,000 acres, comprised of over 27,000 residential lots and about 2,500 commercial acres, principally in the major markets of Texas. The mineral resources segment manages about 595,000 net acres of oil and gas mineral interests located principally in Texas, Louisiana, Alabama and Georgia. Also included in the mineral resources segment is a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 17,800 acres of groundwater leases in Central Texas. The fiber resources segment includes the sale of wood fiber and management of Forestar's recreational leases.

        Prior to December 28, 2007, Forestar was a wholly-owned subsidiary of Temple-Inland Inc. On December 28, 2007, Temple-Inland distributed all of the issued and outstanding shares of Forestar common stock to its shareholders in a transaction commonly referred to as a spin-off. Forestar's real estate origins date back to 1955 with a decades-long legacy of residential and commercial real estate development operations, primarily in Texas. Forestar's mineral resources origins date back to the mid-1940s when it began leasing oil and gas mineral interests to third-party exploration and production companies.

        The address of Forestar's principal executive office is 6300 Bee Cave Road, Building Two, Suite 500, Austin, Texas 78746-5149 and Forestar's telephone number is (512) 433-5200.


Merger Sub

        Merger Sub is a Delaware corporation, and wholly owned subsidiary of Forestar, formed for the sole purpose of completing the Merger. Pursuant to the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Forestar.

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THE MERGER

        This discussion of the Merger is qualified in its entirety by reference to the Merger Agreement, which is attached to this proxy statement as Annex A. We highly recommend that you read the Merger Agreement carefully and in its entirety, as it is the definitive legal document that governs the Merger.


Background of the Merger

        Our Board of Directors has periodically discussed and reviewed our strategic goals and alternatives, performance and prospects as part of its ongoing evaluation of our business and its strategic planning. From time to time over the years we have been approached by third parties, such as Forestar, about our interest in a sale of the Company. The timeline with respect to this proposed merger is discussed below.

General Background Summary

        Our Board of Directors, in consultation with our management, is actively involved in strategic planning for the Company, which, from time to time, has included consideration of a wide range of strategic alternatives. In addition to concerns regarding an oversupply of natural gas in the U.S. and the related declines in natural gas prices, our Board has continued to be concerned about issues such as the illiquidity of the Common Stock. Trading volumes generally range between 3,000 shares and 10,000 shares per day, and at times fall below 2,000 shares in a day, therefore creating liquidity issues for most stockholders regardless of the number of shares held by such stockholders. The Board was also particularly concerned about the increasing difficulty of competing with larger companies, given the Company's relatively small size and its relatively limited financial resources. In addition, increasing regulation has become a significant burden on the Company's manpower and resources.

        Several years ago, our Board made the strategic decision to rapidly transition Credo's business away from almost exclusively natural gas by focusing primarily on building oil production and reserves. This transition involved an aggressive drilling program and the need for new capital to fund the Company's drilling activities. While the transition has been successful, it has created additional strategic and organizational issues that are frequently associated with rapid growth including manpower shortages, the need for substantial systems upgrades to accommodate such growth, cash flow limitations, and the need for new capital to fund growth.

        Beginning in late 2010, the Board intensified its consideration of strategic alternatives to either monetize the Company's value for our stockholders or significantly increase the size of the Company to address liquidity, scale, regulatory, financing and other issues faced by the Company. The Board concluded that in order to adequately grow the Company and build value for its stockholders, the Company would need to, among other things, add new employees, upgrade its systems, and generally overhaul and revamp various aspects of its business. Because additional financing would be needed to accomplish this growth, the Board considered retaining financial and public relations advisors to aid in these efforts and to assist the Company in developing a more active investor relations program. In view of historically high crude oil prices over recent periods and the momentum that the Company had established in its transition from gas to oil, our Board also considered the option of monetizing the value of the Company for its stockholders through a merger and acquisition transaction where the Company would be sold.

        James T. Huffman, Chairman of the Board and retired Chief Executive Officer of the Company, led the Company's efforts, under the direction of the Board, in pursuing its strategic alternatives because of his familiarity with and knowledge of the Company's business and assets and his extensive experience in the oil and gas industry, and because the Company's then-current management was primarily focused on the Company's operations.

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Specific Transaction Events

        On April 18, 2011, Mr. Huffman received an unsolicited telephone call from Mr. Flavious Smith, Executive Vice President—Mineral Resources of Forestar, inquiring as to whether the Company would be interested in a strategic transaction with Forestar. Mr. Huffman had a longstanding business relationship with Mr. Flavious Smith dating back to the mid-1980s. Mr. Huffman informed Mr. Flavious Smith that the Board was open to considering strategic options that would create value for its stockholders. Mr. Huffman subsequently informed Marlis E. Smith, the Company's then Chief Executive Officer, of the conversations with Mr. Flavious Smith and had telephone conversations with other members of the Board regarding Forestar's interest in the Company.

        Via electronic mail on May 2, 2011, Mr. Marlis Smith informed the entire Board of Mr. Huffman's conversations with Mr. Flavious Smith. On May 6, 2011, the Company entered into a confidentiality agreement with Forestar, which included a standstill provision, to permit the parties to have more detailed discussions about a possible strategic transaction and for Credo to provide Forestar certain non-public information. On the same date, Forestar also executed a confidentiality agreement with Netherland, Sewell & Associates, Inc. pursuant to which Netherland, Sewell & Associates was authorized by the Company to disclose reserve information to Forestar with regard to the Company's oil and gas properties.

        At that time, the Company was involved in an employment lawsuit with a former officer that required significant Board and management attention. Furthermore, the Board wanted to obtain additional results from its 2010 and 2011 drilling programs before engaging in substantive negotiations regarding a potential transaction. Accordingly, on May 19, 2011, Mr. Huffman and Mr. Flavious Smith agreed that in-depth discussions should be delayed until resolution of the lawsuit. In the meantime, Mr. Flavious Smith requested and was provided certain non-public information about the Company's production, reserves and capital expenditures.

        On August 9, 2011, the Company settled the employment lawsuit and, at an August 16, 2011 Board meeting, the Board continued to discuss the Company's strategic alternatives and, among other things, authorized Mr. Huffman and management to engage in substantive discussions concerning a possible strategic transaction between the Company and Forestar. Shortly thereafter, Mr. Huffman contacted Mr. Flavious Smith, who indicated to Mr. Huffman that Forestar continued to be interested in a strategic transaction with the Company. In response, Mr. Huffman reiterated to Mr. Flavious Smith that while the Company was interested in discussing a possible transaction with Forestar, such discussion might still be premature pending further results from the Company's drilling programs.

        On September 14, 2011, the Company and Forestar entered into an amendment to the May 6, 2011, confidentiality agreement to authorize Forestar to contact RCH Energy Opportunity Fund II, LP ("RR Advisors"), or any of the RCH Energy entities that owned Common Stock, and to authorize Forestar to discuss with RR Advisors the possibility of purchasing not less than all of the Common Stock owned by various RCH Energy entities, consisting of 1,837,000 shares. On September 26, 2011, Mr. Flavious Smith met with Robert Raymond in Dallas, Texas, to discuss the Company in general. Mr. Raymond is the sole member of RR Advisors, which controls the various RCH Energy entities who hold the Company's Common Stock. No substantive discussions took place between Forestar and RR Advisors regarding a possible purchase of Common Stock owned by the various RCH Energy entities. The authorization expired on November 11, 2011.

        On October 27, 2011, Mr. Marlis E. Smith informed the Board that he did not intend to renew his employment agreement upon its expiration at the end of 2011. The pending executive transition added another element of uncertainty to the Company's alternative of pursuing significant growth and, thus, intensified the Board's consideration of the relative merits of a possible merger or sale transaction. At its October 27, 2011 meeting, the Board determined to actively pursue two parallel paths: (i) to solicit interest in a strategic merger or sale transaction, including but not limited to a possible transaction with

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Forestar, and (ii) to search for a new chief executive officer and to continue implementing strategies to significantly grow the Company as a standalone entity. At that Board meeting, the Board also discussed the increased production and reserves resulting from the Company's successful drilling program and the resulting anticipated improvement in financial performance. While these developments improved the likelihood that the Company could successfully pursue a growth strategy, the Board also expected them to render the Company more attractive for acquisition. Due to substantial uncertainties and risk associated with both strategies, the Board believed that it was in the stockholders' and Company's best interest to pursue the growth and sale options on parallel paths.

        The Board believed that both a sale transaction and significant growth options were potentially viable alternatives for the Company. However, the Board viewed a properly priced sale transaction as the superior option due to the significant risks associated with the rapid growth strategy, including commodity price risks, increasing costs of doing business, and other general regulatory and economic risks. In response to Mr. Marlis Smith's plans to step down as chief executive officer, on November 2, 2011, the Board issued a press release publicly announcing Mr. Marlis Smith's decision and indicating that the Company was considering its strategic options. Mr. Huffman was quoted in the release saying "the Board will ... take this opportunity to carefully consider and evaluate other strategic options which may be available to the Company."

        On or about November 23, 2011, Messrs. Huffman and Marlis E. Smith made a presentation to Mr. Flavious Smith and other representatives of Forestar in the Company's offices which included public information about the Company as well as non-public information such as projected income through October 31, 2012 and internally prepared production and reserve estimates. Between November 2011 and January 2012, Mr. Flavious Smith requested and was provided certain additional non-public information concerning the Company, including but not limited to, capital expenditure estimates and updated information regarding the Company's production and reserves.

        On November 29, 2011, a public oil and gas company, referred to herein as "Company A," expressed interest in a strategic transaction with the Company and signed a confidentiality agreement. Messrs. Huffman and Marlis E. Smith subsequently gave a non-public presentation to Company A's chief executive officer and vice president similar to that provided to Forestar. Company A subsequently reported to the Company that the Company's assets as a whole were not a good strategic fit for Company A, but that Company A was interested in the Company's Bakken assets. The Company believed an asset sale involving only a portion of the Company's assets would be unlikely to provide the most value to the Company's stockholders, especially when taking into consideration the tax consequences of such a transaction.

        On December 20, 2011, two private investors, collectively referred to herein as "Investor A," expressed interest in a strategic transaction with the Company and signed a confidentiality agreement. One of the investors was the former chief executive officer of a public oil and gas company whose assets were primarily located in the Bakken. Mr. Huffman subsequently gave a presentation to Investor A similar to that provided to Forestar and Company A. The Company did not receive encouragement during the meeting from Investor A and, based on Investor A's reaction to the presentation, did not engage in further discussions. The Company has received no subsequent inquiry or response from Investor A.

        During November and December 2011, Mr. Huffman contacted the managing member of a privately-held company with oil and gas assets, herein referred to as "Company B," regarding a strategic transaction. Company B signed a confidentiality agreement on December 20, 2011 and Mr. Huffman subsequently gave a non-public presentation to Company B similar to that provided to Forestar and the other interested parties. Company B subsequently responded that a transaction involving a purchase of the entire Company was not tax advantageous for Company B and that

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Company B believed that obtaining financing for any such transaction would be difficult therefore further discussions between the Company and Company B occurred.

        In late December 2011, Mr. Huffman was contacted by the chief executive officer of a public oil and gas company, referred to herein as "Company C," who inquired about the Company's interest in a strategic transaction with Company C involving a combination of the two companies. Mr. Huffman contacted Mr. Oakley Hall, a director and chairman of the Company's audit committee, regarding the call and requested that Mr. Hall review the recent SEC filings for Company C. Messrs. Huffman and Hall ultimately concluded that, given the relatively small size of Company C and its preference for a stock merger, a combination with Company C would not satisfy the Company's strategic goals.

        In January 2012, Mr. Huffman and Mr. Leigh Severance, a member of the Company's Board, attended an investor presentation by a public oil and gas company, referred to herein as "Company D." After the presentation, Messrs. Huffman and Severance met privately with Company D's chief executive officer, vice president and an external public relations representative. Company D subsequently signed a confidentiality agreement and Mr. Huffman gave a presentation to Company D's chief executive officer, vice president and public relations representative similar to that provided to Forestar and the other interested parties. Company D made the Company aware that its strategy was highly dependent on future results of its drilling activities. Subsequently, the Company received no further inquiry or response from Company D.

        In late January 2012, Mr. Huffman was contacted by a private equity investor, referred to herein as "Investor B", who inquired about the Company's interest in a strategic transaction with a private oil and gas company, referred to herein as "Company E." Subsequently, Investor B and Company E signed a confidentiality agreement and Mr. Huffman gave a presentation to Investor B and Company E's chief executive officer similar to that provided to the other interested parties. Mr. Huffman informed Mr. Brown, a member of the Company's Board, of the contact because Company E made him aware of a previous acquaintance with Mr. Brown. Messrs. Huffman and Brown ultimately concluded that, given the relatively small size of Company E and its preference for a stock merger, a combination with Company E would not satisfy the Company's strategic goals.

        As part of its strategic alternatives analysis, the Company began discussions with potential financial advisors beginning in October 2011. At a January 26, 2012 Board meeting, Northland Capital Markets made a presentation to the Board regarding its services and background in oil and gas transactions, with a particular focus on Bakken assets. After Northland Capital Markets' presentation, the Board authorized the negotiation of mutually acceptable terms and conditions of a potential engagement of Northland Capital Markets to provide the Company with investment banking services.

        On February 20, 2012, a representative of an oil and gas focused investment banking firm with whom the Company had prior conversations called Mr. Huffman and informed him that there might be some interest from private companies desiring to engage in a reverse merger with public companies like the Company. He noted that such strategy could result in a "seasoned and successful management team" becoming the management of the Company. Mr. Huffman said that the Company would consider all forms of strategic transactions and asked the representative to inform the Company of any such opportunities. There has been no subsequent contact with such representative.

        On or around February 20, 2012, Mr. Flavious Smith contacted Mr. Huffman to request a meeting to further discuss a potential transaction between the Company and Forestar. They agreed to meet at the Company's offices in Denver on February 29, 2012.

        On February 29, 2012, Mr. Jim DeCosmo, president and chief executive officer of Forestar, and Mr. Flavious Smith, met with Mr. Huffman in the Company's offices. During the meeting, Mr. DeCosmo made a verbal indication of interest for Forestar to purchase 100% of the Common Stock for total consideration of $135 million, to be split 50/50 between cash and common stock of

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Forestar, and provided a draft exclusivity agreement providing for a 60-day exclusivity period. Mr. Huffman indicated his belief that the Board would consider such indication of interest to be inadequate but indicated that he would make the Board aware of it.

        On March 1, 2012, Mr. Huffman sent a confidential letter to all Company directors informing them about the details of his February 29, 2012 meeting with Messrs. DeCosmo and Flavious Smith.

        On March 7, 2012, Mr. DeCosmo called Mr. Huffman and indicated that Forestar would also consider making an all cash offer of $12.00 per share. Mr. Huffman indicated that, given that the previous proposal of approximately $13.50 per share (split 50/50 between cash and stock) was considered by the Board to be low, he did not believe that a cash offer of $12.00 per share would be well received by the Board. Mr. Huffman continued to have numerous discussions with other members of the Board during this period. The directors encouraged Mr. Huffman to continue to engage Forestar in in-depth discussions about the Company's business and operational results as a way to help Forestar better understand the Company's value potential to a purchaser.

        On March 12, 2012, the Company executed a confidentiality agreement in favor of Forestar pursuant to which the Company agreed to keep Forestar's information confidential. In addition, Forestar entered into a standstill agreement with the Company pursuant to which Forestar agreed that it would not, among other things acquire, offer to acquire, or agree to acquire any securities (or beneficial ownership thereof) of the Company without the Company's consent.

        On March 21, 2012, Messrs. Huffman, Hall, Meyer, Rigas, Brown and Skewes, directors of the Company, met with Messrs. DeCosmo and Flavious Smith and members of Forestar's senior management in Forestar's corporate headquarters in Austin, Texas to receive information about Forestar, including Forestar's analysis of historical operating data of each company.

        On March 23, 2012, Mr. Huffman called Mr. DeCosmo to request additional information about Forestar. Mr. Huffman continued to stress that the proposed cash/stock price of $13.50 was below the Board's expectations and that the Board was hopeful that Forestar would recognize additional value during its due diligence process. The same day, Mr. Flavious Smith and Mr. Huffman had further discussions, including discussions regarding value.

        On March 26, 2012, Mr. Huffman returned to Forestar's offices in Austin in order to show the Company's presentation directly to Mr. DeCosmo. Mr. Huffman continued to stress that the proposed price of $13.50 was below the Board's expectations and that the Board was hopeful that Forestar would recognize additional value if it engaged in a comprehensive due diligence process.

        On March 30, 2012, Mr. Huffman received a call from Mr. DeCosmo during which Mr. DeCosmo made a verbal indication of interest of $14.50 per share, subject to due diligence, with consideration consisting of 50% cash and 50% stock. Mr. Huffman agreed to take the $14.50 indication of interest to the Board and subsequently discussed the indication of interest with certain directors.

        Following negotiations between Northland Capital Markets and Mr. Huffman, Northland Capital Markets made a second presentation to the Board at its April 5, 2012 meeting, which included additional background regarding Northland Capital Markets together with an assessment of the Company's current market value, an assessment of borrowing and public stock sale options and an 18 to 24 month plan to communicate the Company's plans and value to investors, raise capital, and add market value to the Common Stock. The Board subsequently authorized Mr. Huffman to conduct further negotiations with Northland Capital Markets and to enter into a mutually acceptable investment banking engagement letter with Northland Capital Markets.

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        At an April 5, 2012 Board meeting in Denver, Messrs. DeCosmo and Flavious Smith made a presentation about Forestar, including operational information regarding a combination of Forestar and the Company. Forestar's verbal indication of price at that time was $14.50 per share, subject to due diligence, in a 50% cash and 50% stock transaction. Forestar also presented a 60-day exclusivity agreement covering a proposed period during which due diligence would be conducted. After the representatives of Forestar left the meeting, the Board authorized Mr. Huffman to continue merger discussions with Forestar, to obtain a formal indication of interest outlining Forestar's proposal, and to enter into an exclusivity agreement for due diligence purposes. At that time, there were no active discussions with other potentially interested parties.

        On April 9, 2012, Mr. DeCosmo called Mr. Huffman to discuss terms of a proposed exclusivity agreement and the Company's interim Chief Executive Officer.

        On or around April 9, 2012, Mr. Huffman requested that Mr. Flavious Smith come to Denver for an updated presentation regarding the opportunity and value of the Company's non-Bakken assets.

        On April 9, 2012, Mr. Huffman contacted Mr. Flavious Smith to request that Forestar provide a written indication of interest outlining the terms for a proposed transaction between the Company and Forestar.

        On April 10, 2012, the Company received an indication of interest letter executed by Forestar proposing the purchase of all of the Common Stock for $14.50 per share with consideration consisting of 50% cash and 50% stock.

        Between April 12, 2012 and April 16, 2012, the Company received revised indication of interest letters executed by Forestar proposing the same transaction consideration and acknowledging the Company's request, given the proposed issuance of Forestar stock to the Company's stockholders, for Forestar to appoint one member of the Company's Board to Forestar's board of directors following consummation of the proposed transaction.

        On April 16, 2012, the Company entered into a 45-day exclusivity agreement with Forestar and entered into an amended confidentiality agreement extending the terms of the existing Credo confidentiality agreement and the existing Forestar confidentiality agreement to April 16, 2014. Under the amended Credo confidentiality agreement, Forestar agreed to customary standstill restrictions.

        On April 18, 2012, Mr. Huffman met in Austin with Kenneth M. Jastrow, II, non-executive Chairman of Forestar's board, and Mr. DeCosmo, to discuss the proposed transaction. After the meeting with Mr. Jastrow, Mr. Huffman met with Mr. DeCosmo and David M. Grimm, Forestar's Chief Administrative Officer and General Counsel. Mr. Huffman reiterated that pending negotiation of a mutually acceptable merger agreement, Credo would continue its alternate strategy to remain independent and grow rapidly through oil-focused drilling. In this regard, Mr. Huffman noted that the Company had hired a consultant with the expectation that he would become the Company's chief executive officer if there was no transaction with Forestar. Mr. Huffman also made Forestar aware of the Company's discussions with Northland regarding Northland becoming its primary financial advisor, the Company's discussions with another firm to provide public relations services and the Company's intent to begin making investor presentations.

        On April 20, 2012, Forestar submitted a draft of the Merger Agreement to the Company for review.

        On May 1, 2012, the Company retained Northland Capital Markets to provide investment banking services, including rendering a fairness opinion in any sale transaction prior to the signing of any merger agreement and contacting other potential acquirers during any go-shop period provided for in a merger agreement. On May 3, 2012, the Company also retained Houlihan Lokey to render an additional fairness opinion with respect to the proposed transaction.

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        On May 4, 2012, the Company held a Board meeting at which all Directors were present telephonically. Also attending the Board meeting, either in person or telephonically, were representatives of Northland Capital Markets, Houlihan Lokey, and Company legal counsel, Davis Graham and Stubbs LLP and Rothberger, Johnson and Lyons LLP. Among other things, outside counsel advised the directors regarding their fiduciary duties to the stockholders in connection with a sale transaction. The Board then discussed, with input from outside counsel, certain provisions of the Merger Agreement related to, among other things, valuation of the Forestar stock, the possible inclusion of a go-shop provision and appropriate termination fees. The Board authorized Mr. Huffman and outside counsel to continue with negotiations of a Merger Agreement with Forestar and its representatives.

        On May 4, 2012, Mr. DeCosmo called Mr. Huffman to discuss the status of the Company's response to Forestar's Merger Agreement draft.

        On May 7, 2012, Mr. Huffman met informally with various members of the Forestar board of directors to tell them about Credo and its transition from gas to oil and to discuss their vision for Forestar's oil and gas business and the possible transaction.

        During the 45-day exclusivity period that began on April 16, 2012, the NYMEX price of crude oil fell 19% from approximately $103 per barrel to approximately $83 per barrel. During that period the S&P 500 Stock Index fell 4.1% from 1,369.57 to 1,313.32, and the price of Forestar's stock fell 12% from $15.32 to $13.49 per share. Representatives of the Company and Forestar met several times during the exclusivity period to further discuss the Company's business and assets. Between May 15 and June 1, representatives of the Company and Forestar, in consultation with their respective legal counsel and financial advisors, negotiated the terms of the Merger Agreement. There were several conversations between Mr. Huffman and Mr. DeCosmo regarding specific merger agreement provisions, with a particular focus on the exchange ratio valuation mechanics of the Forestar stock and the use of collars to protect the interests of the Company's stockholders.

        Mutual diligence and merger agreement negotiations were conducted contemporaneously during the exclusivity period. On behalf of the Company, Mr. Hall managed the financial due diligence, Mr. Rigas managed the reserve engineering due diligence and participated with Mr. Huffman and the Company's management and senior staff in the oil and gas property due diligence, and Mr. Huffman, in consultation with Mr. Rigas, managed the real estate and legal due diligence. In consultation with the members of the Board, Mr. Huffman also managed the merger agreement negotiations that were conducted with the assistance of Davis Graham & Stubbs LLP.

        On May 24, 2012, Mr. DeCosmo called Mr. Huffman to discuss issues regarding the proposed merger structure.

        On May 25, 2012, Mr. DeCosmo called Mr. Huffman to discuss the negotiations on the terms of the price collar designed to protect the Company's stockholders from volatility in the price of Forestar common stock. There was also discussion regarding the mechanics of setting the exchange ratio in view of the decline in Forestar's stock price. Mr. Huffman informed Mr. DeCosmo that he would consult with other members of the Company's Board regarding those issues and contact Mr. DeCosmo the following day.

        On May 26, 2012, after consultation with other directors, Mr. Huffman called Mr. DeCosmo and informed him that, in light of current economic conditions in the U.S. and Europe, the Company did not want to risk more than a 5% downside on the value of Forestar's stock and therefore would require a 5% collar. However, Mr. Huffman also expressed understanding about Mr. DeCosmo's concern regarding Forestar stock being undervalued and indicated that the Company's Board would, therefore, consider an all cash transaction at $14.50 per share. Mr. DeCosmo said Forestar would consider a cash transaction and that he would contact Mr. Huffman the next day.

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        On May 27, 2012, Mr. DeCosmo called Mr. Huffman and said that Forestar would change its proposal to an all cash transaction at $14.50 per share. Based on consultation with members of the Board, Mr. Huffman communicated to Mr. DeCosmo his belief that an all cash transaction would likely be acceptable to the Company.

        Between May 27, 2012, and May 31, 2012, Mr. Huffman and representatives of Davis Graham & Stubbs LLP, Skadden, Arps, Slate, Meagher & Flom LLP and Forestar finalized the Merger Agreement.

        On June 1, 2012, the Company held a Board meeting to consider approval of the Merger Agreement negotiated during the exclusivity period. All directors attended the meeting. In addition, the meeting was attended by representatives of Northland Capital Markets, Houlihan Lokey and Davis Graham & Stubbs LLP. It was reported to the Board that the Merger Agreement and related agreements were in substantially final form, subject to Board comment and approval. At the Board meeting, among other things:

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        On June 3, 2012, the board of directors of Forestar approved the Merger Agreement, and representatives of the Company and Forestar executed and delivered the Merger Agreement on June 3, 2012. Prior to the opening of trading on June 4, 2012, Forestar and the Company each issued press releases announcing the execution of the Merger Agreement.

        During the go-shop period beginning on June 3, 2012, Northland Capital Markets, on behalf of the Company, contacted approximately 41 potential financial buyers and 93 potential strategic buyers to determine their interest in pursuing an acquisition of the Company. As a result of these contacts, one financial buyer expressed initial interest in receiving information regarding a proposed acquisition of the Company and three strategic buyers expressed initial interest in acquiring certain of the Company's assets. After further analysis of certain information provided by Northland Capital Markets, each of the potential buyers communicated to Northland Capital Markets that they were no longer interested in pursuing a transaction with the Company and declined to enter into a confidentiality agreement to receive non-public information regarding the Company. The go-shop period expired at 11:59 p.m. on July 3, 2012 without any party having made an acquisition proposal to acquire the Company.


Reasons for the Merger; Recommendation of Our Board of Directors

        In reaching the determinations set forth in the preceding section, our Board of Directors considered a variety of business, financial and market factors based upon, among other items, (i) our Board of Directors' familiarity with the business and operations of the Company and the industry in which it operates, (ii) management reports and presentations regarding the Company and its properties and assets, financial condition, competitive position, business strategy and prospects, (iii) economic and market conditions as they relate to the oil and gas industry, both on an historical and on a prospective basis, (iv) regional oil and gas business conditions in the Company's primary operating areas, and (v) a careful review of the terms and conditions of the transaction contemplated by the Merger Agreement, including the positive factors set forth below:

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        Our Board of Directors also considered potentially negative factors concerning the Merger Agreement and the Merger, including the following:

        These factors constitute the material factors considered by our Board of Directors. Our Board of Directors considered such factors as a whole and decided that in their totality such factors support the decision that our Board of Directors approve the Merger Agreement and adopt the Merger and the other transactions contemplated by the Merger Agreement. The discussion of the information and factors considered by our Board of Directors is not intended to be exhaustive and may not include all factors considered by the Board of Directors. In view of the wide variety of factors considered by our Board of Directors, and the complexity of these matters, our Board of Directors did not find it practicable and did not quantify, rank or otherwise assign relative or specific values to any of the above factors or the other factors considered by it. In addition, our Board of Directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of our Board of Directors may have given different weight to different factors. Our Board of Directors unanimously recommends that you vote "FOR" the adoption of the Merger Agreement, "FOR" the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies and "FOR" the approval, on a non-binding, advisory basis, of the compensation that may be paid or become payable, if any, to the Company's named executive officers that is based on or otherwise relates to the Merger or contemplated by the Merger Agreement.

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Certain Unaudited Prospective Information of the Company

Financial Forecasts

        During the course of the discussions that led to the issuance of the fairness opinions discussed under "—Opinion of Northland Capital Markets to the Company's Board of Directors" and "—Opinion of Houlihan Lokey Financial Advisors, Inc. to the Company's Board of Directors", the Company's management provided certain unaudited prospective financial information regarding the Company's future performance that was not publicly available. The information provided included management's projections of the financial performance for the Company for the remaining portion of fiscal year ending October 31, 2012 (without regard to the impact on the Company of the Merger).

        The following table summarizes selected unaudited financial data for the fiscal year ending 2012 provided by the Company's management to each of Northland Capital Markets, Houlihan Lokey and Forestar. The first fiscal quarter information was public information based on the Company's Form 10-Q for the quarter ended January 31, 2012. The second, third and fourth quarter information and adjustments were non-public internal company estimates used for budgeting purposes. The estimated data for the second fiscal quarter ended April 30, 2012 set forth below was not used by Northland Capital Markets or Houlihan Lokey in their analyses of historical financial information. The financial information for the second fiscal quarter ended April 30, 2012 used by Northland Capital and Houlihan Lokey in their analyses of historical financial information was not materially different than the financial information included in the unaudited financial statements filed in the Company's Quarterly Report on Form 10-Q.

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QUARTERLY DATA FOR FISCAL YEAR 2012
(UNAUDITED)

 
  Q1   Q2   Q3   Q4   Adjustments to
Estimates
  Total
Estimated FY
2012
 
 
  Actual
  Estimated
  Estimated
  Estimated
   
  Estimated
 

Existing Operations

                                     

Oil Revenue

  $ 5,031,000   $ 7,427,000   $ 11,212,000   $ 11,641,000   $ (6,750,000 ) $ 28,561,000  

Gas Revenue

    790,000     555,000     623,000     632,000           2,600,000  
                           

    5,821,000     7,982,000     11,835,000     12,273,000     (6,750,000 )   31,161,000  
                           

Production Tax

    285,000     646,000     950,000     944,000     (520,000 )   2,305,000  

Production Expense

    902,000     940,000     970,000     990,000           3,802,000  

DD&A

    1,904,000     2,100,000     2,300,000     2,500,000           8,804,000  

G&A

    788,000     760,000     825,000     825,000           3,198,000  
                           

    3,879,000     4,446,000     5,045,000     5,259,000     (520,000 )   18,109,000  
                           

Income from Operations

    1,942,000     3,536,000     6,790,000     7,014,000     (6,230,000 )   13,052,000  
                           

Realized Hedge Gain (loss)

    (44,000 )                           (44,000 )

Unrealized Hedge Gain (loss)

    (481,000 )                           (481,000 )

Investment Income (loss)

    2,000                             2,000  
                           

    (523,000 )                   (523,000 )
                           

Income before tax

    1,419,000     3,536,000     6,790,000     7,014,000     (6,230,000 )   12,529,000  

Income tax

    (454,000 )   (1,132,000 )   (2,173,000 )   (2,244,000 )   1,994,000     (4,009,000 )
                           

Net Income

    965,000   $ 2,404,000   $ 4,617,000   $ 4,770,000   $ (4,236,000 ) $ 8,520,000  
                           

Oil Production BOE

    55,696     85,128     117,005     128,767     (77,320 )   309,276  

Gas Production Mcf

    211,524     219,476     228,553     223,673           883,226  
                           

Total production BOE

    90,950     121,707     155,097     166,046     (77,320 )   456,480  
                           

Average Daily BOE Production

    988.59     1,352.30     1,685.84     1,804.85           1,247.21  
                           

EBITDA

                                  21,333,000  
                                     

        The Company does not as a matter of course make public forecasts as to future performance, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. The unaudited estimated financial information was not prepared with a view toward public disclosure, and therefore the inclusion of this information should not be regarded as an indication that the Company, Forestar, Merger Sub, their respective financial advisors or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results. While presented with numeric specificity, the unaudited estimated financial information reflects numerous estimates and assumptions with respect to matters such as industry performance and competition, general business, economic, market and financial conditions, commodity prices, demand for natural gas and oil, production growth, capacity utilization and additional matters specific to the Company's business, all of which are difficult to predict and many of which are beyond the Company's control. The unaudited estimated financial information was, in general, prepared solely for internal use and is subjective in many respects. As a result, there can be no assurance that the estimated results will be realized or that actual results will not be significantly higher or lower than estimated. Since the unaudited estimated financial information covers multiple quarters, such information by its nature

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becomes less predictive with each successive quarter. The unaudited estimated financial information was not prepared with a view toward complying with GAAP, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of estimated financial information. Neither the Company's independent registered public accounting firm, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the unaudited estimated financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

        Certain matters discussed herein, including the unaudited estimated financial information above, are forward-looking in nature and inherently subject to significant uncertainties and contingencies, including industry performance and competition, general business, economic, market and financial conditions, commodity prices, demand for natural gas and oil, production growth, capacity utilization and other factors or risks described in the Company's most recent Annual Report on Form 10-K for the year ended October 31, 2011, Quarterly Reports on Form 10-Q and other documents filed or furnished with the SEC.

        Readers of this proxy statement are cautioned not to place undue reliance on the unaudited estimated financial information set forth above. No representation is made by the Company, Forestar, Merger Sub or by any of their respective officers, directors, advisors or representatives to any stockholder of the Company regarding the ultimate performance of the Company compared to the information included in the above unaudited estimated financial information. NONE OF THE COMPANY, FORESTAR, MERGER SUB AND THEIR RESPECTIVE OFFICERS, DIRECTORS, ADVISORS AND REPRESENTATIVES UNDERTAKES TO UPDATE OR OTHERWISE REVISE THE ABOVE ESTIMATED FINANCIAL INFORMATION TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH ESTIMATED FINANCIAL INFORMATION ARE NO LONGER APPROPRIATE.

Reconciliation of Net Income to EBITDA

Net Income

    8,520,000  

Add:

       

DD & A

    8,804,000  

Income Taxes

    4,009,000  
       

EBITDA

    21,333,000  
       


Fairness Opinions

Overview

        Pursuant to an engagement letter dated May 1, 2012, the Company retained Northland Capital Markets to provide certain services in connection with a possible transaction with Forestar, including to provide a fairness opinion and to act as financial advisor to the Company in connection with a post-signing market check during the go-shop period. Pursuant to an engagement letter dated May 3, 2012, the Company retained Houlihan Lokey to deliver a fairness opinion with respect to any transaction with Forester. In selecting these advisors, the Company's Board of Directors considered, among other things, the fact that these advisors are nationally recognized investment banking firms with substantial experience providing strategic advisory services.

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        At the June 1, 2012 meeting of our Board of Directors, Northland Capital Markets delivered its oral opinion, which was subsequently confirmed in writing, that as of that date, and based upon and subject to the assumptions, matters considered, qualifications and limitations set forth in the written opinion, the total consideration to be paid to the Independent Holders was fair, from a financial point of view, to the Independent Holders. Also at the June 1, 2012 meeting of our Board of Directors, Houlihan Lokey delivered its oral opinion, which was subsequently confirmed in writing, that as of that date, and based upon and subject to the assumptions, matters considered and qualifications set forth in the written opinion, the merger consideration to be paid to the Unaffiliated Holders pursuant to the Merger Agreement was fair, from a financial point of view. The Board of Directors knew that there is no difference in the per share consideration to be received by any of the holders of the Company's Common Stock.

        The full text of these written opinions are attached as Annexes B and C to this proxy statement and we recommend you read the opinions carefully and in their entirety. The opinions set forth the assumptions made, the matters considered and qualifications to and limitations of the review undertaken by these financial advisors. These opinions are subject to the assumptions and conditions contained therein and are necessarily based on economic, market and other conditions and the information made available to these financial advisors as of the date of the opinions. Neither Northland Capital Markets nor Houlihan Lokey has a responsibility to update, revise or reaffirm its opinion based on circumstances or events occurring after the date of the rendering of such opinion.

Summary of Analyses

        The following is a summary of the principal financial and valuation analyses performed by each of Northland Capital Markets and Houlihan Lokey, respectively, and presented to the Company's Board of Directors in connection with rendering such opinions.

        Some of the financial and valuation analyses summarized below include summary data and information presented in tabular format. In order to understand fully the financial and valuation analyses, the summary data and tables must be read together with the full text of the summary. Considering the summary data and tables alone could create a misleading or incomplete view of the financial and valuation analyses.


Opinion of Northland Capital Markets to the Company's Board of Directors

        The Company retained Northland Capital Markets to render an opinion to the Company's Board of Directors as to whether the Merger Consideration is fair, from a financial point of view, to the Independent Holders.

        On June 1, 2012, Northland Capital Markets delivered to the Board of Directors its oral opinion that, as of such date and based upon and subject to the procedures followed and factors, assumptions and limitations set forth in its written opinion and described below, the total consideration to be paid to the Independent Holders is fair, from a financial point of view, to the Independent Holders. Northland Capital Markets subsequently confirmed its oral opinion by delivering its written opinion, dated June 1, 2012, to the Company's Board of Directors.

        The full text of Northland Capital Markets' written opinion is attached to this proxy statement as Annex B. The summary of the opinion set forth in this section is qualified in its entirety by reference to that opinion. We urge our stockholders to read the Northland Capital Markets opinion carefully in its entirety for a complete statement of the considerations and procedures followed, factors considered, findings, assumptions and qualifications made, the bases for and methods of arriving at these findings, limitations on the review undertaken in connection with the opinion, and judgments made or conclusions undertaken by Northland Capital Markets in rendering its opinion. Some of the financial and valuation analyses summarized in this section include data and information presented in tabular

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format. In order to understand fully Northland Capital Markets' financial and valuation analyses, the summary data and tables must be read together with the full text of the summary and Northland Capital Markets' opinion. Northland Capital Markets' opinion is directed to the Company's Board of Directors, addresses only the fairness, from a financial point of view, of the total consideration to be paid to the Independent Holders as of the date of the opinion, and does not address any other aspect of the Merger or the relative merits of the Merger compared to any alternative business strategy or transaction in which the Company might engage. Northland Capital Markets does not express any view on, and its opinion does not address, any other term or aspects of the Merger Agreement or the Merger, including, without limitation, the fairness of the Merger to, or any consideration received in connection therewith by, creditors or other constituencies of the Company or Forestar, nor as to the fairness or the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company or Forestar, or any class of such persons, relative to the compensation to the public stockholders of the Company, in connection with the Merger. Northland Capital Markets provided its opinion for the information and assistance of the Board of Directors of the Company in connection with its consideration of the Merger. The opinion of Northland Capital Markets does not constitute a recommendation as to how any stockholder should vote with respect to the Merger and should not be construed as creating any fiduciary duty on Northland Capital Markets' part to any person or entity.

        In addition, Northland Capital Markets' opinion was just one of the many factors taken into consideration by the Company's Board of Directors when considering the Merger and the Merger Agreement. Consequently, Northland Capital Markets' analysis should not be viewed as determinative of the decision of the Board of Directors with respect to the fairness, from a financial point of view, of the total consideration to be paid to the Independent Holders as of the date of the opinion.

        In arriving at its opinion, Northland Capital Markets, among other things:

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        The following is a summary of certain of the financial analyses undertaken and information presented by Northland Capital Markets and delivered to the Company's Board of Directors on June 1, 2012, which analyses were among those considered by Northland Capital Markets in connection with delivering its opinion. In the tables below and related discussion of Northland Capital Markets' analyses, "LTM" means the most recently completed 12-month period for which financial information has been made publicly available (other than for the Company, which refers to the 12 months ended April 30, 2012), "EV" means Enterprise Value, "BOE" means Barrels of Oil Equivalent, "BOEPD" means average Barrels of Oil Equivalent Per Day, and "EBITDAX" means GAAP income from operations, plus depreciation and amortization, plus exploration expense, plus impairment, plus accretion of discount on asset retirement obligations, plus non-cash compensation. Northland Capital Markets also removed non-recurring items (such as one-time sales of property, transactions and transaction-related expenses) and revenues and expense relating to hedging gains or losses from the calculation of EBITDAX, in each case which were removed to provide a more comparable measurement of earnings from operations across companies. Northland Capital Markets calculated Enterprise Value as fully diluted equity market value, plus debt outstanding, plus preferred stock (at redemption value), minus cash and cash equivalents. All dollar amounts (other than per share amounts) set forth in the tables below discussing Northland Capital Markets' analyses are in millions. The Company's financial information was provided by the Company's management. The select valuation ratios analyzed in the tables below include enterprise value over most recent publicly available proved reserves for an audited fiscal year (other than for the Company, which were updated by non-public estimates provided by the Company as of April 30, 2012), enterprise value over the last publicly available fiscal quarter average daily production (other than for the Company, which were based on a non-public estimate provided by the Company for the fiscal quarter ended April 30, 2012), enterprise value over estimated fiscal year 2012 production taken from research analyst estimates deemed credible by Northland Capital Markets (other than for the Company, for which non-public estimates provided by the Company were used), and enterprise value over LTM EBITDAX and, in the case of the comparable company analysis, estimated fiscal year 2012 EBITDAX calculated by averaging publicly available research analyst estimates deemed credible by Northland Capital Markets (other than for the Company, for which non-public estimates provided by the Company were used). For purposes of its analysis, Northland Capital Markets used the following financial information with respect to the Company: proved reserves of 4.7 million BOE; BOEPD for the fiscal quarter ended April 30, 2012 of 1,014; estimated fiscal year 2012 BOEPD of 1,164; EBITDAX for the 12 months ended April 30, 2012 of $13.6 million; and estimated fiscal year 2012 EBITDAX of $26.4 million.

        Northland Capital Markets reviewed and analyzed general background information concerning the Company, including recent financial and operating results and outlook, the Company's stock price and volume over selected periods and the Company's stock closing price over the prior twelve months.

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Northland Capital Markets presented the recent Common Stock trading information contained in the following table:

Closing Prices:

       

May 30, 2012

  $ 10.71  

1 Week Prior

  $ 10.85  

4 Weeks Prior

  $ 10.12  

3 Months Prior

  $ 11.64  

6 Months Prior

  $ 9.23  

12 Months Prior

  $ 9.99  

52-Week High

  $ 11.68  

52-Week Low

  $ 7.46  

        Northland Capital Markets analyzed the $14.50 per share price used in the transaction against recent historical closing price ranges for the Company's Common Stock. In the one month prior to June 1, 2012, the Company's stock closed at a price per share ranging from $10.35 to $10.98. In the three months prior to June 1, 2012, the Company's stock closed at a price per share ranging from $9.67 to $11.60. In the six months prior to June 1, 2012, the Company's stock closed at a price per share ranging from $9.08 to $11.68.

        Northland Capital Markets analyzed financial information and valuation ratios relating to nine publicly traded companies involved in oil and gas exploration that were deemed by Northland Capital Markets to be comparable to the Company. The following table identifies the comparable companies included in Northland Capital Markets' analysis and five valuation ratios calculated for each company.

Company
  EV/Proved
Reserves
(BOE)
  EV/Last
Fiscal
Quarter
BOEPD
  EV/2012E
BOEPD
  EV/LTM
EBITDAX
  EV/2012E
EBITDAX
 

Abraxas Petroleum Corp. 

  $ 13.3   $ 100,809   $ 106,430     12.4x     9.1x  

Kodiak Oil & Gas Corp. 

  $ 55.0   $ 240,016   $ 174,439     NM (1)   8.0x  

Northern Oil and Gas, Inc. 

  $ 27.3   $ 150,148   $ 120,967     9.3x     5.6x  

Oasis Petroleum Inc. 

  $ 37.5   $ 167,416   $ 140,537     9.9x     6.4x  

Panhandle Oil and Gas Inc. 

  $ 10.0   $ 45,691     NA (2)   7.9x     NA  

Synergy Resources Corporation

  $ 22.4   $ 91,223   $ 73,722     8.9x     4.8x  

Triangle Petroleum Corporation

    NM (1) $ 219,527   $ 100,481     NEG     5.4x  

Voyager Oil & Gas, Inc. 

  $ 34.3   $ 192,961   $ 109,617     16.4x     4.9x  

Warren Resources Inc. 

  $ 11.2   $ 50,061   $ 48,742     4.1x     3.0x  

(1)
NM means not meaningful.

(2)
NA means not publicly available.

        Northland Capital Markets used a statistical regression analysis to calculate mean, median, first quartile and third quartile multiples using each of the five valuation ratios, and derived implied enterprise value and implied per share value for the Company from each. Northland Capital Markets selected a reference range from the first quartile multiples to the third quartile multiples described in the summary table below. This analysis produced implied per share values for the Company ranging from a first quartile low of $6.16 to a third quartile high of $19.68.

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        The following table summarizes the multiples of the selected valuation ratios, the multiples implied by the $14.50 price per share used in the transaction and the implied per share values. For purposes of the table below, EBITDAX multiples greater than 20x and reserve multiples greater than $100 were excluded as not meaningful because they were considerably outside the range of the multiples for the other comparable companies.

 
  EV/Proved
Reserves
(BOE)
  EV/Last
Fiscal
Quarter
BOEPD
  EV/2012E
BOEPD
  EV/LTM
EBITDAX
  EV/2012E
EBITDAX
 

Comparable Company Multiples:

                               

Low

  $ 10.0   $ 45,691   $ 48,742     4.1x     3.0x  

Quartile 1

  $ 12.7   $ 91,223   $ 93,791     8.4x     4.9x  

Mean

  $ 26.4   $ 139,761   $ 109,367     9.8x     5.9x  

Median

  $ 24.8   $ 150,148   $ 108,024     9.3x     5.5x  

Quartile 3

  $ 35.1   $ 192,961   $ 125,860     11.2x     6.8x  

High

  $ 55.0   $ 240,016   $ 174,439     16.4x     9.1x  

Implied CREDO Multiples

 
$

30.8
 
$

141,949
 
$

123,655
   
10.5x
   
5.4x
 

Implied Equity Value Per Share:

                               

Low

  $ 4.91   $ 4.86   $ 5.89   $ 5.76   $ 8.05  

Quartile 1

  $ 6.16   $ 9.44   $ 11.10   $ 11.65   $ 13.02  

Mean

  $ 12.48   $ 14.33   $ 12.90   $ 13.58   $ 15.75  

Median

  $ 11.77   $ 15.37   $ 12.74   $ 12.79   $ 14.74  

Quartile 3

  $ 16.52   $ 19.68   $ 14.80   $ 15.38   $ 18.08  

High

  $ 25.75   $ 24.42   $ 20.41   $ 22.49   $ 24.26  

        Northland Capital Markets reviewed publicly available information for selected transactions involving the sale of public companies based in the United States or Canada with transaction values of between $10 million and $500 million to determine the implied premiums payable in the transactions over recent stock closing prices prior to announcement of the transaction, including the one-day prior, one-week prior and four-week prior closing prices. Northland Capital Markets selected these transactions by searching SEC filings, public company disclosures, press releases, databases and other sources. The transactions include only companies within the oil and gas exploration and production industry and only transactions in which greater than 90% of the target was acquired. Share repurchases and hostile transactions were excluded.

        Northland Capital Markets used a statistical regression analysis to calculate mean, median, first quartile and third quartile premiums paid using each of the three prior closing price periods. Northland Capital Markets selected a reference range from the first quartile multiples to the third quartile multiples described in the summary table below. These implied equity values per share ranged from a first quartile low of $11.49 to a third quartile high of $15.70.

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        The following table summarizes the premiums paid in these transactions, the premium implied by the $14.50 price per share used in the Merger, the Company's historical stock prices used in the analysis and the implied per share values.

Historical Period
  One Day   One Week   Four Week  

Premiums/(Discounts):

                   

Low

    (7.7 )%   (10.6 )%   (10.6 )%

Quartile 1

    10.5 %   13.6 %   14.5 %

Mean

    27.8 %   30.9 %   31.9 %

Median

    20.4 %   24.9 %   23.4 %

Quartile 3

    38.4 %   44.1 %   42.9 %

High

    99.1 %   103.4 %   91.5 %

Premium Implied by $14.50 Per Share

   
35.4

%
 
33.0

%
 
44.5

%

CREDO Stock Price

 
$

10.71
 
$

10.90
 
$

10.03
 

Implied Equity Value Per Share:

                   

Low

  $ 9.89   $ 9.74   $ 8.97  

Quartile 1

  $ 11.84   $ 12.39   $ 11.49  

Mean

  $ 13.68   $ 14.27   $ 13.23  

Median

  $ 12.90   $ 13.61   $ 12.38  

Quartile 3

  $ 14.83   $ 15.70   $ 14.33  

High

  $ 21.32   $ 22.17   $ 19.21  

        Northland Capital Markets reviewed 12 transactions involving acquired businesses that it deemed comparable to the Company. It selected these transactions by searching SEC filings, public company disclosures, press releases, industry and popular reports, databases and other sources and by applying the following criteria:

        Northland Capital Markets excluded transactions that did not meet these criteria or for which information was not available, and excluded repurchases, minority interest acquisitions and hostile transactions.

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        The following table identifies the acquiring and target companies involved in the 12 transactions included in Northland Capital Markets' analysis, the transaction's closing date and the three valuation ratios calculated for each transaction.

Closing Date
  Acquiring Company   Target Company   EV/Proved
Reserves
(BOE)
  EV/Last
Fiscal
Quarter
BOEPD
  EV/LTM
EBITDAX
 

5/1/2012

  Crescent Point Energy Corp.   Reliable Energy Ltd.     NM (2) $ 133,294     8.7x  

4/25/2012(1)

  Halcón Resources Corporation   GeoResources, Inc.   $ 35.4   $ 151,542     10.4x  

12/7/2011

  Statoil ASA   Brigham Exploration Co.   $ 71.8     NM (2)   15.7x  

8/19/2011

  BHP Billiton Ltd.   Petrohawk Energy Corporation     NM (2) $ 125,016     15.6x  

5/3/2011

  Magnum Hunter Resources Corp.   NuLoch Resources, Inc.   $ 49.3     NM (2)   NM (2)

4/13/2011

  Magnum Hunter Resources Corp.   NGAS Resources, Inc.   $ 8.4   $ 59,344     14.9x  

12/31/2011

  Vanguard Natural Gas, LLC   Encore Energy Partners LP   $ 24.8   $ 115,017     10.7x  

12/20/2010

  Hess Corporation   American Oil & Gas Inc.     NM (2)   NM (2)   NM (2)

7/16/2010

  SandRidge Energy, Inc.   Arena Resources, Inc.   $ 18.7   $ 157,481     10.0x  

6/25/2010

  Exxon Mobil Corporation   XTO Energy Inc.   $ 8.2   $ 84,180     6.3x  

3/9/2010

  Denbury Resources Inc.   Encore Acquisition Co.   $ 19.7   $ 101,112     6.9x  

11/25/2009

  Apollo Global Management, LLC   Parallel Petroleum Corp.   $ 14.1   $ 74,378     6.1x  

(1)
Announcement date; transaction not closed as of 6/1/2012.

(2)
NM means not meaningful.

        Northland Capital Markets calculated a statistical regression analysis to calculate mean, median, first quartile and third quartile multiples using each of three valuation ratios, and derived implied enterprise value and implied per share values for the Company from each. Northland Capital Markets selected a reference range from the first quartile multiples to the third quartile multiples described in the summary table below. These implied equity values per share ranged from a first quartile low of $6.80 to a third quartile high of $19.04.

        The following table summarizes the multiples of the selected valuation ratios, the multiple implied by the $14.50 price per share used in the Merger and the implied per share values. For purposes of the table below, EBITDAX multiples greater than 20x and reserve multiples greater than $100 were

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excluded as not meaningful because they were considerably outside the range of the multiples for the other comparable transactions.

 
  EV/Proved
Reserves
(BOE)
  EV/Last
Fiscal
Quarter
BOEPD
  EV/LTM
EBITDAX
 

Comparable Transaction Multiples:

                   

Low

  $ 8.2   $ 59,344     6.1x  

Quartile 1

  $ 14.1   $ 84,180     7.4x  

Mean

  $ 27.8   $ 111,263     10.5x  

Median

  $ 19.7   $ 115,017     10.2x  

Quartile 3

  $ 35.4   $ 133,294     13.9x  

High

  $ 71.8   $ 157,481     15.7x  

Implied CREDO Merger Multiples

 
$

30.8
 
$

141,949
   
10.5x
 

Implied Equity Value Per Share:

                   

Low

  $ 4.08   $ 6.24   $ 8.47  

Quartile 1

  $ 6.80   $ 8.73   $ 10.26  

Mean

  $ 13.15   $ 11.46   $ 14.52  

Median

  $ 9.39   $ 11.84   $ 14.08  

Quartile 3

  $ 16.64   $ 13.68   $ 19.04  

High

  $ 33.53   $ 16.11   $ 21.51  

        Northland Capital Markets reviewed 13 transactions involving acquired assets that it deemed comparable to the Company's business. It selected these transactions by searching SEC filings, public company disclosures, press releases, industry and popular reports, databases and other sources and by applying the following criteria:

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        The following table identifies the acquiring and selling companies involved in the 13 transactions included in Northland Capital Markets' analysis, the transaction's closing date and the two valuation ratios calculated for each transaction.

Closing Date
  Acquiring Company   Selling Company   Price/Proved
Reserves (BOE)
  Production Price/
Last Fiscal
Quarter BOEPD
 

5/22/2012

  Magnum Hunter Resources Corp.   Baytex Energy USA Ltd.   $ 36.2   $ 240,154  

3/30/2012

 

Linn Energy Holdings, LLC

 

BP America Production Company

 
$

9.6
 
$

63,818
 

3/30/2012

 

Williston Hunter ND, LLC

 

Eagle Operating, Inc.

 
$

40.6
 
$

126,687
 

3/28/2012(1)

 

Continental Resources, Inc.

 

Wheatland Oil Inc.

 
$

20.0
 
$

136,031
 

3/16/2012

 

Crescent Point Energy Corp.

 

PetroBakken Energy Ltd.

   
NA

(2)

$

147,241
 

1/10/2012

 

Kodiak Oil & Gas Corp.

 

North Plains Energy, LLC

   
NA

(2)

$

163,889
 

10/28/2011

 

Kodiak Oil & Gas Corp.

 

NA(2)

   
NA

(2)

$

82,733
 

3/31/2011

 

Linn Energy, LLC

 

Concho Resources, Inc.

 
$

24.5
 
$

145,111
 

12/21/2010

 

Williams Companies, Inc.

 

NA(2)

 
$

5.1
 
$

287,576
 

12/13/2010

 

Occidental Petroleum Corporation

 

NA(2)

 
$

5.6
 
$

254,545
 

11/30/2010

 

Kodiak Oil & Gas Corp.

 

NA(2)

   
NA

(2)

$

217,300
 

10/18/2010

 

Enerplus Resources Fund

 

NA(2)

 
$

57.0
   
NM

(3)

2/1/2010

 

NA(2)

 

Ellora Energy Inc.

   
NA

(2)

$

48,431
 

(1)
Announcement date; transaction not closed as of 6/1/12.

(2)
NA means not publicly available.

(3)
NM means not meaningful.

        Northland Capital Markets used a statistical regression analysis to calculate mean, median, first quartile and third quartile multiples using each of two valuation ratios, and derived implied enterprise value and implied per share value for the Company from each. Northland Capital Markets selected a reference range from the first quartile multiples to the third quartile multiples described in the summary table below. These implied equity values per share ranged from a first quartile low of $4.25 to a third quartile high of $22.70.

        The following table summarizes the selected valuation ratios and the implied per share prices. For purposes of the table below, price to production multiples greater than $275,000 and price to reserves

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multiples greater than $100 were excluded as not meaningful because they were considerably outside the range of the multiples for the other comparable transactions.

 
  Price/Proved
Reserves (BOE)
  Production Price/
Last Fiscal
Quarter BOEPD
 

Comparable Transaction Data:

             

Low

  $ 5.1   $ 48,431  

Quartile 1

  $ 8.6   $ 115,699  

Mean

  $ 24.8   $ 159,460  

Median

  $ 22.2   $ 146,176  

Quartile 3

  $ 37.3   $ 223,014  

High

  $ 57.0   $ 287,576  

Implied CREDO Merger Multiples

 
$

30.8
 
$

141,949
 

Implied Price Per Share:

             

Low

  $ 2.64   $ 5.14  

Quartile 1

  $ 4.25   $ 11.91  

Mean

  $ 11.76   $ 16.31  

Median

  $ 10.57   $ 14.97  

Quartile 3

  $ 17.53   $ 22.70  

High

  $ 26.67   $ 29.20  

        The preparation of a fairness opinion is a complex, analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and is not necessarily susceptible to partial analysis or summary description. In arriving at its opinion, Northland Capital Markets did not attribute any particular weight to any particular analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Several analytical methodologies were employed by Northland Capital Markets in its analyses, and no one method of analysis should be regarded as critical to the overall conclusion it reached. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. Accordingly, Northland Capital Markets believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors in their entirety, could create a misleading or incomplete view of the evaluation process underlying its opinion. The conclusion reached by Northland Capital Markets, therefore, is based on the application of its own experience and judgment to all analyses and factors considered by it, taken as a whole. Northland Capital Markets' opinion was reviewed and approved by its fairness opinion committee.

        The analyses of Northland Capital Markets are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by the analyses. Analyses relating to the value of companies do not purport to be appraisals or valuations or necessarily reflect the price at which companies may actually be sold. No company or transaction used in the analyses of comparable companies or transactions for purposes of comparison is identical or directly comparable to the Company or the Merger. Accordingly, an analysis of the results of the comparisons is not mathematical; rather, it involves complex considerations and judgments about differences in the companies and transactions to which the Company and the Merger were compared and other factors that could affect the public trading value or transaction value of the companies.

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        In conducting its review and in rendering its opinion, Northland Capital Markets has relied upon and assumed the accuracy, completeness and fairness of the financial, accounting and other information discussed with it, reviewed by it, provided to it or otherwise made available to Northland Capital Markets, and has not attempted to independently verify, and has not assumed responsibility for the independent verification of, such information. Northland Capital Markets has further relied upon the assurances of the Company's management that the information provided has been prepared on a reasonable basis in accordance with industry practice, and that they are not aware of any information or facts that would make the information provided to Northland Capital Markets incomplete or misleading. Northland Capital Markets has assumed that there have been no material changes in the Company's assets, financial condition, results of operations, business or prospects since the date of the last financial statements made available to Northland Capital Markets. Without limiting the generality of the foregoing, for the purpose of this opinion, Northland Capital Markets has assumed that the Company is not party to any material pending transaction, including any external financing, recapitalization, acquisition or merger, other than the Merger. With respect to financial forecasts, estimates of proved reserves and other estimates and forward-looking information relating to the Company and the Merger reviewed by Northland Capital Markets, the Company has informed Northland Capital Markets, and Northland Capital Markets has assumed, that such information reflects the best currently available estimates and judgments of the Company's management. Northland Capital Markets expresses no opinion as to any financial forecasts, proved reserves or other estimates or forward-looking information of the Company or the assumptions on which they were based. In reaching its conclusions hereunder, Northland Capital Markets did not perform a discounted cash flow analysis because the projections provided by the Company did not extend beyond the fiscal year ending 2012. Northland Capital Markets understood that the Company does not otherwise produce long range projections in connection with the Merger or otherwise.

        For purposes of its opinion, Northland Capital Markets assumed that the Merger Agreement was executed in substantially the same form as the draft dated May 29, 2012 and reviewed by it, the representations and warranties of the parties in the Merger Agreement are true and correct and the Merger will be consummated pursuant to the terms of the Merger Agreement without amendments thereto and without waiver by any party of any conditions or obligations thereunder. In arriving at its opinion, Northland Capital Markets has assumed that all the necessary regulatory approvals and consents required for the Merger will be obtained in a manner that will not adversely affect the Company or alter the terms of the Merger.

        In arriving at its opinion, Northland Capital Markets has not performed any appraisals or valuations of any specific assets or liabilities (fixed, contingent or other) of the Company, has not been furnished with any such appraisals or valuations, and has made no physical inspection of the property or assets of the Company. Northland Capital Markets expresses no opinion regarding the liquidation value of any entity. Northland Capital Markets understood that the Company's estimates regarding its proved reserves were based upon analyses by, and input from, petroleum engineers. Northland Capital Markets does not express any opinion as to such estimates. The analyses Northland Capital Markets performed in connection with this opinion were going concern analyses of an entity. Northland Capital Markets was not requested to opine, and no opinion was rendered, as to whether any analyses of an entity, other than as a going concern, is appropriate in the circumstances and, accordingly, it has performed no such analyses.

        Northland Capital Markets has undertaken no independent analysis of any pending or threatened litigation, governmental proceedings or investigations, possible unasserted claims or other contingent liabilities, to which either the Company or its affiliates is a party or may be subject and at the Company's direction and with its consent, Northland Capital Markets' opinion makes no assumption concerning and therefore does not consider, the possible assertion of claims, outcomes, damages or recoveries arising out of any such matters.

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        Northland Capital Markets' opinion is necessarily based upon the financial, market, economic and other conditions that existed on, and the information made available to it as of, June 1, 2012. It should be understood that subsequent developments may affect its opinion and that Northland Capital Markets disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion which may come or be brought to its attention after June 1, 2012. Northland Capital Markets is not expressing any opinion in its opinion as to the price at which shares of the Company's Common Stock have traded or such stock may trade following announcement of the Merger or at any future time. Northland Capital Markets has not undertaken to reaffirm or revise its opinion or otherwise comment upon any events occurring after June 1, 2012 and does not have any obligation to update, revise or reaffirm its opinion.

        The Company's Board of Directors selected Northland Capital Markets because Northland Capital Markets, as a customary part of its investment banking business, is continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. In the ordinary course of Northland Capital Markets' business, it and its affiliates may actively trade the Company's and Forestar's securities for its own account or the account of its customers and, accordingly, Northland Capital Markets may at any time hold a long or short position in such securities. As of June 1, 2012, Northland Capital Markets did not hold a long or short position in the Company's or Forestar's securities for its own account.

        Under the terms of the engagement letter dated May 1, 2012, Northland Capital Markets has received a fee of $150,000 from the Company for providing its opinion, which is not contingent upon consummation of the Merger. Northland Capital Markets was not retained to, and did not materially, participate in the negotiation of the terms of the Merger Agreement or the transactions contemplated thereby, nor was Northland Capital Markets retained to, and Northland Capital Markets did not materially, provide any advice or services in connection with the Merger Agreement or the transactions contemplated thereby other than the delivery of its opinion. Northland Capital Markets has been retained to act as financial advisor to the Company in connection with a post-signing market check on behalf of the Company. If a transaction arising out of the post-signing market check is consummated, Northland Capital Markets would receive a fee equal to 1.4% of the consideration paid or to be paid in connection with the transaction, or 20% of any termination or similar fee received by the Company in connection with any such transaction that is not consummated. Northland Capital Markets also was engaged to provide certain investment banking services to the Company, including preparing a preliminary asset valuation and investor marketing materials, identifying potential investors in the Company, formulating a strategy for soliciting interest from investors, and introducing the Company to potential investors, for which it has been paid a retainer of $10,000 per month up to a maximum of $60,000 that was credited against the fee for providing its opinion, and to act as a financial advisor to the Company in connection with alternative sale or financing transactions (in addition to acting as the Company's financial advisor in connection with the post-signing market check described above) if the Merger is not consummated, for which Northland Capital Markets would be paid a fee, a significant portion of which would be contingent upon consummation of such alternative transactions. The Company has agreed to indemnify Northland Capital Markets against certain liabilities in connection with Northland Capital Markets' services and reimburse Northland Capital Markets for certain out-of-pocket expenses incurred in connection with its services.

        Northland Capital Markets has not performed any work for, and has not received any fees from, either Forestar or, except as disclosed in the preceding paragraph, the Company.

        Northland Capital Markets is the trade name for certain equity capital markets and investment banking activities of Northland Securities, Inc. member FINRA SIPC.

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Opinion of Houlihan Lokey Financial Advisors, Inc. to the Company's Board of Directors

        On June 1, 2012, Houlihan Lokey rendered an oral opinion to our Board of Directors (which was confirmed in writing by delivery of Houlihan Lokey's written opinion dated June 1, 2012), to the effect that, as of June 1, 2012, based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion, the merger consideration to be received by the Unaffiliated Holders in the Merger was fair, from a financial point of view, to the Unaffiliated Holders.

        Houlihan Lokey's opinion was addressed to our Board of Directors and only addressed the fairness from a financial point of view of the merger consideration to be received by the Unaffiliated Holders in the Merger and does not address any other aspect or implication of the Merger. The summary of Houlihan Lokey's opinion in this proxy statement is qualified in its entirety by reference to the full text of Houlihan Lokey's written opinion, which is included as Annex C to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion. However, neither Houlihan Lokey's opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute advice or a recommendation to our Board of Directors or any stockholder or any other party as to how to act or vote with respect to the Merger or related matters.

        In arriving at its opinion, Houlihan Lokey, among other things:

        Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to

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Houlihan Lokey, discussed with or reviewed by Houlihan Lokey, or publicly available, and did not assume any responsibility with respect to such data, material and other information. In addition, the management of the Company advised Houlihan Lokey, and Houlihan Lokey assumed, that the financial projections reviewed by Houlihan Lokey were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of the management of the Company as to the future financial results and condition of the Company, and Houlihan Lokey expressed no opinion with respect to such projections or the assumptions on which they are based Houlihan Lokey relied upon and assumed, without independent verification, that there was no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to Houlihan Lokey that would be material to its analyses or its opinion, and that there is no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading.

        Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the agreements identified above and all other related documents and instruments that are referred to therein are true and correct, (b) each party to all such agreements and other related documents and instruments will fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the Merger will be satisfied without waiver thereof, and (d) the Merger will be consummated in a timely manner in accordance with the terms described in all such agreements and other related documents and instruments, without any amendments or modifications thereto. Houlihan Lokey also relied upon and assumed, without independent verification, that (i) the Merger will be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the Merger will be obtained and that no delay, limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have an effect on the amount of, or expected timing of the receipt of, the consideration that would be material to Houlihan Lokey's analyses or its opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final forms of any draft documents identified above would not differ in any respect from the drafts of said documents.

        Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of the Company or any other party, nor was Houlihan Lokey provided with any such appraisal or evaluation in connection with the Merger; except for certain engineering reports as of October 31, 2011, regarding the proved reserves of the Company. Houlihan Lokey understood that the Company's estimates as of April 30, 2012 regarding its proved reserves were based upon analyses by, and input from, petroleum engineers. Houlihan Lokey is not an oil and gas reserve valuation expert, and it did not express any opinion with respect to such subject matter. If the conclusions set forth in the Company's estimates are not accurate, the conclusions set forth in Houlihan Lokey's opinion could be materially affected. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity or business. Houlihan Lokey did not undertake an independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company is or may be a party or is or may be subject.

        Houlihan Lokey was not requested to, and did not, (a) initiate any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to the Merger, the securities, assets, businesses or operations of the Company or any other party, or any alternatives to the Merger,

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(b) negotiate the terms of the Merger, or (c) advise our Board of Directors, the Company or any other party with respect to alternatives to the Merger. The opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of its opinion. Houlihan Lokey did not undertake, and was under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring or coming to its attention after the date of its opinion.

        Houlihan Lokey's opinion was furnished for the use of our Board of Directors (in its capacity as such) in connection with its evaluation of the Merger and may not be used for any other purpose without Houlihan Lokey's prior written consent. Houlihan Lokey's opinion should not be construed as creating any fiduciary duty on Houlihan Lokey's part to any party. The opinion of Houlihan Lokey is not intended to be, and does not constitute, a recommendation to our Board of Directors, the Company, any security holder or any other party as to how to act or vote with respect to any matter relating to the Merger or otherwise.

        Houlihan Lokey was not requested to opine as to, and its opinion did not express an opinion as to or otherwise address, among other things: (i) the underlying business decision of the Company, Forestar, their respective security holders or any other party to proceed with or effect the Merger, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form, structure or any other portion or aspect of, the Merger or otherwise (other than the merger consideration to the extent expressly specified therein), (iii) the fairness of any portion or aspect of the Merger to the holders of any class of securities, creditors or other constituencies of the Company, Forestar or to any other party, except if and only to the extent expressly set forth in the last sentence of its opinion, (iv) the relative merits of the Merger as compared to any alternative business strategies or transactions that might be available for the Company, Forestar or any other party, (v) the fairness of any portion or aspect of the Merger to any one class or group of the Company's, Forestar's or any other party's security holders or other constituents vis-à-vis any other class or group of the Company's, Forestar's or such other party's security holders or other constituents (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders or other constituents), (vi) whether or not the Company, Forestar, or their respective security holders or any other party is receiving or paying reasonably equivalent value in the Merger, (vii) the solvency, creditworthiness or fair value of the Company, Forestar or any other participant in the Merger, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the Merger, any class of such persons or any other party, relative to the consideration or otherwise. Furthermore, no opinion, counsel or interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey assumed that such opinions, counsel or interpretations would be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with the consent of our Board of Directors, on the assessments by the Company and its advisors, as to all legal, regulatory, accounting, insurance and tax matters with respect to the Company and the Merger or otherwise. The issuance of Houlihan Lokey's opinion was approved by a committee authorized to approve opinions of this nature.

        In preparing its opinion to our Board of Directors, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey's analyses is not a complete description of the analyses underlying Houlihan Lokey's opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither a fairness opinion nor its underlying analyses is readily susceptible to summary description.

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Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, Houlihan Lokey believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors or focusing on information presented in tabular format, without considering all analyses, methodologies and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Houlihan Lokey's analyses and opinion. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques.

        In performing its analyses, Houlihan Lokey considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of the opinion. Houlihan Lokey's analyses involved judgments and assumptions with regard to industry performance, general business, economic, regulatory, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the business of the Company and on the industry generally, industry growth and the absence of any material change in the financial condition and prospects of the Company or the industry or in the markets generally. No Company, transaction or business used in Houlihan Lokey's analyses for comparative purposes is identical to the Company or the proposed Merger and an evaluation of the results of those analyses is not entirely mathematical. Houlihan Lokey believes that mathematical derivations (such as determining average and median) of financial data are not by themselves meaningful and should be considered together with qualities, judgments and informed assumptions. The estimates contained in the Company's analyses and the implied reference range values indicated by Houlihan Lokey's analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of the Company. Much of the information used in, and accordingly the results of, Houlihan Lokey's analyses are inherently subject to substantial uncertainty.

        Houlihan Lokey's opinion was provided to our Board of Directors in connection with its evaluation of the proposed Merger and was only one of many factors considered by our Board of Directors in evaluating the proposed Merger. Neither Houlihan Lokey's opinion nor its analyses were determinative of the merger consideration or of the views of our Board of Directors or management with respect to the Merger or the merger consideration. The type and amount of consideration payable in the Merger were determined through negotiation between the Company and Forestar, and the decision to enter into the Merger was solely that of our Board of Directors.

        The following is a summary of the material analyses reviewed by Houlihan Lokey with our Board of Directors in connection with Houlihan Lokey's opinion rendered on June 1, 2012. The order of the analyses does not represent relative importance or weight given to those analyses by Houlihan Lokey. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Houlihan Lokey's analyses.

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        For purposes of its analyses, Houlihan Lokey reviewed a number of financial and operating metrics, including:

        Unless the context indicates otherwise, enterprise values derived from the selected companies analysis described below were calculated using (i) the closing price of our Common Stock and the common stock of the selected oil and gas exploration and production companies listed below as of May 30, 2012, and (ii) net debt amounts as indicated in public filings available as of May 30, 2012; transaction values for the targets derived from the selected transactions analysis listed below were calculated as of the public announcement date of the relevant transaction based on the estimated purchase prices paid in the selected transactions. Accordingly, this information may not reflect current or future market conditions. The calculations of Adjusted EBITDAX for the latest twelve months for which financial information has been made public ("LTM") for the Company was for the twelve months ending April 30, 2012 and, for each of the Company and the selected oil and gas exploration and production companies were based on publicly available information for the Company and the selected oil and gas exploration and production companies. Estimates of Adjusted EBITDAX for the next fiscal year for which financial information has not been made public ("NFY") for the Company were based on estimates provided by the management of the Company and were for the fiscal year ending October 31, 2012. Estimates of NFY Adjusted EBITDAX for the selected oil and gas exploration and production companies listed below were based on certain publicly available consensus and research analyst estimates for those oil and gas exploration and production companies, and may have been calendarized to approximate the Company's fiscal year end of October 31, 2012. PR and ADP amounts for (i) the selected oil and gas exploration companies listed below were based on publicly available information as of May 30, 2012, (ii) the selected publicly-announced oil and gas exploration and production company and asset transactions listed below were based on publicly available information as of the public announcement date of the relevant transaction, and (iii) the Company were based upon internally prepared estimates of the Company as represented by Company management, including proved reserves of 4.5 million BOE and average daily production of 1,008 BOE, as of, and for the quarter ended, April 30, 2012, respectively.

        Historical Trading Analysis.    Houlihan Lokey reviewed certain historical stock price information for the Common Stock. This review indicated that for the one year period ended prior to May 31, 2012, Common Stock closing prices ranged between $7.14 and $11.86, per share, with an average per share closing price for the period of $10.25, as compared to the implied per share merger consideration of $14.50.

        Selected Companies Analysis.    Houlihan Lokey calculated certain enterprise value multiples based on certain financial and operating data for the Company and the following selected oil and gas exploration and production companies. The calculated multiples included (i) enterprise value as a

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multiple of LTM Adjusted EBITDAX, (ii) enterprise value as a multiple of estimated NFY Adjusted EBITDAX, (iii) enterprise value divided by PR and (iv) enterprise value divided by ADP. The list of selected companies and the related financial and operating data for such selected companies are set forth below.

 
  Enterprise
Value to
Adjusted
EBITDAX:
  Enterprise Value to:  
Selected Companies
  LTM   NFY   PR   ADP  

Abraxas Petroleum Corporation

    12.5x     11.7x   $ 13.43   $ 100,734  

American Standard Energy Corp.(1)

    NMF     27.6x   $ 38.21   $ 155,661  

Approach Resources Inc. 

    13.4x     10.2x   $ 13.44   $ 142,384  

Dune Energy, Inc. 

    8.3x     NA   $ 14.58   $ 75,952  

Kodiak Oil & Gas Corp.(2)

    23.1x     8.5x   $ 71.69   $ 238,298  

Northern Oil and Gas, Inc. 

    8.9x     6.6x   $ 27.95   $ 151,950  

Oasis Petroleum Inc. 

    10.1x     7.1x   $ 37.54   $ 167,567  

Panhandle Oil and Gas Inc. 

    6.8x     NA   $ 11.94   $ 45,190  

Triangle Petroleum Corporation

    NMF     13.6x   $ 108.01   $ 378,342  

Voyager Oil & Gas, Inc. 

    17.9x     8.0x   $ 34.03   $ 189,440  

Warren Resources, Inc. 

    4.1x     3.8x   $ 11.32   $ 91,056  

For the purposes of the table set forth above, "NMF" means "not meaningful."

For the purposes of the table set forth above, "NA" means "not available."

(1)
The Enterprise Value/NFY Adjusted EBITDAX multiple for this company was excluded from high, low, mean and median data.

(2)
At the time of the opinion, publicly available LTM EBITDAX data reflecting Kodiak Oil & Gas Corp.'s acquisition of oil and gas properties in the Williston Basin, which added 103,000 net acres of oil and gas properties, was not available. As a result, Kodiak's Enterprise Value/LTM Adjusted EBITDAX multiple was excluded from the high, low, mean and median data.

        The list of the low, high, mean and median multiples for the selected companies set forth above, as well as for the Company were as follows:

 
  Enterprise Value as a Multiple of:  
 
  LTM Adjusted
EBITDAX
  NFY Adjusted
EBITDAX
  PR   ADP  

Low

    4.1x     3.8x   $ 11.32   $ 45,190  

High

    17.9x     13.6x   $ 108.01   $ 378,342  

Mean

    10.2x     8.7x   $ 34.74   $ 157,870  

Median

    9.5x     8.3x   $ 27.95   $ 151,950  

The Company as of 5/30/12

    7.7x     4.8x   $ 23.19   $ 104,396  

The Company at merger consideration

    10.6x     6.6x   $ 31.64   $ 142,415  

        From this data, Houlihan Lokey selected implied enterprise value reference ranges for the Company using LTM Adjusted EBITDAX multiples of 8.0x to 9.0x, NFY Adjusted EBITDAX multiples of 5.0x to 6.0x, enterprise value per PR (BOE) of $22.00 to $27.00 and enterprise value per ADP value (BOE) of $100,000 to $125,000. Houlihan Lokey selected these ranges based on a comparison of, among other things, the Company's size, composition of reserves, geographic dispersion of reserves and

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business operations as compared to those of the selected companies. Houlihan Lokey then adjusted these ranges to reflect net debt outstanding and common shares outstanding, each as of April 30, 2012 (the most recent date for which such information was available) to arrive at a per share implied equity reference range. This analysis indicated the following implied per share reference range for the Company, as compared to the proposed per share merger consideration:

Implied Per Share
Equity Reference Range for
the Company based on:
 
Per Share
Merger Consideration
$10.17 - $13.27   $14.50

        Selected Transactions Analysis.    Houlihan Lokey calculated certain enterprise value multiples based on the estimated purchase prices paid in the following selected publicly-announced oil and gas exploration and production company and asset transactions. The calculated multiples included (i) transaction value as a multiple of LTM EBITDAX (LTM for the latest twelve months for which financial information has been made public as of the announcement date of the relevant transaction), (ii) transaction value divided by PR and (iii) transaction value divided by ADP. The list of selected transactions and the related multiples and certain financial data are set forth below.

Announcement Date
  Acquiror   Target   Transaction
Value/
EBITDAX
  PR
($/BOE)
  ADP
($/BOE/DAY)
 

4/25/2012

  Halcón Resources Corporation   GeoResources, Inc.     11.9x   $ 35.31   $ 165,047  

3/28/2012

 

Continental Resources, Inc.

 

Wheatland Oil Inc.

   
NA
 
$

19.75
 
$

136,032
 

1/23/2012

 

Apache Corporation

 

Cordillera Energy Partners III, LLC

   
NA
 
$

39.96
 
$

158,733
 

11/30/2011

 

Korea National Oil Corporation
and Samsung C&T Corporation

 

Parallel Petroleum Corp.

   
NA
 
$

11.21
 
$

91,845
 

11/14/2011

 

Kodiak Oil & Gas Corp.

 

Producing Properties and Undeveloped Leaseholds in the Williston Basin

   
NA
 
$

34.03
 
$

163,889
 

10/27/2011

 

Linn Energy, LLC

 

Two Acreage Acquisitions in the Permian Basin Wolfberry

   
NA
 
$

12.65
 
$

131,250
 

10/17/2011

 

Statoil ASA

 

Brigham Exploration Company

   
15.7x
 
$

71.83
 
$

143,485
 

9/28/2011

 

Kodiak Oil & Gas Corp.

 

Properties and Undeveloped Leaseholds in the Williston Basin

   
NA
   
NA
 
$

78,333
 

8/31/2011

 

Crescent Point Energy Corp.

 

Two Acreage Acquisitions in the Bakken and Three Forks Formations

   
NA
   
NA
 
$

223,773
 

4/12/2011

 

Eagle Rock Energy Partners, L.P.

 

Crow Creek Energy II, L.L.C.

   
7.6x
 
$

11.75
 
$

67,021
 

3/25/2011

 

Vanguard Natural Gas, LLC

 

Encore Energy Partners LP

   
22.6x
 
$

29.73
 
$

144,428
 

2/28/2011

 

Linn Energy Holdings, LLC

 

Certain Oil and Natural Gas Properties in the Bakken Formation held by Concho Resources, Inc.

   
NA
 
$

23.32
 
$

143,097
 

2/28/2011

 

Linn Energy Holdings, LLC

 

Oil, and Natural Gas Properties in the Permian Basin in New Mexico held by SandRidge Exploration and Production

   
NA
 
$

19.05
   
NA
 

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Announcement Date
  Acquiror   Target   Transaction
Value/
EBITDAX
  PR
($/BOE)
  ADP
($/BOE/DAY)
 

1/19/2011

 

Magnum Hunter Resources Corp.

 

NuLoch Resources, Inc.(1)

    52.6x   $ 52.61   $ 200,245  

11/15/2010

 

Williams Companies, Inc.

 

85,800 Net Acres on Fort Berthold Indian Reservation in the Williston Basin

   
NA
   
NA
 
$

280,303
 

11/09/2010

 

Chevron Corporation

 

Atlas Energy, Inc.

   
13.4x
 
$

31.71
 
$

273,410
 

7/20/2010

 

Exxon Mobile Corporation

 

Ellora Energy, Inc.

   
14.1x
 
$

78.92
 
$

108,399
 

6/02/2010

 

Citation 2004 Investment LP

 

Mid-Continent and Illinois-Basin Properties held by Nobel Energy, Inc.

   
NA
 
$

17.25
 
$

96,842
 

4/04/2010

 

SandRidge Energy, Inc.

 

Arena Resources, Inc.

   
10.0x
 
$

18.61
 
$

199,474
 

1/04/2010

 

Undisclosed

 

Hugoton Field Assets and Colorado Properties held by Ellora Energy, Inc.

   
NA
   
NA
 
$

48,431
 

For the purposes of the table set forth above, "NA" means "not available."

(1)
Transaction Value/LTM EBITDAX data for this transaction was excluded from high, low, mean and median data.

        This analysis indicated the following low, high, mean and median multiples for the selected transactions:

 
  Transaction Value as a Multiple of:  
 
  LTM/EBITDAX   PR   ADP  

Low

    7.6x   $ 11.21   $ 48,431  

High

    22.6x   $ 78.92   $ 280,303  

Mean

    13.6x   $ 31.73   $ 150,213  

Median

    13.4x   $ 26.52   $ 143,485  

        From this data, Houlihan Lokey selected implied enterprise values reference ranges for the Company using LTM EBITDAX multiples of 9.0x to 10.0x, transaction value per PR (BOE) of $25.00 to $30.00 and transaction value per ADP value (BOE) of $110,000 to $135,000. Houlihan Lokey selected these ranges based on a comparison of, among other things, the Company's size, composition of reserves, geographic dispersion of reserves, and business operations, as compared to those of the selected transactions. Houlihan Lokey then adjusted these ranges to reflect net debt outstanding and common shares outstanding, each as of April 30, 2012 (the most recent date for which such information was available) to arrive at a per share implied equity reference range. This analysis indicated the following per share reference range for the Company, as compared to the proposed per share merger consideration value:

Implied Per Share
Equity Reference Range for the
Company based on:
 
Per Share
Merger Consideration

$11.27 - $13.76

  $14.50

        Houlihan Lokey was engaged by the Company to provide an opinion to our Board of Directors regarding the fairness from a financial point of view of the merger consideration to be received by the Unaffiliated Holders in the Merger and to provide certain valuation services to the Company regarding certain assets of Forestar. We engaged Houlihan Lokey based on Houlihan Lokey's experience and

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reputation. Houlihan Lokey is regularly engaged to render financial opinions in connection with mergers, acquisitions, divestitures, leveraged buyouts, recapitalizations, and for other purposes. Pursuant to its engagement, the Company paid Houlihan Lokey $350,000 for its services, a portion of which became payable upon Houlihan Lokey's retention and the balance of which became payable prior to, or upon the delivery of, Houlihan Lokey's opinion, regardless of the conclusion reached therein. No portion of Houlihan Lokey's fee is contingent upon the successful completion of the Merger. The Company has also agreed to reimburse Houlihan Lokey for certain expenses and to indemnify Houlihan Lokey, its affiliates and certain related parties against certain liabilities and expenses, including certain liabilities under the federal securities laws arising out of or relating to Houlihan Lokey's engagement.

        In the ordinary course of business, Houlihan Lokey does not trade in debt, equity, or other securities or financial instruments (including loans and other obligations), or in any currency or commodity. However, in the ordinary course of business, certain of Houlihan Lokey's employees and affiliates, as well as investment funds in which they may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or investments in, the Company, Forestar, or any other party that may be involved in the Merger and their respective affiliates or any currency or commodity that may be involved in the Merger.

        Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and other financial services to the Company, Forestar, other participants in the Merger or certain of their respective affiliates in the future, for which Houlihan Lokey and such affiliates may receive compensation. In the past two years, Houlihan Lokey has not provided services of any kind to Forestar. Other than as described above, Houlihan Lokey has not provided services of any kind to the Company over the last two years.


Certain Effects of the Merger

        If the Merger Agreement is adopted by our stockholders and the other conditions to the closing of the Merger are satisfied, Merger Sub will be merged with and into the Company, with the Company being the surviving corporation. Following the Merger, all of the Company's capital stock will be owned by Forestar.

        When 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 the Company as treasury stock or held directly or indirectly by Forestar, or held by stockholders who are entitled to and who properly exercise and perfect appraisal rights in compliance with all of the required procedures under the laws of Delaware) will be canceled and converted into the right to receive $14.50 in cash without interest and less any applicable withholding taxes.


Regulatory and Other Approvals

        No filing or registration with, declaration or notification to, or order, authorization, consent or approval of, any federal, state, local or foreign court, arbitral, legislative, executive or regulatory authority or agency is required in connection with the execution, delivery and performance of the Merger Agreement, or any other transactions contemplated thereby, except for (i) the filing of a definitive proxy statement with the SEC relating to the Merger Agreement and the transactions contemplated thereby, (ii) the filing of a Certificate of Merger with the Delaware Secretary of State, and (iii) any filings in connection with compliance with the rules of Nasdaq.

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Material U.S. Federal Income Tax Consequences of the Merger

        The following discussion summarizes the material U.S. federal income tax consequences of the Merger to U.S. holders (as defined below) of shares of our Common Stock. This summary is based on current law as of the date hereof, is for general informational purposes only and does not purport to be a complete description of all of the tax consequences of the Merger. The information in this section is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable U.S. Treasury regulations promulgated thereunder, current administrative interpretations of the U.S. Internal Revenue Service ("IRS"), and court decisions, all as of the date hereof and all of which are subject to change at any time, possibly with retroactive effect. We cannot assure you that future legislation, U.S. Treasury regulations, administrative interpretations and court decisions will not significantly change the current law or adversely affect existing interpretations of current law. Any such change could apply retroactively. No ruling from the IRS has been or will be sought with respect to any of the tax consequences of the Merger and the statements in this proxy are not binding on the IRS or any court. We can provide no assurance that the tax consequences described below will not be challenged by the IRS or will be sustained by a court if so challenged.

        This summary does not address all aspects of taxation that may be relevant to you in light of your specific circumstances which may be important to you. This summary does not address the tax treatment of holders of shares of our Common Stock who are not U.S. holders (as defined below). Holders of shares of our Common Stock who are not U.S holders should consult their tax advisors concerning the tax treatment of the Merger under U.S. and non-U.S. tax laws. Except as indicated otherwise, this summary also does not address the tax treatment of holders of shares of our Common Stock who are subject to special treatment under the U.S. federal income tax laws, including, without limitation, banks and other financial institutions, insurance companies, tax-exempt organizations, mutual funds, real estate investment trusts, partnerships (or any entity taxable as a partnership for U.S. federal income tax purposes), S corporations and other pass-through entities, individual retirement accounts and other tax-deferred accounts, dealers in securities or currencies, traders in securities that elect to apply a mark-to-market method of accounting for their securities holdings, U.S. holders (as defined below) whose functional currency is not the U.S. dollar, persons holding their shares of our Common Stock as part of a hedging transaction, appreciated financial position, conversion transaction or constructive sale or as a position in a "straddle" or other risk reduction strategy, holders who acquired their shares of our Common Stock pursuant to the exercise of employee stock options, warrants or similar derivative securities or otherwise as compensation or in connection with the performance of services, holders who are subject to the alternative minimum tax provisions of the Code, holders who hold our Common Stock which constitutes "qualified small business stock" as defined in Section 1202 of the Code, U.S. expatriates, and holders who hold an equity interest (actually or constructively) in Forestar or the Company after the Merger. Moreover, this summary does not address the U.S. federal income tax consequences to holders of shares of our Common Stock who perfect their appraisal rights in connection with the Merger by complying with all the required procedures under Delaware law.

        For purposes of this discussion, a "U.S. holder" means a beneficial owner of shares of our Common Stock that for U.S. federal income tax purposes is:

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        If an entity treated as a partnership for U.S. federal tax purposes holds shares of our Common Stock, the U.S. federal income tax treatment of such partnership and its partners or members generally will depend upon the status of the partner or member and the activities of the entity. If you are such an entity, a partner of a partnership or a member of a limited liability company or other entity classified as a partnership for U.S. federal income tax purposes holding shares of our Common Stock, you should consult your own tax advisor regarding the U.S. federal, state, local and non-U.S. tax considerations applicable to you with respect to the disposition of the Common Stock pursuant to the Merger.

        This discussion assumes that your shares of our Common Stock are held as capital assets within the meaning of Section 1221 of the Code. This summary does not address consequences of the Merger under the tax laws of any state, local or non-U.S. jurisdiction, or any estate, gift or other non-income tax considerations.

        Exchange of Shares of Common Stock for Cash Pursuant to the Merger.    The receipt of cash by a U.S. holder in exchange for its shares of our Common Stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount of cash received by such holder in exchange for its shares of our Common Stock and the holder's adjusted tax basis in such shares. Gain or loss (and the character thereof) will be determined separately for each block of shares of our Common Stock surrendered for cash pursuant to the Merger, with a block consisting of shares of our Common Stock acquired at the same cost in a single transaction. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the shares of our Common Stock surrendered in the Merger have been held for more than one year at the effective time of the Merger. Such gain or loss will generally be short-term capital gain or loss if at the effective time of the Merger the shares of our Common Stock surrendered in the Merger have been held for one year or less. Individuals and certain other non-corporate U.S. holders who recognize long-term capital gains are generally eligible for preferential rates of taxation. The deductibility of capital losses is subject to certain limitations.

        Backup Withholding and Information Reporting.    The receipt of cash by a U.S. holder in exchange for its shares of our Common Stock pursuant to the Merger may be subject to information reporting and backup withholding tax at the applicable rate (currently 28%), unless the U.S. holder (i) timely furnishes an accurate taxpayer identification number and otherwise complies with applicable U.S. information reporting or certification requirements (typically by completing and signing an IRS Form W-9, or a Substitute Form W-9, a copy of which will be included as part of the letter of transmittal to be timely returned to the paying agent) or (ii) is a corporation or other exempt recipient and, when required, properly establishes such fact. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. holder's U.S. federal income tax liability, if any; provided that the required information is furnished to the IRS in a timely manner.

        HOLDERS OF OUR COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF UNITED STATES FEDERAL, STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.

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Interests of Certain Persons in the Merger

        In considering the recommendation of our Board of Directors with respect to the Merger, you should be aware that certain of our directors and executive officers have interests in the Merger that may be different from, or in addition to, your interests as a stockholder generally. Such interests are described below. Members of our Board of Directors were aware of these differing or additional interests and considered them, among other matters, in reaching their decision to approve the Merger Agreement and approve the Merger and to recommend that you vote in favor of adopting the Merger Agreement.

Treatment of Stock Options

        As of August 10, 2012, there were approximately 107,813 shares of Common Stock subject to stock options granted under our 1997 and 2007 Stock Incentive Plans, in each case as amended and/or restated from time to time, to our directors and executive officers.

        Pursuant to the Merger Agreement, as of the effective time of the Merger, each then outstanding stock option will be canceled and converted automatically into the right to receive, in full satisfaction of such option, a cash amount, without interest and less applicable withholding taxes, equal to the product of:

        All outstanding options have an exercise price per share of less than $14.50 and were fully vested prior to the Board's approval of the Merger Agreement. The following table summarizes the options held by our directors and executive officers as of August 10, 2012 and the before-tax consideration that each of them will receive pursuant to the Merger Agreement in connection with the cash-out of their options, calculated in accordance with the formula set forth above:

Name
  Number of
Shares Subject
to Options
  Exercise
Price Per
Share ($)
  Total Cash
Value of
Options ($)
 

Directors

                   

Clarence Brown

    29,250     5.93     250,673  

Oakley Hall

    20,000     12.78     34,400  

James T. Huffman

    58,563     5.93     501,885  

Officers

                   

Alfred B. Neely

    20,000     12.78     34,400  

Key Employee Retention Plan

        Pursuant to the Company's Key Employee Retention Plan, originally effective on July 10, 1996 and amended and restated on June 12, 2008, Michael D. Davis would be entitled to a lump sum cash severance payment and continued welfare benefits following a termination of employment upon or following a change in control of the Company—which would include consummation of the Merger—by the Company or its successor without "cause" or within 24 months following the change in control by Mr. Davis for "good reason" (which includes among other things a material diminution in duties, a material reduction in base pay and a required relocation of more than 20 miles). The amount of the cash severance payment is equal to the excess of (i) the product of (A) the sum of (I) Mr. Davis's monthly base salary plus (II) the greater of 1/12th of (x) Mr. Davis's annual bonus for the year preceding the year of termination and (y) Mr. Davis's average annual bonus for the three years preceding the year of termination times (B) the number of years (including fractions thereof) Mr. Davis was

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employed by the Company, or such other greater amount as the Board may deem appropriate considering the circumstances and documented in writing to Mr. Davis over (ii) the salary payments earned and received by Mr. Davis for employment with the Company after the change in control. The welfare benefit continuation period, during which benefits would be provided at the same employee cost as in effect before the termination, equals one month for each year or partial year that Mr. Davis was employed by the Company reduced by one month for each complete month during which Mr. Davis is employed by the Company or its successor after the change in control, or for such longer period as the Board may deem appropriate. In any event, however, the value of the severance and continued benefit coverage would be limited to the extent necessary to ensure that Mr. Davis is not subject to the "golden parachute" excise taxes under the Code. Based on pay and level of benefits as of the date hereof, Mr. Davis would receive a severance payment of $11,111 and continued benefits with a value of $1,333, for a total of $12,144, under the Company's Key Employee Retention Plan if his employment terminated on the date of the consummation of the Merger under circumstances entitling him to severance and benefits. The actual amount, if any, payable to Mr. Davis will depend on the circumstances prevailing upon any actual termination of employment.

        Alfred B. Neely retired from his position as Chief Financial Officer of the Company effective July 31, 2012. Mr. Neely is therefore no longer entitled to any benefits under the Company's Key Employee Retention Plan. Upon Mr. Neely's retirement, Brian Mazeski became the Company's Chief Accounting Officer, Principal Financial Officer and Principal Accounting Officer. Pursuant to Mr. Mazeski's employment agreement with the Company, if the Company eliminates Mr. Mazeski's position within 18 months of the date of his hire, Mr. Mazeski will be entitled to a lump-sum payment of $80,000.

Agreements with Mr. Huffman

        The Company has agreed with Mr. Huffman, the Chairman of our Board of Directors and our former Chief Executive Officer, before the Merger is consummated to convey to him the company car he presently drives, the replacement value of which does not exceed $60,000.

        Furthermore, Forestar is considering entering into a consulting agreement with Mr. Huffman after the consummation of the Merger to assist Forestar with certain ongoing litigation matters regarding Credo. No determination has been made at this time as to whether there will in fact be any such agreement or, if so, on what terms and conditions.


Golden Parachute Compensation

        The following table sets forth the information required by Item 402(t) of SEC Regulation S-K regarding certain compensation that the Company's named executive officers could receive that is based on or that otherwise relates to the Merger. The amounts set forth below are estimates based on multiple assumptions about events that may or may not actually occur. As a result, the actual amounts, if any, to be received by the named executive officers may differ from the amounts set forth below.

 
  Cash(1)   Equity   Pension /
NQDC
  Perquisites/
Benefits(2)
  Tax
Reimbursement
  Other   Total  

Michael D. Davis

  $ 11,111   $ 0   $ 0   $ 1,333   $ 0   $ 0   $ 12,444  

(1)
Represents the cash lump sum severance payment that would be due if the executive experienced a qualifying termination of employment upon consummation of the Merger, as more fully described in "Interests of Certain Persons in the Merger—Key Employee Retention Plan."

(2)
Represents the value of continued welfare benefits that would be provided if the executive experienced a qualifying termination of employment upon consummation of the Merger, as more fully described in "Interests of Certain Persons in the Merger—Key Employee Retention Plan."

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        Marlis E. Smith, Jr., who served as the Company's Chief Executive Officer from January 2010 until January 2012 and Alfred B. Neely are not entitled to any compensation based on or that otherwise relates to the Merger.


Delisting and Deregistration of Common Stock

        If the Merger is completed, the Company's Common Stock will be delisted from Nasdaq and deregistered under the Exchange Act and we will no longer file periodic reports with the SEC.


THE MERGER AGREEMENT

        The summary of the terms of the Merger Agreement below and elsewhere in this proxy statement is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached to this proxy statement as Annex A and which we incorporate by reference herein. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We encourage you to carefully read the Merger Agreement in its entirety.

        The Merger Agreement has been included to provide you with information regarding its terms and is not intended to provide any other factual information about the Company, Forestar, Merger Sub or any of their respective subsidiaries. In particular, the Merger Agreement contains representations and warranties that the Company made to Forestar and Merger Sub and representations and warranties that Forestar and Merger Sub made to the Company. The statements embodied in the Company's representations and warranties are in some cases subject to important exceptions, limitations and supplemental information that the Company delivered to Forestar and Merger Sub in connection with signing the Merger Agreement. Certain representations and warranties were made as of a specified date, may be subject to contractual standards of materiality different from those generally applicable under federal securities laws, or may have been included in the Merger Agreement for the purpose of allocating risk between the parties rather than to establish matters as facts. Thus, stockholders should be aware that the representations and warranties contained in the Merger Agreement serve business purposes other than providing the Company's stockholders with information about the Company, and stockholders should not base their investment decisions regarding the Company, or their decision as whether to vote in favor of the adoption of the Merger Agreement, thereon.


The Merger

        The Merger Agreement provides that Merger Sub will merge with and into the Company, and the separate existence of Merger Sub will cease. The Company will survive the Merger as a wholly owned subsidiary of Forestar (we sometimes refer to the Company as of and after such time as the "surviving corporation"). Following completion of the Merger, our Common Stock will cease to be listed on Nasdaq, will be deregistered under the Exchange Act and will no longer be publicly traded. Our current stockholders will cease to have any ownership interest in the Company or rights as stockholders of the Company. Therefore, our current stockholders will not participate in any future earnings or growth of the Company and will not benefit from any appreciation in value of the Company.

        Unless otherwise agreed by the parties to the Merger Agreement, the closing date for the Merger will occur no later than the fifth business day after the satisfaction or waiver of the conditions to the Merger Agreement as described below in "The Merger Agreement—Conditions to the Merger" beginning on page 75.

        The effective time of the Merger will occur at the time we, together with Forestar, duly file a Certificate of Merger with the Secretary of State of the State of Delaware or at such time as may be specified in the Certificate of Merger.

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Treatment of Stock and Other Awards

Company Common Stock

        At the effective time of the Merger, each share of Common Stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $14.50 in cash, without interest and less any applicable withholding taxes, other than the following shares:

        After the effective time of the Merger, each holder of a certificate or book entry share representing any shares of Common Stock (other than shares for which appraisal rights have been properly demanded and perfected) will no longer have any rights with respect to the shares, except for the right to receive the merger consideration, without interest and less any applicable withholding taxes.

Company Options

        At the effective time of the Merger, each option to acquire shares of our Common Stock will be converted automatically into the right to receive for each share of Common Stock then subject to such option an amount equal to the excess of $14.50 over the exercise price per share payable in respect of such share of Common Stock issuable under such option, without interest and less any applicable withholding taxes. Each outstanding stock option has an exercise price per share of less than $14.50.

Appraisal Rights

        If you properly exercise and perfect appraisal rights under Delaware law your shares of Common Stock will not be converted into the right to receive $14.50 in cash per share, but instead will be canceled and cease to exist, and you will cease to have any rights with respect to such shares, except the right to receive the judicially determined fair value of your shares of Common Stock (plus interest, if any, in the amount determined to be the fair value), which may be more or less than $14.50 per share, determined in accordance with the provisions of Section 262 of the Delaware General Corporation Law (attached to this proxy statement as Annex D). See "Appraisal Rights" beginning on page 81.


Exchange and Payment Procedures

        Before the effective time of the Merger, Forestar will designate a paying agent to act as agent for the benefit of holders of shares of Common Stock in connection with the Merger (such firm, the "paying agent"). Prior to the effective time, Forestar will deposit (or will cause to be deposited) with the paying agent the cash necessary to pay for the shares of Common Stock converted into the right to receive the merger consideration. As soon as reasonably practicable after the effective time of the Merger, the paying agent will mail to each holder of record of Common Stock a letter of transmittal and instructions for use in effecting the surrender of the certificates or book-entry shares representing shares of our Common Stock. The letter of transmittal and instructions will tell you how to surrender your Common Stock certificates or shares you may hold that are represented by book-entry in exchange for the merger consideration.

        You should not return your stock certificates with the enclosed proxy card and you should not forward your stock certificates to the paying agent without a properly completed letter of transmittal to be forwarded by the paying agent at a later time after the adoption of the Merger Agreement.

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        You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates (or affidavit of loss in lieu thereof) or book-entry share to the paying agent, together with a properly completed and duly executed letter of transmittal and any other documents as may be reasonably requested by the paying agent. If a transfer of ownership of shares is not registered in the transfer records of the Company, cash to be paid upon due surrender of the stock certificate or book-entry share may be paid to the transferee if the stock certificate or book-entry share formerly representing the shares is presented to the paying agent accompanied by all documents required to evidence and effect the transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

        No interest will be paid or accrued on the amount payable upon the surrender of the stock certificates or book-entry shares.

        After the effective time of the Merger, there will be no transfers on our stock transfer books of shares of Common Stock that were outstanding immediately prior to the effective time of the Merger. If, after the effective time of the Merger, stock certificates are presented to the surviving corporation for transfer, they will be canceled and exchanged for the merger consideration.

        Any portion of the merger consideration deposited with the paying agent that remains undistributed to holders of our Common Stock one year after the effective time of the Merger will be delivered, upon demand, to Forestar. Former holders of our Common Stock who have not complied with the above-described exchange and payment procedures will thereafter only look to Forestar for payment of the merger consideration.

        Forestar and the paying agent will be entitled to deduct and withhold from the merger consideration otherwise payable to any person such amounts as may be required to be deducted and withheld with respect to the making of such payments under the Code or under any provision of state, local or foreign tax law.

        If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to make an affidavit of the certificate's loss, theft or destruction, and if required by Forestar or the paying agent, post a bond in a reasonable amount as Forestar may direct to protect it against any claim that may be made against it with respect to that certificate. Delivery is at risk of the holder. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.


Certificate of Incorporation, Bylaws, Directors and Officers

        When the Merger is completed, the certificate of incorporation and the bylaws of Merger Sub in effect immediately prior to the effective time of the Merger will be the certificate of incorporation and the bylaws of the surviving corporation. The directors of Merger Sub at the effective time of the Merger will be the directors of the surviving corporation immediately following the effective time of the Merger. The officers of Merger Sub at the effective time of the Merger will be the officers of the surviving corporation immediately following the effective time of the Merger.


Representations and Warranties

        The Merger Agreement contains representations and warranties made by us to Forestar and Merger Sub, and by Forestar and Merger Sub to us, and may be subject to important limitations and qualifications agreed to by the parties in connection with the negotiation of the terms of the Merger Agreement. The statements embodied in the representations and warranties made by us are in some cases subject to important exceptions, limitations and supplemental information that we delivered to Forestar and Merger Sub in connection with signing the Merger Agreement. Certain representations and warranties were made as of a specified date, may be subject to contractual standards of materiality

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different from those generally applicable under federal securities laws or may have been included in the Merger Agreement for the purpose of allocating risk between the parties rather than to establish matters as facts. For the foregoing reasons, you should not rely on the representations and warranties contained in the Merger Agreement as statements of factual information.

        Our representations and warranties relate to, among other things:

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        Certain of our representations and warranties are qualified by a "Company Material Adverse Effect" standard. "Company Material Adverse Effect" is defined to mean (A) any fact, circumstance, event, change, development, effect or occurrence that, individually or in the aggregate with other facts, circumstances, events, changes, developments, effects or occurrences, is materially adverse to the business, assets, properties, liabilities, results of operations or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole and (B) any fact, circumstance, event, change, development, effect or occurrence that, individually or in the aggregate with other facts, circumstances, events, changes, developments, effects or occurrences, materially impairs the ability of the Company and its subsidiaries to consummate the transactions contemplated by the Merger Agreement, or prevents or materially delays or materially impairs the ability of the Company or its subsidiaries to perform its obligations under the Merger Agreement or to consummate the Merger or the other transactions contemplated by the Merger Agreement, but does not include (i) facts, circumstances, events, changes, developments, effects or occurrences generally affecting the industries in which the Company and its subsidiaries operate or general economic conditions in either case except to the extent the Company and its subsidiaries are disproportionately affected thereby relative to others in the industry in which the Company and its subsidiaries operate, (ii) facts, circumstances, events, changes, developments, effects or occurrences to the extent directly resulting from the announcement of the execution of the Merger Agreement or the pendency of the transactions contemplated thereby, (iii) fluctuations in the price or trading volume of the Common Stock; provided, that the exception in this clause (iii) will not prevent or otherwise affect a determination that any fact, circumstance, event, change, development, effect or occurrence underlying such fluctuation has resulted in, or contributed to, a Company Material Adverse Effect, (iv) facts, circumstances, events, changes, developments, effects or occurrences to the extent resulting from any changes in applicable law or in GAAP (or the interpretation thereof) after the date of the Merger Agreement, (v) any failure by the Company to meet any published analyst estimates or expectations of the Company's revenue, earnings or other financial performance or results of operations for any period or any failure by the Company to meet its internal budgets, plans, projections or forecasts of its revenues, earnings or other financial performance or results of operations; provided, that the exception in this clause (v) will not prevent or otherwise affect a determination that any fact, circumstance, event, change, development, effect or occurrence underlying such failure has resulted in, or contributed to, a Company Material Adverse Effect, (vi) acts of war or terrorism (or the escalation of the foregoing) or natural disasters or other force majeure events except to the extent the Company and its subsidiaries are disproportionately affected thereby relative to others in the industry in which they operate, or (vii) acts or omissions by the Company taken with the specific prior written consent of Forestar.

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        The Merger Agreement also contains various representations and warranties made by Forestar and Merger Sub that are subject, in some cases, to specified exceptions and qualifications. Their representations and warranties relate to:

        Certain of Forestar's and Merger Sub's representations and warranties are qualified by a "Parent Material Adverse Effect" standard. "Parent Material Adverse Effect" is defined to mean any fact, circumstance, event, change, development, effect or occurrence that, individually or in the aggregate with other facts, circumstances, events, changes, developments, effects or occurrences, materially impairs the ability of Forestar and its subsidiaries to consummate the transactions contemplated by the Merger Agreement, or prevents or materially delays or materially impairs the ability of Forestar or its subsidiaries to perform its obligations under the Merger Agreement or to consummate the Merger or the other transactions contemplated by the Merger Agreement.


Conduct of Our Business Prior to Closing

        We have agreed in the Merger Agreement that, subject to certain exceptions, until the effective time of the Merger, unless Forestar agrees in writing or as otherwise contemplated, permitted or required by the Merger Agreement, we will, and we will cause each of our subsidiaries, to:

        We have also agreed in the Merger Agreement that, subject to certain exceptions, until the effective time of the Merger, unless Forestar agrees in writing or as otherwise contemplated, permitted or required by the Merger Agreement, we will not, and we will cause each of our subsidiaries not, to:

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Stockholders Meeting

        The Merger Agreement requires us to duly call, give notice of and hold a special meeting of our stockholders for the purpose of obtaining the vote of our stockholders necessary to adopt the Merger Agreement, even if we change our recommendation that our stockholders vote in favor of adopting the Merger Agreement, unless the Merger Agreement is terminated as described below in "The Merger Agreement—Termination of the Merger Agreement."


Activities During the "Go-Shop" and "No-Shop" Periods

        During the period beginning on the date of the Merger Agreement and continuing until 11:59 p.m. (New York City time) on July 3, 2012, such period being referred to as the "go-shop" period, the Company and its subsidiaries and their respective officers, directors, advisors, affiliates and other representatives, which are referred to herein as "representatives," may:

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        Except as expressly permitted in the Merger Agreement, beginning at 12:01 a.m. (New York City time) on July 4, 2012, such period being referred to as the "no-shop" period, the Company and its subsidiaries shall:

        However, the Company may continue to engage with, and provide information to, a "qualified go-shop bidder" (generally, a person from whom the Company receives an acquisition proposal during the go-shop period that the Board concludes is or is reasonably expected to lead to a superior proposal) through July 17, 2012, including with respect to any amended or revised acquisition proposal submitted by such a bidder.

        In addition, the Company and the Board of Directors may participate or engage in discussions or negotiations with, and provide information to, a third party if at any time on or after the commencement of the no-shop period, and prior to the Company obtaining the required vote from its stockholders to adopt the Merger Agreement, (i) the Company receives an unsolicited bona fide written acquisition proposal from such third party, (ii) the Board of Directors determines in good faith that such proposal constitutes, or is reasonably likely to result in, a superior proposal, after receiving such advice of its financial advisors, and (iii) the Board of Directors determines in good faith, after consultation with its outside counsel, that the failure to participate in such negotiations or discussions or to furnish such information or data to such third party would be reasonably expected to result in a breach of the Board of Director's fiduciary duties under applicable law. The Company may not deliver any information to such third party without entering into an acceptable confidentiality agreement with that party.

        An "acquisition proposal" is generally defined as any proposal, whether or not in writing, for any "acquisition transaction." An "acquisition transaction" is defined as any transaction or series of transactions involving the (i) direct or indirect acquisition or purchase of a business or assets that (in the aggregate) constitutes 20% or more of the net revenues, net income or the assets (based on the fair market value thereof) of the Company and its subsidiaries, taken as a whole, (ii) direct or indirect acquisition or purchase of 20% or more of any class of equity securities or capital stock of the Company or any of its subsidiaries whose business (in the aggregate) constitutes 20% or more of the net revenues, net income or assets of the Company and its subsidiaries, taken as a whole, or (iii) merger, consolidation, restructuring, transfer of assets or other business combination, sale of shares of capital stock, tender offer, exchange offer, recapitalization, stock repurchase program or other similar transaction or series of transactions that if consummated would result in any person or persons beneficially owning 20% or more of any class of equity securities of the Company or any of its subsidiaries whose business (in the aggregate) constitutes 20% or more of the net revenues, net income or assets of the Company and its subsidiaries, taken as a whole, other than the transactions contemplated by the Merger Agreement.

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        A "superior proposal" is generally defined as any bona fide written acquisition proposal made after the date of the Merger Agreement that was not solicited or initiated by the Company or any of its subsidiaries or any of their respective representatives in breach of the Merger Agreement, made by a third party to purchase all or substantially all of the Company's assets or all of the outstanding equity securities of the Company pursuant to a tender offer, exchange offer or merger (i) on terms which the Board of Directors determines in good faith to be superior to the Company and its stockholders (in their capacity as stockholders) from a financial point of view as compared to the transactions contemplated by the Merger Agreement and to any alternative transaction or changes to the terms of the Merger Agreement proposed by Forestar (after consultation with its financial advisors, and taking into account all financial, legal and regulatory terms and conditions of the acquisition proposal and the Merger Agreement, including any changes to the terms of the Merger Agreement offered by Forestar in response to such superior proposal, including any conditions to and expected timing of consummation, and any risks of non-consummation, of such acquisition proposal and taking into account all other legal, financial and regulatory aspects of such proposal), and (ii) which the Board of Directors reasonably believes is likely to be consummated on its terms.

        Except as permitted by the terms of the Merger Agreement, the Merger Agreement provides that neither our Board of Directors nor any committee of our Board of Directors directly or indirectly:

        Notwithstanding these restrictions, the Merger Agreement provides that prior to obtaining the required stockholder vote, so long as the Company has complied in all material respects with certain provisions in the Merger Agreement, the Board of Directors may make an adverse recommendation change, or terminate the Merger Agreement, because it received a superior proposal if, and only after, the Board of Directors (x) provides written notice to Forestar advising it that the Board of Directors or a committee thereof has received a superior proposal, specifying the material terms and conditions of such superior proposal, and identifying the person or group making such superior proposal, and (y) determines in good faith, (1) after receipt of advice from its financial advisors that any alternative transaction (including any modifications to the terms of the Merger Agreement) proposed by Forestar is not at least as favorable to the Company and its stockholders from a financial point of view (taking into account, among other things, all legal, financial, regulatory and other aspects of the proposal and identity of the offeror and the financial capacity of the offeror to consummate the transaction) as the superior proposal, and (2) after receipt of advice from its outside counsel that its failure to do so would be reasonably expected to result in a breach of its fiduciary duties under laws applicable to the Company; provided, however, that (I) neither the Board of Directors nor any committee thereof may make an adverse recommendation change or terminate the Merger Agreement pursuant to the foregoing until the fourth business day after receipt of a notice of superior proposal by Forestar, (II) any change in the financial or other material terms of a superior proposal will require a new notice

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and a new four business day period, and (III) during any such period, if requested by Forestar, the Company will negotiate in good faith with respect to any changes or modifications to the Merger Agreement which would allow the Board of Directors not to make such adverse recommendation change or terminate the Merger Agreement consistent with its fiduciary duties.

        In addition, the Merger Agreement provides the Board of Directors may generally make an adverse recommendation change because of an "intervening event" if the Board of Directors determines in good faith, after consultation with its outside legal counsel and any other advisor it chooses to consult, that the failure to make such adverse recommendation change would be reasonably expected to result in a breach of its fiduciary duties under applicable law and provides written notice of its intention to make the adverse recommendation change to Forestar at least four business days in advance. "Intervening event" means any material event, development, circumstance, occurrence or change in circumstances or facts (including any change in probability or magnitude of circumstances) not related to an acquisition proposal that was not known or reasonably foreseeable to the Board of Directors on the date of the Merger Agreement (or if known, the magnitude or material consequences of which were not known or reasonably foreseeable to or understood by the Board of Directors as of such date).

        If we receive a superior proposal, subject to the requirements described above, the Company or its subsidiaries may enter into an acquisition agreement with respect to such proposal and terminate the Merger Agreement as set forth in "The Merger Agreement—Termination of the Merger Agreement" at page 77.


D&O Indemnification and Insurance

        Forestar and Merger Sub have agreed that all rights to exculpation, indemnification and advancement of expenses now existing in favor of the current or former directors, officers or employees of the Company or its subsidiaries as provided in their respective certificates of incorporation or bylaws or other organizational documents or in any agreement to which the Company or any of its subsidiaries is a party, shall survive the Merger and shall continue in full force and effect. For a period of six years from the effective time of the Merger, Forestar and the surviving corporation will maintain in effect the exculpation, indemnification and advancement of expenses provisions of the Company's and any of its subsidiaries' certificate of incorporation and bylaws or similar organizational documents in effect immediately prior to the effective time of the Merger or in any indemnification agreements of the Company or its subsidiaries with any of their respective directors, officers or employees in effect immediately prior to the effective time. In addition, prior to the closing of the Merger, the Company shall purchase, and after the effective time the surviving corporation shall maintain, directors' and officers' liability insurance covering, for a period of six years after the effective time of the Merger, the directors and officers of the Company and its subsidiaries who are currently covered by the Company's existing directors' and officers' liability insurance with respect to claims arising from facts or events that occurred before the effective time of the Merger, on terms and conditions no less favorable to such directors and officers than those in effect on the date of the Merger Agreement. However, the surviving corporation will not be required to maintain directors' and officers' liability insurance policies having aggregate annual premiums in excess of 250% of the per annum rate of premium currently paid by the Company and its subsidiaries for such insurance. In lieu of such insurance coverage, Forestar may direct the Company to purchase "tail" insurance coverage, at a cost no greater than the aggregate amount that the surviving corporation would be permitted to spend during the six-year period provided for above, that provides coverage no less favorable than the coverage described above.

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Agreement to Take Appropriate Action

        The parties are required to use their commercially reasonable efforts to cause the conditions to the closing of the Merger to be satisfied, including:


Financing of the Merger Consideration

        The obligations of Forestar and Merger Sub under the Merger Agreement are not subject to any conditions regarding their or any other person's ability to obtain financing for the consummation of the Merger and related transactions. Forestar and Merger Sub have represented in the Merger Agreement that they will have available at such time as the closing conditions are met all funds necessary for the payment of the aggregate merger consideration, to satisfy all of their respective obligations under the Merger Agreement and to pay all related fees and expenses.


Other Covenants

        The Merger Agreement contains additional agreements among the Company, Forestar and Merger Sub relating to, among other things:


Conditions to the Merger

Conditions to Each Party's Obligations

        Each party's obligation to complete the Merger is subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:

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Conditions to Forestar's and Merger Sub's Obligations

        The obligation of Forestar and Merger Sub to complete the Merger is subject to the satisfaction or waiver of the following conditions:

Conditions to the Company's Obligations

        Our obligation to complete the Merger is subject to the satisfaction or waiver of the following additional conditions:

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Termination of the Merger Agreement

Mutual Termination Rights

        The Merger Agreement may generally be terminated by Forestar or the Company if:

Forestar Termination Rights

        The Merger Agreement may generally be terminated by Forestar if:

Company Termination Rights

        The Merger Agreement may generally be terminated by the Company if prior to obtaining the required stockholder vote, the Company desires to enter into an agreement with respect to a superior proposal after having complied with certain provisions of the Merger Agreement (including the obligation of the Company to negotiate with Forestar after its receipt of notification of the Company's intent to enter into an agreement with respect to such superior proposal).

Effect of Termination

        If the Merger Agreement is terminated as specified above, the Merger Agreement will have no further effect, except in certain circumstances requiring the payment of a termination fee and/or the reimbursement of certain of Forestar's expenses. See "The Merger Agreement—Termination Fee and

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Expenses" below. If the Merger Agreement is terminated, certain covenants will survive the termination.


Termination Fee and Expenses

Company Termination Fee and Reimbursement of Expenses

        We have agreed to pay to Forestar a termination fee of $5.2 million, in cash, if the Merger Agreement is terminated in any of the circumstances described in "Termination of the Merger Agreement—Forestar Termination Rights" or "—Company Termination Rights." Subject to certain conditions, the termination fee will generally be reduced from $5.2 million to $3.0 million if the Merger Agreement is terminated prior to the end of the go-shop period (or on or prior to July 17, 2012 if the termination relates to an acquisition proposal made by a qualified go-shop bidder) with respect to a termination event described under "Termination of the Merger Agreement—Forestar Termination Rights" or "—Company Termination Rights" unless the termination relates to a breach of the Company's obligations relating to solicitations or acquisition proposals.

        In the event that (i) an acquisition proposal has been proposed or announced by any person and (ii) thereafter the Merger Agreement is terminated by either the Company or Forestar because the Merger is not completed by December 31, 2012 or because the Merger is not adopted by the Company's stockholders at the special meeting, then the Company shall reimburse Forestar for up to $1.25 million of its expenses associated with the Merger Agreement. Furthermore, if those expenses become reimbursable in the circumstances described in the preceding sentence and, within 365 days after the termination of the Merger Agreement, the Company or any of its subsidiaries enters into any definitive agreement providing for an acquisition transaction, or an acquisition transaction is consummated, then the Company shall pay Forestar the termination fee, reduced by the amount of expenses already paid to Forestar.


Litigation Relating to the Merger

        On June 13, 2012, a lawsuit titled Schatz v. Credo Petroleum Corp., Forestar Group Inc., Brown, et al., C.A. No. 12-CV-01538-REB-MEH (D. Colo.), was filed in the U.S. District Court for the District of Colorado against the Company, Forestar, and each of the Company's directors by a purported stockholder alleging that the Company and the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Forestar had aided and abetted those breaches. The plaintiff seeks certification of the suit as a class action. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that it in the best interests of the stockholders. On July 9, 2012, Credo and its directors, joined by Forestar, filed a Motion to Dismiss the Schatz action for failure to state a claim upon which relief could be granted. Also on July 9, 2012, Credo and its directors, joined by Forestar, filed a Motion to Stay the Schatz action in favor of parallel proceedings in the Delaware Court of Chancery. On August 2, 2012, plaintiff Schatz voluntarily dismissed her action.

        On June 19, 2012, a purported class action lawsuit, titled Farley v. Huffman, Credo Petroleum Corp., Forestar Group, Inc., et al., C.A. No. 7638-VCP (Del. Ch.), was filed in the Court of Chancery of the State of Delaware against the Company, Forestar, Merger Sub and each of the Company's directors by a purported stockholder, on behalf of the public stockholders of the Company, alleging that the Company and the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Credo, Forestar and Merger Sub had aided and abetted the alleged breaches. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among

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other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders. On July 16, 2012, plaintiff in the Farley action voluntarily dismissed her complaint.

        On June 21, 2012, a purported class action lawsuit, titled Franklin v. Brown, Credo Petroleum Corp., Forestar Group Inc., et al., C.A. No. 7641-VCP (Del. Ch.), was filed in the Court of Chancery of the State of Delaware against the Company, Forestar, Merger Sub and each of the Company's directors by a purported stockholder, on behalf of the public stockholders of the Company, alleging that the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Forestar and Merger Sub had aided and abetted the alleged breaches. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders.

        On June 22, 2012, a purported class action lawsuit, titled Newton v. Huffman, Credo Petroleum Corp., Forestar Group Inc., et al., C.A. No. 7648-VCP (Del. Ch.), was filed in the Court of Chancery of the State of Delaware against the Company, Forestar, Merger Sub and each of the Company's directors by a purported stockholder, on behalf of the public stockholders of the Company, alleging that the Company and the Company's directors had breached their fiduciary duties to the stockholders in connection with the Merger Agreement and that Credo, Forestar and Merger Sub had aided and abetted the alleged breaches. In the complaint, the plaintiff alleges, among other things, that the consideration to be paid pursuant to the Merger Agreement is inadequate. The complaint seeks, among other relief, to enjoin the defendants from consummating the Merger and to direct the Company's directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the stockholders.

        On July 18, 2012, plaintiff Franklin filed an amended complaint in the Delaware Court of Chancery, additionally claiming that Credo and its directors breached their fiduciary duties by issuing a materially misleading preliminary proxy statement. Also on July 18, 2012, the Delaware Court of Chancery consolidated the Franklin and Newton actions, captioning the consolidated case In re Credo Petroleum Corporation Shareholder Litigation, Consolidated C.A. No. 7641-VCP. Also on July 18, 2012, plaintiffs in the consolidated Delaware action filed their Motion for Expedited Proceedings and Motion for Preliminary Injunction. On July 26, 2012, the Court of Chancery denied plaintiffs' Motion for Expedited Proceedings without prejudice.

        On July 27, 2012, a lawsuit titled Gavrilas v. Huffman, Skewes, Hall, et al., File No. 45601011, was filed in the Denver County District Court 2nd JD against the Company, Forestar and each of the Company's directors by a purported stockholder. The complaint alleges, among other things, that the Company's directors breached their fiduciary duties to the Credo stockholders by agreeing to an inadequate price and issuing a materially misleading proxy statement, and that Forestar aided and abetted those breaches. The complaint seeks an injunction, damages and attorneys' fees.

        The Company, Forestar, and the Company's Board of Directors believe that the claims in the above complaints are entirely without merit and intend to defend the actions vigorously.


Miscellaneous

Amendment and Waiver

        The Merger Agreement may be amended by the parties in writing by action of their respective boards of directors; provided, that, after the Company's stockholder vote, no such amendment will be made which by applicable law requires further approval by the Company's stockholders, without first obtaining such approval.

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Assignment

        The Merger Agreement may not be assigned without the prior written consent of the other parties, except each of Forestar's and Merger Sub's rights and obligations may be assigned to and assumed by any subsidiary of Forestar or Merger Sub or to any lender to each of Forestar and Merger Sub or any subsidiary or affiliate of Forestar or Merger Sub as security for obligations to such lender.

Consent to Jurisdiction; Venue

        The parties have consented to jurisdiction and venue with the Delaware Court of Chancery, and any state appellate court therefrom within the State of Delaware (or, only if the Delaware Court of Chancery declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware).

Waiver of Jury Trial

        Each party waived its right to a jury trial.

Governing Law

        The Merger Agreement is governed by Delaware law, without regard to its conflicts of laws principles.


FEES AND EXPENSES

        All expenses incurred in connection with the Merger Agreement will be paid by the party incurring such expenses, except as set forth above.

        The estimated fees and expenses incurred or expected to be incurred in connection with the Merger are as follows:

Description
  Amount  

Financial advisory fees

  $ 611,129  

Legal fees and expenses

  $ 300,000  

Proxy solicitation expenses

  $ 15,000  

SEC filing fees

  $ 16,781  

Printing and mailing costs

  $ 35,500  

Paying agent fees

  $ 23,000  

Total

  $ 1,001,410  

        In addition, it is expected that Forestar will incur approximately $7 million of expenses, including legal and other advisory fees, and excluding costs associated with financing the consummation of the Merger and related transactions.


AGREEMENTS INVOLVING COMMON STOCK

Voting Agreement

        The following is a summary of the material provisions of the Voting Agreement, a copy of which is attached to this proxy statement as Annex E, and which we incorporate by reference into this proxy statement. This summary may not contain all of the information about the Voting Agreement that is important to you. We encourage you to read carefully the Voting Agreement in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Voting Agreement and not by this summary or any other information contained in this proxy statement.

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        In connection with the Merger, Forestar entered into a Voting Agreement, dated as of June 3, 2012 (the "Voting Agreement"), with James T. Huffman, RCH Energy Opportunity Fund III, LP and RCH Energy SSI Fund, LLP (each a "Stockholder" and collectively, the "Stockholders"), who collectively own approximately 21.1% of the outstanding Common Stock. Pursuant to the Voting Agreement, the Stockholders have agreed to vote in favor of the adoption of the Merger Agreement and against proposals or other corporate actions that would prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement. In addition, the Stockholders have agreed, subject to certain exceptions, not to acquire or dispose of shares of Common Stock. The Voting Agreement will terminate upon the earlier of the termination of the Merger Agreement, an amendment to the Merger Agreement that reduces the aggregate consideration payable to holders of our Common Stock, and the effective time of the Merger.


MARKET PRICES OF COMMON STOCK

        Our Common Stock is traded on Nasdaq under the symbol "CRED". The following table sets forth the high and low sales prices per share of our Common Stock on Nasdaq for the periods indicated.


Market Information

 
  Common Stock  
 
  High   Low  

Fiscal Year Ending October 31, 2010

             

1st Quarter

  $ 10.52     8.70  

2nd Quarter

  $ 10.47     8.40  

3rd Quarter

  $ 9.91     7.13  

4th Quarter

  $ 8.63     7.67  

Fiscal Year Ending October 31, 2011

             

1st Quarter

  $ 11.84     7.36  

2nd Quarter

  $ 14.79     11.07  

3rd Quarter

  $ 11.66     9.16  

4th Quarter

  $ 10.01     7.46  

Fiscal Year Ending October 31, 2012

             

1st Quarter

  $ 10.70     9.03  

2nd Quarter

  $ 11.68     9.67  

3rd Quarter

  $ 14.48     9.93  

        The closing sale price of our Common Stock on Nasdaq on June 1, 2012, which was the last trading day before we announced the Merger, was $10.86. On August 9, 2012, which was the last trading day before the date of this proxy statement, the Common Stock closed at $14.47 per share. You are encouraged to obtain current market quotations for the Common Stock in connection with voting your shares.


APPRAISAL RIGHTS

        Under Delaware law, stockholders of record of Common Stock have the right to dissent from the Merger and to receive payment in cash for the fair value of their Common Stock, as determined by the Delaware Court of Chancery, referred to herein as the "Chancery Court". Any of our stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the Delaware General Corporation Law in order to perfect their rights. Delaware law requires strict compliance with the statutory procedures. A copy of Section 262 is attached to this proxy statement as Annex D.

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        The following is a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to dissent from the Merger and perfect the stockholder's appraisal rights. This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 262 of the Delaware General Corporation Law. The following summary does not constitute any legal or other advice that you exercise your rights to appraisal under Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Annex D because failure to timely and properly comply with the requirements of Section 262 will result in the loss of your appraisal rights under Delaware law. Section 262 requires that stockholders be notified not less than 20 days before the special meeting to vote on the Merger that dissenters' appraisal rights will be available. A copy of Section 262 must be included with such notice. This proxy statement constitutes our notice to our stockholders of the availability of appraisal rights in connection with the Merger in compliance with the requirements of Section 262.

        If you elect to demand appraisal of your shares, 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 consideration offered for your shares of our Common Stock as provided for in the Merger Agreement, but will have no appraisal rights with respect to your shares of our Common Stock.

        All demands for appraisal should be addressed to the Company at 1801 Broadway, Suite 900, Denver, Colorado 80202, Attention: Secretary, should be delivered before the vote on the Merger is taken at the special meeting and should be executed by, or on behalf of, the record holder of the shares of our Common Stock. The demand for appraisal must reasonably inform us of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares.

        To be effective, a demand for appraisal by a holder of our Common Stock must be made by, or in the name of, such record stockholder, fully and correctly, as the stockholder's name appears on his, her or its stock certificate(s) and cannot be made by the beneficial owner if he, she or it does not also hold the shares of record. The beneficial holder must, in such cases, have the record owner submit the required demand in respect of such shares.

        If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal must be made in such capacity; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand 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 demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand,

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he, she or it is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a nominee for others, may exercise his, her or its right of appraisal with respect to the shares held for one or more beneficial owners, while not exercising this right for other beneficial owners. In such case, the written demand should state the number of shares as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of such record owner.

        If you hold your shares of our Common Stock in a brokerage or bank account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker, bank or such other nominee to determine the appropriate procedures for the making of a demand for appraisal by such nominee. Within 10 days after the effective date of the Merger, the surviving corporation must give written notice of the date the Merger became effective to each Company stockholder who has properly filed a written demand for appraisal and who did not vote in favor of the Merger.

        Within 120 days after the effective date of the Merger, either the surviving corporation or any stockholder who has complied with the requirements of Section 262 may commence an appraisal proceeding by filing a petition in the Chancery Court demanding a determination of the fair value of the shares held by all stockholders entitled to appraisal. The surviving corporation has no obligation to file such a petition. There is no present intent on the part of the Company to file an appraisal petition, and stockholders seeking to exercise appraisal rights should not assume that the surviving corporation will file such a petition. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify such stockholder's previous written demand for appraisal.

        At any time within 60 days after the effective date of the Merger, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw the demand and accept the consideration offered pursuant to the Merger Agreement for his, her or its shares of our Common Stock. Any attempt to withdraw an appraisal demand more than 60 days after the effective date of the Merger will require the written approval of the surviving corporation. No appraisal proceeding in the Chancery Court will be dismissed as to any stockholder without the approval of the Chancery Court, and such approval may be conditioned upon such terms as the Chancery Court deems just; provided, however, that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may, within 60 days after the effective date of the Merger, withdraw his, her or its demand for appraisal and accept the consideration offered pursuant to the Merger Agreement. If the surviving corporation does not approve a request to withdraw a demand for appraisal when that approval is required or, except with respect to a stockholder who withdraws such stockholder's demand for appraisal in accordance with the proviso in the immediately preceding sentence, if the Chancery Court does not approve the dismissal of an appraisal proceeding, the stockholder will be entitled to receive only the appraised value determined in any such appraisal proceeding, which value could be less than, equal to or more than the consideration offered pursuant to the Merger Agreement. Within 120 days after the effective date of the Merger, any stockholder who has complied with Section 262 will be entitled, upon written request, to receive from the surviving corporation a statement setting forth the aggregate number of shares of our Common Stock not voted in favor of the Merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such statement must be mailed within 10 days after a written request has been received by the surviving corporation or within 10 days after the expiration of the period for delivery of demands for appraisal, whichever is later. Notwithstanding the foregoing, a person who is the beneficial owner of shares of our Common Stock held either in a voting trust or by a nominee on behalf of such person may, in such person's own name, file a petition or request from the Company the statement described in this paragraph.

        If a petition for appraisal is duly filed by a stockholder and a copy of the petition is served upon the surviving corporation, the surviving corporation will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all

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stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached. After notice to dissenting stockholders who demanded appraisal of their shares as required by the Chancery Court, the Chancery Court is empowered to conduct a hearing upon the petition, to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Chancery Court may require the stockholders who have demanded appraisal for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Chancery Court may dismiss the proceedings as to such stockholder.

        After the Chancery Court determines the stockholders entitled to appraisal of their shares of our Common Stock, the appraisal proceeding shall be conducted in accordance with the rules of the Chancery Court, including any rules specifically governing appraisal proceedings. Through such proceedings, the Chancery Court will determine the "fair value" of the shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the fair value. When the value is determined, the Chancery Court will direct the payment of such value, with interest thereon accrued during the pendency of the proceeding to be paid in accordance with Section 262 and as the Chancery Court so determines, to the stockholders entitled to receive the same, upon surrender by such holders of the certificates representing such shares. Unless the Chancery Court, in its discretion, determines otherwise for good cause shown, interest from the effective date of the Merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the Merger and the date of payment of the judgment.

        In determining fair value, the Chancery Court is required to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered, and that "fair price obviously requires consideration of all relevant factors involving the value of a company." The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the Merger that throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the Merger." In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a "narrow exclusion [that] does not encompass known elements of value," but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court also stated that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the Merger and not the product of speculation, may be considered."

        You should be aware that the fair value of your shares as determined under Section 262 could be less than, equal to or more than the consideration that you are entitled to receive pursuant to the Merger Agreement. Moreover, the Company does not anticipate offering more than the consideration stockholders are entitled to receive pursuant to the Merger Agreement to any stockholder exercising appraisal rights and reserves the right to assert, in any appraisal proceeding, that, for the purposes of Section 262, the fair value of a share of Common Stock is less than such consideration. You should be aware that investment banking opinions as to the fairness, from a financial point of view, of the consideration payable in the Merger are not opinions as to fair value under Section 262.

        Costs of the appraisal proceeding may be imposed upon the surviving corporation and the stockholders participating in the appraisal proceeding by the Chancery Court as the Chancery Court

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deems equitable in the circumstances. However, costs do not include attorneys' fees and expert witness fees. Each dissenting stockholder is responsible for his, her or its attorneys' and expert witness fees, although, upon the application of a stockholder, the Chancery Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who has duly demanded appraisal rights will not, after the effective date of the Merger, be entitled to vote shares subject to such demand for any purpose or to receive payments of dividends or any other distribution with respect to such shares (other than with respect to payment as of a record date prior to the effective date).

        If no petition for appraisal is filed within 120 days after the effective date of the Merger, or if a stockholder delivers a written withdrawal of his, her or its demand for appraisal and accepts the merger consideration in accordance with Section 262, then the right of such stockholder to appraisal will cease and such stockholder will be entitled to receive the consideration offered for his, her or its shares of our Common Stock pursuant to the Merger Agreement.

        In view of the complexity of Section 262, any of our stockholders who may wish to dissent from the Merger and pursue appraisal rights should consult their legal advisors. Failure to take any required step in connection with exercising appraisal rights may result in the termination or waiver of such rights.


BENEFICIAL OWNERSHIP OF COMMON STOCK

        The following table sets forth certain information regarding the beneficial ownership of the shares of our Common Stock as of August 10, 2012 by:

        On August 10, 2012, we had 10,041,164 shares of Common Stock outstanding. Except as noted, all information with respect to beneficial ownership has been furnished by the respective director, executive officer or beneficial owner of more than 5% of our Common Stock, or is based on filings with the SEC. Unless otherwise indicated below, the persons named below have sole voting and investment power with respect to the number of shares set forth opposite their names. Beneficial ownership of the Common Stock has been determined for this purpose in accordance with the Exchange Act, which provides, among other things, that a person is deemed to be the beneficial owner of the Common Stock if that person, directly or indirectly, has or shares voting power or investment power with respect to such stock or has the right to acquire such ownership within 60 days. The amounts shown in the table do not purport to represent beneficial ownership for any purpose other than compliance with the SEC's reporting requirements. Beneficial ownership as determined in this manner does not necessarily bear on the economic incidence of ownership of the Common Stock.

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Unless otherwise indicated below, the address of those identified in the table is c/o CREDO Petroleum Corporation, 1801 Broadway, Suite 900, Denver, Colorado 80202.

Name and Address of Beneficial Owner
  Number of
Shares
Beneficially
Owned
  Percentage of
Shares
Beneficially
Owned (%)
 

Clarence H. Brown(1)

    91,080     *  

Oakley Hall(2)

    120,000     1.20  

John Rigas(3)

    0     *  

H. Leigh Severance(4)

    196,885     1.96  

William Skewes(5)

    70,301     *  

Marlis E. Smith, Jr.(6)

    50,000     *  

Michael D. Davis

    0     *  

Alfred B. Neely(7)

    20,000     *  

Brian Mazeski(8)

    0     *  

James T. Huffman(9)(12)

    746,555     7.4  

All executive officers and directors as a group (9 individuals)(10)

    1,294,821     12.7  

RCH Energy SSI Fund, LP(11)

   
1,150,000
   
11.5
 

RCH Energy Opportunity Fund III, LP(11)(12)
3953 Maple Avenue, Suite 180,
Dallas, Texas 75219

    687,000     6.8  

Forestar Group Inc.(13)
6300 Bee Cave Road, Building Two, Suite 500
Austin, Texas 78746-5149

    2,179,149     21.6  

(1)
Includes 61,830 shares held in the name of a trust, of which Mr. Brown is a beneficiary, and 29,250 shares of Common Stock subject to stock options that are currently exercisable.

(2)
Includes 100,000 shares held in the name of a family investment partnership over which Mr. Hall has sole voting and dispositive power and 20,000 shares of Common Stock subject to stock options that are currently exercisable.

(3)
Mr. Rigas is a partner in RCH Energy SSI Fund, LP and RCH Energy Opportunity Fund III, LP. The two funds, combined, hold 1,837,000 shares or 18.3% of the Common Stock. Based on a Schedule 13D filed on May 25, 2011, Robert J. Raymond and RR Advisors, LLC have dispositive power over the 1,837,000 shares. Forestar entered into a Voting Agreement, dated June 3, 2012, with James Huffman, RCH Energy Opportunity Fund III, LP and RCH Energy SSI Fund, LP. Pursuant to the Voting Agreement, such stockholders have agreed to vote in favor of the adoption of the Merger Agreement and against proposals or other corporate actions that would prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement.

(4)
Consists of 196,885 shares of Common Stock.

(5)
Consists of 70,301 shares of Common Stock.

(6)
Consists of 50,000 shares of Common Stock.

(7)
Consists of 20,000 shares of Common Stock subject to stock options that are currently exercisable. Alfred B. Neely retired from his position as Chief Financial Officer of the Company effective July 31, 2012.

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(8)
Brian Mazeski became the Company's Chief Accounting Officer, Principal Financial Officer and Principal Accounting Officer upon the retirement of Alfred B. Neely.

(9)
Includes 285,586 shares of Common Stock owned by Mr. Huffman, 56,563 shares of Common Stock subject to stock options that are currently exercisable and 404,406 shares of Common Stock owned by members of Mr. Huffman's immediate family, who retain investment and voting power.

(10)
Includes 764,602 shares of Common Stock, 404,406 shares of Common Stock owned by members of James T Huffman's immediate family, who retain investment and voting power, and 127,813 shares of Common Stock subject to stock options that are currently exercisable.

(11)
Mr. Rigas is a partner in RCH Energy SSI Fund, LP and RCH Energy Opportunity Fund III, LP. The two funds, combined, hold 1,837,000 shares or 18.3% of the Common Stock. Based on a Schedule 13D filed on May 25, 2011, Robert J. Raymond and RR Advisors, LLC have dispositive power over the 1,837,000 shares. Forestar entered into a Voting Agreement, dated June 3, 2012, with James Huffman, RCH Energy Opportunity Fund III, LP and RCH Energy SSI Fund, LP. Pursuant to the Voting Agreement, such stockholders have agreed to vote in favor of the adoption of the Merger Agreement and against proposals or other corporate actions that would prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement.

(12)
Forestar entered into a Voting Agreement, dated June 3, 2012, with James Huffman, RCH Energy Opportunity Fund III, OP and RCH Energy SSI Fund, LP. Pursuant to the Voting Agreement, such stockholders have agreed to vote in favor of the adoption of the Merger Agreement and against proposals or other corporate actions that would prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement.

(13)
Includes an aggregate of 2,179,149 shares of Common Stock, including James T. Huffman's 56,563 shares of Common Stock subject to stock options that are currently exercisable. Forestar entered into a Voting Agreement, dated June 3, 2012, with James T. Huffman, RCH Energy Opportunity Fund III, LP and RCH Energy SSI Fund, LP. Pursuant to the Voting Agreement, such stockholders have agreed to vote in favor of the adoption of the Merger Agreement and against proposals or other corporate actions that would prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement. The Voting Agreement will terminate upon the earlier of the termination of the Merger Agreement, an amendment to the Merger Agreement that reduces the aggregate consideration payable to the Company's stockholders, and the effective time of the Merger. As a result of the Voting Agreement, Forestar may be deemed to have the power to vote or direct the vote of the securities subject to the Voting Agreement and thus, may be deemed to have beneficial ownership of those securities. Forestar disclaims beneficial ownership of the shares of Common Stock covered by the Voting Agreement and nothing herein shall be construed as an admission that Forestar is the beneficial owner of such shares of Common Stock. The information in this footnote is based on a Schedule 13D filed with the SEC on June 4, 2012 and on information provided to us.

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VOTE ON ADJOURNMENT

        Our stockholders are being asked to approve a proposal that will give us authority to adjourn the special meeting for the purpose of soliciting additional proxies in favor of the proposal to adopt the Merger Agreement if there are not sufficient votes at the time of the special meeting to approve the proposal to adopt the Merger Agreement. If this proposal is approved, the special meeting could be successively adjourned to any date. In addition, our Board of Directors could postpone the meeting before it commences, whether for the purpose of soliciting additional proxies or for other reasons. If the special meeting is adjourned for the purpose of soliciting additional proxies, stockholders who have already submitted their proxies will be able to revoke them at any time prior to their use. If you return a proxy and do not indicate how you wish to vote on any proposal, or if you indicate that you wish to vote in favor of the proposal to adopt the Merger Agreement but do not indicate a choice on the adjournment proposal, your shares will be voted in favor of the adjournment proposal. But if you indicate that you wish to vote against the proposal to adopt the Merger Agreement, your shares will only be voted in favor of the adjournment proposal if you indicate that you wish to vote in favor of that proposal.

        Our Board of Directors unanimously recommends a vote "FOR" adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the Merger Agreement.


ADVISORY VOTE ON NAMED EXECUTIVE OFFICER MERGER-RELATED COMPENSATION ARRANGEMENTS

        As required by Section 14A of the Exchange Act and the applicable SEC rules issued thereunder, which were enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Company is required to submit a proposal to Company stockholders for a non-binding, advisory vote to approve the payment by the Company of certain compensation to the named executive officers of the Company that is based on or otherwise relates to the Merger. This proposal, commonly known as "say-on-golden parachute," and which we refer to as the named executive officer merger-related compensation proposal, gives Company stockholders the opportunity to vote on an advisory basis on the compensation that the Company's named executive officers may be entitled to receive from the Company that is based on or otherwise relates to the Merger.

        The compensation that the Company's named executive officers may be entitled to receive from the Company that is based on or otherwise relates to the Merger is summarized and included in the "The Merger—Golden Parachute Compensation" beginning on page 62. That summary includes all compensation and benefits that may be paid or become payable to the Company's named executive officers by the Company that are based on or otherwise relate to the Merger.

        Our Board of Directors encourages you to review carefully the named executive officer merger-related compensation information disclosed in this proxy statement.

        Our Board of Directors unanimously recommends that our stockholders approve the following resolution:

        "RESOLVED, that the stockholders of CREDO Petroleum Corporation hereby approve, on an advisory basis, the compensation to be paid or become payable by CREDO to its named executive officers that is based on or otherwise relates to the Merger as disclosed pursuant to Item 402(t) of Regulation S-K in the section entitled "The Merger—Golden Parachute Compensation" in CREDO's proxy statement for the special meeting."

        The vote on the named executive officer merger-related compensation proposal is a vote separate and apart from the vote on the proposal to adopt the Merger Agreement. Accordingly, you may vote to approve the proposal to adopt the Merger Agreement and vote not to approve the named executive

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officer merger-related compensation proposal and vice versa. Because the vote on named executive officer merger-related compensation proposal is advisory only, it will not be binding on either the Company or Forestar. Accordingly, if the Merger Agreement is adopted and the Merger is completed, the compensation will be payable, subject only to the conditions applicable thereto, regardless of the outcome of the non-binding, advisory vote of our stockholders.

        The affirmative vote of holders of a majority of the shares of our Common Stock present in person or by proxy and entitled to vote on the matter will be required to approve the named executive officer merger-related compensation proposal.

        Our Board of Directors unanimously recommends a vote "FOR" the named executive officer merger-related compensation proposal.


STOCKHOLDER PROPOSALS

        Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present proper proposals for inclusion in the Company's proxy statement and for consideration at the next annual meeting of the Company's stockholders by submitting their proposals to the Company in a timely manner.

        We intend to hold an annual meeting in 2013 only if the Merger is not completed. If we hold such an annual meeting, we expect it will be more than 30 days after the anniversary date of the 2012 annual meeting. In order to be eligible for inclusion in our proxy materials pursuant to Rule 14a-8 under the Exchange Act for our 2013 annual meeting, if such meeting is held, written notice of any stockholder proposal must be received by us within a reasonable time before we begin to print and mail our proxy materials for such annual meeting. In addition, nominations by stockholders of candidates for director and proposals by stockholders other than pursuant to Rule 14a-8 under the Exchange Act must be submitted in accordance with our bylaws. Our bylaws currently provide that in order for a stockholder to nominate a candidate for election as a director at an annual meeting of stockholders or propose business for consideration at an annual meeting of stockholders, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Company not less than 90 days nor more than 120 days prior to the date of the meeting; provided, however, that in the event that public disclosure of the date of the meeting is first made less than 120 days prior to the date of the meeting, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the day on which such public disclosure of the date of the meeting was made. Our Secretary will provide a copy of our bylaws upon written request and without charge.


OTHER MATTERS

        We currently are not aware of any business or matter other than as indicated above which may be properly presented at the special meeting. If, however, any other matter properly comes before the special meeting, the persons named as proxies in the accompanying proxy will, in their discretion, vote thereon in accordance with their best judgment.


WHERE YOU CAN FIND ADDITIONAL INFORMATION

        The Company files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that the Company files with the SEC at the SEC's Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 800-SEC-0330 for further information on the operation of the Public Reference Room. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549 at prescribed rates. These SEC filings are also available to the public at the Internet site maintained by the SEC at www.sec.gov. Our

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Internet site address is www.credopetroleum.com. You may also contact our Secretary at 303-297-2200 or in writing, 1801 Broadway, Suite 900, Denver, Colorado 80202, Attention: Secretary.

        The SEC allows us to "incorporate by reference" into this proxy statement documents we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that we file with the SEC will update and supersede that information. We incorporate by reference the documents listed below and any documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and prior to the date of the special meeting:

        Notwithstanding the foregoing, information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K, including the related exhibits, is not incorporated by reference in this proxy statement.

        No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This proxy statement is dated August 10, 2012. 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 stockholders shall not create any implication to the contrary.

        If you would like to receive copies of the documents incorporated herein by reference, please contact our Secretary at the phone number or address above to receive such copies and such copies will be sent, without charge, within one business day of receipt of such request.

* * *

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Annex A

AGREEMENT AND PLAN OF MERGER

by and among

FORESTAR GROUP INC.

LONGHORN ACQUISITION INC.

and

CREDO PETROLEUM CORPORATION

dated as of

June 3, 2012


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

ARTICLE I THE MERGER

    A-1  

1.1

 

The Merger

    A-1  

1.2

 

Effective Time

    A-1  

1.3

 

Closing

    A-2  

1.4

 

Certificate of Incorporation and Bylaws of the Surviving Corporation

    A-2  

1.5

 

Directors

    A-2  

1.6

 

Officers

    A-2  

ARTICLE II CONVERSION OF SHARES

    A-2  

2.1

 

Effect of the Merger on Capital Stock

    A-2  

2.2

 

Dissenter's Rights

    A-3  

2.3

 

Treatment of Equity Awards

    A-3  

2.4

 

Exchange of Company Common Stock

    A-4  

2.5

 

Stock Transfer Books

    A-5  

2.6

 

Certain Adjustments

    A-6  

ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY

    A-6  

3.1

 

Organization

    A-6  

3.2

 

Capitalization

    A-7  

3.3

 

Authorization; Validity of Agreement

    A-8  

3.4

 

No Violations; Consents and Approvals

    A-8  

3.5

 

SEC Reports and Financial Statements

    A-9  

3.6

 

Internal Control Over Financial Reporting; Disclosure Controls

    A-11  

3.7

 

Absence of Certain Changes

    A-11  

3.8

 

Absence of Undisclosed Liabilities

    A-12  

3.9

 

Proxy Statement

    A-12  

3.10

 

Company Employee Benefit Plans; ERISA

    A-13  

3.11

 

Litigation; Compliance with Law

    A-15  

3.12

 

Intellectual Property

    A-16  

3.13

 

Material Contracts

    A-17  

3.14

 

Taxes

    A-18  

3.15

 

Environmental Matters

    A-20  

3.16

 

Assets

    A-21  

3.17

 

Overriding Royalty Interests

    A-22  

3.18

 

Insurance

    A-22  

3.19

 

Labor Matters

    A-22  

3.20

 

Affiliate Transactions

    A-24  

3.21

 

Derivative Transactions

    A-24  

3.22

 

Reserve Reports

    A-24  

3.23

 

Investment Company

    A-25  

3.24

 

Required Votes

    A-25  

3.25

 

Rights Plan

    A-25  

3.26

 

Brokers

    A-25  

3.27

 

Recommendation of Company Board; Opinion of Financial Advisor

    A-26  

3.28

 

Maintenance of Properties

    A-26  

3.29

 

Gas Imbalances, Payout Balances

    A-27  

3.30

 

Marketing of Production

    A-27  

3.31

 

Oil and Gas Operations

    A-27  

3.32

 

Additional Drilling Obligations

    A-28  

3.33

 

No Other Representations or Warranties

    A-28  

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND THE MERGER SUB

    A-29  

4.1

 

Organization

    A-29  

Table of Contents

 
   
  Page  

4.2

 

Authorization; Validity of Agreement

    A-29  

4.3

 

No Violations; Consents and Approvals

    A-29  

4.4

 

Proxy Statement

    A-30  

4.5

 

Interim Operations of Merger Sub

    A-30  

4.6

 

Availability of Funds

    A-30  

4.7

 

Brokers

    A-30  

4.8

 

No Other Representations or Warranties

    A-30  

ARTICLE V COVENANTS

    A-31  

5.1

 

Interim Operations of the Company

    A-31  

5.2

 

[RESERVED]

    A-34  

5.3

 

Solicitation; Acquisition Proposals

    A-34  

5.4

 

Access to Information and Properties

    A-38  

5.5

 

Further Action; Reasonable Best Efforts

    A-40  

5.6

 

Proxy Statement; Stockholders' Meeting

    A-41  

5.7

 

Notification of Certain Matters

    A-43  

5.8

 

Directors' and Officers' Insurance and Indemnification

    A-43  

5.9

 

Publicity

    A-44  

5.10

 

Repayment of Indebtedness

    A-44  

5.11

 

Takeover Statute

    A-44  

5.12

 

Employee Benefits

    A-44  

ARTICLE VI CONDITIONS

    A-45  

6.1

 

Conditions to Each Party's Obligation to Effect the Merger

    A-45  

6.2

 

Conditions to the Obligation of the Company to Effect the Merger

    A-46  

6.3

 

Conditions to Obligations of Parent and Merger Sub to Effect the Merger

    A-46  

ARTICLE VII TERMINATION

    A-47  

7.1

 

Termination

    A-47  

7.2

 

Effect of Termination

    A-48  

ARTICLE VIII MISCELLANEOUS

    A-49  

8.1

 

Fees and Expenses

    A-49  

8.2

 

Amendment; Waiver

    A-50  

8.3

 

Survival

    A-50  

8.4

 

Notices

    A-50  

8.5

 

Interpretation; Definitions

    A-51  

8.6

 

Headings

    A-57  

8.7

 

Counterparts

    A-57  

8.8

 

Entire Agreement

    A-57  

8.9

 

Severability

    A-57  

8.10

 

Governing Law

    A-57  

8.11

 

Assignment

    A-57  

8.12

 

Parties in Interest

    A-58  

8.13

 

Jurisdiction; Specific Enforcement

    A-58  

8.14

 

WAIVER OF JURY TRIAL

    A-58  

iii


Table of Contents

TABLE OF DEFINED TERMS

Acceptable Confidentiality Agreement

  45

Acquisition Agreement

  46

Acquisition Proposal

  48

Acquisition Transaction

  48

Action

  55

Adjustment Event

  7

Administrative Agent

  56

Adverse Recommendation Change

  46

affiliates

  66

Agreement

  1

beneficial ownership

  66

Business Day

  66

Calliope System

  21

Capital Stock

  66

Certificate of Merger

  2

Closing

  2

Closing Date

  2

COBRA

  18

Code

  25

Collective Bargaining Agreement

  28

Company

  1

Company Assets

  27

Company Balance Sheet

  12

Company Board

  1

Company Common Stock

  3

Company Confidentiality Agreement

  66

Company Credit Agreement

  67

Company Disclosure Letter

  8

Company Environmental Claim

  26

Company ERISA Affiliate

  16

Company Material Adverse Effect

  67

Company Material Contract

  23

Company Notice of Change

  47

Company Oil and Gas Contracts

  67

Company Oil and Gas Properties

  68

Company Option

  4

Company Payout Balance

  35

Company Permits

  20

Company Plans

  16

Company Preferred Stock

  9

Company Recommendation

  33

Company Required Vote

  32

Company Reserve Reports

  31

Company Rights

  3

Company Rights Agreement

  32

Company SEC Documents

  12

Company Stock Incentive Plans

  4

Confidentiality Agreements

  68

Continuing Employees

  57

Cutoff Date

  45

date hereof

  66

Derivative Transaction

  31

DGCL

  1

Dissenting Shares

  4

Effective Time

  2

Environmental Laws

  26

Environmental Permits

  25

ERISA

  16

Exchange Act

  12

Exchange Fund

  5

Excluded Shares

  4

Expenses

  68

GAAP

  13

Good and Marketable Title

  69

Go-Shop Period

  44

Governmental Entity

  11

Hazardous Substance

  27

Houlihan Lokey

  33

Hydrocarbon Interests

  69

Hydrocarbons

  69

Intellectual Property

  69

Intervening Event

  47

In-the-Money Company Options

  4

Investigation

  50

IRS

  17

knowledge

  70

Laws

  11

Liens

  70

Litigation

  70

made available

  66

Merger

  1

Merger Consideration

  3

Merger Sub

  1

Net Revenue Interest

  70

Northland Capital

  33

No-Shop Period Start Date

  44

Notice of Superior Proposal

  46

Parent

  1

Parent Board

  1

Parent Confidentiality Agreement

  70

Parent Material Adverse Effect

  70

Parent Plans

  57

Paying Agent

  5

Permits

  20

Permitted Liens

  70

Person

  71

Prior Service

  57

Proxy Statement

  53

iv


Table of Contents

Qualified Go-Shop Bidder

  71

Release

  27

Report Preparer

  31

Representatives

  44

SEC

  11

Secretary of State

  2

Securities Act

  12

Shares

  3

SOX

  12

SPD

  17

Special Meeting

  54

Subsidiary

  72

Superior Proposal

  48

Surviving Corporation

  1

Takeover Laws

  32

Tax Return

  25

Taxes

  25

Termination Date

  60

Termination Fee

  72

the date of this Agreement

  66

Trade Secrets

  70

Voting Agreement

  1

WARN Act

  30

Working Interest

  72

v


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AGREEMENT AND PLAN OF MERGER

        AGREEMENT AND PLAN OF MERGER, dated as of June 3, 2012 (the "Agreement"), by and among CREDO Petroleum Corporation, a Delaware corporation (the "Company"), Forestar Group Inc., a Delaware corporation ("Parent"), and Longhorn Acquisition Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent ("Merger Sub").

        WHEREAS, the Board of Directors of the Company (the "Company Board") and the Board of Directors of Parent (the "Parent Board") have each approved, and declared it advisable and in the best interests of their respective stockholders to consummate, the merger of the Company and Merger Sub upon the terms and subject to the conditions set forth herein; and

        WHEREAS, in furtherance of the Merger, the Parent Board, the Company Board and the Board of Directors of Merger Sub have each approved this Agreement and the merger of the Company with and into Merger Sub in accordance with the terms of this Agreement and the DGCL; and

        WHEREAS, the Company Board has resolved to recommend to the Company's stockholders the approval and adoption of this Agreement and the approval of the transactions contemplated hereby, including the Merger, upon the terms and subject to the conditions set forth in this Agreement; and

        WHEREAS, in order to induce Parent to enter into this Agreement, each of the Company's stockholders listed on Schedule A is contemporaneously entering into a Voting Agreement, of even date herewith (each, a "Voting Agreement"), with Parent, in the form of Exhibit A attached hereto.

        NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows:

ARTICLE I

THE MERGER

        1.1    The Merger.    

        1.2    Effective Time.    

        Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Parent, Merger Sub and the Company will cause an appropriate Certificate of Merger (the "Certificate of Merger") to be executed and filed with the Secretary of State of the State of Delaware (the "Secretary of State") in such form and executed as provided in the DGCL. The Merger shall become effective (the "Effective Time") upon the later of (i) the date of filing of a properly executed Certificate of Merger with the Secretary of State in accordance with the DGCL, and (ii) such time, if any, as the parties shall

A-1


Table of Contents

agree and as shall be specified in the Certificate of Merger. The filing of the Certificate of Merger shall be made as soon as practicable on the Closing Date.

        1.3    Closing.    

        Unless this Agreement shall have been terminated and the transactions contemplated herein abandoned pursuant to Section 7.1, and subject to the satisfaction or waiver of the conditions set forth in Article VI, the closing of the Merger (the "Closing") will take place at 10:00 a.m., New York time, on a date to be specified by the parties hereto, which shall be no later than the fifth Business Day after satisfaction or waiver (by the party entitled to waive the condition) of all of the conditions set forth in Article VI (except for those conditions that can by their nature be satisfied only at the time of the Closing, but subject to the satisfaction or waiver of such conditions) (the "Closing Date"), at the offices of Davis Graham & Stubbs LLP, 1550 17th Street, Suite 500, Denver, Colorado 80202, unless another date and/or place is agreed to in writing by the parties hereto.

        1.4    Certificate of Incorporation and Bylaws of the Surviving Corporation.    

        1.5    Directors.    

        Subject to applicable Law, the directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation and shall hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

        1.6    Officers.    

        The officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation and shall hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

ARTICLE II

CONVERSION OF SHARES

        2.1    Effect of the Merger on Capital Stock.    

        At the Effective Time, by virtue of the Merger and without any action on the part of any party or the holder of any of their securities:

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        2.2    Dissenter's Rights.    

        Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock issued and outstanding immediately prior to the Effective Time that are held by any record holder who is entitled to demand and properly demands appraisal of such shares pursuant to, and who complies in all respects with, the provisions of Section 262 of the DGCL (the "Dissenting Shares") shall not be converted into the right to receive the Merger Consideration payable pursuant to Section 2.1, but instead at the Effective Time shall become the right to payment of the fair value of such shares in accordance with the provisions of Section 262 of the DGCL and, at the Effective Time, all Dissenting Shares shall no longer be outstanding and shall automatically be canceled and cease to exist. Notwithstanding the foregoing, Dissenting Shares held by stockholders who shall have failed to perfect or who effectively shall have withdrawn or otherwise lost their rights to appraisal of such shares under the DGCL shall thereupon be deemed to have been converted, at the Effective Time, into the right to receive the Merger Consideration without any interest thereon. The Company shall deliver prompt notice to Parent of any demands for appraisal of any shares of Company Common Stock and provide Parent with the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the DGCL. Prior to the Effective Time, the Company shall not, without the prior written consent of Parent, voluntarily make any payment with respect to, or settle or offer to settle, any such demands, or agree to do any of the foregoing.

        2.3    Treatment of Equity Awards.    

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        2.4    Exchange of Company Common Stock.    

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        2.5    Stock Transfer Books.    

        At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock theretofore outstanding on the records of the Company. From and after the Effective Time, any certificates or book entry Shares presented to the Paying Agent, Parent or the Surviving Corporation for any reason shall represent the right to receive the Merger Consideration payable in respect of the shares of Company Common Stock represented thereby.

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        2.6    Certain Adjustments.    

        If, after the date of this Agreement and at or prior to the Effective Time, the outstanding shares of Company Common Stock are changed into a different number of shares or type of securities by reason of any reclassification, recapitalization, split-up, stock split, subdivision, combination or exchange of shares, or any dividend payable in stock or other securities is declared thereon or rights issued in respect thereof with a record date within such period, or any similar event occurs (any such action, an "Adjustment Event"), the Merger Consideration will be adjusted accordingly to provide to the holders of Company Common Stock and Company Options the same economic effect as contemplated hereby prior to such Adjustment Event.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

        Except as set forth in (i) other than with respect to Sections 3.1, 3.2 and 3.3, the Company SEC Documents filed on or after October 31, 2011 and prior to the date of this Agreement (excluding any disclosures set forth in any risk factor section, any disclosures in any section relating to forward looking statements and any other disclosures included therein that are predictive, cautionary or forward-looking in nature), to the extent a matter is disclosed in such Company SEC Documents in such a way as to make its relevance to the applicable representation or warranty reasonably apparent, and (ii) the disclosure letter delivered to Parent and Merger Sub by the Company at or prior to the execution hereof (the "Company Disclosure Letter") (each section of which qualifies the correspondingly numbered representation, warranty or covenant to the extent specified therein and such other representations, warranties or covenants to the extent a matter in such section is disclosed in such a way as to make its relevance to such other representation, warranty or covenant reasonably apparent), the Company hereby represents and warrants to Parent and Merger Sub as follows:

        3.1    Organization.    

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        3.2    Capitalization.    

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        3.3    Authorization; Validity of Agreement.     

        The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, subject, with respect to the consummation of the Merger, to receipt of the Company Required Vote. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby have been duly authorized by the Company Board. The Company Board has directed that this Agreement and the transactions contemplated hereby be submitted to the Company's stockholders for approval and adoption at a meeting of such stockholders and, except for the Company Required Vote, no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery of this Agreement by Parent and Merger Sub, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except that such enforcement may be subject to or limited by (i) bankruptcy, insolvency or other similar Laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding at Law or in equity).


        3.4
    No Violations; Consents and Approvals.     

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        3.5
    SEC Reports and Financial Statements.