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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14a INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Midland Resources, Inc.
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(Name of Registrant as Specified in Its Charter)
Midland Resources, Inc. Definitive Proxy
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] 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 $.001 per share, of Midland Resources, Inc.
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(2) Aggregate number of securities to which transaction applies:
6,988,793
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(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 per unit price of $2.19 was calculated pursuant to Rule 0-11(c) and
(a)(4) based on the average trading price of common stock of Midland
Resources, Inc. on June 30, 1998. Such fee was paid on July 2, 1998 with
the initial filing of the Form S-4. On August 25, 1998, additional
shares were registered with the filing of Amendment No. 1 to the Form
S-4 and the per unit price for such shares of $1.88 was calculated
pursuant on Rule 0-11(c) and (a)(4) based on the average trading price
of common stock of Midland Resources, Inc. on August 21, 1998.
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(4) Proposed maximum aggregate value of transaction:
$15,222,377
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(5) Total fee paid:
$4,490.61
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[ ] Fee paid previously with preliminary materials.
[x] 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:
$4,490.61
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(2) Form, Schedule or Registration Statement No.:
S-4
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(3) Filing Party:
Vista Energy Resources, Inc.
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(4) Date Filed:
August 25, 1998
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MIDLAND RESOURCES, INC.
616 FM 1960 West, Suite 600
Houston, Texas 77090
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Midland Resources, Inc. ("Midland") to be held at 10:00 a.m. Midland, Texas time
on October 28, 1998 at The Midland Room, Fasken Center, Tower II, 2nd Floor, 550
West Texas Avenue, Midland, Texas. I hope that you will be present or
represented by proxy at this important meeting.
Midland has entered into an agreement and plan of merger (the "Merger
Agreement") with Vista Resources Partners, L.P. (the "Vista Partnership") that
provides for Midland to become a subsidiary of Vista Energy Resources, Inc.
("Vista"), currently a newly created subsidiary of the Vista Partnership. The
transaction involving Midland will require Midland Merger Co., currently a newly
created subsidiary of Vista, to be merged into Midland, resulting in Midland
becoming a subsidiary of Vista (the "Merger"). As contemplated by the Merger
Agreement, each of the limited partners of the Vista Partnership and each of the
stockholders of Vista Resources I, Inc., the general partner of the Vista
Partnership (the "General Partner"), have entered into exchange agreements
pursuant to which each such holder's limited partnership interests in the Vista
Partnership and shares of common stock in the General Partner will be exchanged
(the "Vista Exchange") for shares of common stock of Vista contemporaneously
with the Merger. As a result of the Merger and the Vista Exchange, a new
publicly held oil and gas exploration and development company will be created
that will own interests in 497 gross oil and gas wells located in Texas, New
Mexico, Colorado and Illinois and operate 402 gross oil and gas wells located in
Texas and New Mexico, that had a combined production in 1997 of approximately
596,392 Bbls of oil and 1,772,407 Mcf of gas.
The purpose of the Special Meeting is to approve the Merger Agreement among
Midland, the Vista Partnership, Vista and Merger Sub. Your Board of Directors
has determined that the Merger is fair to and in the best interests of Midland
and its stockholders. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
The Merger and related matters are described in greater detail in the
accompanying Proxy Statement/ Prospectus, which you are urged to read carefully
and in its entirety.
Approval and adoption of the Merger Agreement to be voted on at the Special
Meeting requires the affirmative vote of the holders of at least two-thirds
(66 2/3%) of the outstanding shares of Midland Common Stock. Holders of Midland
Common Stock will not be entitled to dissenters' rights in connection with the
Merger.
WE URGE YOU TO CONSIDER THESE IMPORTANT MATTERS, WHICH ARE DESCRIBED IN THE
ENCLOSED PROXY STATEMENT/ PROSPECTUS. In order to ensure that your vote is
represented at the Special Meeting, whether or not you plan to attend the
Special Meeting, PLEASE INDICATE YOUR CHOICE ON THE ENCLOSED PROXY CARD, DATE
AND SIGN IT, AND RETURN IT IN THE ENCLOSED ENVELOPE. Your prompt response will
be greatly appreciated. If you are able to attend the Special Meeting, you may
revoke your proxy at any time before its exercise and may, of course, vote your
shares in person.
Sincerely,
Wayne M. Whitaker Robert R. Donnelly Deas H. Warley III
Chairman of the Board of Directors President, Director Director
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THE BOARD OF DIRECTORS OF MIDLAND RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT TO BE PRESENTED AT THE
SPECIAL MEETING.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER IN
WRITING OR BY VOTING IN PERSON AT THE SPECIAL MEETING, AT ANY TIME PRIOR TO ITS
EXERCISE.
YOUR VOTE IS IMPORTANT
PLEASE VOTE, SIGN, DATE AND RETURN YOUR PROXY
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MIDLAND RESOURCES, INC.
616 FM 1960 West, Suite 600
Houston, Texas 77090
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 28, 1998
To the Stockholders of Midland Resources, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of Stockholders (the "Special
Meeting") of Midland Resources, Inc., a Texas corporation ("Midland"), has been
called by the Board of Directors of Midland and will be held at The Midland
Room, Fasken Center, Tower II, 2nd Floor, 550 West Texas Avenue, Midland, Texas,
at 10:00 a.m. Midland, Texas time on October 28, 1998 to consider and vote upon
the following matters described in the accompanying Proxy Statement/Prospectus:
(1) To consider and vote upon a proposal to adopt and approve the
Agreement and Plan of Merger, dated as of May 22, 1998, as it may be
amended, supplemented or modified from time to time (the "Merger
Agreement"), by and among Midland, Vista Resources Partners, L.P., a Texas
limited partnership (the "Vista Partnership"), Vista Energy Resources, Inc.,
a Delaware corporation and a direct wholly owned subsidiary of the Vista
Partnership ("Vista"), and Midland Merger Co., a Texas corporation and a
direct wholly owned subsidiary of Vista ("Merger Sub"), pursuant to which
Merger Sub will be merged into Midland; and
(2) Such other business as may properly come before the Special Meeting
or any adjournments or postponements thereof.
Notwithstanding stockholder approval of the Merger Agreement, Midland
reserves the right to abandon the Merger at any time prior to the consummation
of the Merger, subject to the terms and conditions of the Merger Agreement and
applicable law.
The Board of Directors has fixed the close of business on September 23,
1998, as the record date for determination of stockholders entitled to notice of
and to vote at such meeting or any adjournments or postponements thereof.
Approval and adoption of the Merger Agreement to be voted on at the Special
Meeting requires the affirmative vote of the holders of at least two-thirds
(66 2/3%) of the outstanding shares of Midland Common Stock. Holders of Midland
Common Stock will not be entitled to dissenters' rights in connection with the
Merger.
A proxy card and Proxy Statement/Prospectus containing more detailed
information with respect to the Merger (including the Merger Agreement attached
as Appendix A thereto) accompany and form a part of this notice.
By Order of the Board of Directors,
Marilyn D. Wade
Secretary
Houston, Texas
September 25, 1998
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THE BOARD OF DIRECTORS OF MIDLAND RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT TO BE PRESENTED AT THE
SPECIAL MEETING.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER IN
WRITING OR BY VOTING IN PERSON AT THE SPECIAL MEETING, AT ANY TIME PRIOR TO ITS
EXERCISE.
YOUR VOTE IS IMPORTANT
PLEASE VOTE, SIGN, DATE AND RETURN YOUR PROXY
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MIDLAND RESOURCES, INC.
PROXY STATEMENT
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VISTA ENERGY RESOURCES, INC.
PROSPECTUS
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is being
furnished to holders of shares of common stock, par value $.001 per share
("Midland Common Stock"), of Midland Resources, Inc., a Texas corporation
("Midland"), in connection with the solicitation of proxies by the board of
directors of Midland (the "Midland Board") for use at the meeting of Midland
stockholders (the "Midland Meeting") to be held at 10:00 a.m. (Midland, Texas
time) on October 28, 1998, at The Midland Room, Fasken Center, Tower II, 2nd
Floor, 550 West Texas Avenue, Midland, Texas and any adjournment or postponement
thereof.
This Proxy Statement/Prospectus relates to an Agreement and Plan of Merger,
dated as of May 22, 1998 (the "Merger Agreement"), among Midland, Vista
Resources Partners, L.P., a Delaware limited partnership (the "Vista
Partnership"), Vista Energy Resources, Inc., a Delaware corporation ("Vista"),
and Midland Merger Co., a Texas corporation ("Merger Sub"). The Merger Agreement
provides for the merger (the "Merger") of Merger Sub with and into Midland with
Midland being the surviving corporation (the "Surviving Subsidiary"). As a
result of the Merger, (a) each issued and outstanding share of Midland Common
Stock will be converted into the right to receive one share of common stock, par
value $.01 per share, of Vista ("Vista Common Stock"), (b) each Midland Stock
Option (as defined herein) (other than the Midland Exchange Stock Options (as
defined herein)) and each outstanding Midland Warrant (as defined herein) shall
remain outstanding following consummation of the Merger (the "Effective Time"),
at which time such options and warrants will be assumed by Vista and will be
exercisable for shares of Vista Common Stock and (c) each other outstanding
right, warrant, option, convertible security or indebtedness, exchangeable
security or other instrument, or other right (other than the Midland Stock
Options and Midland Warrants) exercisable for or convertible or exchangeable
into, directly or indirectly, shares of Midland Common Stock at the time of
issuance or upon the passage of time or occurrence of some future event (each a
"Midland Common Stock Warrant") shall remain outstanding following the Effective
Time, at which time such warrants will be assumed by Vista and will be
exercisable for shares of Vista Common Stock.
During May and June of 1998, and as contemplated by the Merger Agreement,
Sam R. Brock, a director of Midland, Darrell M. Dillard, a director of Midland,
Robert R. Donnelly, president and a director of Midland, Wayne M. Whitaker, a
director of Midland, John Q. Adams, an advisory director of Midland and Marilyn
D. Wade, corporate secretary of Midland, who hold all issued and outstanding
options to acquire shares of Midland Common Stock ("Midland Exchange Stock
Options") granted pursuant to the Midland Resources, Inc. 1997 Board of
Directors' Stock Incentive Plan (the "Midland Directors Plan"), and 137,931
options granted pursuant to the 1996 Midland Resources, Inc. Long-Term Incentive
Plan (the "Midland Incentive Plan") entered into separate exchange agreements
with Vista (collectively, the "Midland Exchange Agreement"). Pursuant to the
terms of such agreement, at the Effective Time, without any action on the part
of any holder thereof, each Midland Exchange Stock Option will be exchanged for
a warrant having an initial exercise price of $4.00 per share (a "Vista
Warrant") that is exercisable for that whole number of shares of Vista Common
Stock (to the nearest whole share) equal to the product of (x) .725 times (y)
the number of shares of Vista Common Stock into which the shares of Midland
Common Stock subject to such Midland Exchange Stock Option would be converted
pursuant to the Merger. Pursuant to the Midland Exchange Agreement, no payment
shall be made for fractional interests. Pursuant to the terms of the Midland
Exchange Agreement, each Midland Exchange Stock Option subject thereto shall be
terminated immediately following its exchange for a Vista Warrant.
(continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR CERTAIN CONSIDERATIONS
RELEVANT TO APPROVAL OF THE PROPOSAL AND AN INVESTMENT IN THE SECURITIES
REFERRED TO HEREIN.
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No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/ Prospectus and, if given
or made, such information or representation should not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, any securities, or the
solicitation of a proxy, by any person in any jurisdiction in which such an
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such an offer or solicitation of an offer or proxy
solicitation. Neither delivery of this Proxy Statement/Prospectus nor any
distribution of the securities referred to in this Proxy Statement/Prospectus
shall, under any circumstances, create an implication that there has been no
change in the information set forth therein since the date of this Proxy
Statement/Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is September 18, 1998.
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(continued from previous page)
During May and June of 1998, and as contemplated by the Merger Agreement,
the holders of all of the outstanding shares of common stock, par value $.01 per
share ("GP Common Stock"), of Vista Resources I, Inc., the sole general partner
of the Vista Partnership (the "General Partner"), and the holders of all of the
outstanding limited partnership interests ("Partnership Interests") in the Vista
Partnership entered into separate exchange agreements with Vista (collectively,
the "Vista Exchange Agreement"). Pursuant to the terms of such agreement, at the
Effective Time, without any action on the part of any holder thereof, (a) each
share of GP Common Stock that is issued and outstanding prior to the Effective
Time shall be exchanged (the "Vista Exchange") for (i) a number of shares of
Vista Common Stock equal to 1.60089817 (the "Vista GP Conversion Stock Number")
and (ii) a Vista Warrant that is exercisable for a number of shares of Vista
Common Stock equal to 1.16511028 (the "Vista GP Conversion Warrant Number") and
(b) each Partnership Interest that is issued and outstanding prior to the
Effective Time shall be exchanged for (i) a number of shares of Vista Common
Stock equal to 117,674.06 (the "Vista LP Conversion Stock Number") and (ii) a
Vista Warrant that is exercisable for a number of shares of Vista Common Stock
Equal to 85,641.46 (the "Vista LP Conversion Warrant Number"). As provided in
the Vista Exchange Agreement, any fractional Partnership Interest shall be
likewise exchanged on a pro rata basis.
As a result of the Merger, Midland stockholders will receive 27.5% of the
outstanding shares of Vista Common Stock in exchange for their shares of Midland
Common Stock, with such transaction being tax free under Sections 351 and 368 of
the Internal Revenue Code of 1986, as amended (the "Code"). As a result of the
Vista Exchange, the former holders of Partnership Interests in the Vista
Partnership and shares of GP Common Stock will hold 72.5% of the shares of Vista
Common Stock and Vista Warrants outstanding upon consummation of the Merger. The
Vista owners will receive additional shares of Vista Common Stock in order to
maintain their 72.5% sharing ratio based on the number of Midland Common Stock
Warrants whose exercise price is equal to or less than the American Stock
Exchange (the "ASE") trading price of Midland Common Stock for any of the five
days prior to the closing of the Merger ("Midland Exercisable Warrants").
Vista has filed a registration statement pursuant to the Securities Act of
1933 (the "Securities Act") covering the shares of Vista Common Stock issuable
in connection with the Merger. This Proxy Statement/Prospectus constitutes the
Prospectus filed as a part of the registration statement and is being furnished
to stockholders of Midland in connection with the solicitation of proxies by the
Midland Board for use at Midland's special meeting of stockholders (or any
adjournment or postponement thereof), scheduled to be held on October 28, 1998
(the "Midland Meeting").
The shares of Midland Common Stock are listed on the ASE under the symbol
"MLD." On September 11, 1998, the last reported sales price of Midland Common
Stock was $2 11/16. Application will be made for the shares of Vista Common
Stock to be listed on the ASE.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Midland on or about September 25, 1998.
All information in this Proxy Statement/Prospectus relating to Midland has
been supplied by Midland and all information relating to the Vista Partnership
and Vista has been supplied by Vista. Certain capitalized terms used in this
Proxy Statement/ Prospectus without definition have the meanings ascribed
thereto in the Glossary of Terms.
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TABLE OF CONTENTS
SUMMARY..................................................... 5
RISK FACTORS................................................ 14
THE COMPANIES............................................... 20
THE MIDLAND MEETING......................................... 21
MARKET PRICE DATA........................................... 22
THE MERGER.................................................. 23
General................................................... 23
The Merger................................................ 23
The Vista Exchange........................................ 23
The Midland Exchange...................................... 24
Vista Ownership Chart..................................... 24
Background of the Merger.................................. 25
Recommendation of Midland's Board of Directors; Midland's
Reasons for the Merger................................. 28
Opinion of Midland's Financial Advisor.................... 29
Other Agreements.......................................... 34
Interests of Certain Persons in the Merger................ 36
Material Income Tax Consequences.......................... 37
Accounting Treatment...................................... 40
Registration Rights....................................... 40
Stock Exchange Listing.................................... 40
Restrictions on Resales by Affiliates..................... 40
Dissenters' Rights........................................ 41
Information Agent......................................... 41
VISTA....................................................... 42
CAPITALIZATION.............................................. 46
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF VISTA
ENERGY RESOURCES, INC..................................... 47
MIDLAND..................................................... 57
THE VISTA PARTNERSHIP....................................... 78
CERTAIN TERMS OF THE MERGER AGREEMENT, THE VISTA EXCHANGE
AGREEMENT AND THE MIDLAND EXCHANGE AGREEMENT.............. 99
OWNERSHIP OF MIDLAND AND VISTA COMMON STOCK................. 109
CERTAIN TRANSACTIONS........................................ 111
DESCRIPTION OF VISTA CAPITAL STOCK.......................... 113
VISTA STOCK OPTION PLAN..................................... 114
REGISTRATION RIGHTS FOR VISTA STOCKHOLDERS.................. 117
COMPARISON OF STOCKHOLDER RIGHTS............................ 117
DISSENTERS' RIGHTS.......................................... 120
LEGAL MATTERS............................................... 120
TAX OPINION................................................. 120
EXPERTS..................................................... 120
STOCKHOLDER PROPOSALS....................................... 120
GLOSSARY OF TERMS........................................... 121
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER................ A-1
APPENDIX B -- VISTA EXCHANGE AGREEMENT.................... B-1
APPENDIX C -- MIDLAND EXCHANGE AGREEMENT.................. C-1
APPENDIX D-1 -- DAIN RAUSCHER WESSELS FAIRNESS OPINION
REGARDING MERGER............................ D-1-1
APPENDIX D-2 -- DAIN RAUSCHER WESSELS FAIRNESS OPINION
REGARDING RESTRUCTURING OF OPTIONS.......... D-2-1
APPENDIX E -- VISTA KEY EMPLOYEE STOCK OPTION PLAN........ E-1
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AVAILABLE INFORMATION FOR MIDLAND
Midland is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, file
reports, proxy statements other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by Midland with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material also can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, at prescribed rates. Such material may also be
accessed electronically at the Commission's site on the World Wide Web located
at http://www.sec.gov.
The shares of Midland Common Stock are currently listed on the ASE, and
such material relating to Midland may also be inspected at the offices of the
ASE, 86 Trinity Place, New York, New York 10006. After consummation of the
Merger, Midland will no longer file reports, proxy statements or other
information with the Commission. Instead, such information would be provided, to
the extent required, in filings made by Vista. Application will be made for
listing of the Vista Common Stock on the ASE. Accordingly, after receiving
approval from the ASE, such material may also be inspected at the offices of the
ASE, 86 Trinity Place, New York, New York 10006 after consummation of the
Merger.
This Proxy Statement/Prospectus is included as part of a Registration
Statement on Form S-4 (together with all amendments, exhibits and schedules
thereto, including documents and information incorporated therein by reference,
the "Registration Statement") filed with the Commission by Vista relating to the
registration under the Securities Act, (i) with respect to the shares of Vista
Common Stock to be issued to holders of outstanding shares of Midland Common
Stock and the upon consummation of the Merger and (ii) issuable upon exercise of
the warrants issued and outstanding under that certain Warrant Agreement dated
as of November 1, 1990 by and between Midland and Stock Transfer Company of
America, Inc. (the "Midland Warrants") that will be assumed by Vista in the
Merger. This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Such
additional information is available for inspection and copying at the offices of
the Commission. Statements contained in this Proxy Statement/ Prospectus as to
the contents of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in this
Proxy Statement/Prospectus. Stockholders are urged to carefully read this Proxy
Statement/Prospectus in its entirety. As used in this Proxy
Statement/Prospectus, unless otherwise required by the context, the term
"Midland" refers to the historical results of Midland Resources, Inc. and its
consolidated subsidiaries and the term "the Vista Partnership" refers to the
historical results of Vista Resources Partners, L.P. and its consolidated
subsidiaries. Unless otherwise indicated, all reserve information is as of
December 31, 1997. Certain terms relating specifically to the transactions
described in this Proxy Statement/Prospectus and relating to the oil and gas
business and used herein are defined in the "Glossary of Terms" included
elsewhere in this Proxy Statement/Prospectus.
GENERAL
At the Midland Meeting, the stockholders of Midland will be asked to
approve the Merger Agreement pursuant to which Merger Sub will merge with and
into Midland. A copy of the Merger Agreement is attached to this Proxy
Statement/Prospectus as Appendix A.
As a result of the Merger, (a) each issued and outstanding share of Midland
Common Stock will be converted into the right to receive one share of Vista
Common Stock, (b) each issued and outstanding option to acquire shares of
Midland Common Stock granted pursuant to any of the Midland Stock Plans (each a
"Midland Stock Option") (other than the Midland Exchange Stock Options) and each
outstanding Midland Warrant shall remain outstanding following the Effective
Time, at which time such options and warrants will be assumed by Vista and will
be exercisable for shares of Vista Common Stock and (c) each Midland Common
Stock Warrant shall remain outstanding following the Effective Time, at which
time such warrants will be assumed by Vista and will be exercisable for shares
of Vista Common Stock.
During May and June of 1998, and as contemplated by the Merger Agreement,
Sam R. Brock, a director of Midland, Darrell M. Dillard, a director of Midland,
Robert R. Donnelly, president and a director of Midland, Wayne M. Whitaker, a
director of Midland, John Q. Adams, an advisory director of Midland and Marilyn
D. Wade, corporate secretary of Midland, who hold all issued and outstanding
Midland Exchange Stock Options granted pursuant to the Midland Directors Plan,
and 137,931 options granted pursuant to the Midland Incentive Plan entered into
the Midland Exchange Agreement. Pursuant to the terms of such agreement, at the
Effective Time, without any action on the part of any holder thereof, each
Midland Exchange Stock Option will be exchanged for a Vista Warrant that is
exercisable for that whole number of shares of Vista Common Stock (to the
nearest whole share) equal to the product of (x) .725 times (y) the number of
shares of Vista Common Stock into which the shares of Midland Common Stock
subject to such Midland Exchange Stock Option would be converted pursuant to the
Merger. Pursuant to the Midland Exchange Agreement, no payment shall be made for
fractional interests. Pursuant to the terms of the Midland Exchange Agreement,
each Midland Exchange Stock Option subject thereto shall be terminated
immediately following its exchange for a Vista Warrant.
Pursuant to the terms of the Midland Exchange Agreement, the holders of
Midland Exchange Stock Options will receive warrants exercisable for 995,375
shares of Vista Common Stock, representing 5.8% of such shares outstanding at
the Effective Time (assuming for purposes of this calculation exercise of all
such warrants as of such time).
During May and June of 1998, and as contemplated by the Merger Agreement,
the holders of all of the outstanding GP Common Stock and the holders of all of
the outstanding Partnership Interests entered into the Vista Exchange Agreement.
Pursuant to the terms of such agreement, at the Effective Time, without any
action on the part of any holder thereof, (a) each share of GP Common Stock that
is issued and outstanding prior to the Effective Time shall be exchanged for (i)
a number of shares of Vista Common Stock equal to the Vista GP Conversion Stock
Number (being 1.60089817) and (ii) a Vista Warrant that is exercisable for a
number of shares of Vista Common Stock equal to the Vista GP Conversion Warrant
Number (being 1.16511028) and (b) each Partnership Interest that is issued and
outstanding prior to the Effective Time shall
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9
be exchanged for (i) a number of shares of Vista Common Stock equal to the Vista
LP Conversion Stock Number (being 117,674.06) and (ii) a Vista Warrant that is
exercisable for a number of shares of Vista Common Stock Equal to the Vista LP
Conversion Warrant Number (being 85,641.46). As provided in the Vista Exchange
Agreement, any fractional Partnership Interest shall be likewise exchanged on a
pro rata basis.
Pursuant to the terms of the Vista Exchange Agreement, the holders of GP
Common Stock and Partnership Interests will receive 11,778,479 shares of Vista
Common Stock, representing 72.5% of such shares outstanding at the Effective
Time, and warrants exercisable for 8,564,146 shares of Vista Common Stock,
representing 34.5% of such shares outstanding at the Effective Time (assuming
for purposes of this calculation exercise of all such warrants as of such time).
The warrants will be issued to prevent the dilutive effect of existing Midland
Warrants to holders of GP Common Stock and Partnership Interests.
THE COMPANIES
Midland. Midland is a Texas independent oil and gas corporation engaged in
the exploration, acquisition, development, exploitation and production of oil
and gas properties. The principal executive offices of Midland are located at
616 FM 1960 West, Suite 600, Houston, Texas 77090, and its telephone number at
such offices is (281) 580-9989.
The Vista Partnership. The Vista Partnership is a Texas limited partnership
engaged in the exploration, acquisition, development, exploitation and
production of oil and gas properties. The principal executive offices of the
Vista Partnership are located at 550 West Texas Avenue, Suite 700, Midland,
Texas 79701, and its telephone number at such offices is (915) 570-5045.
Vista. Vista is a newly formed Delaware corporation and wholly owned
subsidiary of the Vista Partnership that has not, to date, conducted any
significant activities other than those incident to its formation, its execution
of the Merger Agreement and its participation in the preparation of this Proxy
Statement/ Prospectus. Vista has no material assets or liabilities, other than
its rights and obligations under the Merger Agreement and the Vista Exchange
Agreement, and has not generated any material revenues or expenses. The Merger
and the Vista Exchange will create a newly formed independent oil and gas
company by combining the oil and gas reserves, operations and businesses of the
Vista Partnership and Midland. Drilling and production operations will be
located in Texas and New Mexico. The principal executive offices of Vista are
located at 550 West Texas Avenue, Suite 700, Midland, Texas 79701, and its
telephone number at such offices is (915) 570-5045.
Vista's principal strength and strategies will include the following:
- Vista will have over 14.0 MMBOE of total proved reserves, comprised of
25.2 Bcf of natural gas and 9.9 MMBbls of crude oil, with a PV10 of
approximately $56.4 million and Vista's daily production is expected to
be over 1,800 Bbls of oil and 5,200 Mcf of natural gas;
- Vista will operate over 400 producing wells, representing over 92% of its
total proved reserves and increasing its control over the implementation
of its strategies and projects;
- Vista's management team will be led by C. Randall Hill, Steven D. Gray
and R. Cory Richards, the current Chairman and Chief Executive Officer,
President and Vice President -- Exploration, respectively, of the General
Partner of the Vista Partnership, with over 35 years of collective
experience in the oil and gas industry; and
- Vista intends to pursue its primary corporate objective to rapidly expand
its reserve base, production capacity, cash flow and earnings by: (i)
acquiring domestic, proved oil and gas properties with realizable upside
potential; (ii) exploiting such properties through a comprehensive
program of workovers, recompletions, developmental and exploratory
drilling, and secondary recovery projects using sophisticated technology;
(iii) reducing costs at all levels of its business; and (iv) internally
generating exploration projects where Vista can operate and control the
timing and costs of such exploration efforts.
6
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However, in considering the Merger, stockholders should take into account
various risk factors which are summarized in this Summary section under the
heading "-- Risk Factors" and are discussed in greater detail under the heading
"Risk Factors."
THE MIDLAND MEETING
Date, Time and Place. The Midland Meeting will be held on October 28, 1998
at 10:00 a.m., Midland, Texas time, at The Midland Room, Fasken Center, Tower
II, 2nd Floor, 550 West Texas Avenue, Midland, Texas.
Purpose of Midland Meeting. At the Midland Meeting the stockholders of
Midland will be asked to consider and vote upon the proposal to approve and
adopt the Merger Agreement, which is summarized below and described in more
detail elsewhere in this Proxy Statement/Prospectus. See "Certain Terms of the
Merger Agreement, the Vista Exchange Agreement and the Midland Exchange
Agreement."
Record Date; Holders Entitled to Vote. The Midland Board has established
September 23, 1998 ("Midland Record Date") as the date to determine those record
holders of Midland Common Stock entitled to notice of and to vote at the Midland
Meeting and any adjournments or postponements thereof.
Quorum; Vote Required. The presence, in person or by proxy, of the holders
of a majority of the shares entitled to vote is necessary to constitute a quorum
at the Midland Meeting. Approval and adoption of the Merger Agreement to be
voted on at the Midland Meeting requires the affirmative vote of the holders of
at least two-thirds (66 2/3%) of the outstanding shares of Midland Common Stock.
Holders of Midland Common Stock will not be entitled to dissenters' rights in
connection with the Merger.
RECOMMENDATION OF MIDLAND'S BOARD OF DIRECTORS; MIDLAND'S REASONS FOR THE MERGER
The Midland Board believes that the terms of the Merger Agreement and the
transactions contemplated thereby are fair to and in the best interests of
Midland and its stockholders. Accordingly, the Midland Board has approved the
Merger Agreement and recommended approval and adoption thereof by the
stockholders of Midland. In reaching its determination, the Midland Board
consulted with Midland management and considered a number of factors, including
without limitation the following:
Strategic Considerations. An assessment of Midland's current operational
and financial position and strategic alternatives that would enhance stockholder
value, including remaining a separate company, selling additional equity or
debt, and making acquisitions or divestitures of assets. In this respect, the
Midland Board concluded, following extensive discussions with Midland's
management and among the directors, that the transactions contemplated by the
Merger Agreement provided the best means for holders of Midland Common Stock to
maximize the value of their holdings.
Property Characteristics. The level of operational control and the location
of the Vista Partnership's properties, the long life nature of the Vista
Partnership's properties, the relative amount of oil properties versus gas
properties and the amount of development potential of Midland's properties.
Financial. Information concerning the financial performance, financial
condition, business operations and prospects of each of the Vista Partnership
and Midland;
Efficiencies. The opportunities for operating efficiencies that are
anticipated to result from the Merger, particularly in terms of the integration
of office facilities, technical personnel and support functions;
Management. The management strengths of the Vista Partnership in building
equity value and the experience of Natural Gas Partners II, L.P. and Natural Gas
Partners III, L.P. (collectively, "NGP"), which will be the largest stockholder
of Vista upon consummation of the Merger, in assisting their portfolio companies
execute their business plans.
Access to Capital. Improvements in the combined company's ability to access
the capital markets and otherwise increase its financial flexibility;
7
11
Exchange Ratio/Market Price. The exchange ratio of shares of Vista Common
Stock issuable for shares of Midland Common Stock upon consummation of the
Merger (the "Midland Conversion Number") and recent trading prices for Midland
Common Stock and the belief of the Midland Board, following analyses and
discussions with Midland's management and among the directors, that the Midland
Conversion Number was fair and in the best interests of the Midland
stockholders; and
Fairness Opinion. The opinion of Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, to the effect that the Merger is fair to the holders of
Midland Common Stock from a financial point of view.
The Midland Board believes that the Merger offers the opportunity to create
a combined company that will have greater competitive strengths, business
opportunities, financial resources and flexibility than Midland could achieve
alone.
OPINION OF MIDLAND'S FINANCIAL ADVISOR
At the May 21, 1998 meeting of the Midland Board held to consider and vote
on entering into the Merger Agreement, the Midland Board considered the
presentation made by the representatives of Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, regarding its preliminary valuation and financial
analysis of the Merger, that was confirmed by its final valuation and financial
analysis presented at a meeting of the Midland Board on June 25, 1998, and in
writing with delivery of its written fairness opinion on June 30, 1998, that the
Merger was fair from a financial point of view to the holders of Midland Common
Stock.
For information on the assumptions made, matters considered and limits of
the review by Dain Rauscher Wessels, and for information concerning compensation
paid or payable to such firm in connection with the Merger, see "The
Merger -- Opinion of Midland's Financial Advisor." Midland Stockholders are
urged to read in its entirety the full text of the opinion of Dain Rauscher
Wessels, which is set forth as Appendix D-1 and D-2 to this Proxy
Statement/Prospectus.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Midland Board, stockholders should
be aware that certain members of the boards of directors and certain executive
officers of Vista and Midland have interests in the Merger separate from their
interests as stockholders. Such interests include the following: (i) the Midland
Board shall designate one individual to serve on the Vista Board; (ii) Vista
will enter into indemnification agreements with each of the directors and
officers of Vista; (iii) Vista will enter into indemnification agreements with
each of the directors and officers of Midland; (iv) pursuant to the terms of the
Midland Exchange Agreement, Sam R. Brock, a director of Midland, Darrell M.
Dillard, a director of Midland, Robert R. Donnelly, president and a director of
Midland, Wayne M. Whitaker, a director of Midland, John Q. Adams, an advisory
director of Midland, and Marilyn D. Wade, corporate secretary of Midland, shall
exchange each Midland Exchange Stock Option for a Vista Warrant that is
exercisable for that whole number of shares of Vista Common Stock (to the
nearest whole share) equal to the product of (x) .725 times (y) the number of
shares of Vista Common Stock into which the shares of Midland Common Stock
subject to such Midland Exchange Stock Option would be converted pursuant to the
Merger; (v) concurrently with execution of the Merger Agreement, Midland
obtained written resignations from each of its officers and directors effective
as of the Effective Time and Midland entered into termination agreements with
Howard E. Ehler and Marilyn D. Wade effective as of the Effective Time; (vi)
concurrently with execution of the Merger Agreement, Midland entered into a
Settlement Agreement with Deas H. Warley; and (vii) concurrently with execution
of the Merger Agreement, Deas H. Warley and Marilyn D. Wade entered into a
Release and Hold Harmless Agreement. See "The Merger -- Interests of Certain
Persons in the Merger."
ACCOUNTING TREATMENT
The Merger and the Midland Exchange will be accounted for as a purchase of
Midland by Vista for financial accounting purposes. See "The
Merger -- Accounting Treatment."
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MATERIAL TAX CONSEQUENCES
The Merger has been structured to qualify as a reorganization under the
Code. Midland received an opinion from Arthur Andersen LLP to the effect that
(i) The Merger will constitute a reorganization within the meaning of
the Code.
(ii) Vista, Midland and Merger Sub will all be "a party to a
reorganization" under the Code.
(iii) No gain or loss will be recognized by the stockholders of
Midland on the receipt of Vista Common Stock solely in exchange for Midland
Common Stock surrendered pursuant to the plan of reorganization. The
payment of cash in lieu of fractional share interests of Vista Common Stock
will be treated as if each fractional share is distributed as part of the
exchange and then redeemed by Vista. Subject to the conditions and
limitations of Section 302(a) of the Code, these cash payments will be
treated as having been received as distributions in full payment in
exchange for the fractional share of Vista Common Stock. Any gain or loss
recognized upon such exchange will be capital gain or loss provided the
fractional share would constitute a capital asset in the hands of the
exchanging stockholder.
The Vista Exchange should constitute a transfer to a controlled corporation
within the meaning of Section 351 of the Code. Accordingly, under current law,
no gain or loss should be recognized upon the exchange for Vista Common Stock,
except that (1) any gain inherent in the exchange should be recognized to the
extent of the fair market value of any Vista Warrants received and (2) gain or
loss should be recognized equal to the difference between any cash received in
lieu of fractional share interest and the tax basis in the fractional share
deemed to have been redeemed in the exchange. See "The Merger -- Material Income
Tax Consequences."
DISSENTERS' RIGHTS
Under Texas law, holders of Midland Common Stock will not be entitled to
any dissenters' rights in connection with the Merger.
COMPARISON OF STOCKHOLDER RIGHTS
Rights of stockholders of Midland are currently governed by the Texas
Business Corporation Law, the Articles of Incorporation of Midland and the
Bylaws of Midland. Upon consummation of the Merger, Midland stockholders will
become stockholders of Vista and their rights as Vista stockholders will be
governed by the Delaware General Corporation Law, the Certificate of
Incorporation of Vista and the Bylaws of Vista. There are various differences
between the rights of Midland stockholders and the rights of Vista stockholders.
See "Comparison of Stockholder Rights" and "Description of Vista Capital Stock."
RISK FACTORS
In evaluating the Merger, stockholders should take into account the
following risk factors relating to the Merger, Midland, the Vista Partnership
and Vista, and their respective businesses, which risk factors are discussed at
greater length under the caption "Risk Factors."
- forward-looking statements are contained in this Proxy
Statement/Prospectus and, although Vista and Midland believe they are
based on reasonable assumptions, no assurances can be given that actual
results may not differ from such forward-looking statements;
- the merger consideration to be received by the stockholders of Midland is
fixed and will not be adjusted due to market conditions or in the event
of any fluctuations in the price of the Midland Common Stock;
- prices for oil and gas production and the costs of acquiring, finding,
developing and producing such products are volatile;
- the Vista Partnership's and Midland's reserve information is based upon
estimates of proved reserves and future net cash flows, which may not
prove to be accurate;
9
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- Vista's success will depend upon replacement of reserves;
- Vista's success will require substantial capital requirements;
- Vista will have substantial indebtedness upon consummation of the Merger;
- drilling for oil and gas involves a high degree of risk;
- Vista's success will depend upon successful acquisitions and divestitures
of properties;
- the failure of Midland stockholders to approve the Merger Agreement would
likely cause Midland to further reduce personnel, consider the sale of
properties it would prefer not to sell at current market prices to reduce
debt, and possibly take other actions that the Midland Board does not
presently consider to be as advantageous to the Midland stockholders as
the Merger;
- substantially all of Vista's oil and gas properties will be mortgaged to
secure borrowings from its lenders;
- Vista's success will depend upon key personnel;
- a majority of Vista's capital stock will be controlled by a single
stockholder;
- oil and gas operations involve risks that may not be fully insured;
- governments regulate the oil and gas industry extensively;
- oil and gas production, development and exploration activities are highly
competitive;
- certain Vista stockholders will have the right to require Vista to
register their Vista Common Stock;
- restrictions will exist on the payment of dividends under Vista's Credit
Facility (as defined herein);
- Vista Common Stock will not have a public market before the Merger and no
assurances can be given that an active public market for such stock will
develop or be sustained; and
- the price of Vista Common Stock may be volatile.
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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE VISTA PARTNERSHIP
The following table sets forth selected consolidated financial information
of the Vista Partnership for the six months ended June 30, 1998 and 1997, and
for the years ended December 31, 1997 and 1996 and for the period from inception
(September 21, 1995) to December 31, 1995. This data should be read in
conjunction with the Consolidated Financial Statements of the Vista Partnership
and the related notes thereto.
FOR THE PERIOD
FROM INCEPTION
SIX MONTHS ENDED (SEPT. 21,
JUNE 30, YEAR ENDED DECEMBER 31, 1995)
------------------------- ------------------------- TO DEC. 31,
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- --------------
(UNAUDITED)
REVENUES:
Oil and gas sales............................. $ 4,057,279 $ 3,633,274 $ 8,874,961 $ 5,537,720 $ 1,348,647
----------- ----------- ----------- ----------- -----------
Total revenues.......................... 4,057,279 3,633,274 8,874,961 5,537,720 1,348,647
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Lease operating............................... 1,939,530 1,672,260 3,688,695 2,544,567 728,540
Exploration costs............................. -- 58,600 97,211 273,843 --
Depreciation, depletion and amortization...... 962,026 932,192 2,169,098 1,272,316 308,132
General and administrative.................... 620,665 475,640 987,020 581,048 208,509
Amortization of unit option awards............ 192,177 264,594 315,518 -- --
----------- ----------- ----------- ----------- -----------
Total costs and expenses................ 3,714,398 3,403,286 7,257,542 4,671,774 1,245,181
----------- ----------- ----------- ----------- -----------
Operating income........................ 342,881 229,988 1,617,419 865,946 103,466
----------- ----------- ----------- ----------- -----------
Loss on sale of property...................... (192,898) (7,247) (86,678) (56,738) --
Interest expense.............................. (713,961) (394,169) (1,048,009) (476,363) (77,093)
Other income (loss), net...................... 40,291 63,856 115,949 61,437 33,684
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE TAXES(1)............... (523,687) (107,572) 597,681 394,282 60,057
----------- ----------- ----------- ----------- -----------
Pro forma benefit (provision) for taxes....... 183,290 37,650 (211,720) (139,284) (21,190)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)............................... $ (340,397) $ (69,922) $ 385,961 $ 254,998 $ 38,867
=========== =========== =========== =========== ===========
CASH FLOW DATA:
EBITDAEX(2)..................................... 1,304,907 1,220,780 3,883,728 2,412,105 411,598
Cash flows from operating activities............ 625,976 1,677,619 3,469,638 2,072,649 195,878
Cash flows from investing activities............ (1,585,830) (4,379,753) (12,648,815) (7,046,720) (7,948,840)
Cash flows from financing activities............ 500,000 2,184,923 9,189,095 5,015,077 8,265,167
Capital expenditures............................ 1,717,694 (4,379,753) 13,038,815 7,417,091 7,720,478
Ratio of earnings to fixed charges(3)........... -- -- 1.6x 1.8x 1.8x
BALANCE SHEET DATA (end of period):
Working capital................................. 158,777 (490,950) 421,132 613,666 648,130
Property, plant, and equipment, net............. 25,234,284 17,982,188 24,870,766 14,523,202 9,076,679
Total assets.................................... 26,989,793 19,150,432 27,036,103 16,259,340 10,364,620
Long-term obligations........................... 18,400,000 10,800,000 17,900,000 8,615,077 3,600,000
Owners' equity.................................. 7,365,142 6,940,475 7,696,652 6,783,453 6,389,171
- ---------------
(1) The pro forma benefit (provision) for taxes is the amount that would have
been recorded in the financial statements had the Vista Partnership been a
taxable entity.
(2) The Vista Partnership believes that EBITDAEX may provide additional
information about the Vista Partnership's discretionary cash flow and its
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDAEX is a financial measure commonly
used in the oil and gas industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measures of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity. Because EBITDAEX
excludes some, but not all, items that affect net income and these measures
may vary among companies, the EBITDAEX data presented above may not be
comparable to similarly titled measures of other companies. EBITDAEX (as
used herein) is calculated by adding depletion, depreciation and
amortization, and exploration costs to operating income. Exploration costs
represent discretionary cost items. Therefore, exploration costs have been
added back in order to present a discretionary cash flow for the Vista
Partnership. Interest includes accrued interest expense and amortization of
deferred financing costs.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before taxes plus fixed charges. Fixed charges
consist of interest expense. For the six months ended June 30, 1998,
earnings were insufficient to cover fixed charges by $0.5 million.
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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MIDLAND
The following table sets forth selected consolidated financial information
of Midland for the six months ended June 30, 1998 and 1997, and for each of the
five fiscal years in the period ended December 31, 1997. This data should be
read in conjunction with the Consolidated Financial Statements of Midland and
the related notes thereto.
SUMMARY BALANCE SHEET DATA
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Current Assets........... $ 1,138,585 $ 1,739,197 $ 2,036,145 $ 3,644,720 $ 2,038,452 $ 1,134,999 $ 1,444,981
Current Liabilities...... 1,626,529 3,165,528 1,564,683 3,268,428 1,950,703 2,152,910 1,864,131
----------- ----------- ----------- ----------- ----------- ----------- -----------
Working capital........ (487,944) (1,426,331) 471,462 376,292 87,749 (1,017,911) (419,150)
Oil and gas properties
(net).................. 12,892,411 13,657,090 13,004,527 13,408,878 9,887,998 9,257,900 7,991,304
Other assets............. 2,876,036 3,322,934 2,579,811 1,923,048 2,196,902 2,385,641 2,113,785
Total assets............. 16,907,032 18,719,221 17,620,483 18,976,646 14,123,352 12,778,540 11,550,070
Long-term debt (excluding
current maturities).... 8,856,319 7,012,488 9,115,370 7,166,421 4,524,617 4,254,042 3,616,628
Other non-current
liabilities............ 205,554 214,454 221,404 364,537 -- -- --
Stockholders' equity..... $ 6,218,630 $ 8,326,751 $ 6,719,026 $ 8,177,260 $ 7,648,032 $ 6,371,588 6,069,311
=========== =========== =========== =========== =========== =========== ===========
Stockholders' equity per
common share........... $ 1.39 $ 1.88 $ 1.51 $ 1.86 $ 1.74 $ 1.90 $ 1.80
=========== =========== =========== =========== =========== =========== ===========
Shares outstanding....... 4,467,699 4,434,872 4,463,499 4,401,031 4,386,231 3,362,222 3,373,522
=========== =========== =========== =========== =========== =========== ===========
SUMMARY OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Oil and gas sales...... $ 2,182,394 $ 3,346,815 $ 6,396,249 $ 6,958,491 $ 5,147,033 $ 5,265,759 $ 4,569,022
Other.................. 67,352 158,812 204,238 183,234 231,141 217,884 82,173
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
revenues........... 2,249,746 3,505,627 6,600,487 7,141,725 5,378,174 5,483,643 4,651,195
Production costs....... 1,416,724 1,449,529 3,088,886 2,981,837 2,509,854 2,423,032 2,091,955
Exploration costs...... 4,709 360,284 849,534 766,855 198,453 -- --
Depreciation, depletion
and amortization..... 678,255 634,233 1,964,658 1,306,287 1,033,905 1,120,841 786,918
Abandonments........... 39,808 -- 93,760 -- 3,000 41,676 25,732
General and
administrative
expenses............. 574,837 817,183 1,451,404 1,295,298 1,049,904 1,145,719 1,422,094
Impairment costs(a).... -- 356,000 1,277,342 114,904 1,020,670 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 2,714,333 3,617,229 8,725,584 6,465,181 5,815,786 4,731,268 4,326,699
----------- ----------- ----------- ----------- ----------- ----------- -----------
(464,587) (111,602) (2,125,097) 676,544 (437,612) 752,375 324,496
Gain (loss) on sale of
properties(b)........ 10,048 376,505 462,571 36,308 (102,984) 81,962 --
Other income(c)........ 14,038 18,155 32,337 61,997 38,911 169,174 51,692
Interest expense....... (416,759) (410,832) (970,430) (722,447) (611,587) (473,048) (296,797)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle............ (857,260) (127,774) (2,600,619) 52,402 (1,113,272) 530,463 79,391
Income tax expense
(benefit)............ (291,491) (45,291) (717,237) 30,280 (376,241) 204,769 29,457
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of
change in accounting
principle............ $ (565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031) $ 325,694 $ 49,934
=========== =========== =========== =========== =========== =========== ===========
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SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Income (loss) per
common share before
cumulative effect of
change (basic and
diluted)............. $ (.13) $ (.02) $ (0.42) $ 0.01 $ (0.22) $ 0.10 $ 0.02
=========== =========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding.......... 4,464,822 4,416,345 4,433,113 4,395,414 3,381,592 3,368,455 2,267,563
=========== =========== =========== =========== =========== =========== ===========
- ---------------
(a) In 1995, concurrent with Midland's adoption of the Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"),
Midland recognized a charge of $1,020,670 for certain properties which were
held for sale.
(b) Gain (loss) on sale of properties was principally composed of the loss on
the sale of Midland's former office facilities in Midland, Texas, in 1995
and a gain on the sale of a working interest in an oil and gas property to
Summit Petroleum Corporation in 1994. In 1997, gains were realized
primarily from the sale of oil and gas properties.
(c) In 1994, there was other income from the settlement of litigation regarding
a former property operator of $120,090.
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF VISTA
The following tables sets forth unaudited pro forma combined financial data
of Vista for the six months ended June 30, 1998 and for the year ended December
31, 1997. This data should be read in conjunction with "Unaudited Pro Forma
Combined Financial Statements of Vista Energy Resources, Inc."
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
REVENUES:
Oil and gas sales......................................... $ 6,239,673 $16,468,947
----------- -----------
Total revenues.................................... 6,239,673 16,468,947
----------- -----------
COSTS AND EXPENSES:
Lease operating(1)........................................ 3,122,905 6,628,040
Exploration costs......................................... 4,709 946,745
Depreciation, depletion and amortization.................. 2,140,894 4,855,431
General and administrative(1)............................. 1,376,996 2,842,248
Amortization of unit option awards........................ 192,177 315,518
----------- -----------
Total costs and expenses.......................... 6,837,681 15,587,982
----------- -----------
Operating income (loss)........................... (598,008) 880,965
----------- -----------
Loss on sale of property.................................... (192,898) (87,678)
Interest expense............................................ (1,073,509) (1,704,034)
Other income, net........................................... 79,874 233,512
----------- -----------
NET INCOME (LOSS) BEFORE TAXES.............................. (1,784,541) (677,235)
----------- -----------
Pro forma benefit (provision) for taxes................... 624,589 237,032
----------- -----------
NET INCOME (LOSS)........................................... $(1,159,951) $ (440,203)
=========== ===========
- ---------------
(1) The accompanying unaudited pro forma financial statements have been prepared
pursuant to regulations prescribed by the Securities and Exchange
Commission. The unaudited pro forma statements of operations do not consider
the effects of the cost reduction plans of management to be implemented
after closing. Management expects to reduce lease operating expenses by
approximately $210,000 on an annual basis for efficiencies to be realized
through economies of scale in common operating locations and reductions of
certain field personnel. In addition, management expects to reduce general
and administrative expenses by approximately $1,475,000 on an annual basis
from the elimination of redundant personnel, lease space and other corporate
services. In accordance with Securities and Exchange Commission regulation,
none of these anticipated cost reductions have been reflected in the
accompanying pro forma statements of operations.
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RISK FACTORS
Stockholders should carefully review the following factors together with
the other information contained in this Proxy Statement/Prospectus prior to
voting on the proposal herein.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus includes forward-looking statements. All
statements other than statements of historical fact included in this Proxy
Statement/Prospectus including, without limitation, the statements under
"Summary," "The Vista Partnership -- Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Vista Partnership," "The
Vista Partnership -- Business and Properties of the Vista Partnership,"
"Midland -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of Midland" and "Midland -- Business and Properties of
Midland" are forward-looking statements. Although the Vista Partnership and
Midland believe their respective expectations are based on reasonable
assumptions, no assurance can be given that actual results may not differ
materially from those in the forward-looking statements. Important factors that
could cause actual results to differ materially from the expectations of the
Vista Partnership and Midland include, among other things, the prices received
or demand for oil and gas, the uncertainty of reserve estimates, operating
hazards, competition and the effects of governmental and environmental
regulation, conditions in the capital markets and equity markets, and the
ability of Vista to achieve the goals described in "Vista -- Strengths and
Strategies," as well as other factors discussed in this Proxy
Statement/Prospectus.
FIXED MERGER CONSIDERATION FOR MIDLAND STOCKHOLDERS
Stockholders of Midland should consider that the merger consideration will
not be adjusted in the event of an increase or decrease in the market price of
Midland Common Stock. Holders of Midland Common Stock will receive one share of
Vista Common Stock for each share of Midland Common Stock held. Stockholders of
Midland are urged to obtain current stock market quotations for Midland Common
Stock.
EFFECT OF VOLATILE PRODUCT PRICES AND MARKETS
The future financial condition and results of operations of Vista will
depend upon the prices received for oil and gas production and the costs of
acquiring, finding, developing and producing reserves. Prices for oil and gas
are subject to fluctuations in response to relatively minor changes in supply,
demand, market uncertainty and a variety of additional factors that are beyond
the control of Vista. These factors include worldwide political instability
(especially in the Middle East and other oil-producing regions), the foreign
supply of oil and gas, the price of foreign imports, the level of consumer
product demand, government regulations and taxes, the price and availability of
alternative fuels and the overall economic environment. A substantial or
extended decline in oil or gas prices would have a material adverse effect on
Vista's financial position, results of operations, quantities of oil and gas
that may be economically produced and access to capital.
The sale of oil and gas production of Vista depends upon a number of
factors beyond its control, including the availability and capacity of
transportation and processing facilities. A substantial portion of Vista's oil
and a significant portion of its gas is transported through gathering systems
and pipelines that are not owned by Vista. Transportation space on such
gathering systems and pipelines is occasionally limited and at times unavailable
due to repairs or improvements being made to such facilities or due to such
space being utilized by other oil and gas shippers that may or may not have
priority transportation agreements. Vista has not experienced any material
inability to market its proved reserves of oil or gas as a result of limited
access to transportation space. If transportation space is materially restricted
or is unavailable in the future, Vista's ability to market its oil or gas could
be impaired and cash flow from the affected properties could be reduced, which
could have a material adverse effect on Vista's financial condition or results
of operations. See "-- Governmental Regulation and Environmental Matters."
Oil and gas prices have historically been volatile and are likely to
continue to be volatile in the future. Such volatility makes it difficult to
estimate the value of producing properties for acquisition and to budget and
project the financial return on exploration and development projects involving
producing properties. In
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addition, unusually volatile prices often disrupt the market for oil and gas
properties, as buyers and sellers have more difficulty agreeing on the purchase
price of properties. In particular, from January 2, 1997 to September 11, 1998,
the prices of crude oil have ranged from a high of $26.82 per Bbl to a low of
$11.56 per Bbl and gas prices have ranged from a high of $3.68 per Mcf to a low
of $1.70 per Mcf, in each case as the reported NYMEX Daily Prompt Month Closing
Price.
The Vista Partnership engages in hedging activities with respect to a
portion of its projected oil and gas production through a variety of financial
arrangements designed to protect against price declines, including swaps,
collars and futures agreements and Vista expects to continue to do so. To the
extent that Vista engages in such activities, it may be prevented from realizing
the benefits of price increases above the levels reflected in such hedges.
RELIANCE ON ESTIMATES OF PROVED RESERVES AND FUTURE NET CASH FLOWS
Information relating to the Vista Partnership's and Midland's proved oil
and gas reserves set forth in this Proxy Statement/Prospectus is based upon
engineering estimates. Reserve engineering is a subjective process of estimating
the recovery from underground accumulations of oil and gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. Because all reserve estimates are to some
degree speculative, the quantities of oil and gas that are ultimately recovered,
production and operation costs, the amount and timing of future development
expenditures, and future oil and gas sales prices may all vary from those
assumed in these estimates. Those variances may be material. In addition,
different reserve engineers may make different estimates of reserve quantities
and cash flows based upon the same available data.
The present value of estimated future net cash flows should not be
construed as the current market value of the estimated proved oil and gas
reserves attributable to the Vista Partnership's or Midland's properties. In
accordance with applicable requirements of the Commission, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the date of the estimate, whereas actual future prices
and costs may be materially higher or lower. Actual future net cash flows also
will be affected by factors such as the amount and timing of actual production,
supply and demand for oil and gas, curtailments or increases in consumption by
gas purchasers and changes in governmental regulations or taxation. The timing
of actual future net cash flows from proved reserves, and thus their actual
present value, will be affected by the timing of both the production and the
incurrence of expenses in connection with development and production of oil and
gas properties. In addition, the 10% discount factor, which is required by the
Commission to be used to calculate discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Vista Partnership's or Midland's business or the oil and gas industry in
general.
REPLACEMENT OF RESERVES
Vista's future success will depend on its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable. The
proved reserves of Vista will generally decline as reserves are depleted, except
to the extent that Vista conducts successful exploration or development
activities or acquires properties containing proved reserves, or both. There can
be no assurance that Vista's planned development and exploration projects and
acquisition activities will result in significant additional reserves or that
Vista will have success drilling productive wells at low finding and development
costs. Furthermore, while Vista's revenues may increase if prevailing oil and
gas prices increase significantly, Vista's finding costs for additional reserves
could also increase.
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SUBSTANTIAL CAPITAL REQUIREMENTS
The Vista Partnership and Midland have made, and Vista will continue to
make, substantial capital expenditures for the development, exploration,
acquisition and production of oil and gas reserves. Historically, the Vista
Partnership and Midland have financed these expenditures primarily with proceeds
from bank borrowings, cash flow and private placements. The Vista Partnership
and Midland respectively made capital expenditures (including expenditures for
acquisitions) of $6.7 million and $3.8 million during 1996, $12.1 million and
$4.1 million during 1997 and $1.7 million and $622,000 for the six months ended
June 30, 1998. If revenues decrease as a result of lower oil and gas prices or
operating difficulties, Vista may be limited in its ability to expend the
capital necessary to undertake or complete its drilling program in future years.
There can be no assurance that additional debt or equity financing or cash
generated by operations will be available to meet these requirements.
LEVERAGE
Upon consummation of the Merger, Vista will have long-term indebtedness of
approximately $28 million under its Amended and Restated Credit Agreement, dated
August 15, 1997, between the Vista Partnership and Union Bank of California (the
"Credit Facility"). It is anticipated that Vista will incur additional
indebtedness in the future to assist in financing its growth. Any delay in
repayment or default on such debt could have an adverse effect on Vista and its
stockholders.
Vista's degree of leverage could have important consequences to the holders
of the Vista Common Stock, including the following: (i) Vista's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired in
the future; (ii) a substantial portion of Vista's cash flow from operations must
be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to Vista for other purposes; (iii) Vista's
borrowings under the Credit Facility will be at variable rates of interest,
which will expose Vista to the risk of increased interest rates; (iv) Vista may
be substantially more leveraged than certain of its competitors, which may place
Vista at a competitive disadvantage; and (v) Vista's degree of leverage may
limit its flexibility to adjust to changing market conditions, reduce its
ability to withstand competitive pressures and make it more vulnerable to a
downturn in general economic conditions or its business.
DRILLING RISKS
Drilling for oil and gas involves a high degree of risk. For any given
well, there is no assurance that a reservoir will be encountered or, if
encountered, will produce in commercial quantities. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors,
including, without limitation, unexpected drilling conditions, pressure or
irregularities in formations, equipment failures or accidents, adverse weather
conditions and shortages or delays in the delivery of equipment. Vista's future
drilling activities may not be successful and, if unsuccessful, such failure
will have an adverse effect on Vista's future results of operations and
financial condition. While all drilling, whether development or exploratory,
involves these risks, exploratory drilling involves greater risks of dry holes
or failure to find commercial quantities of hydrocarbons. Because of the
percentage of Vista's capital budget devoted to exploratory projects, it is
likely that Vista will continue to experience exploration and abandonment
expenses.
ACQUISITIONS AND DIVESTITURES
Each of the Vista Partnership's and Midland's rapid growth in recent years
has been largely the result of acquisitions of producing oil and gas properties.
Vista's growth following full development of its existing property base could be
impeded if it is unable to acquire additional oil and gas properties on a
profitable basis. The success of any acquisition will depend on a number of
factors, including the ability to estimate accurately the recoverable volumes of
reserves, rates of future production and future net revenues attributable to
reserves and to assess possible environmental liabilities. All of these factors
affect whether an acquisition will ultimately generate cash flows sufficient to
provide a suitable return on investment. Although Vista performs a
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review of the properties it seeks to acquire that it believes is consistent with
industry practices, such reviews are often limited in scope.
Vista reviews its property base for the purpose of identifying
non-strategic assets, the disposition of which would increase capital resources
available for other activities and create organizational and operational
efficiencies. Various factors could materially affect the ability of Vista to
dispose of non-strategic assets, including the availability of purchasers
willing to purchase the non-strategic assets at prices acceptable to Vista.
EFFECT ON MIDLAND OF FAILURE TO OBTAIN STOCKHOLDER APPROVAL OF THE MERGER
The Midland Board has considered various strategic alternatives to the
Merger including the issuance of equity or debt securities, the sale of assets,
and the merger with, or acquisition of, another company. After exhaustively
exploring such alternatives, the Midland Board has determined that the Merger is
in the best interests of the Midland stockholders. Midland has devoted
substantial management and capital resources in pursuing the Merger for the
reasons set forth under "The Merger -- Recommendation of Midland's Board of
Directors; Midland's Reasons for the Merger." Further, in an effort to achieve
operating efficiencies, Midland has made certain personnel reductions and
operational changes. As a result of these events and actions and the current
reduced level of oil and gas prices, the failure of the Midland stockholders to
approve the Merger Agreement would likely cause Midland to further reduce
personnel, consider the sale of properties it would prefer not to sell at
current market prices to reduce debt, and possibly take other actions which the
Midland Board does not presently consider to be as advantageous to the Midland
stockholders as the Merger.
TITLE TO PROPERTIES
Substantially all of Vista's oil and gas properties will be mortgaged to
secure borrowings under the Credit Facility. In the event of Vista's default
under certain provisions of the Credit Facility, Vista's ownership interest in
these properties may by subject to foreclosure by the lender.
DEPENDENCE ON KEY PERSONNEL
Vista will depend to a large extent on the services of C. Randall Hill,
Steven D. Gray and R. Cory Richards. Vista has key man life insurance on Messrs.
Hill and Gray in the amount of $1 million for each officer. The loss of the
services of Messrs. Hill, Gray or Richards could have a material adverse effect
on Vista's ability to achieve its goals.
CONTROL BY PRINCIPAL STOCKHOLDER
After consummation of the Merger, Vista's principal stockholder will be
NGP. As of September 11, 1998, NGP owned approximately 71% of the outstanding
Partnership Interests and approximately 79% of the outstanding shares of GP
Common Stock. Upon consummation of the Merger, NGP will own approximately 52% of
the outstanding shares of Vista Common Stock. Accordingly, NGP will be able to
control the outcome of stockholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in Vista's
Certificate of Incorporation or Bylaws and the approval of mergers and other
significant transactions. The existence of this level of ownership concentrated
in a single stockholder makes it unlikely that any other holder of Vista Common
Stock will be able to affect the management or direction of Vista. These factors
may also have the effect of delaying or preventing a change in the management or
voting control of Vista.
OPERATING HAZARDS; LIMITED INSURANCE COVERAGE
Vista's operations will be subject to hazards and risks inherent in
drilling for and production and transportation of oil and gas, such as fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of Vista and others. These risks could result in
substantial losses to Vista due to injury and loss of life, severe damage to and
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destruction of property and equipment, pollution and other environmental damage
and suspension of operations. As protection against operating hazards, the Vista
Partnership and Midland have maintained and Vista expects to maintain insurance
coverage against some, but not all, potential losses. The occurrence of an event
that is not covered, or not fully covered, by insurance could have a material
adverse effect on Vista's financial condition and results of operations. In
addition, pollution and environmental risks generally are not fully insurable.
The occurrence of an event that is not fully covered by insurance could have an
adverse effect on Vista's financial condition and results of operations.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Vista's business will be regulated by certain local, state and federal laws
and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and gas.
Vista's business will also be subject to extensive and changing environmental
and safety laws and regulations governing plugging and abandonment, the
discharge of materials into the environment or otherwise relating to
environmental protection. As with any owner of property, Vista will also be
subject to cleanup costs and liability for hazardous materials, asbestos or any
other toxic or hazardous substance that may exist on or under any of its
properties. The implementation of new, or the modification of existing, laws or
regulations, including amendments to the Oil Pollution Act of 1990, as amended,
or regulations which may be promulgated thereunder, could have a material
adverse effect on Vista. The imposition of any such liabilities on Vista could
have a material adverse effect on Vista's financial condition and results of
operations.
COMPETITION
The oil and gas industry is highly competitive. Vista will encounter
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. Vista's competitors include
major integrated oil and gas companies and numerous independent oil and gas
companies, individuals and drilling and income programs. Many of its competitors
are large, well-established companies with substantially larger operating staffs
and greater capital resources than Vista and which, in many instances, have been
engaged in the energy business for a much longer time than Vista. Such companies
may be able to pay more for productive oil and gas properties and exploratory
prospects and to define, evaluate, bid for and purchase a greater number of
properties and prospects than Vista's financial or human resources will permit.
Vista's ability to acquire additional properties and to discover reserves in the
future will be dependent upon its ability to evaluate and select suitable
properties and to consummate transactions in a highly competitive environment.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish the 21st century dates
from 20th century dates. As a result, computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Although Vista does not expect that the cost of converting its computer system
to comply with Year 2000 requirements will be material to its financial
condition, and it does not currently anticipate any disruption in its operations
as the result of any failure by Vista to be in compliance, there can be no
assurance that Vista's upgraded system will contain all necessary software
routines and programs necessary for the accurate calculation, display, storage
and manipulation of data involving dates. Moreover, Vista cannot determine what
effect, if any, the Year 2000 requirements will have on its vendors, customers,
other businesses with which it conducts business and the numerous local, state,
federal and other U.S. and foreign governmental entities by which it is
regulated, governed or taxed. No assurance can be given that the computer
systems and software of such entities will be Year 2000 compliant or that
compliance costs or the impact of Vista's failure to achieve substantial Year
2000 compliance will not have a material adverse effect on Vista's financial
position and results of operations.
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SHARES ELIGIBLE FOR FUTURE SALE
Vista believes that immediately after the Effective Time, in addition to
the shares of Vista Common Stock being registered pursuant to this Proxy
Statement/Prospectus, all of the 11,778,479 shares issued pursuant to the Vista
Exchange will be eligible for resale under Rules 144 and 145 of the Securities
Act. In addition, out of the shares of Vista Common Stock subject to this Proxy
Statement/Prospectus, 1,621,918 shares will be subject to Rule 145 and will be
eligible for resale thereunder.
RESTRICTIONS ON DIVIDENDS
Dividends will be paid on Vista Common Stock only if, as and when declared
by the board of directors of Vista (the "Vista Board"). Vista's ability to pay
dividends is limited by the terms of the Credit Facility and may be limited by
terms of any future debt indentures and preferred stock. It is Vista's current
intention to retain earnings to fund future growth and, therefore, Vista will
not pay dividends.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Before consummation of the Merger, there has been no public market for the
Vista Common Stock, and an active public market for the Vista Common Stock may
not develop or be sustained. The market price for Vista Common Stock may be
highly volatile depending on various factors, including the general economy,
stock market conditions, announcements by Vista, its competitors and
fluctuations in Vista's overall operating results. In addition, the stock market
historically has experienced volatility that has affected the market price of
securities of many companies and which has sometimes been unrelated to the
operating performance of such companies. The market price of the Vista Common
Stock could also be subject to significant fluctuations in response to
variations in quarterly results of operations, changes in earnings estimates by
analysts, governmental regulatory action, general trends in the industry and
overall market conditions, and other factors.
RISKS RELATING TO LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON
LIQUIDITY FOR VISTA'S SECURITIES
If after the Merger the Vista Common Stock should cease to be listed on the
ASE and if the Vista Common Stock is not relisted on a different exchange or on
the Nasdaq National Market, then, the Vista Common Stock would become subject to
Rule 15g-9 under the Exchange Act. This Rule (the "Penny Stock Rule") imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, upon the
occurrence of such an event, the application of such Rule may affect the ability
of broker-dealers to sell Vista's securities and may affect the ability of
purchasers to sell any of Vista's securities in the secondary market.
The Commission has adopted regulations that define a "penny stock" to be
any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.
The foregoing required penny stock restrictions will not apply to Vista
Common Stock if Vista satisfies ASE requirements regarding continued listing or
if the Vista Common Stock is listed on a different exchange or on the Nasdaq
National Market. There can be no assurance that Vista Common Stock will qualify
for exemption from the penny stock restrictions. In any event, even if Vista
Common Stock were exempt from such restrictions, Vista would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the
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Commission the authority to restrict any person from participating in a
distribution of penny stock, if the Commission finds that such a restriction
would be in the public interest.
If Vista Common Stock were subject to the rules on penny stocks, the market
liquidity for Vista Common Stock could be materially adversely affected.
THE COMPANIES
MIDLAND
Midland is an independent oil and gas company engaged primarily in the
exploration and development of domestic oil and gas. Midland's initial emphasis
was on acquisition and exploitation of oil and gas properties. In 1995, Midland
changed its emphasis to exploration, utilizing 3-D seismic technology. Although
Midland's principal properties are located in Texas, Midland also owns working
interest and minor royalty leasehold interests in developed and undeveloped oil
and gas acreage in Illinois and Colorado.
Midland had approximately 5.0 million BOE of total proved reserves at
December 31, 1997 and PV10 of approximately $17.8 million. Oil reserves at year
end 1997 were 2.7 million Bbls and natural gas reserves at year end 1997 were
13.9 Bcf. On a BOE basis, 67% of Midland's total proved reserves at December 31,
1997 are proved developed reserves. Midland operates 95% of its total proved
reserves. The reserve-to-production ratio associated with Midland's proved
reserves is 14 years on a BOE basis.
THE VISTA PARTNERSHIP
The Vista Partnership is a privately held independent oil and gas
exploration and production company with operations and properties located in the
Permian Basin of West Texas and Southeastern New Mexico and the onshore Gulf
Coast region of South Texas. The Vista Partnership and its operating subsidiary,
Vista Resources, Inc., were formed by management of the Vista Partnership and
various affiliates of NGP in September 1995 to focus on acquisitions and
exploitation drilling primarily in the Permian Basin of West Texas and Southeast
New Mexico.
The Vista Partnership had approximately 9.1 million BOE of total proved
reserves at December 31, 1997 and PV10 of approximately $38.6 million. Oil
reserves at year end 1997 were 7.2 million Bbls and natural gas reserves at year
end 1997 were 11.3 Bcf. On a BOE basis, 52% of the Vista Partnership's total
proved reserves at December 31, 1997 are proved developed reserves. The Vista
Partnership operates 92% of its total proved reserves. The reserve-to-production
ratio associated with the Vista Partnership's proved reserves is 14 years on a
BOE basis.
VISTA
Vista is a newly formed Delaware corporation and wholly owned subsidiary of
the Vista Partnership that has not, to date, conducted any significant
activities other than those incident to its formation, its execution of the
Merger Agreement and its participation in the preparation of this Proxy
Statement/Prospectus. Vista has no material assets or liabilities, other than
its rights and obligations under the Merger Agreement, the Midland Exchange
Agreement and the Vista Exchange Agreement, and has not generated any material
revenues or expenses. The Merger will create a newly formed independent oil and
gas company by combining the oil and gas reserves, operations and businesses of
the Vista Partnership and Midland. Vista's growth strategy involves a
coordinated balance of acquisitions, exploitation and exploration. Drilling and
production operations will be located in Texas and New Mexico.
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THE MIDLAND MEETING
DATE, TIME AND PLACE
The Midland Meeting will be held on October 28, 1998 at 10:00 a.m.,
Midland, Texas time, at The Midland Room, Fasken Center, Tower II, 2nd Floor,
550 West Texas Avenue, Midland, Texas.
PURPOSE OF MIDLAND MEETING
The Midland Meeting of the stockholders of Midland has been called by the
Midland Board. The stockholders of Midland are being asked to consider and vote
upon the proposal to approve and adopt the Merger Agreement, which is described
in more detail elsewhere in this Proxy Statement/Prospectus. See "Certain Terms
of the Merger Agreement, the Vista Exchange Agreement and the Midland Exchange
Agreement."
RECORD DATE; HOLDERS ENTITLED TO VOTE
The Midland Board has established September 23, 1998 ("Midland Record
Date") as the date to determine those record holders of Midland Common Stock
entitled to notice of and to vote at the Midland Meeting and any adjournments or
postponements thereof.
QUORUM; VOTE REQUIRED
The presence, in person or by proxy, of the holders of a majority of the
shares entitled to vote is necessary to constitute a quorum at the Midland
Meeting. The approval and adoption of the Merger Agreement to be voted on at the
Midland Meeting requires the affirmative vote of the holders of at least
two-thirds (66 2/3%) of the outstanding shares of Midland Common Stock. Holders
of Midland Common Stock will not be entitled to dissenters' rights in connection
with the Merger. The persons voting proxies submitted to the Midland Meeting by
Midland stockholders will not use discretionary authority granted from proxies
voting against the Merger to adjourn the Midland Meeting in order to solicit
additional votes.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the Midland Meeting may be made in
person or by mail, telephone, telecopy or telegram. Midland will bear the cost
of solicitation of proxies from its stockholders and Midland and Vista will
share equally the Registration Statement filing fees and the cost of printing
this Proxy Statement/Prospectus. In addition to solicitation by mail, the
directors, officers and regular employees of Midland and its subsidiaries may
solicit proxies from stockholders of Midland by telephone, telecopy or telegram,
or in person. Midland has requested banking institutions, brokerage firms,
custodians, trustees, nominees and fiduciaries to forward solicitation materials
to the beneficial owners of Midland Common Stock held of record by such
entities, and Midland will, upon the request of such record holders, reimburse
reasonable forwarding expenses. In addition, Midland and Vista have engaged
American Stock Transfer & Trust Company to assist in the solicitation of
proxies. Vista anticipates that it will incur total fees of approximately
$12,500, plus reimbursement of certain out-of-pocket expenses for this service.
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MARKET PRICE DATA
There is no established trading market for the securities of the Vista
Partnership or the General Partner. Application will be made for the shares of
Vista Common Stock to be listed on the ASE.
Midland Common Stock is traded on the ASE under the symbol "MLD." Midland
Common Stock was originally authorized for trading on NASDAQ Small-Cap Issues in
May 1991 and, in August 1997, Midland listed with the ASE. The following table
sets forth the high and low sales prices of Midland Common Stock for the periods
indicated.
HIGH LOW
---- ---
1996
Quarter ended March 31.................................... 3 7/8 2 5/8
Quarter ended June 30..................................... 4 1/4 3 1/8
Quarter ended September 30................................ 3 3/4 2 7/8
Quarter ended December 31................................. 3 1/4 1 15/16
1997
Quarter ended March 31.................................... 6 1/2 2 5/8
Quarter ended June 30..................................... 7 3/4 4 1/2
Quarter ended September 30................................ 5 1/8 3 1/8
Quarter ended December 31................................. 4 1 7/8
1998
Quarter ended March 31.................................... 4 1/8 2 1/8
Quarter ended June 30..................................... 4 1 7/8
Quarter ending September 30 (through September 11)........ 2 3/4 1 1/2
On May 22, 1998, the last full trading day prior to the public
announcements by the Vista Partnership and Midland of the proposed Merger, the
last reported sales price on the ASE of the Midland Common Stock was $3 5/8 and
the high and low sales prices were $3 3/4 and $3 1/2, respectively. As of the
last trading date immediately before the date of this Proxy
Statement/Prospectus, the last reported sales price on the ASE of the Midland
Common Stock was $3 9/16 and the high and low sales prices were $3 3/4 and
$3 9/16, respectively;
On September 11, 1998, there were 7,271,251 Partnership Interests of the
Vista Partnership held of record by 25 securityholders and there were 4,467,699
shares of Midland Common Stock outstanding held of record by 1,353 stockholders.
DIVIDEND POLICIES
The Vista Partnership has not paid distributions to its partners and
Midland has not paid dividends on its capital stock. It is Vista's intention to
retain earnings to fund future growth and, therefore, Vista will not pay
dividends.
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THE MERGER
GENERAL
The Vista Partnership, Midland, Vista and Merger Sub have entered into the
Merger Agreement which provides that, subject to the satisfaction of the
conditions thereof (see "Certain Terms of the Merger Agreement, the Vista
Exchange Agreement and the Midland Exchange Agreement -- Conditions to the
Merger"), the Merger will be effected. THE DESCRIPTION OF THE MERGER AGREEMENT
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO
THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED IN ITS ENTIRETY HEREIN BY
REFERENCE.
THE MERGER
The final structure of the Merger, the Midland Exchange and the Vista
Exchange, as respectively set out in the Merger Agreement, the Midland Exchange
Agreement and the Vista Exchange Agreement, respectively, provide that (i) Vista
will be formed as a new Delaware corporation; (ii) holders of Partnership
Interests and GP Common Stock will exchange all of their interests in the Vista
Partnership and the General Partner for shares of outstanding Vista Common Stock
(together with Vista Warrants to purchase 8,564,146 shares of Vista Common Stock
at $4.00 per share and having terms substantially similar to the Midland
Warrants, including their expiration at the same time as the Midland Warrants,
with such transaction being tax free under Section 351 of the Code); (iii)
Merger Sub, a newly formed, wholly owned subsidiary of Vista, will be merged
with and into Midland with Midland being the Surviving Subsidiary, upon which
Midland stockholders would receive shares of Vista Common Stock equal to 27.5%
of the outstanding shares of Vista Common Stock in exchange for their stock in
Midland, with such transaction being tax free under Sections 351 and 368 of the
Code; (iv) after such transactions the former holders of Partnership Interests
and GP Common Stock and former Midland stockholders will own all of the issued
and outstanding Vista Common Stock in accordance with their 72.5% and 27.5%
combination ratios; (iv) all currently existing and outstanding Midland Warrants
to purchase 2,253,094 shares of Midland Common Stock at $4.00 per share, all of
which expire in November 2002 will become exercisable for Vista Common Stock on
a one-to-one basis after the closing of the Merger; (v) all Midland Stock
Options (other than the Midland Exchange Stock Options) to acquire 268,000
shares of Midland Common Stock at various exercise prices will expire within 120
days after the closing of the Merger unless otherwise exercised; (vi) all
currently existing Midland Exchange Stock Options to acquire 1,372,931 shares of
Midland Common Stock at an exercise price of $3.00 per share will be exchanged
by their holders for Vista Warrants to purchase 995,375 shares of Vista Common
Stock at $4.00 per share; and (vii) the currently existing Midland Common Stock
Warrants to purchase 270,000 shares of Midland Common Stock at various exercise
prices and containing various termination dates which were issued to various
financial advisers and brokers over the last few years by Midland in return for
various services will (unless otherwise agreed to by the holders of the Midland
Common Stock Warrants prior to closing of the Merger) become exercisable for
Vista Common Stock on a one-to-one basis after the closing of the Merger;
provided, however, the Vista owners will receive additional shares of Vista
Common Stock in order to maintain their 72.5% sharing ratio based on the number
of Midland Common Stock Warrants whose exercise price is equal to or less than
the ASE trading price of the Midland Exercisable Warrants.
THE VISTA EXCHANGE
During May and June of 1998, and as contemplated by the Merger Agreement,
the holders of all of the outstanding GP Common Stock and the holders of all of
the outstanding Partnership Interests entered into the Vista Exchange Agreement.
Pursuant to the terms of such agreement, at the Effective Time, without any
action on the part of any holder thereof, (a) each share of GP Common Stock that
is issued and outstanding prior to the Effective Time shall be exchanged for (i)
a number of shares of Vista Common Stock equal to the Vista GP Conversion Stock
Number (being 1.60089817) and (ii) a Vista Warrant that is exercisable for a
number of shares of Vista Common Stock equal to the Vista GP Conversion Warrant
Number (being 1.16511028) and (b) each Partnership Interest that is issued and
outstanding prior to the Effective Time shall be exchanged for (i) a number of
shares of Vista Common Stock equal to the Vista LP Conversion Stock
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Number (being 117,674.06) and (ii) a Vista Warrant that is exercisable for a
number of shares of Vista Common Stock Equal to the Vista LP Conversion Warrant
Number (being 85,641.46). As provided in the Vista Exchange Agreement, any
fractional Partnership Interest shall be likewise exchanged on a pro rata basis.
Pursuant to the terms of the Vista Exchange Agreement, the holders of GP
Common Stock and Partnership Interests will receive 11,778,479 shares of Vista
Common Stock, representing 72.5% of such shares outstanding at the Effective
Time, and warrants exercisable for 8,564,146 shares of Vista Common Stock,
representing 34.5% of such shares outstanding at the Effective Time (assuming
for purposes of this calculation exercise of all such warrants as of such time).
The warrants will be issued to prevent the dilutive effect of existing Midland
Warrants to holders of GP Common Stock and Partnership Interests.
THE MIDLAND EXCHANGE
During May and June of 1998, and as contemplated by the Merger Agreement,
Sam R. Brock, a director of Midland, Darrell M. Dillard, a director of Midland,
Robert R. Donnelly, president and a director of Midland, Wayne M. Whitaker, a
director of Midland, John Q. Adams, an advisory director of Midland and Marilyn
D. Wade, corporate secretary of Midland, who hold all issued and outstanding
options to acquire shares of Midland Common Stock ("Midland Exchange Stock
Options") granted pursuant to the Midland Resources, Inc. 1997 Board of
Directors' Stock Incentive Plan (the "Midland Directors Plan"), and 137,931
options granted pursuant to the 1996 Midland Resources, Inc. Long-Term Incentive
Plan (the "Midland Incentive Plan") entered into separate exchange agreements
with Vista (collectively, the Midland Exchange Agreement"). Pursuant to the
terms of such agreement, at the Effective Time, without any action on the part
of any holder thereof, each Midland Exchange Stock Option will be exchanged for
a Vista Warrant that is exercisable for that whole number of shares of Vista
Common Stock (to the nearest whole share) equal to the product of (x) .725 times
(y) the number of shares of Vista Common Stock into which the shares of Midland
Common Stock subject to such Midland Exchange Stock Option would be converted
pursuant to the Merger. Pursuant to the Midland Exchange Agreement, no payment
shall be made for fractional interests. Pursuant to the terms of the Midland
Exchange Agreement, each Midland Exchange Stock Option subject thereto shall be
terminated immediately following its exchange for a Vista Warrant.
Pursuant to the terms of the Midland Exchange Agreement, the holders of
Midland Exchange Stock Options will receive warrants exercisable for 995,375
shares of Vista Common Stock, representing 5.8% of such shares outstanding at
the Effective Time (assuming for purposes of this calculation exercise of all
such warrants as of such time).
VISTA OWNERSHIP CHART
The following chart sets forth in tabular form the ownership of Vista as of
the Effective Time after giving effect to the Merger, the Midland Exchange and
the Vista Exchange:
MIDLAND VISTA
SECURITYHOLDERS MIDLAND PARTNERSHIP VISTA
PRIOR TO SECURITYHOLDERS SECURITYHOLDERS SECURITYHOLDERS
EFFECTIVE TIME POST EFFECTIVE TIME POST EFFECTIVE TIME POST EFFECTIVE TIME
--------------- ------------------- ------------------- -------------------
Common shares outstanding..... 4,467,699 4,467,699 11,778,479 16,246,178
Midland Stock Options(1)...... 268,000 268,000 0 268,000
Midland Common Stock
Warrants(2)................. 270,000 270,000 0 270,000
Midland Exchange Stock
Options..................... 1,372,931 0 0 0
Midland Warrants.............. 2,253,094 2,253,094 0 2,253,094
Vista Warrants................ 0 0 5,939,975(3) 5,939,975
Vista Warrants................ 0 995,375(4) 2,624,171(5) 3,619,546
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- ---------------
(1) All Midland Stock Options expire on the 120th day following the Effective
Time unless previously exercised. If Midland Stock Options are exercised,
then the holders of GP Common Stock and Partnership Interests will receive
additional shares of Vista Common Stock in order to maintain their 27.5%
sharing ratio.
(2) Holders of GP Common Stock and Partnership Interests will receive no
securities comparable to the Midland Common Stock Warrants; provided,
however, the holders of GP Common Stock and Partnership Interests will
receive shares of Vista Common Stock based on the amount of Midland
Exercisable Warrants (as if such Midland Exercisable Warrants were
equivalent to shares of outstanding Midland Common Stock) in order to
maintain their 72.5% sharing ratio with the holders of outstanding Midland
Common Stock.
(3) Vista Warrants that the holders of GP Common Stock and Partnership Interests
will receive in order to maintain their 72.5% sharing ratio with the holders
of Midland Warrants.
(4) Vista Warrants for which holders of the 1,372,931 Midland Exchange Stock
Options have agreed to exchange pursuant to the Midland Exchange.
(5) Vista Warrants that the holders of GP Common Stock and Partnership Interests
will receive in order to maintain their 72.5% sharing ratio with the 995,375
Vista Warrants to be received by the holders of the Midland Exchange Stock
Options pursuant to the Midland Exchange.
BACKGROUND OF THE MERGER
In November 1996, the Midland Board established certain operational
objectives and goals for management to achieve. Thereafter, during the first
seven months of 1997, Midland conducted drilling on four of its exploration
projects and achieved four commercial wells. The use of Midland's resources to
drill these four exploratory wells, coupled with the results management had
achieved in meeting the operational objectives and goals, resulted in the
Midland Board determining that the company should consider various strategic
alternatives including the issuance of equity or debt, the sale of assets, and
the merger with or acquisition of another company. Thereafter, on August 8,
1997, Midland engaged First Union Capital Markets Corp. ("First Union"), an
entity affiliated with Midland's senior lender, to assist and advise in
considering these alternatives. Following the engagement of First Union, the
Midland Board determined that a transaction with another company would be the
most likely method to permit the company to achieve its financial and
operational objectives and goals and increase value for its stockholders.
Beginning in September 1997, First Union sent information packages to
approximately 50 companies, seeking both a cash transaction as well as
transactions involving only the exchange of equity securities. As a result of
these activities, no formal offer to purchase Midland's assets in a cash
transaction was received. Although various companies expressed some level of
interest in pursuing discussions with Midland, only two companies expressed
significant interest in a transaction involving only the exchange of equity
securities. However after due diligence and limited negotiations, no formal
offers were received from either of these companies. Given the significant level
of time devoted by Midland's management to these negotiations and in assisting
First Union, coupled with the lack of apparent success, the Midland Board
determined in December 1997 to terminate the engagement of First Union and
complete any ongoing discussions with potential transaction candidates before
developing and pursuing other strategies intended to meet its original
objectives. Under the agreement by which Midland engaged First Union, First
Union was to receive up to 2% of the gross consideration received by Midland or
its stockholders in an acquisition transaction. Midland intends to dispute
whether First Union has complied with such engagement agreement so as to entitle
it to receive such compensation. To the extent any amount is determined to be
owed by Midland to First Union under such agreement, such amount will be paid by
Vista.
On November 13, 1997, Mr. C. Randall Hill, the Chairman and Chief Executive
Officer of the General Partner, contacted Mr. Bill Haskins of First Union, and
expressed the Vista Partnership's interest in learning more about Midland and
its plans for the future, including whether Midland would be interested in
pursuing a potential business combination with the Vista Partnership. Mr. Hill
followed up the telephone conversation with a letter dated November 13, 1997
addressed to Mr. Haskins in which Mr. Hill requested information about Midland
and provided preliminary information to First Union about the Vista Partnership.
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On or about November 17, 1997, the Vista Partnership received a proposed
confidentiality agreement concerning and covering non-public Midland data and
information to be supplied by Midland through First Union. The confidentiality
agreement was executed by the Vista Partnership and returned to First Union on
November 18, 1997. Mr. Hill also requested that First Union forward a copy of
the Midland Information Memorandum (herein so called) for the Vista
Partnership's review.
On December 2, 1997, Mr. Haskins informed Mr. Hill that Midland was not
interested in pursuing a potential business combination with the Vista
Partnership. Mr. Hill then sent a letter dated December 2, 1997, and addressed
to each member of the Midland Board. Such letter expressed the Vista
Partnership's disappointment in Midland's decision to not pursue discussions
with the Vista Partnership about a possible business combination without either
party having been provided any significant information about the other and
without the Vista Partnership being permitted to address the Midland Board about
the Vista Partnership's business and properties as well as why the Vista
Partnership believed a business combination with Midland might be beneficial to
each company's stockholders and partners. Later in the day on December 2, 1997,
Mr. Haskins called Mr. Hill and informed him that the Midland Board was in fact
interested in learning more about the Vista Partnership and was interested in
discussing a possible business combination. The next day the Vista Partnership
received a copy of the Midland Information Memorandum along with other
previously requested due diligence information.
From December 2, 1997 through December 17, 1997, Darrell Dillard, one of
the members of the Midland Board, contacted Mr. Hill concerning the status of
the Vista Partnership's review of Midland and so that Mr. Dillard could learn
more information about the Vista Partnership. On various occasions during this
period, Mr. Dillard and four of the five members of the Midland Board met in the
General Partner's offices in Midland, Texas with Mr. Hill, Mr. Steven D. Gray,
the General Partner's President, and Mr. R. Cory Richards, the General Partner's
Vice President and Exploration Manager. The primary purpose of each of these
meetings was for each of the members of the Midland Board to learn more about
the Vista Partnership, its business, properties, operations and management team.
At these meetings, the idea of combining the two companies was generally
discussed, along with strategies for growth, attitudes toward leverage,
management philosophies and other pertinent matters.
On December 18, 1997, Mr. Hill faxed a preliminary proposal for a business
combination to First Union for further delivery to the Midland Board. Such
proposal was included in a Vista Presentation (herein so called) dated December
19, 1997. Such proposal was for a tax free, stock-for-stock merger of the two
companies pursuant to which the stockholders of Midland would own 25% of the
combined company and the owners of the Vista Partnership would own 75% of the
combined company (the "Initial Vista Proposal"). Late in the afternoon on
December 18, 1997, Mr. Hill received a telephone call from Mr. Haskins of First
Union informing Mr. Hill that First Union's relationship as financial advisor to
Midland had been terminated and suggested that further contact between the Vista
Partnership and Midland should not be made through First Union. By letter dated
December 18, 1997, Mr. Warley informed Mr. Hill that he believed the Initial
Vista Proposal was inadequate.
On December 22, 1997, the complete Vista Presentation, together with the
Initial Vista Proposal, was sent directly to each board member of Midland by
overnight mail. On December 29, 1997, and again on December 30, 1997, Mr. Hill
and Mr. Gray met with Mr. Dillard concerning the Vista Partnership's continued
interest in pursuing a potential business combination along the lines of the
Initial Vista Proposal. Throughout the first week of January 1998, various
telephone calls and meetings resulted in Mr. Hill and Mr. Dillard agreeing that,
subject to the approval of both companies' respective boards, the Vista
Partnership and Midland would enter into a letter agreement pursuant to which
the Vista Partnership would have the exclusive right to negotiate a definitive
merger agreement with Midland through February 19, 1998. The General Partner's
board of directors was informed of the potential business combination and the
Initial Vista Proposal through a series of phone calls with Mr. Ken Hersh, Mr.
David Albin and Mr. John Foster on or about January 7, 1998. All General Partner
board members unanimously agreed to proceed with execution of the proposed
letter agreement. Such letter agreement was entered into as of January 14, 1998
(as amended from time to time, the "Letter Agreement"), and provided for, among
other things, a non-binding expression of interest in pursuing a tax free,
stock-for-stock merger between the two companies pursuant to which the
stockholders of Midland
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would own 26% of the combined company and the owners of the Vista Partnership
would own 74% of the combined company (the "Second Vista Proposal"). Pursuant to
the terms of the Letter Agreement, the Second Vista Proposal was a non-binding
expression of mutual intent, subject to the fulfillment of a number of
conditions including, without limitation, the negotiation and execution of a
definitive merger agreement and related documentation, the requisite approval of
the stockholders of Midland, and the preparation and delivery of acceptable
final, independent reserve reports by Williamson Petroleum Consultants
("Williamson") on each company's reserves (individually, the "Vista Williamson
Report" or the "Midland Williamson Report," as the case may be, and
collectively, the "Williamson Reports"). The Letter Agreement also provided that
the Vista Partnership would have the exclusive right to negotiate a definitive
merger agreement with Midland until February 19, 1998, on the assumption that
the Vista Williamson Report and the Midland Williamson Report would be completed
by February 16, 1998.
On January 20, 1997, Mr. Warley met with Messrs. Hill and Gray in the
General Partner's offices in Midland. At such meeting, Mr. Hill and Mr. Warley
discussed a timetable for due diligence matters, timing of the Williamson
Reports and other related issues. Mr. Hill and Mr. Gray also discussed various
aspects of the Vista Partnership so that Mr. Warley could learn more about the
Vista Partnership, its business, properties, operations, and management team.
Mr. Hill also discussed the Vista Partnership's history, its strategies for
growth, management philosophies and other pertinent matters.
From and after January 20, 1998, through February 10, 1998, the Vista
Partnership and Midland continued due diligence reviews of each company's
business, operations, prospects and financial position. Also, both companies
continued to work with Williamson on preparation of the Williamson Reports. On
February 12, 1998, the Vista Partnership and Midland entered into an amendment
of the Letter Agreement extending its terms through March 2, 1998, in order to
give Williamson sufficient time to complete the Williamson Reports. On February
25, 1998, the Vista Partnership and Midland entered into Amendment No. 2 to the
Letter Agreement to extend its term through March 20, 1998, in order to give
Williamson more time to complete the Williamson Reports. Williamson completed
the Vista Report on or about March 5, 1998, and such report was forwarded to
Midland for review and additional due diligence review of the reserves. On March
13, 1998, the Vista Partnership and Midland entered into Amendment No. 3 to the
Letter Agreement extending its terms through March 31, 1998, in order to give
Williamson more time to finish the Midland Report. On March 30, 1998, the Vista
Partnership and Midland entered into Amendment No. 4 to the Letter Agreement
extending its terms through April 17, 1998, in order to give Williamson more
time to finish the Midland Report. Williamson completed the Midland Report on or
about April 5, 1998, and such report was forwarded to the Vista Partnership for
review and additional due diligence review of the Vista Partnership's reserves.
On April 8, 1998, representatives of Midland, being Mr. Wayne Whitaker, Mr.
Dillard, and Mr. Robert R. Donnelly met at the offices of the Vista Partnership
with Messrs. Hill, Gray and Richards to negotiate the main terms of a business
combination. In the afternoon, the Midland negotiating group convened in Mr.
Dillard's office in Midland, Texas to deliberate and continue to negotiate by
telephone with the Vista Partnership negotiating group. Later that afternoon,
the boards of the two companies unanimously approved the main terms of the
transaction (which remained subject to the satisfaction of a number of
conditions including, without limitation, definitive documentation, the delivery
of a fairness opinion and the requisite approval of Midland's stockholders). A
press release announcing the unanimous approval by the Midland Board of the main
terms of the Merger was released on April 9, 1998. The main terms included a tax
free, stock-for-stock merger between the two companies pursuant to which the
stockholders of Midland would own 27.5% of the combined company and the owners
of the Vista Partnership would own 72.5% of the combined company (the "Final
Main Terms"). It was also announced that the management team of the Vista
Partnership would become the management team of the newly combined company and
the headquarters of the newly combined company would be located in Midland,
Texas. From and after April 10, 1998, the parties began drafting and negotiating
definitive merger documentation and Midland engaged Dain Rauscher Incorporated
("Dain Rauscher") for the purpose of rendering a fairness opinion.
On April 13, 1998, the Vista Partnership and Midland entered into Amendment
No. 5 to the Letter Agreement extending its terms through April 29, 1998, in
order to give both parties sufficient time to negotiate
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and draft definitive merger documentation and for Dain Rauscher to complete and
deliver a fairness opinion. From April 13 through April 28, 1998,
representatives of the Vista Partnership and Midland, including their legal
counsel, held meetings to further conduct due diligence reviews of the other
party and to negotiate and draft a definitive merger agreement along with all
ancillary exhibits and disclosure schedules to the definitive merger agreement.
Also during this period, both Midland personnel and the Vista Partnership
personnel had numerous discussions with representatives of Dain Rauscher
concerning the structure of the Merger and the business, operations, prospects,
properties and financial condition of both the Vista Partnership and Midland. On
April 28, 1998, the Vista Partnership and Midland entered into Amendment No. 6
to the Letter Agreement extending its terms through May 8, 1998, in order to
give both parties sufficient time to negotiate and draft definitive merger
documentation and for Dain Rauscher to complete and deliver a fairness opinion.
From April 28 to May 8, 1998, the parties continued to negotiate and revise
drafts of definitive merger documentation and to provide Dain Rauscher with
additional information about the two companies in order for Dain Rauscher to be
able to complete and deliver a fairness opinion.
On May 8, 1998, and again on May 18, 1998, the parties entered into
Amendments Nos. 7 and 8, respectively, to extend the terms of the Letter
Agreement through May 18 and May 27, 1998, respectively, in order to give the
parties sufficient time to finalize all definitive merger documentation. On May
22, 1998, the parties finalized all definitive merger documentation. The Midland
Board held a special meeting in Fort Worth, Texas and unanimously approved the
execution and delivery of an Agreement and Plan of Merger dated May 22, 1998 (as
amended from time to time, the "Merger Agreement").
On the evening of May 22, 1998, Midland and the Vista Partnership, after
final negotiations, executed the Merger Agreement. All members of the Midland
Board being Messrs. Warley, Whitaker, Dillard, Donnelly, Sam Brock and advisory
member John Adams executed voting agreements pursuant to which they agreed,
among other things, to vote in favor of the approval of the Merger Agreement at
the Midland Special Meeting.
On May 26, 1998 the Vista Partnership and Midland publicly announced the
execution and delivery of the Merger Agreement.
RECOMMENDATION OF MIDLAND'S BOARD OF DIRECTORS; MIDLAND'S REASONS FOR THE MERGER
THE MIDLAND BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF MIDLAND COMMON
STOCK VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The Midland Board believes that the terms of the Merger Agreement and the
transactions contemplated thereby are fair to and in the best interests of
Midland and its stockholders. Accordingly, the Midland Board has approved the
Merger Agreement and recommends approval and adoption thereof by the
stockholders of Midland. In view of the wide variety of factors considered in
connection with its evaluation of the Merger, the Midland Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination to
recommend approval of the Merger and the Merger Agreement. In reaching its
determination, the Midland Board consulted with Midland management and
considered a number of strategic, financial and other factors, including without
limitation those described below.
Strategic Considerations. The Midland Board assessed Midland's properties
that it currently operates, the developmental potential of properties from its
exploration activities and its financial position in light of the capital needed
to fully develop its assets. As a part of this assessment, the Midland Board
considered strategic alternatives that would enhance stockholder value,
including whether to remain a separate company, sell additional equity or debt
to fund future development of its assets, or make additional property
acquisitions or divest a significant amount of assets and use those funds to
develop its assets or reduce debt. In this respect, the Midland Board concluded,
following extensive discussions with Midland's management and among the
directors, that the transactions contemplated by the Merger Agreement provided
the best means for holders of Midland Common Stock to maximize the value of
their holdings.
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Property Characteristics. The Midland Board considered many aspects of the
Vista Partnership properties to be attractive in the context of a merger.
Specifically, the Midland Board considered that (i) the Vista Partnership
operated a significant number of its properties, which was consistent with the
Midland Board's belief that controlling property operations is important, (ii)
that a significant number of both companies' properties were close
geographically, thereby allowing operational efficiencies, and (iii) the long
life nature of the properties, thereby providing for relatively predictable
operating conditions. The Midland Board also considered that Midland's higher
gas production would balance the greater oil production of the Vista Partnership
and that the amount of development potential of Midland's properties would
provide the combined company with future drilling opportunities.
Financial. The Midland Board considered the historical financial
performance of both companies as well as a financial analysis of the impact of
the Merger on the balance sheet and cash flow of the combined company. Based
upon historical operating costs achieved by the Vista Partnership and coupled
with certain anticipated operating efficiencies of the combined company, the
Midland Board believes that the combined company will achieve a greater return
on Midland's currents assets than it has historically achieved. The Midland
Board believes that the combined company will have improved credit ratios from
those it currently has, which it believes will allow the combined company to
have a lower cost of capital and a better ability to withstand a downturn in oil
and gas prices and the business cycle.
Efficiencies. The Midland Board viewed favorably the opportunities for
operating efficiencies that it believes can be achieved from the Merger,
particularly from the integration of office facilities, technical personnel,
support functions and consolidation of certain field operations.
Management. The Midland Board considered the management strengths of the
Vista Partnership and believes C. Randall Hill, Steven D. Gray and R. Cory
Richards, the current Chairman and Chief Executive Officer, President and Vice
President -- Exploration, respectively, of the General Partner of the Vista
Partnership, are highly trained and qualified personnel who have demonstrated an
ability to profitably locate, purchase and produce oil and gas properties.
Access to Capital. The Midland Board considered that the combined company
should have a greater ability to access the capital markets and otherwise
increase its financial flexibility, which would allow capitalizing on
acquisition and development opportunities.
Exchange Ratio/Market Price. The Midland Board considered the Midland
Conversion Number and recent trading prices for Midland Common Stock. The
Midland Board analyzed the ownership structure of the combined company and had
discussions with Midland's management and among the directors, and determined
that the Midland Conversion Number was fair and in the best interests of the
Midland stockholders.
Fairness Opinion. The Midland Board considered analyses provided by Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, which included
Midland Common Stock trading prices and volumes, financial, operational and
market information and ratios of comparable companies, comparable merger and
acquisition transactions, cash flow analyses and the restructure of stock
options. The Midland Board considered the presentation made by representatives
of Dain Rauscher Wessels at the meeting of the Midland Board on May 21, 1998
regarding its preliminary valuation and financial analysis of the Merger, that
was confirmed by its final valuation and financial analysis presented at a
meeting of the Midland Board on June 25, 1998, and in writing with delivery of
its written fairness opinion on June 30, 1998, that the Merger was fair from a
financial point of view to the holders of Midland Common Stock. See "-- Opinion
of Midland's Financial Advisor."
The Midland Board believes that the Merger offers the opportunity to create
a combined company that will have greater competitive strengths, business
opportunities, financial resources and flexibility than Midland could achieve
alone.
OPINION OF MIDLAND'S FINANCIAL ADVISOR
On June 30, 1998, Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated ("DRW"), delivered its written opinion to the Midland Board that as
of the date of such opinion the Merger is fair from a
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financial point of view to the holders of the currently outstanding Midland
Common Stock. THE FULL TEXT OF THE WRITTEN OPINION OF DRW DATED JUNE 30, 1998,
WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS APPENDIX
D-1 AND D-2 TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS OF MIDLAND ARE URGED TO, AND SHOULD, READ SUCH OPINION
IN ITS ENTIRETY. DRW HAS CONSENTED TO THE USE OF ITS OPINION IN THIS PROXY
STATEMENT/PROSPECTUS.
In connection with DRW's review of the Merger, and in arriving at its
opinion described below, DRW has reviewed business and financial information
relating to Midland and the Vista Partnership. DRW has, among other things: (i)
reviewed the Merger Agreement; (ii) reviewed the Annual Reports on Form 10-KSB
for the years ended December 31, 1995, 1996 and 1997 and the Quarterly Reports
on Form 10-QSB and related unaudited financial information for certain interim
periods, including the three months ended March 31, 1998, of Midland; (iii)
reviewed the Proxy Statement filed on Schedule 14A dated May 29, 1997 of
Midland; (iv) reviewed the audited financial statements for the years ended
December 31, 1997 and 1996 and the period from inception (September 21, 1995) to
December 31, 1995, audited by Arthur Andersen LLP, independent public
accountants, and the unaudited financial statements for the three months ended
March 31, 1998 of the Vista Partnership; (v) reviewed Midland's proved oil and
gas reserves and the standardized measure of discounted future net cash flows
relating to proved oil and gas reserves as of January 1, 1998, estimated by
Williamson Petroleum Consultants, Inc., independent petroleum engineers; (vi)
reviewed the Vista Partnership's proved oil and gas reserves and the
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves as of January 1, 1998, estimated by Williamson Petroleum
Consultants, Inc., independent petroleum engineers; (vii) met with certain
members of Midland's and the Vista Partnership's senior management to discuss
their respective operations, historical financial statements and future
prospects and their views of the business, operational and strategic benefits,
potential synergies and other implications of the Merger; (viii) reviewed
certain operating and financial information of Midland and the Vista
Partnership, including projections and projected cost savings and operating
synergies, provided to us by Midland's and the Vista Partnership's management
relating to their respective businesses and prospects; (ix) reviewed the
projected consolidated pro forma financial statements for the combined companies
for the years ending December 31, 1998 and 1999 as prepared by Midland's and the
Vista Partnership's management; (x) reviewed historical market prices and
trading volumes for Midland Common Stock; (xi) reviewed publicly available
financial data and stock market performance data of publicly held companies that
we deemed generally comparable to Midland and the Vista Partnership; and (xii)
reviewed the financial terms of certain business combinations of comparable
exploration and production companies. In addition, DRW has considered such other
information and has conducted such other analyses and investigations as it
deemed appropriate under the circumstances.
DRW relied upon the accuracy and completeness of all of the financial and
other information reviewed by it and has assumed such accuracy for purposes of
its opinion. DRW has relied solely upon the reserve reports and internal
estimates prepared by the independent petroleum engineers and managements of
Midland and the Vista Partnership and reviewed by Midland. DRW has assumed with
Midland's consent that such information and the financial forecasts provided to
DRW and discussed with DRW with respect to Midland and the Vista Partnership
after giving effect to the Merger have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of Midland and that such forecasts will be realized in the amounts
and at the times contemplated thereby. DRW's opinion was based upon economic and
market conditions existing on the date of such opinion.
The following is a summary of certain of the financial analyses used by DRW
in its presentations to the Midland Board on May 21, 1998 and June 25, 1998 and
in connection with providing its written opinion to the Midland Board on June
30, 1998.
Historical Trading Analysis. DRW reviewed the daily historical closing
prices and volumes for shares of Midland Common Stock during the period from
January 2, 1998 to June 12, 1998.
Comparable Company Analysis. DRW reviewed and compared certain financial,
operating and market information relating to Midland to corresponding financial
information, ratios and public multiples for six
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small capitalization, acquisition and exploitation focused exploration and
production companies: Abraxas Petroleum Corporation; Comstock Resources, Inc.;
Costilla Energy, Inc.; Magnum Hunter Resources, Inc.; Southern Mineral
Corporation and Titan Exploration, Inc. (the "Selected Companies"). The Selected
Companies were chosen because they are publicly traded companies with operations
that for purposes of analysis can be considered similar to Midland. The
multiples and ratios for the Selected Companies were based on DRW estimates and
latest public information.
DRW considered certain publicly available information for the Selected
Companies, including, but not limited to, (i) stock price as a multiple of
discretionary cash flow ("DCF") (net income plus depreciation, depletion and
amortization, deferred taxes, exploration expenses and other non-cash items
before changes in working capital) as estimated for the 1998 (the "1998E P/DCF
Multiple") and 1999 (the "1999E P/CF Multiple") calendar years; (ii) market
value of capitalization ("MVC") (market value of equity plus book value of total
debt and liquidation value of preferred stock, less excess cash and equivalents)
as a ratio of 1997 pretax PV-10% Value ("1997 PV-10") (estimated value of total
proved reserves at December 31, 1997 based on oil and gas prices at December 31,
1997 and applying a 10% discount rate, calculated based on guidelines
promulgated by the Commission) (the "MVC/1997 PV-10 Ratio); and (iii) MVC as a
multiple of earnings before interest, taxes, depreciation, depletion and
amortization and exploration expenses ("EBITDX") as estimated for the 1998 (the
"1998E MVC/EBITDX Multiple") and 1999 (the "1999E MVC/EBITDX Multiple") calendar
years.
DRW's analyses indicated (i) 1998E P/DCF Multiples for the Selected
Companies ranged from 2.8x to 15.0x with a mean of 6.8x, compared with 16.5x for
Midland; (ii) 1999E P/DCF Multiples for the Selected Companies ranged from 2.2x
to 7.7x with a mean of 4.3x, compared with 13.3x for Midland; (iii) MVC/1997
PV-10 Ratios for the Selected Companies ranged from 92.8% to 157.4% with a mean
of 125.3%, compared with 126.9% for Midland; (iv) 1998E MVC/EBITDX Multiples for
the Selected Companies ranged from 4.9x to 13.2x with a mean of 8.3x, compared
with 15.1x for Midland; and (v) 1999E MVC/EBITDX Multiples for the Selected
Companies ranged from 4.4x to 9.1x with a mean of 6.2x, compared with 13.5x for
Midland.
No company utilized in the comparable company analysis is identical to
Midland. Accordingly, an analysis of the foregoing is not purely mathematical.
Rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
or company to which they are being compared.
Comparable Merger & Acquisition Transaction Analysis. DRW considered
certain publicly announced completed business combinations in the oil and gas
sector for which terms were publicly available, including the following 21
transactions announced between March 1994 and May 1998: Lomak Petroleum, Inc.'s
acquisition of Domain Energy Corporation; Meridian Resource Corp.'s acquisition
of Shell Oil Co.'s south Louisiana properties; Ocean Energy, Inc.'s acquisition
of United Meridian Corporation; Texoil, Inc.'s acquisition of Cliffwood Oil &
Gas Corp.; Chesapeake Energy Corporation's acquisition of Hugoton Energy Corp.;
Titan Exploration, Inc.'s acquisition of Carrollton Resources, LLC; Belco Oil &
Gas Corp.'s acquisition of Coda Energy, Inc.; Chesapeake Energy Corporation's
acquisition of DLB Oil & Gas, Inc.; Southern Mineral Corporation's acquisition
of Amerac Energy Corporation; Titan Exploration, Inc.'s acquisition of Offshore
Energy Development Corporation; Meridian Resource Corp.'s acquisition of Cairn
Energy USA, Inc.; Louis Dreyfus Natural Gas Corp.'s acquisition of American
Exploration Company; Forcenergy Inc.'s acquisition of Convest Energy
Corporation; Forcenergy Inc.'s acquisition of Edisto Resources Corporation;
Monterey Resources, Inc.'s acquisition of McFarland Energy, Inc.; Columbia
Natural Resources, Inc.'s acquisition of Alamco, Inc.; Forcenergy Inc.'s
acquisition of Great Western Resources, Inc.; Texas Pacific Group, Inc.'s
acquisition of Belden & Blake Corporation; HS Resources, Inc.'s acquisition of
Tide West Oil Company; Key Production Company, Inc.'s acquisition of Brock
Exploration Corporation and Alexander Energy Corporation's acquisition of
American Natural Energy Corporation (the "Selected Transactions").
For purposes of this analysis, DRW assumed Midland was acquiring the Vista
Partnership in a stock transaction (the "Merger Analysis"). DRW considered
certain publicly available information for the Selected
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Transactions, including, but not limited to, (i) transaction value to target
company total proved reserves ("Transaction Value/Proved Reserves") and (ii)
transaction value to target company PV-10% Value ("Transaction Value/PV-10").
DRW calculated multiples based on the consideration attributable to oil and gas
reserves for each of the Selected Transactions to, among other things, such
acquired companies' respective proved reserves. DRW's analyses indicated (i)
Transaction Value/Proved Reserves for the Selected Transactions ranged from
$2.55 to $14.37 per BOE with a mean of $7.09 per BOE, compared with $5.56 per
BOE for the Merger Analysis and (ii) Transaction Value/PV-10 for the Selected
Transactions ranged from 0.6x to 2.2x with a mean of 1.1x, compared with 1.1x
for the Merger Analysis.
No transaction utilized in the comparable merger and acquisition
transaction analysis is identical to the Merger Analysis. In evaluating the
Selected Transactions, DRW made judgments and assumptions with regard to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Midland,
such as the impact of competition on the business of Midland, the Vista
Partnership and the industry generally, industry growth and the absence of any
material change in the financial condition and prospects of Midland or the Vista
Partnership or the industry or in the financial markets in general. Mathematical
analysis is not in itself a meaningful method of using comparable transaction
data.
Contribution Analysis. DRW reviewed certain estimated future operating and
financial information (including, among other things, estimated proved reserves
and future net revenue from oil and gas properties) for Midland and the Vista
Partnership based on reserve studies as of January 1, 1998, estimated by
Williamson Petroleum Consultants, Inc., independent petroleum engineers. Based
on the reserve studies, DRW calculated field cash flow ("Field Cash Flow")
(total net revenue less ad valorem taxes and lease operating expenses) as
estimated for the 1998 ("1998E Field Cash Flow") and 1999 ("1999E Field Cash
Flow") calendar years for Midland and the Vista Partnership. This analysis
indicated that Midland stockholders, who will receive 27.5% of the equity
interest in the combined company, would contribute (i) 35.1% of the 1998E Field
Cash Flow of the combined company and (ii) 32.7% of the 1999E Field Cash Flow of
the combined company. According to Midland management, Midland does not
currently have the capital available to fund future development of its proved
undeveloped reserves. DRW calculated Field Cash Flow, excluding the development
of proved undeveloped reserves, for the same time periods for Midland. Based on
this analysis, Midland stockholders would contribute (i) 29.5% of the 1998E
Field Cash Flow of the combined company and (ii) 23.4% of the 1999E Field Cash
Flow of the combined company.
The preceding contribution analysis was derived from projections of
reserves and future net revenue to the evaluated interests based on economic
parameters and operating conditions considered to be applicable as of January 1,
1998. A base oil price of $18.00 per barrel and a base gas price of $2.40 per
Mcf were provided to Williamson Petroleum Consultants, Inc. by Midland and the
Vista Partnership to be used at the effective date. Adjustments to these price
assumptions were provided to Williamson Petroleum Consultants, Inc. by Midland
and the Vista Partnership based on additional factors on a property-by-property
basis.
Oil and gas prices have declined since the reserve studies were completed.
Average year-to-date through June 12, 1998 WTI Cushing oil price was $14.92 per
barrel and average year-to-date through June 12, 1998 Henry Hub gas price was
$2.24 per MCF. DRW was informed by Midland management that Midland currently has
no hedges in place or contemplated. DRW was informed by management of the Vista
Partnership that the Vista Partnership currently employs two costless collar
NYMEX WTI oil hedges, one expiring December 31, 1998 for 10,000 barrels per
month with put/call prices of $18.00/$19.085 per barrel and one expiring March
31, 1999 for 10,000 barrels per month with put/call prices of $18.50/$19.28 per
barrel. The Vista Partnership also has in effect three natural gas hedging
contracts through September 1998. One is a costless collar (based on NYMEX Henry
Hub Natural Gas) for 80,000 MMBtu per month with put/call prices of $2.20/$2.49
per MMBtu. The other two gas hedges are basis swaps: (i) Houston Ship Channel
Basis for 40,000 MMBtu per month at a fixed price of NYMEX Henry Hub minus
$0.0275 per MMBtu, and (ii) Permian Basin (El Paso) Basis for 40,000 MMBtu per
month at a fixed price of NYMEX Henry Hub minus $0.20 per MMBtu.
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Net Asset Value Analysis. DRW calculated net asset values for Midland and
the Vista Partnership based on (i) reserve studies as of January 1, 1998,
estimated by Williamson Petroleum Consultants, Inc., independent petroleum
engineers, and (ii) unaudited balance sheet information as of March 31, 1998.
Utilizing discounted future net revenues generated by Midland and the Vista
Partnership proved reserves, DRW applied additional risk adjustments (100% for
proved developed producing reserves, 75% for proved developed non-producing
reserves and 60% for proved undeveloped reserves) to arrive at risk-adjusted
reserve values of $19.3 million for Midland and $39.4 million for the Vista
Partnership. By adding other assets and working capital (current assets minus
current liabilities, excluding short-term debt) and subtracting long-term debt
and estimated off-balance sheet liabilities (estimated by Midland management),
DRW calculated risk-adjusted net asset values of $8.9 million for Midland and
$22.3 million for the Vista Partnership. Based on this analysis, Midland
stockholders, who will receive 27.5% of the equity interest in the combined
company, would contribute 28.6% of the net asset value of the combined company.
In each of the comparisons of the value to be achieved by the Midland
stockholders in the Merger as compared to the mean of the multiples of operating
results realized by the stockholders of the Comparable Companies and Merger and
Acquisition Transactions, the multiples of operating results achieved by the
Midland stockholders were equal or superior to those realized by the Comparable
Companies and Merger and Acquisition Transactions. The Contribution Analysis and
Net Asset Value Analysis, when viewed in light of the oil and gas environment at
the time of the Merger and Midland's current financial and operating situation,
indicates that the consideration received was greater or comparable to Midland's
contribution.
Restructuring of Midland Exchange Stock Options Analysis. In connection
with the Merger, Midland intends to restructure the Midland Exchange Stock
Options issued under the Midland Directors Plan into a restricted version of the
Vista Warrants (being the Midland Exchange). In connection with the analysis of
the Midland Exchange, DRW has, among other things: (i) reviewed the stock option
agreements governing the Midland Exchange Stock Options; (ii) reviewed the 1997
Board of Directors Stock Incentive Plan; (iii) reviewed the agreement governing
the Vista Warrants; (iv) reviewed the registration rights agreement for Midland
securityholders; and (v) reviewed publicly available financial data and stock
market performance data of Midland Common Stock as well as the publicly traded
Midland Warrants. In addition, DRW has considered such other information and has
conducted such other analyses and investigations as it deemed appropriate under
the circumstances.
DRW utilized the Black-Scholes option valuation model to evaluate the
Midland Exchange. The Black-Scholes model, utilizing assumptions as of June 12,
1998, returned a value of $0.848 per option for the existing Midland Exchange
Stock Options and a value of $1.534 per warrant for the publicly traded Midland
Warrants. As of June 12, 1998, the publicly traded Midland Warrants closed at
$1.0625 per warrant. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because Midland Exchange Stock Options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models do not necessarily provide a reliable single measure of fair
value of the Vista Warrants. Based on the current price levels of Midland Common
Stock, application of the Black-Scholes option pricing model, the restrictions
on the Vista Warrants, and an overall business judgment, an exchange ratio of
0.725 Vista Warrants for one Midland Exchange Stock Option is fair as of the
date hereof from a financial point of view to the holders of the currently
outstanding Midland Common Stock.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. No company
or transaction used in the above analyses as a comparison is directly comparable
to Midland or the Vista Partnership or the Merger. The analyses were prepared
solely for purposes of DRW's providing its opinion to the Midland Board as to
the fairness from a financial point of view of the terms of the Merger to the
holders of Midland Common Stock and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities may be sold.
Analyses based upon forecast of future results are not necessarily indicative of
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being
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based upon numerous factors or events beyond the control of the parties or their
respective advisors, none of Midland, the Vista Partnership, DRW or any other
person assumes responsibility if future results are materially different from
those forecast. As described above, DRW's opinion to the Midland Board was one
of many factors taken into consideration by the Midland Board in making its
determination to approve the Merger Agreement. DRW's opinion was provided to the
Midland Board for the information and assistance of the Midland Board in
connection with its consideration of the Merger, and such opinion does not
constitute a recommendation as to how any holder of Midland Common Stock should
vote with respect to the Merger.
The foregoing summary does not purport to be a complete description of the
analyses performed by DRW or of its presentations to the Midland Board. The
preparation of the financial analyses and fairness opinion is a complex process
and is not necessarily susceptible to a partial analysis or summary description.
DRW believes that its analyses (and the summary set forth above) must be
considered as a whole, and that selecting portions of such analyses and of the
factors considered by DRW, without considering all of the analyses and factors,
could create an incomplete view of the processes underlying the analyses
conducted by DRW and its opinion. DRW did not attempt to assign specific weights
to particular analyses. Any estimates contained in DRW's analyses are not
necessarily indicative of actual values, which may be significantly more or less
favorable than as set forth herein. Estimates of values of companies do not
purport to be appraisals or necessarily to reflect the prices at which companies
may actually be sold.
DRW, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DRW in the normal course of its
business may trade the securities of Midland for its own account and for the
accounts of its customers and, accordingly, may hold a long or short position in
such securities at any time. DRW was selected to serve as the Midland Board's
financial advisor in connection with the Merger on the basis of DRW's experience
with mergers and acquisitions in the energy industry. Midland paid DRW a
financial advisory fee of $50,000 upon the execution of its engagement letter
and an additional $50,000 at the time DRW delivered the fairness opinion. DRW
also was subsequently engaged to evaluate the Midland Exchange of Midland
Exchange Stock Options. Midland paid DRW a financial advisory fee of $30,000
upon the execution of its engagement letter and an additional $35,000 at the
time DRW delivered the fairness opinion. Midland also agreed to reimburse DRW
for its reasonable out-of-pocket expenses and to indemnify DRW and its
controlling persons against certain liabilities and expenses relating to or
arising out of the consummation of the Merger, including certain liabilities
under U.S. Federal securities laws.
OTHER AGREEMENTS
Voting Agreements. Concurrently with execution of the Merger Agreement,
holders of 21.7% of the outstanding shares of Midland Common Stock entered into
voting agreements with Vista, pursuant to which such holders have agreed, at any
meeting of the holders of Midland Common Stock, to vote such holders' shares in
favor of the Merger Agreement and the transactions contemplated thereby. In
addition, such holders have agreed to vote against any proposal that might
materially adversely affect the Merger.
Affiliates Agreements. Rule 145 promulgated under the Securities Act
regulates the disposition of securities by "affiliates" of the Vista Partnership
and Midland in connection with the Merger. Prior to the Effective Time, Vista
will enter into agreements with the affiliates of the Vista Partnership and
Midland, pursuant to which such persons will agree that they will not sell any
shares of Vista Common Stock unless such transaction is (i) pursuant to an
effective registration statement under the Securities Act, (ii) in conformity
with the volume and other limitations of Rule 145 or (iii) in reliance upon an
exemption from registration that is available under the Securities Act.
Midland Resignations and Termination Agreements. Concurrently with
execution of the Merger Agreement, Midland obtained written resignations from
each of its officers and directors under which such persons have resigned as an
officer and/or director of Midland effective as of the Effective Time.
Concurrently with the execution of the Merger Agreement, Midland entered into
termination agreements, effective as of the
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Effective Time, with Howard E. Ehler and Marilyn D. Wade. Such termination
agreements provide for payment of each employee's annual salary as consideration
for such employee's agreement to resign from his or her position with Midland.
In addition, the employees agreed to release Midland from any claims relating to
the employees' respective employment with Midland and agreed not to disclose to
third parties any confidential information relating to Midland's business and
operations.
Settlement Agreement. Concurrently with execution of the Merger Agreement,
Midland and Mr. Warley executed that certain Warley Settlement Agreement, to be
effective March 27, 1998, in settlement of Mr. Warley's employment contract with
Midland. The settlement agreement contains the following principal terms: (i)
from March 27, 1998, through either the consummation or termination of the
Merger Agreement, Midland shall pay Warley the sum of $11,390 per month; (ii) on
the effective date of the Merger, Midland agrees to pay to Warley the sum of
$1,300,000 (reduced by a payment of $100,000 made by Midland to Marilyn D. Wade
on behalf of Mr. Warley pursuant to the Wade Release (as defined below)),
payable $20,000 a month over sixty (60) months, provided that, after one year,
either Midland or Warley may elect to have such amount paid as a lump sum (using
a discount factor of six percent (6%)); (iii) Warley's existing Midland stock
options for 15,000 shares shall expire on the 120th day following the effective
date of the Merger; (iv) Warley agrees to support the Merger and to take or
refrain from taking actions as contemplated by the Merger Agreement; and (v)
Warley and Midland mutually release one another from all claims which either
party may have (including a release by Warley of Midland's directors and
officers) except pursuant to such Agreement and pursuant to confidentiality and
non-compete provisions in Warley's employment agreement and Warley's rights to
indemnification as officer and director of Midland.
Release and Hold Harmless Agreement. Concurrently with execution of the
Merger Agreement, Midland, Mr. Warley, and Marilyn D. Wade executed that certain
Release and Hold Harmless Agreement (the "Wade Release") containing the
following principal terms and provisions: (i) Wade agrees to resign her
employment upon consummation of the Merger; (ii) Warley agrees to pay the sum of
$100,000 to Wade upon consummation of the Merger, which payment Midland has
agreed to pay to Wade on behalf of Warley under the Warley Settlement Agreement;
(iii) upon execution of the Wade release, Midland granted Wade options to
purchase 137,931 shares of Midland Common Stock at $2.6875 per share; (iv)
within three (3) business days after Wade's resignation, Midland agrees to pay
the sum of $56,590; and (v) Wade releases Warley, Midland and Midland's
directors and officers from all claims which she may have against them.
Contract Operating Agreement. Effective as of June 1, 1998, Midland's
wholly owned, operating subsidiary, Midland Resources Operating Company, Inc.
("MRO"), and Vista Resources, Inc., the Vista Partnership's wholly owned,
operating subsidiary (the "Vista Operator"), entered into a Contract Operating
Agreement (herein so called) which provides, among other things, that the
Operator will provide various contract operating services for and on behalf of
Midland's oil and gas properties through October 31, 1998 and on a
month-to-month basis thereafter unless otherwise terminated by either party upon
30 days' prior written notice. The services to be provided shall be on an as
requested basis by Midland and shall include, without limitation, field
operations services, engineering supervision and analysis, geological review and
analysis, land and legal analysis, well site supervision, and accounting and
production overview and supervision. All field level services shall be charged
to Midland on an actual cost basis as incurred by the Operator, engineering and
geological review and supervision shall be charged at a flat rate of $400 per
day with a half day minimum charge, and limited general and administrative
assistance will be charged at a flat rate of $1,500 per month (which escalates
to $3,000 per month on November 1, 1998). Any general and administrative
services requested by Midland beyond the limited services set out in the
Contract Operating Agreement shall be charged on agreed upon hourly rates for
the number and type of Operator employees utilized by Midland.
Financial Advisory Agreement. Contemporaneously with the closing of the
Merger, Vista will enter into an Advisory Services Agreement with NGP. Pursuant
to the Advisory Services Agreement, Vista will pay NGP $75,000 per year on a
year-to-year basis and reimburse NGP for certain expenses in consideration for
certain consulting and financial analysis services to be provided by NGP and its
representatives.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Appointment to Vista Board. The Midland Board has designated John Q. Adams,
currently an advisory director of Midland, as a director to the Vista Board,
effective at the Effective Time, to serve until Vista's 1999 annual stockholders
meeting.
Indemnification of Vista Officers and Directors. As provided in the Merger
Agreement, at the Effective Time, Vista will enter into indemnification
agreements with each of the directors and officers of Vista pursuant to which
Vista will agree to indemnify and hold harmless each such director and officer
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities arising out of the fact that he is
a director or officer of Vista or any of its subsidiaries, to the full extent
permitted under Delaware law, Vista's Bylaws and the indemnification agreements.
Indemnification of Midland Officers and Directors. As provided in the
Merger Agreement, at the Effective Time, Vista will enter into indemnification
agreements with each of the directors and officers of Midland pursuant to which
Vista will agree to indemnify and hold harmless each such director and officer
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities arising out of the fact that he
was a director or officer of Midland or any of its subsidiaries prior to the
Effective Time, to the full extent permitted under Delaware law, Midland's
Bylaws and the indemnification agreements.
Midland Exchange Agreement. During May and June of 1998, and as
contemplated by the Merger Agreement, Sam R. Brock, a director of Midland,
Darrell M. Dillard, a director of Midland, Robert R. Donnelly, president and a
director of Midland, Wayne M. Whitaker, a director of Midland, John Q. Adams, an
advisory director of Midland and Marilyn D. Wade, corporate secretary of
Midland, who hold all issued and outstanding Midland Exchange Stock Options
granted pursuant to the Midland Directors Plan, and 137,931 options granted
pursuant to the Midland Incentive Plan, entered into the Midland Exchange
Agreement. Pursuant to the terms of such agreement, at the Effective Time,
without any action on the part of any holder thereof, each Midland Exchange
Stock Option will be exchanged for a Vista Warrant that is exercisable for that
whole number of shares of Vista Common Stock (to the nearest whole share) equal
to the product of (x) .725 times (y) the number of shares of Vista Common Stock
into which the shares of Midland Common Stock subject to such Midland Exchange
Stock Option would be converted pursuant to the Merger. Pursuant to the Midland
Exchange Agreement, no payment shall be made for fractional interests. Pursuant
to the terms of the Midland Exchange Agreement, each Midland Exchange Stock
Option subject thereto shall be terminated immediately following its exchange
for a Vista Warrant.
Pursuant to the terms of the Midland Exchange Agreement, the holders of
Midland Exchange Stock Options will receive warrants exercisable for 995,375
shares of Vista Common Stock, representing 5.8% of such shares outstanding at
the Effective Time (assuming for purposes of this calculation exercise of all
such warrants as of such time).
The following table sets forth (i) the number of shares of Midland Common
Stock underlying the Midland Exchange Stock Options held by Midland directors
and officers and their affiliates and (ii) the number of shares of Vista Common
Stock underlying the Vista Warrants that such persons will receive upon
conversion of their Midland Exchange Stock Options pursuant to the Midland
Exchange.
SHARES OF MIDLAND SHARES OF VISTA
COMMON STOCK UNDERLYING COMMON STOCK
MIDLAND EXCHANGE EXERCISE UNDERLYING EXERCISE
STOCK OPTIONS(1) PRICE VISTA WARRANTS(2) PRICE
----------------------- -------- ----------------- --------
John Q. Adams................. 175,000 $ 3.00 126,875 $4.00
Sam R. Brock.................. 250,000 $ 3.00 181,250 $4.00
Darrell M. Dillard............ 250,000 $ 3.00 181,250 $4.00
Robert R. Donnelly............ 250,000 $ 3.00 181,250 $4.00
Marilyn D. Wade............... 197,931 $ 3.00 143,500 $4.00
Wayne M. Whitaker............. 250,000 $ 3.00 181,250 $4.00
--------- -------
Total............... 1,372,931 995,375
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(1) The original term of the Midland Exchange Stock Options expires March 1,
2002, except upon a change of control (for which the Merger qualifies), at
which time the term will be shortened to one year after the date of the
change of control.
(2) The Vista Warrants will expire on November 1, 2002.
Midland Resignations and Termination Agreements. Concurrently with
execution of the Merger Agreement, Midland obtained written resignations from
each of its officers and directors under which such persons have resigned as an
officer and/or director of Midland effective as of the Effective Time.
Concurrently with the execution of the Merger Agreement, Midland entered into
termination agreements, effective as of the Effective Time, with Howard E. Ehler
and Marilyn D. Wade. Such termination agreements provide for payment of each
employee's annual salary as consideration for such employee's agreement to
resign from his or her position with Midland. In addition, the employees agreed
to release Midland from any claims relating to the employees' respective
employment with Midland and agreed not to disclose to third parties any
confidential information relating to Midland's business and operations.
Settlement Agreement. Mr. Warley had a five-year employment contract with
Midland that was terminated by the Midland Board on March 27, 1998. As of that
date, the employment contract provided for an annual salary of $247,963 with a
minimum 5% semi-annual adjustment. Mr. Warley waived such adjustments for 1997.
In addition, the contract provided for medical reimbursement of up to $10,000
for non-insurance covered medical expenses, disability payments of one-half the
annual salary for 10 years and a covenant not to compete with Midland for six
months. The term of the agreement extended for an additional five years each
January 1, unless notice was given by either Mr. Warley or Midland. Following
termination of Mr. Warley's contract and pending the conclusion of negotiations
with respect to the Merger Agreement, Midland and Mr. Warley agreed to Midland
paying Mr. Warley one-half of his former monthly salary and providing him the
use of a company vehicle. On May 22, 1998, Midland and Mr. Warley executed that
certain Warley Settlement Agreement, to be effective March 27, 1998, containing
the following principal terms: (i) from March 27, 1998, through either the
consummation or termination of the Merger Agreement, Midland shall pay Warley
the sum of $11,390 per month; (ii) on the effective date of the Merger, Midland
agrees to pay to Warley the sum of $1,300,000 (reduced by a payment of $100,000
made by Midland to Marilyn D. Wade on behalf of Mr. Warley pursuant to the Wade
Release (as defined below)), payable $20,000 a month over sixty (60) months,
provided that, after one year, either Midland or Warley may elect to have such
amount paid as a lump sum (using a discount factor of six percent (6%)); (iii)
Warley's existing Midland stock options for 15,000 shares shall expire on the
120th day following the effective date of the Merger; (iv) Warley agrees to
support the Merger and to take or refrain from taking actions as contemplated by
the Merger Agreement; and (v) Warley and Midland mutually release one another
from all claims which either party may have (including a release by Warley of
Midland's directors and officers) except pursuant to such Agreement and pursuant
to confidentiality and non-compete provisions in Warley's employment agreement
and Warley's rights to indemnification as officer and director of Midland.
Release and Hold Harmless Agreement. On May 22, 1998, Midland, Mr. Warley,
and Marilyn Wade executed that certain Release and Hold Harmless Agreement (the
"Wade Release") containing the following principal terms and provisions: (i)
Wade agrees to resign her employment upon consummation of the Merger; (ii)
Warley agrees to pay the sum of $100,000 to Wade upon consummation of the
Merger, which payment Midland has agreed to pay to Wade on behalf of Warley
under the Warley Settlement Agreement; (iii) upon execution of the Wade release,
Midland granted Wade options to purchase 137,931 shares of Midland Common Stock
at $2.6875 per share; (iv) within three (3) business days after Wade's
resignation, Midland agrees to pay the sum of $56,590; and (v) Wade releases
Warley, Midland and Midland's directors and officers from all claims which she
may have against them.
MATERIAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States federal
income tax consequences of the Merger and the Vista Exchange and is not intended
to be a complete discussion of all potential tax effects that might be relevant
to the Merger and the Vista Exchange. Such discussion deals only with persons
that are
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citizens or residents of the United States or are entities formed under the laws
of the United States (or any state or locality thereof) This summary assumes
that the holders of Midland Common Stock, GP Common Stock and Partnership
Interests have held such stock or partnership interest as a capital asset. The
discussion does not address all aspects of Federal income taxation that may be
important to particular stockholders and partnership interest holders and may
not be applicable to certain special classes of stockholders and unitholders,
including without limitation stockholders and partnership interest holders who
are not citizens or residents of the United States, stockholders and partnership
interest holders who acquired their stock or partnership interest pursuant to
the exercise of employee stock options or otherwise as compensation,
stockholders and partnership interest holders that are corporations subject to
the alternative minimum tax, insurance companies, tax-exempt organizations,
financial institutions, securities dealers, broker-dealers, or foreign
partnerships or foreign corporations. Moreover, the state, local, foreign and
estate tax consequences of the Merger and the Vista Exchange are not discussed.
This summary is based on laws, regulations, rulings and judicial decisions
in effect at the date of this Proxy Statement/Prospectus. Future legislation or
judicial or administrative changes or interpretations could alter or modify the
statements and conclusions set forth herein. Any such changes or interpretations
may or may not be retroactive and could affect the tax consequences to
stockholders and unitholders as described herein.
EACH STOCKHOLDER AND UNITHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER AND
THE VISTA EXCHANGE DESCRIBED HEREIN INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGE OF APPLICABLE TAX LAWS.
General. The Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. The Vista Exchange should constitute a transfer to a
controlled corporation within the meaning of Section 351 of the Code.
Midland has received a tax opinion from Arthur Andersen LLP, the tax
advisors to the Vista Partnership, to the effect that the Merger will be treated
as a reorganization within the meaning of Section 368(a) of the Code. No Private
Letter Ruling is being sought from the Internal Revenue Service. No opinion is
to be issued with respect to the Vista Exchange. The opinion is not binding on
the Internal Revenue Service or the courts and therefore the delivery of such
tax opinion cannot assure that the Internal Revenue Service or the courts will
treat the Merger as a reorganization within the meaning of Section 368(a) of the
Code. The tax opinion (as well as the description of tax consequences set forth
herein) is based on, among other things, assumptions relating to certain facts
and circumstances of, and the intentions of, the parties to the Merger, which
assumptions either (i) have been made with the consent of Midland and the Vista
Partnership or (ii) are based upon certain representations of fact made by the
Vista Partnership, Midland or management of the Vista Partnership or Midland. It
is a condition to the Merger that the opinion be delivered on the closing date
of the Merger. If either the Vista Partnership or Midland waives the receipt of
a tax opinion from Arthur Andersen LLP, it is the intent of both parties to
postpone the Midland Meeting and supplementally provide additional disclosure to
the Midland stockholders regarding the waiver of such tax opinion and the effect
of such waiver.
The material Federal income tax consequences of the Merger and the Vista
Exchange should be as follows:
Midland, the Vista Partnership and the General Partner. No gain or loss
will be recognized by Midland, Vista, the General Partner or any of their
respective subsidiaries as a result of the Merger. No gain or loss should be
recognized by the Vista Partnership as a result of the Vista Exchange.
Consequences to Holders of Midland Common Stock. The following discussion
is a summary of the opinion of Arthur Andersen LLP, which is included herein as
Appendix F. Except with respect to cash received in lieu of fractional shares,
no gain or loss will be recognized by holders of Midland Common Stock upon the
receipt of Vista Common Stock in the Merger. Gain or loss with respect to
receipt of any cash in lieu of fractional shares is equal to the difference
between the cash received and that portion of the stockholder's tax basis in the
Midland Common Stock exchanged attributable to the fractional share interest
deemed to
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have been redeemed in the Merger. The tax basis of the Vista Common Stock
received will equal to the basis of the Midland Common Stock surrendered in
exchange therefor reduced by the amount of tax basis allocable to any fractional
share interest deemed to have been issued and redeemed in the Merger. The
holding period of the Vista Common Stock received will assume the holding period
of the Midland Common Stock surrendered in the exchange therefor, provided that
the Midland Common Stock surrendered was a capital asset in the hands of the
exchanging shareholder.
Consequences to Holders of Partnership Interests. The exchange of the
Partnership Interests pursuant to the Vista Exchange should constitute a
transfer to a controlled corporation within the meaning of Section 351 of the
Code. Accordingly, under current law, no gain or loss should be recognized by
holders of the Partnership Interests upon the exchange for Vista Common Stock,
except that (i) any gain inherent in the exchange should be recognized to the
extent of the fair market value of any Vista Warrants received and (ii) gain or
loss should be recognized equal to the difference between any cash received in
lieu of fractional share interest and the partnership interest holder's tax
basis in the fractional share deemed to have been redeemed in the Vista
Exchange. A holder's tax basis for the shares of Vista Common Stock received in
the Vista Exchange should be the same as the holder's tax basis of its
Partnership Interests exchanged therefor, decreased by (i) the fair market value
of any Vista Warrants received (which Vista believes would be determined by the
trading price of the Midland Warrants immediately after the Effective Time
discounted to reflect that the Vista Warrants are not publicly traded) and (ii)
the tax basis of any fractional share interest deemed to have been issued and
redeemed and increased by the amount of gain (other than the gain recognized on
the deemed redemption of any fractional share interest) recognized on the Vista
Exchange. The holding period of the Vista Common Stock received should be a
split holding period. The Vista Common Stock received by the holders of
Partnership Interests attributable to the Vista Partnership's Section 751 assets
should begin on the day after the Effective Time of the Merger. Based on current
estimates Vista believes approximately 25% of the Vista Common Stock received by
the holders of Partnership Interests will have a holding period beginning the
day after the Effective Time of the Merger. The holding period attributable to
the remaining Vista Common Stock should include the holding period of the
Partnership Interests exchanged therefor, provided that the Partnership
Interests exchanged were held as capital assets by the exchanging Vista
Partnership limited partner. The tax basis of Vista Warrants received in the
Vista Exchange should be their fair market value and their holding period should
begin on the day after the Effective Time of the Merger.
Consequences to Holders of GP Common Stock. The exchange of the GP Common
Stock pursuant to the Vista Exchange should constitute a transfer to a
controlled corporation within the meaning of Section 351 of the Code.
Accordingly, under current law, no gain or loss should be recognized by holders
of the GP Common Stock upon the exchange for Vista Common Stock, except that (i)
any gain inherent in the transaction should be recognized to the extent of the
fair market value of any Vista Warrants received and (ii) gain or loss equal to
the difference between any cash received in lieu of fractional share interest
and the stockholder's tax basis in the fractional share deemed to have been
redeemed in the Vista Exchange. A holder's tax basis for the shares of Vista
Common Stock received in the Vista Exchange should be the same as the holder's
tax basis of the shares of its GP Common Stock exchanged therefor, decreased by
(i) the fair market value of any warrants received (which Vista believes would
be determined by the trading price of the Midland Warrants immediately after the
Effective Time discounted to reflect that the Vista Warrants are not publicly
traded) and (ii) the tax basis of any fractional share interest deemed to have
been issued and redeemed and increased by the amount of gain recognized (other
than the gain recognized on the deemed redemption of any fractional share
interest) on the Vista Exchange. The holding period of the Vista Common Stock
should include the holding period of the GP Common Stock exchanged therefor,
provided that the GP Common Stock surrendered was a capital asset in the hands
of the exchanging stockholder. The tax basis of Vista Warrants received in the
Vista Exchange should be their fair market value and their holding period should
begin on the day after the Effective Time of the Merger.
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ACCOUNTING TREATMENT
The Merger and the Midland Exchange will be accounted for as a purchase of
Midland by Vista for financial accounting purposes. For presentation of certain
anticipated effects of the accounting treatment on the consolidated financial
position and results of operations of Vista after giving effect to the Merger
and the Midland Exchange, see "Unaudited Pro Forma Combined Financial
Statements."
REGISTRATION RIGHTS
The Merger Agreement provides that contemporaneously with the Closing,
Vista shall enter into separate registration rights agreements (collectively,
the "Registration Rights Agreements") with each of the stockholders of the
General Partner and each of the limited partners of the Vista Partnership
immediately prior to the Vista Exchange and with each holder of a Midland
Exchange Stock Option covering (i) with respect to the Vista securityholders,
the resale of shares of Vista Common Stock to be received by such
securityholders pursuant to the terms of the Vista Exchange Agreement, together
with all shares of Vista Common Stock issuable to such securityholders upon the
exercise of an Exchange Warrant, (ii) with respect to the Midland
securityholders, the resale of shares of Vista Common Stock issuable to such
securityholders upon the exercise of an Exchange Warrant and (iii) any
securities issued or issuable in respect of any such shares by way of any stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise
((i), (ii) and (iii) above collectively referred to as the "Registrable
Shares").
The Registration Rights Agreements provide that the holders of more than
50% of the Registrable Shares outstanding may, at any time after the first
anniversary of the Effective Time, require Vista to effect the registration
under the Securities Act of Registrable Shares on no more than two occasions by
means of a "shelf" registration statement for an offering to be made on a
continuous basis under the Securities Act, subject to certain limitations. The
Registration Rights Agreements also provide certain "piggyback" registration
rights to the holders of Registrable Shares whenever Vista proposes to register
an offering of any of its capital stock under the Securities Act, subject to
certain exceptions, including pro rata reduction if, in the reasonable opinion
of the managing underwriter(s) of the offering, such a reduction is necessary to
prevent an adverse effect on the marketability or offering price of all the
securities proposed to be offered in the offering.
The Registration Rights Agreements contain customary provisions regarding
the payment of expenses by Vista and regarding mutual indemnification agreements
between Vista and the holders of Registrable Shares for certain securities law
violations.
STOCK EXCHANGE LISTING
It is a condition to the Merger that the shares of Vista Common Stock be
authorized for listing on the ASE, subject to official notice of issuance.
Application has been made for such listing.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Vista Common Stock to be received by Midland stockholders in
connection with the Merger have been registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of Vista Common Stock to be issued in connection with the Merger and
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 144 under the Securities Act) of the Vista Partnership or Midland prior
to the Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act (or, in case any such person
should become an affiliate of Vista, Rule 144 under the Securities Act) or as
otherwise permitted under the Securities Act. Accordingly, the Merger Agreement
provides that each of the Vista Partnership and Midland will use all reasonable
efforts to cause its affiliates to execute an agreement to the effect that such
persons will not sell any shares of Vista Common Stock at any time in violation
of the Securities Act or the rules and regulations promulgated thereunder,
including Rule 145.
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DISSENTERS' RIGHTS
Under Texas law, holders of Midland Common Stock will not be entitled to
any dissenters' rights in connection with the Merger. Section 5.11 of the Texas
Business Corporation Act provides that stockholders have the right to dissent
from any plan of merger that requires stockholder approval. Notwithstanding the
foregoing, however, Section 5.11 provides that a stockholder shall not have the
right to dissent from a plan of merger if (i) the stockholder is not required to
accept for the stockholder's shares any consideration that is different from the
consideration to be provided to any other stockholder and (ii) the stockholder
will receive as consideration shares of stock that are listed, or authorized for
listing upon official notice of issuance, on a national securities exchange.
INFORMATION AGENT
Midland has appointed American Stock Transfer & Trust Company as its
Information Agent with respect to the Merger. Any questions or requests for
additional copies of this Proxy Statement/Prospectus or a Proxy Card may be
directed to the Information Agent at the following address and telephone number:
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
(718) 921-8217
Any stockholder of Midland whose shares are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee may also receive
copies of this Proxy Statement/Prospectus or a Proxy Card by contacting such
nominee.
Vista will pay the fees and expenses of the Information Agent and has also
agreed to indemnify the Information Agent from certain liabilities that it may
incur in connection with the Merger.
Midland and Vista have also engaged American Stock Transfer & Trust Company
to assist in the solicitation of proxies. See "The Midland
Meeting -- Solicitation of Proxies."
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VISTA
GENERAL
Vista is a newly formed Delaware corporation and wholly owned subsidiary of
the Vista Partnership that has not, to date, conducted any significant
activities other than those incident to its formation, its execution of the
Merger Agreement, the Midland Exchange Agreement and the Vista Exchange
Agreement and its participation in the preparation of this Proxy
Statement/Prospectus. Vista has no material assets or liabilities, other than
its rights and obligations under the Merger Agreement, the Midland Exchange
Agreement and the Vista Exchange Agreement, and has not generated any material
revenues or expenses. The Merger, the Midland Exchange and the Vista Exchange
will create a newly formed independent oil and gas company by combining the oil
and gas reserves, operations and businesses of the Vista Partnership and
Midland. Vista's growth strategy involves a coordinated balance of acquisitions,
exploitation and exploration. Drilling and production operations will be located
in Texas and New Mexico.
STRENGTHS AND STRATEGIES
Vista's principal strengths and strategies will be the following:
Reserves and Production
- Vista will have over 14.0 MMBOE of total proved reserves, comprised of
25.2 Bcf of natural gas and 9.9 MMBbls of crude oil, with a PV10 of
approximately $56.4 million.
- Vista's daily production is expected to be over 1,800 Bbls of oil and
5,200 Mcf of natural gas.
- Vista's reserve base will be approximately 30% natural gas and 70% crude
oil.
- Vista's aggregate reserve to production ratio will be approximately 13
years. A significant benefit of owning long-lived reserves is an enhanced
ability to provide long-term funding for additional growth opportunities.
- More than 90% of Vista's total proved reserves will be concentrated in
the Permian Basin of West Texas and Southeastern New Mexico, a premier
oil and gas producing province typified by numerous long-life, multi-pay
exploitation and exploration opportunities.
- Vista will operate over 400 producing wells, representing over 92% of its
total proved reserves and increasing its control over the implementation
of its strategies and projects.
Management
- Vista's management team will be led by C. Randall Hill, Steven D. Gray
and R. Cory Richards, the current Chairman and Chief Executive Officer,
President, and Vice President -- Exploration, respectively, of the
General Partner of the Vista Partnership.
- Vista's management team is well-rounded and experienced with professional
backgrounds in law, petroleum engineering and geology, and over 35 years
of collective experience in the oil and gas industry.
- The members of this management team will collectively own approximately
13% of the Vista Common Stock, thereby aligning their interests with
those of the other Vista stockholders. Virtually all of the management
team's net worth will consist of their respective ownership in Vista and
they have no outside business interests, making them very focused on
growing the equity value of Vista.
NGP's Ownership
- NGP will own approximately 52% of the Vista Common Stock and will be
Vista's largest stockholder upon consummation of the Merger.
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- NGP enjoys a reputation as an active and experienced investor in the oil
and gas industry.
- Three of NGP's principals, Kenneth A. Hersh, David R. Albin and John S.
Foster, will serve as directors of Vista. Vista considers NGP's continued
participation in the ownership and management of Vista to be of
substantial value, particularly in the areas of corporate finance
activities, access to financial markets and building sponsorship for
Vista in the public arena.
OBJECTIVES AND GROWTH STRATEGY
- Vista's primary corporate objective will be to rapidly expand its reserve
base, production capacity, cash flow and earnings in order to
substantially increase the value of the Vista Common Stock.
- Vista's management will continue to employ the same business
philosophies, techniques and strategies that have grown the Vista
Partnership and its predecessor from a start up company with no reserves
or initial cash flow in December 1992 to a company of over 9.1 MMBOE and
$3.9 million of EBITDAEX for 1997.
- Vista's strategy involves these basic components: (i) acquiring domestic,
proved oil and gas properties with realizable upside potential; (ii)
exploiting such properties through a comprehensive program of workovers,
recompletions, developmental and exploratory drilling, and secondary
recovery projects using sophisticated technology; (iii) reducing costs at
all levels of its business; and (iv) internally generating exploration
projects where Vista can operate and control the timing and costs of such
exploration efforts.
- Vista will be committed to continuing to enhance stockholder value
through adherence to its strategy and believes that its expected
inventory of development, exploitation and exploratory projects, along
with strategic acquisition opportunities that may arise in the future,
may provide significant opportunity for future growth in value. See "Risk
Factors -- Cautionary Statement Regarding Forward-Looking Information."
MANAGEMENT OF VISTA
Directors and Executive Officers
Set forth below is certain information concerning the directors and
executive officers of Vista at the Effective Time.
NAME AGE POSITION
---- --- --------
C. Randall Hill..... 39 Chairman of the Board, Chief Executive Officer and
Chief Financial Officer
Steven D. Gray...... 39 President and Director
R. Cory Richards.... 37 Executive Vice President -- Exploration Manager and
Secretary
Kenneth A. Hersh.... 35 Director
David R. Albin...... 39 Director
John S. Foster...... 40 Director
John Q. Adams....... 61 Director
Set forth below is a description of the backgrounds of the future directors
and executive officers of Vista.
C. Randall Hill, a graduate of the University of New Mexico with a B.B.A.
and the University of Tulsa with a J.D., has served as Chairman of the Board and
Chief Executive Officer of the General Partner of the Vista Partnership and its
predecessor, Lobo Resources, Inc., since its inception in December 1992. From
1985 through November 1992, Mr. Hill practiced law with the law firms of Weil,
Gotshal & Manges and Johnson & Swanson in Dallas, Texas.
Steven D. Gray, a graduate of Texas Tech University with a B.S. degree in
Petroleum Engineering, has served as President and a director of the General
Partner of the Vista Partnership and its predecessor, Lobo
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Resources, Inc., since its inception in December 1992. From 1982 to 1989, Mr.
Gray held several petroleum engineering positions with Texas Oil and Gas Corp.
From 1989 to 1992, Mr. Gray was a petroleum operations and reservoir engineer
with Bettis, Boyle and Stovall, a privately held, independent oil and gas
company in Graham, Texas
R. Cory Richards, a graduate of the University of Texas at Austin with a
B.S. degree in Geological Sciences, has served as Vice President and Exploration
Manager of Vista Resources, Inc., the operating subsidiary of the Vista
Partnership, since its inception in 1995. From 1987 until 1995, Mr. Richards was
employed as Exploration Manager with J. McShane, Inc., a privately held,
independent oil and gas company in Monahans, Texas.
Kenneth A. Hersh, a graduate of Princeton University with a B.A. and
Stanford University Graduate School of Business with an M.B.A., has served as a
director of the General Partner since its inception in 1995. Since 1989, Mr.
Hersh has been a manager of the NGP investment funds, which were organized to
make direct equity investments in the oil and gas industry. From 1985 to 1987,
Mr. Hersh was employed as a member of the energy group of Morgan Stanley & Co.
investment banking division. Mr. Hersh serves as a director of Pioneer Natural
Resources Company, HS Resources, Inc., Titan Exploration, Inc. and Petroglyph
Energy, Inc.
David R. Albin, a graduate of Stanford University with a B.S. in Physics
and Stanford University Graduate School of Business with an M.B.A., has served
as a director of the General Partner since its inception in 1995. Since 1988,
Mr. Albin has been a manager of the NGP investment funds, which were organized
to make direct equity investments in the oil and gas industry. From December
1984 until November 1988, Mr. Albin was employed by Bass Investment Limited
Partnership, where he was also responsible for portfolio management. Mr. Albin
serves as a director of Titan Exploration, Inc. and Petroglyph Energy, Inc.
John S. Foster, a graduate of Williams College with a B.A. and New York
University's Stern School of Business with an M.B.A., has served as a director
of the General Partner since its inception in 1995. Since April 1989, Mr. Foster
has been the chief financial officer of the NGP investment funds, which were
organized to make direct equity investments in the oil and gas industry. From
August 1986 to March 1989, Mr. Foster was employed in the corporate bond
research department of Credit Suisse First Boston Corporation, where he focused
on the oil and gas industry.
John Q. Adams, a graduate of Heidelberg College with a B.A. in Biology, has
been an advisory director of Midland since 1995. Mr. Adams has been in the
pharmaceutical business for 30 years and founded Adams Laboratories Inc. in
1985. Medeva PLC acquired Adams Laboratories in 1992, at which time Mr. Adams
became a director of Medeva PLC and president of Medeva's North American
operations until his retirement from Medeva in 1995. Since 1995, Mr. Adams has
continued as President and Chairman of J.Q. Enterprises and Rough Creek Lodge,
Inc. He currently serves as Chairman of the Board of Adams Laboratories Inc.,
which he repurchased from Medeva PLC in 1997.
Vista was incorporated in May 1998 and has not yet paid compensation to its
executive officers. The compensation of the executive officers of Vista will be
initially set at the same level as currently being paid in connection with their
services for the Vista Partnership. After consummation of the Merger, Vista's
Compensation Committee will determine any adjustments to the compensation of
such officers. The executive officers of Vista will be C. Randall Hill, Steven
D. Gray and R. Cory Richards. Each such officer's current annual salary in
connection with his services for the Vista Partnership is $120,000, $120,000 and
$100,000, respectively.
Committees of the Board
Upon consummation of the Merger, the Vista Board intends to establish a
Compensation Committee and an Audit Committee. The Compensation Committee will
exercise the power of the Vista Board in connection with all matters relating to
compensation of executive officers, employee benefit plans and the
administration of Vista's stock option programs. The Audit Committee's primary
responsibilities will be to (i) recommend
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Vista's independent auditors to the Vista Board, (ii) review with Vista's
auditors the plan and scope of the auditors' annual audit, the results thereof
and the auditors' fees, (iii) review Vista's financial statements and (iv) take
such other action as it deems appropriate to the accuracy and completeness of
financial records of Vista and financial information gathering, reporting
policies and procedures of Vista.
Director Compensation
Directors who are also employees of Vista will not be separately
compensated for serving on the Vista Board. Directors who are not employees of
Vista will receive $250 per meeting for their services as directors. In
addition, Vista will reimburse directors for the expenses incurred in connection
with attending meetings of the Vista Board and its committees.
Compensation Committee Interlocks and Insider Participation
Vista's Compensation Committee will consist of Messrs. Hersh and Albin and
all determinations concerning executive compensation for Vista's executive
officers will be made by the Compensation Committee. The Compensation Committee
members will abstain from participation in compensation determinations
concerning their own compensation. None of the members of the Compensation
Committee has served on the board of directors or on the compensation committee
of any other entity, any of whose officers served on the Vista Board.
Employee Benefit Plans
The Vista Board and the Vista stockholders approved the adoption of the
Vista Energy Resources, Inc. 1998 Key Employee Stock Option Plan (the "Vista
Stock Option Plan") as of June 1, 1998. The Vista Board, or a committee
delegated by the Vista Board, selects participants in the Vista Stock Option
Plan from among those key employees of Vista whose performance may have a
significant effect on the success of Vista. See "Vista Stock Option Plan" for a
more detailed description of the plan.
Indemnification Agreements
As provided for in the Merger Agreement, at the Effective Time, Vista will
enter into indemnification agreements with the directors and officers of Vista
pursuant to which Vista will agree to indemnify and hold harmless such directors
and officers against any costs or expenses (including reasonable attorneys'
fees), judgments, fines, losses, claims, damages or liabilities arising out of
the fact that he is a director or officer of Vista or any of its subsidiaries,
to the full extent permitted under Delaware law, Vista's Bylaws and the
indemnification agreements.
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CAPITALIZATION
The following table sets forth the capitalization of Vista as of June 30,
1998, on a historical basis and as adjusted to give effect to the Merger, the
Midland Exchange and the Vista Exchange as if such transactions had been
consummated as of June 30, 1998. The Merger and the Midland Exchange will be
accounted for as a purchase of Midland by Vista. Accordingly, the amounts
included under "Actual" at June 30, 1998 are the historical amounts of the Vista
Partnership. The following table should be read in conjunction with the
unaudited Combined Pro Forma Financial Statements of Vista and the related notes
and the other information contained elsewhere in this Proxy
Statement/Prospectus, including the information set forth in "The Vista
Partnership -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Vista Partnership."
JUNE 30, 1998
-------------------------
ACTUAL PRO FORMA
----------- -----------
Long-term debt (excluding current portion)(1).............. $18,400,000 $28,156,319
Owners' equity:
Partners' capital........................................ 7,365,142 --
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; no shares outstanding..................... -- --
Common Stock, $0.01 par value, 50,000,000 shares
authorized; 16,246,178 shares outstanding on a pro
forma basis(2)........................................ -- 162,462
Additional paid-in capital............................... -- 25,134,127
----------- -----------
Total owners' equity............................. 7,365,142 25,296,589
----------- -----------
Total capitalization............................. $25,765,142 $53,452,908
=========== ===========
- ---------------
(1) As of June 30, the outstanding principal balance of long-term debt
(excluding current portion) was approximately $18.4 million.
(2) Excludes (i) 268,000 shares of Vista Common Stock issuable upon exercise of
outstanding Midland Stock Options, with exercise prices between $2.375 and
$4.00, (ii) 3,248,469 shares of Vista Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $4.00 and (iii) 270,000
warrants at exercise prices between $2.50 and $3.50.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
VISTA ENERGY RESOURCES, INC.
The Vista Partnership has entered into the Merger Agreement with Midland
that provides for Midland to become a subsidiary of Vista, currently a newly
created subsidiary of the Vista Partnership. The Merger will require Merger Sub
to be merged into Midland, resulting in Midland becoming a subsidiary of Vista.
As contemplated by the Merger Agreement, each of the limited partners of the
Vista Partnership and each of the stockholders of the General Partner have
entered into separate exchange agreements pursuant to which each such holder's
Partnership Interests and shares of GP Common Stock will be exchanged for shares
of Vista Common Stock contemporaneously with the Merger. As a result of the
Merger and the Vista Exchange, Vista, a new publicly held oil and gas
exploration and development company will be created.
To date, Vista has no material assets or liabilities, other than its rights
and obligations under the Merger Agreement, and has not generated any material
revenues or expenses.
The unaudited pro forma combined balance sheet and combined statements of
operations have been prepared to give effect to certain transactions as
described below.
The unaudited pro forma combined balance sheet of Vista as of June 30,
1998, has been prepared to give effect to the Merger, the Midland Exchange
and the Vista Exchange as if such transactions had occurred on June 30,
1998. In accordance with the provisions of APB No. 16, "Business
Combinations," the Merger and the Midland Exchange have been accounted for
as a purchase of Midland by the Vista Partnership.
The unaudited pro forma combined statements of operations of Vista for
the six months ended June 30, 1998, and for the year ended December 31,
1997, have been prepared to give effect to the Merger, the Midland Exchange
and the Vista Exchange and certain events described below for the Vista
Partnership and Midland as if the Merger, the Midland Exchange and the
Vista Exchange and such events had occurred on January 1, 1997.
The unaudited pro forma combined statement of operations for the year
ended December 31, 1997, has been prepared to give effect to (i) the
acquisition of certain oil and gas properties in May and June 1997 by the
Vista Partnership (the "1997 Assets Acquired") and (ii) the sale of certain
oil and gas properties by Midland (the "1997 Assets Sold").
The unaudited pro forma combined financial statements included herein are
not necessarily indicative of the results that might have occurred had the
transactions taken place at the beginning of the period specified and are not
intended to be a projection of future results. In addition, future results may
vary significantly from the results reflected in the accompanying unaudited pro
forma combined financial statements because of normal production declines,
changes in product prices, future acquisitions and divestitures, future
development and exploration activities, and other factors.
The following unaudited pro forma combined financial statements should be
read in conjunction with the Consolidated Financial Statements (and the related
notes) of the Vista Partnership and Midland included elsewhere herein for the
year ended December 31, 1997, and the Vista Partnership's and Midland's interim
information included elsewhere herein for the six months ended June 30, 1998.
47
51
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
THE VISTA PRO FORMA
PARTNERSHIP MIDLAND ADJUSTMENTS PRO FORMA
----------- ------------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents............... $ 67,275 $ 56,673 $ -- $ 123,948
Accounts receivable..................... 1,271,832 1,044,912 (300,000)(c) 2,016,744
Deferred tax asset...................... -- 37,000 (37,000)(b) --
Other................................... 44,321 -- -- 44,321
----------- ------------ ----------- -----------
1,383,428 1,138,585 (337,000) 2,185,013
----------- ------------ ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, successful
efforts accounting.................... 29,136,894 29,230,103 7,662,372(a) 66,029,369
Other................................... 411,883 557,172 (382,393)(a) 586,662
----------- ------------ ----------- -----------
29,548,777 29,787,275 7,279,979 66,616,031
Less accumulated depreciation, depletion
and amortization...................... (4,314,493) (16,613,114) 16,613,114(a) (4,314,493)
----------- ------------ ----------- -----------
Property and equipment, net...... 25,234,284 13,174,161 23,893,093 62,301,538
----------- ------------ ----------- -----------
OTHER ASSETS:
Deferred tax asset...................... -- 1,302,684 (1,302,684)(b) --
Goodwill, net........................... -- 707,240 (707,240)(a) --
Contracts and leases, net............... -- 188,422 (188,422)(a) --
Note receivable......................... -- 294,387 -- 294,387
Other................................... 372,081 101,553 (101,553)(a) 372,081
----------- ------------ ----------- -----------
$26,989,793 $ 16,907,032 $21,256,194 $65,153,019
=========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses... $ 1,224,651 $ 726,529 $ 740,000(c) $ 2,691,180
Current maturities of long-term debt.... -- 900,000 (900,000)(d) --
----------- ------------ ----------- -----------
1,224,651 1,626,529 (160,000) 2,691,180
----------- ------------ ----------- -----------
LONG-TERM DEBT............................ 18,400,000 8,856,319 900,000(d) 28,156,319
DEFERRED TAX LIABILITY.................... -- -- 7,093,779(b) 7,843,377
749,598(e)
OTHER..................................... -- 205,554 960,000(c) 1,165,554
STOCKHOLDER'S EQUITY:
Common stock............................ -- 4,468 157,994(a) 162,462
Additional paid-in capital.............. -- 8,497,772 17,385,953(a) 25,134,127
(749,598)(e) --
Unearned compensation................... -- (109,119) 109,119(a) --
Retained earnings (deficit)............. -- (2,174,491) 2,174,491(a) --
Owner's equity.......................... 7,365,142 -- (7,365,142)(a) --
----------- ------------ ----------- -----------
7,365,142 6,218,630 11,712,817 25,296,589
----------- ------------ ----------- -----------
$26,989,793 $ 16,907,032 $21,256,194 $65,153,019
=========== ============ =========== ===========
BOOK VALUE PER SHARE...................... $ 1.56
===========
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
48
52
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
PRO FORMA
THE VISTA PARTNERSHIP MIDLAND ADJUSTMENTS PRO FORMA
--------------------- ---------- ----------- -----------
REVENUES:
Oil and gas sales................ $4,057,279 $2,182,394 $ -- $ 6,239,673
---------- ---------- --------- -----------
Total revenues........... 4,057,279 2,182,394 -- 6,239,673
---------- ---------- --------- -----------
COSTS AND EXPENSES:
Lease operating.................. 1,939,530 1,416,724 (233,349)(g) 3,122,905(f)
Exploration costs................ -- 4,709 4,709
Depreciation, depletion and
amortization.................. 962,026 678,255 500,613(h) 2,140,894
General and administrative,
net........................... 620,665 522,982 233,349(g) 1,376,996(f)
Amortization of unit option
awards........................ 192,177 -- 192,177
Impairment of oil and gas
properties.................... -- 39,808 (39,808)(i) --
---------- ---------- --------- -----------
Total costs and
expenses............... 3,714,398 2,662,478 460,805 6,837,681
---------- ---------- --------- -----------
Total operating income
(loss)................. 342,881 (480,084) (460,805) (598,008)
---------- ---------- --------- -----------
OTHER:
Loss on sale of property......... (192,898) -- -- (192,898)
Interest and other income........ 40,291 39,583 -- 79,874
Interest expense................. (713,961) (416,759) 57,211(j) (1,073,509)
---------- ---------- --------- -----------
Total other.............. (866,568) (377,176) 57,211 (1,186,533)
---------- ---------- --------- -----------
NET INCOME (LOSS) BEFORE TAXES..... (523,687) (857,260) (403,594) (1,784,541)
Benefit (provision) for taxes.... 183,290 291,491 149,808(e) 624,589
---------- ---------- --------- -----------
NET INCOME (LOSS).................. $ (340,397) $ (565,769) $(253,786) $(1,159,951)
========== ========== ========= ===========
BASIC NET LOSS PER SHARE........... $ (0.07)
===========
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 16,246,178
===========
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
49
53
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
THE VISTA 1997 ASSETS 1997 ASSETS PRO FORMA
PARTNERSHIP MIDLAND ACQUIRED(l) SOLD(m) ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
REVENUES:
Oil and gas sales........... $8,874,961 $ 6,396,249 $1,390,778 $(193,041) $ -- $16,468,947
---------- ----------- ---------- --------- ----------- -----------
Total revenues....... 8,874,961 6,396,249 1,390,778 (193,041) -- 16,468,947
---------- ----------- ---------- --------- ----------- -----------
COSTS AND EXPENSES:
Lease operating............. 3,688,695 3,088,886 521,382 (117,369) (553,554)(g) 6,628,040(f)
Exploration costs........... 97,211 849,534 -- -- 946,745
Depreciation, depletion and
amortization.............. 2,169,098 1,964,658 162,856 (34,016) 592,835(h) 4,855,431
General and administrative,
net....................... 987,020 1,332,392 -- (30,718) 553,554(g) 2,842,248(f)
Amortization of unit option
awards.................... 315,518 -- -- -- -- 315,518
Impairment of oil and gas
properties................ -- 1,371,102 -- -- (1,371,102)(i) --
---------- ----------- ---------- --------- ----------- -----------
Total costs and
expenses........... 7,257,542 8,606,572 684,238 (182,103) (778,267) 15,587,982
---------- ----------- ---------- --------- ----------- -----------
Total operating
income (loss)...... 1,617,419 (2,210,323) 706,540 (10,938) 778,267 880,965
---------- ----------- ---------- --------- ----------- -----------
OTHER:
Gain on sale of property.... (87,678) 462,571 -- -- (462,571)(k) (87,678)
Interest and other income... 115,949 117,563 -- -- -- 233,512
Interest expense............ (1,048,009) (970,430) -- -- 314,405(j) (1,704,034)
---------- ----------- ---------- --------- ----------- -----------
Total other.......... (1,019,738) (390,296) -- -- (148,166) (1,558,200)
---------- ----------- ---------- --------- ----------- -----------
NET INCOME (LOSS) BEFORE
TAXES....................... 597,681 (2,600,619) 706,540 (10,938) 630,101 (677,235)
---------- ----------- ---------- --------- ----------- -----------
Benefit (provision) for
taxes..................... (211,720) 717,237 -- -- (268,485)(e) 237,032
---------- ----------- ---------- --------- ----------- -----------
NET INCOME (LOSS)............. $ 385,961 $(1,883,382) $ 706,540 $ (10,938) $ 361,616 $ (440,203)
========== =========== ========== ========= =========== ===========
BASIC NET INCOME (LOSS) PER
SHARE....................... $ (0.03)
===========
WEIGHTED AVERAGE SHARES
OUTSTANDING................. 16,246,178
===========
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
50
54
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998, AND DECEMBER 31, 1997
1. BASIS OF PRESENTATION:
The Vista Partnership has entered into the Merger Agreement with Midland
that provides for Midland to become a subsidiary of Vista, currently a newly
created subsidiary of the Vista Partnership. The Merger will require Merger Sub
to be merged into Midland, resulting in Midland becoming a subsidiary of Vista.
As contemplated by the Merger Agreement, each of the limited partners of the
Vista Partnership and each of the stockholders of the General Partner have
entered into separate exchange agreements pursuant to which each such holder's
Partnership Interests and shares of GP Common Stock will be exchanged for shares
of Vista Common Stock contemporaneously with the Merger. As a result of the
Merger and the Vista Exchange, Vista, a new publicly held oil and gas
exploration and development company will be created.
The unaudited pro forma combined balance sheet of Vista as of June 30,
1998, has been prepared to give effect to the Merger, the Midland Exchange and
the Vista Exchange as if they had occurred on June 30, 1998. In accordance with
the provisions of APB No. 16, "Business Combinations," the Merger and the
Midland Exchange have been accounted for as a purchase of Midland by the Vista
Partnership.
The unaudited pro forma combined statements of operations of Vista for the
six months ended June 30, 1998, and for the year ended December 31, 1997, have
been presented to give effect to the Merger, the Midland Exchange and the Vista
Exchange and certain events described below for the Vista Partnership and
Midland as if the Merger, the Midland Exchange and the Vista Exchange and such
events had occurred on January 1, 1997.
The following is a description of the individual columns included in these
unaudited pro forma combined financial statements:
THE VISTA PARTNERSHIP -- Represents the consolidated balance sheet of
the Vista Partnership as of June 30, 1998, and the consolidated statements
of operations of the Vista Partnership for the six months ended June 30,
1998, and for the year ended December 31, 1997.
MIDLAND -- Represents the consolidated balance sheet of Midland as of
June 30, 1998, and the consolidated statements of operations of Midland for
the six months ended June 30, 1998, and for the year ended December 31,
1997.
1997 ASSETS ACQUIRED -- Reflects the results of operations for the
year ended December 31, 1997, from certain oil and gas properties prior to
their acquisition in 1997. In May 1997, the Partnership acquired interests
in certain oil and gas properties from Coastal Oil and Gas Corporation for
a net purchase price of $1.1 million. Also, in July 1997, the Vista
Partnership acquired interests in certain oil and gas properties from E.G.
Operating for a net purchase price of $6.1 million. Prior to their
acquisition in 1997, the oil and gas properties so acquired produced 63,864
Bbls of oil and 256,440 Mcf of gas. Average prices of $16.15 per Bbl of oil
and $1.91 per Mcf of gas were received from such production and production
costs per BOE of $3.23 were incurred.
1997 ASSETS SOLD -- Reflects the results of operations for the year
ended December 31, 1997, from certain oil and gas properties prior to their
sale in 1997. During the year ended December 31, 1997, Midland sold certain
nonstrategic oil and gas properties for aggregate proceeds of approximately
$563,000. Prior to their sale in 1997, these oil and gas properties
produced 3,326 Bbls of oil and 56,263 Mcf of gas. Midland received an
average price of $17.87 per Bbl of oil and $2.37 per Mcf of gas from such
production and incurred production costs per BOE of $5.79 and depletion
expense per BOE of $2.27 related to these properties.
51
55
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF MIDLAND:
The aggregate Vista Common Stock, Midland and Vista warrants, Midland stock
options and Midland common stock warrants purchase consideration is computed in
accordance with the exchange ratios agreed to in the Merger Agreement, the
Midland Exchange Agreement and the Vista Exchange Agreement as follows:
MIDLAND
COMMON
STOCK
-----------
Midland shares outstanding.................................. 4,467,699
Exchange ratio to Vista common shares....................... 1.00
-----------
Vista shares................................................ 4,467,699
Value of Vista common stock(i).............................. $ 3.46
-----------
Vista common stock consideration............................ $15,458,239
===========
MIDLAND
AND VISTA
WARRANTS
-----------
Midland warrants outstanding................................ 3,248,469
Exchange ratio to Vista warrants............................ 1.00
-----------
Vista warrants.............................................. 3,248,469
Value of Vista warrants(ii)................................. $ 0.76
-----------
Vista warrants consideration................................ $ 2,468,836
===========
MIDLAND
STOCK
OPTIONS
-----------
Midland stock options outstanding........................... 268,000
Exchange ratio to employee stock options.................... 1.00
-----------
Employee stock options...................................... 268,000
Value of employee stock options(iii)........................ $ 2.29
-----------
Employee stock option consideration......................... $ 613,720
===========
MIDLAND
COMMON
STOCK
WARRANTS
-----------
Midland common stock warrants outstanding................... 255,000
Exchange ratio to Vista common stock warrants............... 1.00
-----------
Vista common stock warrants................................. 255,000
Value of Vista common stock warrants(iv).................... $ 0.55
-----------
Vista common stock warrant consideration.................... $ 140,250
===========
Vista common stock consideration............................ $15,458,239
Vista warrant consideration................................. 2,468,836
Employee stock option consideration......................... 613,720
Vista common stock warrant consideration.................... 140,250
-----------
Aggregate purchase consideration............................ $18,681,045
===========
- ---------------
(i) Vista Common Stock is valued at $3.46 per share which represents Midland's
seven-day average common stock trading price surrounding the announcement
of the Merger on May 26, 1998.
52
56
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) Vista warrants are valued at $0.76 per warrant which represents Midland's
seven-day average stock purchase warrant trading price surrounding the
announcement of the Merger on May 26, 1998.
(iii)Employee Stock Options are valued at $2.29 per option which represents the
fair value of outstanding Stock Options using the Black-Scholes
option-pricing model as of the announcement of the Merger on May 26, 1998,
using the following weighted-average assumptions:
Expected Volatility......................................... 78% to 99%
Risk Free Rate.............................................. 5.50% to 5.58%
Expected Life............................................... 3 to 5 years
Expected Dividend Yield..................................... 0%
(iv) Vista common stock warrants are valued at $0.55 per warrant which
represents the average difference of the in-the-money warrant strike prices
from the value of the Vista Common Stock as defined in (a).
The following table represents the preliminary allocation of the total
purchase price of Midland to the acquired assets and liabilities. The allocation
represents the fair values assigned to each of the significant assets acquired
and liabilities assumed. Any future adjustments to the allocation of the
purchase price are not anticipated to be material to the unaudited pro forma
combined financial statements.
Net working capital......................................... $ 375,056
Oil and gas properties...................................... 36,892,475
Other property and equipment................................ 174,779
Note receivable............................................. 294,387
Deferred tax liability...................................... (7,093,779)
Long-term debt.............................................. (9,756,319)
Other non-current liabilities............................... (205,554)
Cash consideration for non-recurring merger expenses........ (2,000,000)
-----------
Aggregate purchase consideration.................. $18,681,045
===========
In accordance with the exchange ratios agreed to in the Merger Agreement,
the former holders of Partnership Interests in the Vista Partnership and shares
of GP Common Stock will receive approximately 11,767,406 shares of Vista Common
Stock and the Midland Stockholders will receive approximately 4,463,499 shares
of Vista Common Stock.
3. PRO FORMA ENTRIES:
(a) To adjust Midland's historical balances to reflect the fair market
value of the assets acquired, liabilities assumed, and the new capital structure
using the purchase method of accounting based on the aggregate purchase
consideration as discussed in Note 2. All net working capital balances were
estimated to approximate fair market value at the time of acquisition. The
historical goodwill, contracts and leases, and other assets balances were
eliminated as it was determined that these items did not provide any continuing
value to Vista. Unearned compensation was eliminated as it related to the
unamortized portion of Midland's stock-related compensation expense that is not
applicable to Vista.
(b) To record deferred taxes related to the differences between the
historical tax basis of assets acquired and liabilities assumed and the fair
market value allocated to the assets acquired and liabilities assumed based on
the aggregate purchase consideration as discussed in Note 2.
(c) To record cash consideration for non-recurring merger expenses related
to the Warley Settlement Agreement as described on page 36 and legal,
accounting, registration, and other costs directly related to the Midland
acquisition.
53
57
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) To record all assumed debt as long-term under Vista's Amended and
Restated Credit Agreement, dated August 15, 1997.
(e) To record the deferred tax liability and related provision for income
taxes to reflect the change in Vista's tax status from a partnership to a
corporation.
(f) The accompanying unaudited pro forma financial statements have been
prepared pursuant to regulations prescribed by the Securities and Exchange
Commission. The unaudited pro forma statements of operations do not consider the
effects of the cost reduction plans of management to be implemented after
closing. Management expects to reduce lease operating expenses by approximately
$210,000 on an annual basis for efficiencies to be realized through economies of
scale in common operating locations and reductions of certain field personnel.
In addition, management expects to reduce general and administrative expenses by
approximately $1,475,000 on an annual basis from the elimination of redundant
personnel, lease space and other corporate services. In accordance with
Securities and Exchange Commission regulation, none of these anticipated cost
reductions have been reflected in the accompanying pro forma statements of
operations.
(g) To reclassify certain COPAS overhead charges to conform with the
financial statement presentation of Vista.
(h) To adjust depreciation, depletion and amortization expense for the
additional basis allocated to the oil and gas properties acquired and accounted
for using the successful efforts methods of accounting.
(i) To adjust impairment of oil and gas properties to reflect the
restatement of the Midland properties in purchase accounting as if the Merger
had occurred on January 1, 1997. Midland's historical impairment charges were
required under SFAS No. 121 which requires a review for impairment on a property
by property basis. Although the fair value of Midland's oil and gas properties
may have exceeded its cost in total, Midland recorded an impairment because of
the property by property nature of the impairment test required by SFAS No. 121.
In accordance with APB No. 16, the purchase consideration in the Merger has been
allocated to the assets and liabilities acquired based on estimated fair values
as detailed in Note 2. This allocation results in approximately $36.9 million
recorded to oil and gas properties on a pro forma basis after the fair value of
other assets and liabilities acquired was determined. The purchase price
attributed to oil and gas properties was allocated to groups of properties based
on relative fair values. Based on estimated future cash flow, management does
not believe any impairment charge under SFAS No. 121 is required on a pro forma
basis for the Midland properties. Vista could be required to recognize an
impairment charge in the future depending on future expected prices and costs
and production estimates. Due to the significance of the write-up of Midland's
oil and gas properties, such an impairment charge could be significant, if
required.
(j) To adjust interest expense to be reflective of the weighted average
interest rate received under Vista's Amended and Restated Credit Agreement,
dated August 15, 1997. Midland's weighted average indebtedness for the six
months ended June 30, 1998 and the year ended December 31, 1997 was $9.5 million
and $8.6 million, respectively. The applicable interest rate under Vista's
Amended and Restated Credit Agreement, dated August 15, 1997, for both periods
was 7.6%.
(k) To remove gain on 1997 Assets sold as described in footnote (m).
(l) To record revenue and direct operating expenses for the 1997 Assets
Acquired based on the actual results of operations prior to their acquisition.
(m) To reduce revenue and direct operating expenses for the 1997 Assets
Sold based on the actual results of operations prior to their sale.
4. INCOME TAXES:
Vista will account for income tax in accordance with the provisions of SFAS
109. In accordance with SFAS 109, Vista will prepare separate tax calculations
for each tax jurisdiction in which Vista will be subject to income taxes.
54
58
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. OIL AND GAS RESERVE DATA:
The estimates of Midland's proved oil and gas reserves, which are located
entirely within the United States, were prepared in accordance with the
guidelines established by the Commission and Financial Accounting Standards
Board. The estimates of December 31, 1997 are based on evaluations prepared by
Williamson Petroleum Consultants, Inc., independent petroleum engineers. The
estimates as of December 31, 1996 and 1995, are based on evaluations prepared by
E. Ralph Green and Associates, independent petroleum engineers. For information
concerning costs incurred by Midland for oil and gas operations, net revenues
from oil and gas production, estimated future net revenues attributable to
Midland's oil reserves and present value of future net revenues on a 10%
discount rate and changes therein, see Notes to Midland's consolidated financial
statements. Midland emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are subject to change as
further information becomes available.
The estimates of the Vista Partnership's proved oil and gas reserves, which
are located entirely within the United States, were prepared in accordance with
the guidelines established by the Commission and Financial Accounting Standards
Board. The estimates of December 31, 1997, 1996 and 1995 are based on
evaluations prepared by the Vista Partnership. For information concerning costs
incurred by the Vista Partnership for oil and gas operations, net revenues from
oil and gas production, estimated future net revenues attributable to the Vista
Partnership's oil reserves and present value of future net revenues on a 10%
discount rate and changes therein, see Notes to the Vista Partnership's
consolidated financial statements. The Vista Partnership emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly, the
estimates are subject to change as further information becomes available.
The following unaudited pro forma supplemental information regarding the
oil and gas activities of Vista is presented pursuant to the disclosure
requirements promulgated by the Commission and Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing Activities."
Management emphasizes that reserve estimates are inherently imprecise and
subject to revision and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available; such changes could
be significant.
Quantities of oil and gas reserves
Set forth below is a pro forma summary of the changes in the net quantities
of oil and natural gas reserves for the year ended December 31, 1997.
GAS
Bbls (Mcf)
--------- ----------
Balance, January 1, 1997.................................... 7,381,899 25,480,189
Revisions of previous estimates........................... 1,012,971 (2,939,237)
Purchase of minerals-in-place............................. 762,282 6,206,929
Sales of minerals in place................................ (400,989) (2,170,194)
New discoveries and extensions............................ 1,711,787 349,664
Production................................................ (596,392) (1,772,407)
--------- ----------
Balance, December 31, 1997.................................. 9,871,558 25,154,944
========= ==========
55
59
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Standardized measure of discounted future net cash flows
The pro forma combined standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and gas (with consideration
of price changes only to the extent provided by contractual arrangements) to the
estimated future production of oil and gas reserves less estimated future
expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves discounted using a rate of 10% per year to reflect
the estimated timing of the future cash flows. Future income taxes are
calculated by comparing discounted future cash flows to the tax basis of oil and
gas properties, plus available carryforwards and credits, and applying the
current tax rate to the difference.
DECEMBER 31,
1997
------------
Oil and gas producing activities:
Future cash inflows....................................... $208,526,470
Future production costs................................... (79,404,664)
Future development costs.................................. (20,411,169)
Future income tax expense................................. (19,648,988)
10% annual discount factor................................ (36,489,645)
------------
Standardized measure of discounted future net cash
flows.................................................. $ 52,572,004
============
Changes relating to the standardized measure of discounted future net cash
flows
The principal sources of the change in the pro forma combined standardized
measure of discounted future net cash flows for the year ended December 31,
1997, are as follows:
Oil and gas sales, net of production costs.................. $ (7,585,138)
Net changes in prices and production costs.................. (33,486,325)
Extensions and discoveries.................................. 4,902,792
Purchases of minerals-in-place.............................. 8,289,041
Sales of Reserves in Place.................................. (3,507,680)
Revisions of estimated future development costs............. (4,318,823)
Revisions of previous quantity estimates.................... 3,573,186
Accretion of discount....................................... 8,066,938
Changes in production rates, timing and other............... (5,330,746)
Development costs to reduce future development cost......... 5,073,000
Net change in present value of future income taxes.......... 14,403,882
Balance, beginning of year.................................. 62,491,877
------------
Balance, end of year........................................ $ 52,572,004
============
56
60
MIDLAND
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF MIDLAND
The following table sets forth selected consolidated financial information
of Midland for the six months ended June 30, 1998 and 1997, and for each of the
five fiscal years in the period ended December 31, 1997. This data should be
read in conjunction with the Consolidated Financial Statements of Midland and
the related notes thereto.
SUMMARY BALANCE SHEET DATA
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Current Assets................ $ 1,138,585 $ 1,739,197 $ 2,036,145 $ 3,644,720 $ 2,038,452 $ 1,134,999 $ 1,444,981
Current Liabilities........... 1,626,529 3,165,528 1,564,683 3,268,428 1,950,703 2,152,910 1,864,131
----------- ----------- ----------- ----------- ----------- ----------- -----------
Working capital............. (487,944) (1,426,331) 471,462 376,292 87,749 (1,017,911) (419,150)
Oil and gas properties
(net)....................... 12,892,411 13,657,090 13,004,527 13,408,878 9,887,998 9,257,900 7,991,304
Other assets.................. 2,876,036 3,322,934 2,579,811 1,923,048 2,196,902 2,385,641 2,113,785
Total assets.................. 16,907,032 18,719,221 17,620,483 18,976,646 14,123,352 12,778,540 11,550,070
Long-term debt (excluding
current maturities)......... 8,856,319 7,012,488 9,115,370 7,166,421 4,524,617 4,254,042 3,616,628
Other non-current
liabilities................. 205,554 214,454 221,404 364,537 -- -- --
Stockholders' equity.......... $ 6,218,630 $ 8,326,751 $ 6,719,026 $ 8,177,260 $ 7,648,032 $ 6,371,588 $ 6,069,311
=========== =========== =========== =========== =========== =========== ===========
Stockholders' equity per
common share................ $ 1.39 $ 1.88 $ 1.51 $ 1.86 $ 1.74 $ 1.90 $ 1.80
=========== =========== =========== =========== =========== =========== ===========
Shares outstanding............ 4,467,699 4,434,872 4,463,499 4,401,031 4,386,231 3,362,222 3,373,522
=========== =========== =========== =========== =========== =========== ===========
SUMMARY OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Oil and gas sales............. $ 2,182,394 $ 3,346,815 $ 6,396,249 $ 6,958,491 $ 5,147,033 $ 5,265,759 $ 4,569,022
Other......................... 67,352 158,812 204,238 183,234 231,141 217,884 82,173
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues.... 2,249,746 3,505,627 6,600,487 7,141,725 5,378,174 5,483,643 4,651,195
Production costs.............. 1,416,724 1,449,529 3,088,886 2,981,837 2,509,854 2,423,032 2,091,955
Exploration costs............. 4,709 360,284 849,534 766,855 198,453 -- --
Depreciation, depletion and
amortization................ 678,255 634,233 1,964,658 1,306,287 1,033,905 1,120,841 786,918
Abandonments.................. 39,808 -- 93,760 -- 3,000 41,676 25,732
General and administrative
expenses.................... 574,837 817,183 1,451,404 1,295,298 1,049,904 1,145,719 1,422,094
Impairment costs(a)........... -- 356,000 1,277,342 114,904 1,020,670 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.... 2,714,333 3,617,229 8,725,584 6,465,181 5,815,786 4,731,268 4,326,699
----------- ----------- ----------- ----------- ----------- ----------- -----------
(464,587) (111,602) (2,125,097) 676,544 (437,612) 752,375 324,496
Gain (loss) on sale of
properties(b)............... 10,048 376,505 462,571 36,308 (102,984) 81,962 --
Other income(c)............... 14,038 18,155 32,337 61,997 38,911 169,174 51,692
Interest expense.............. (416,759) (410,832) (970,430) (722,447) (611,587) (473,048) (296,797)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and cumulative effect
of change in accounting
principle................... (857,260) (127,774) (2,600,619) 52,402 (1,113,272) 530,463 79,391
Income tax expense
(benefit)................... (291,491) (45,291) (717,237) 30,280 (376,241) 204,769 29,457
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of change
in accounting principle..... $ (565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031) $ 325,694 $ 49,934
=========== =========== =========== =========== =========== =========== ===========
Income (loss) per common share
before cumulative effect of
change (basic and
diluted).................... $ (.13) $ (.02) $ (0.42) $ 0.01 $ (0.22) $ 0.10 $ 0.02
=========== =========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding................. 4,464,822 4,416,345 4,433,113 4,395,414 3,381,592 3,368,455 2,267,563
=========== =========== =========== =========== =========== =========== ===========
- ---------------
(a) In 1995, concurrent with Midland's adoption of the Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be
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Disposed Of" ("FAS 121"), Midland recognized a charge of $1,020,670 for
certain properties which were held for sale.
(b) Gain (loss) on sale of properties was principally composed of the loss on
the sale of Midland's former office facilities in Midland, Texas, in 1995
and a gain on the sale of a working interest in an oil and gas property to
Summit Petroleum Corporation in 1994. In 1997, gains were realized
primarily from the sale of oil and gas properties.
(c) In 1994, there was other income from the settlement of litigation regarding
a former property operator of $120,090.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MIDLAND
Plan of Operations
During 1996 and 1997, Midland's exploration efforts consumed most of its
available resources. While Midland believes its exploratory efforts have
identified possible future drilling opportunities, its ability to actively
pursue these efforts as well as to actively exploit existing developed
properties is dependent upon securing additional capital.
Beginning in early 1997, Midland determined that it should explore
strategic alternatives to raising capital though sales of equity. To assist
Midland, it engaged an investment banking firm. During 1997 and continuing into
1998, Midland considered various alternative transactions, primarily consisting
of the sale of all or substantially all of its assets, acquisitions of another
smaller company, merging with a company of equal size and merging with a larger
company. Midland terminated its contract with its investment banking firm in
December 1997.
On May 22, 1998, Midland entered into the Merger Agreement with the Vista
Partnership. Consummation of the Merger is subject to approval of Midland's
stockholders. If the transaction with Vista is not consummated, Midland expects
to restrict its operations, including future development, to a level that its
current operations can support, and continue to seek a strategic transaction as
well as consider the sale of equity.
Midland's initial capitalization was through the acquisition of interests
of the seven public oil and gas income limited partnerships in exchange for
common stock and warrants of Midland. There were 2,265,522 shares of common
stock issued and, for each share of common stock issued, two warrants were
issued entitling the holder to purchase one share of common stock at $2.50 and
one share at $4.00 during the period November 1990 to November 2002. In October,
1995, Midland called for redemption of its $2.50 warrants. Holders received a
redemption payment of $0.05 per warrant for aggregate payments of $63,373, which
was charged to additional paid in capital. 997,009 of the $2.50 warrants were
exercised, resulting in net proceeds of approximately $1,831,000. As of March
31, 1998, 11,428 of the $4.00 warrants had been exercised.
On December 31, 1993, Midland acquired all of the issued and outstanding
common stock of Midland Resources Operating Company, Inc. ("MRO") through an
agreement of acquisition under which Midland issued 1,110,000 shares of common
stock to Deas H. Warley III and another former officer and director of Midland.
The exchange was based on the relative fair values of Midland and MRO, based on
a determination by the Board of Directors of each respective corporation. The
overall transaction was subject to a fairness opinion provided by an investment
banking firm. The acquisition of MRO expanded Midland's revenue base to include
property operations.
On December 20, 1996, Midland completed the acquisition of Summit Petroleum
Corporation ("Summit"), an affiliated entity engaged in oil and gas acquisition,
development and exploration activities, which owned interests in many of the
same properties as Midland. Midland's total cash investment in acquiring Summit
was approximately $2,011,000. (See Note B of the Notes to the Consolidated
Financial Statements.)
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Capital Resources and Liquidity
Historically, Midland's sources of liquidity have been from both bank debt
financing and operations. However, low product prices in recent months, coupled
with the costs of its exploration program in 1996 and 1997 have had severe
adverse effects on its liquidity. Midland presently has no readily available
sources of additional capital resources and no commitments for capital
expenditures, and intends to incur only those costs required to maintain
necessary business operations and production from its properties.
Net cash provided by operations decreased from $1,893,641 in 1996 to
$1,393,461 in 1997, for a decrease of $500,180, reflecting decreased oil and gas
production and pricing, and increased production costs and interest expense,
partially offset by lower geological and geophysical costs. Net cash used in
investing activities decreased from 1996 by $3,147,583, reflecting greater
proceeds from property sales in 1997 and the purchase of Summit in 1996. Net
cash provided by financing activities decreased from 1996 by $2,715,257,
reflecting additional borrowings for property acquisition and development in
1997 and greater debt repayments resulting primarily from the sale of the
Redfish Bay properties in 1997. In 1997, acquisition costs for proved properties
were $34,993, acquisition costs for unproven properties were $836,863 and
development costs were $1,716,294. Also, $1,536,130 was invested in an oil and
gas limited partnership in 1997. In 1996, cash payments for oil and gas property
acquisition costs totaled $761,476 for proved properties, $144,100 for unproved
properties, and $2,808,534 for development of properties.
In the first half of 1998, cash flow was a negative $94,217. Cash flow from
operations was a negative $24,288, which includes the positive effects of a
decrease in accounts receivable of $338,671 and the negative effects of a net
decrease in accounts of $254,673. Lower oil prices have had a significant
adverse impact on operating cash flows. Investing activities required the use of
$144,653 in cash due primarily to merger costs of $296,332 in connection with
the proposed Vista transaction, partially offset by proceeds from the sales of
properties in excess of capital additions. Financing activities resulted in a
net increase in cash of $74,924 due primarily to bank borrowings of $720,000,
which were used to fund capital expenditures and merger costs. Repayments of
bank debt of $651,615 were funded primarily from the proceeds of a December 1997
property sale.
For 1997, Midland's working capital increased by $95,170 over 1996 to
$471,462. The principal components of this increase was the positive impact of
approximately $400,000 resulting from the sale of the Redfish Bay property in
1997, which was offset by a reduction in current deferred tax assets of
$341,000. At June 30, 1998, Midland's working capital had decreased to a
negative $487,944. This was due primarily to the adverse impact on revenue of
lower oil prices during the first half of 1998, and an increase in current debt
maturities under Midland's revolving credit agreement with its bank, resulting
from a reduction in borrowing base which was also due to current low oil prices.
Management believes current debt maturities can be funded from cash flow
from operations. Management also believes that its credit facilities and its
cash flow from operations are adequate to meet its liquidity needs and, to the
extent necessary, additional operational changes will be made. Any future
drilling will depend on Midland's ability to raise additional capital through
bank borrowings, private placements or merger transactions.
At December 31, 1997, Midland has a net deferred tax asset of $1,048,193
which it believes can be realized based on estimates of future income from the
production of existing hydrocarbon reserves. The net asset is primarily composed
of net operating loss carry-forwards which do not begin to expire until 2005.
Midland has a revolving credit agreement with Compass Bank, which provides
for a credit facility of $30,000,000 and an initial borrowing base of
$10,500,000. Effective June 1, 1998, the borrowing base was reduced to
$9,800,000 with scheduled monthly reductions of $80,000 per month beginning
August 1, 1998. The borrowing base is subject to redetermination in November and
May of each year. Amounts borrowed under this agreement are collateralized by a
first lien on substantially all of Midland's oil and gas properties. Interest
under this agreement is payable monthly at an annual rate which, at Midland's
option, is equal to (a) Compass Bank's index lending rate (8.5% on June 30,
1998), or (b)the London Interbank Offered Rate ("LIBOR"), plus 2.5%. In
addition, a commitment fee equal to 1/2% per annum on the unused portion of the
59
63
borrowing base is required. This agreement also requires that Midland maintain
certain financial ratios and generally restricts Midland's ability to incur
debt, sell assets, materially change the nature of Midland's business structure
or pay dividends. As of June 30, 1998, the balance due under this agreement was
$9,720,000 and currently is $9,640,000.
On March 1, 1995, Midland entered into a one year gas swap agreement to
hedge against a portion of the price risk associated with gas price declines.
This swap agreement expired in February 1996, and Midland has not entered into
another contract. Losses under this contract were $21,109 and $25,860 for 1995
and 1996, respectively.
The prices of crude oil have fluctuated significantly in recent years as
well as in recent months. As of June 30, 1997, Midland was receiving $18.60 per
Bbl as compared to $25.00 at January 1, 1997. At June 30, 1998, Midland was
receiving approximately $12.00 per Bbl as compared to $16.52 at January 1, 1998.
Fluctuations in price have a significant impact on Midland's financial condition
and liquidity.
The following tables set forth a summary of historical financial
information for Midland. These tables should be read in conjunction with the
consolidated financial statements of Midland Resources, Inc. and Subsidiaries
(and the related notes). It should be noted that there are no audited financial
statements included herein for the year 1994. These tables are not covered by
the reports of independent certified public accountants.
SUMMARY BALANCE SHEET DATA
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Current Assets................ $ 1,138,585 $ 1,739,197 $ 2,036,145 $ 3,644,720 $ 2,038,452 $ 1,134,999 $ 1,444,981
Current Liabilities........... 1,626,529 3,165,528 1,564,683 3,268,428 1,950,703 2,152,910 1,864,131
----------- ----------- ----------- ----------- ----------- ----------- -----------
Working capital............. (487,944) (1,426,331) 471,462 376,292 87,749 (1,017,911) (419,150)
Oil and gas properties
(net)....................... 12,892,411 13,657,090 13,004,527 13,408,878 9,887,998 9,257,900 7,991,304
Other assets.................. 2,876,036 3,322,934 2,579,811 1,923,048 2,196,902 2,385,641 2,113,785
Total assets.................. 16,907,032 18,719,221 17,620,483 18,976,646 14,123,352 12,778,540 11,550,070
Long-term debt (excluding
current maturities)......... 8,856,319 7,012,488 9,115,370 7,166,421 4,524,617 4,254,042 3,616,628
Other non-current
liabilities................. 205,554 214,454 221,404 364,537 -- -- --
Stockholders' equity.......... $ 6,218,630 $ 8,326,751 $ 6,719,026 $ 8,177,260 $ 7,648,032 $ 6,371,588 $ 6,069,311
=========== =========== =========== =========== =========== =========== ===========
Stockholders' equity per
common share................ $ 1.39 $ 1.88 $ 1.51 $ 1.86 $ 1.74 $ 1.90 $ 1.80
=========== =========== =========== =========== =========== =========== ===========
Shares outstanding............ 4,467,699 4,434,872 4,463,499 4,401,031 4,386,231 3,362,222 3,373,522
=========== =========== =========== =========== =========== =========== ===========
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SUMMARY OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ----------- ---------- ----------- ---------- ----------
(UNAUDITED)
Oil and gas sales.................... $2,182,394 $3,346,815 $ 6,396,249 $6,958,491 $ 5,147,033 $5,265,759 $4,569,022
Other................................ 67,352 158,812 204,238 183,234 231,141 217,884 82,173
---------- ---------- ----------- ---------- ----------- ---------- ----------
Total operating revenues........... 2,249,746 3,505,627 6,600,487 7,141,725 5,378,174 5,483,643 4,651,195
Production costs..................... 1,416,724 1,449,529 3,088,886 2,981,837 2,509,854 2,423,032 2,091,955
Exploration costs.................... 4,709 360,284 849,534 766,855 198,453 -- --
Depreciation, depletion and
amortization....................... 678,255 634,233 1,964,658 1,306,287 1,033,905 1,120,841 786,918
Abandonments......................... 39,808 -- 93,760 -- 3,000 41,676 25,732
General and administrative
expenses........................... 574,837 817,183 1,451,404 1,295,298 1,049,904 1,145,719 1,422,094
Impairment costs(a).................. -- 356,000 1,277,342 114,904 1,020,670 -- --
---------- ---------- ----------- ---------- ----------- ---------- ----------
Total operating expenses........... 2,714,333 3,617,229 8,725,584 6,465,181 5,815,786 4,731,268 4,326,699
---------- ---------- ----------- ---------- ----------- ---------- ----------
(464,587) (111,602) (2,125,097) 676,544 (437,612) 752,375 324,496
Gain (loss) on sale of
properties(b)...................... 10,048 376,505 462,571 36,308 (102,984) 81,962 --
Other income(c)...................... 14,038 18,155 32,337 61,997 38,911 169,174 51,692
Interest expense..................... (416,759) (410,832) (970,430) (722,447) (611,587) (473,048) (296,797)
---------- ---------- ----------- ---------- ----------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle............... (857,260) (127,774) (2,600,619) 52,402 (1,113,272) 530,463 79,391
Income tax expense (benefit)......... (291,491) (45,291) (717,237) 30,280 (376,241) 204,769 29,457
---------- ---------- ----------- ---------- ----------- ---------- ----------
Income (loss) before cumulative
effect of change in accounting
principle.......................... $ (565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031) $ 325,694 $ 49,934
========== ========== =========== ========== =========== ========== ==========
Income (loss) per common share before
cumulative effect of change (basic
and diluted)....................... $ (.13) $ (.02) $ (0.42) $ 0.01 $ (0.22) $ 0.10 $ 0.02
========== ========== =========== ========== =========== ========== ==========
Weighted average shares
outstanding........................ 4,464,822 4,416,345 4,433,113 4,395,414 3,381,592 3,368,455 2,267,563
========== ========== =========== ========== =========== ========== ==========
- ---------------
(a) In 1995, concurrent with Midland's adoption of the Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS
121"), Midland recognized a charge of $1,020,670 for certain properties
which were held for sale.
(b) Gain (loss) on sale of properties was principally composed of the loss on
the sale of Midland's former office facilities in Midland, Texas, in 1995
and a gain on the sale of a working interest in an oil and gas property to
Summit Petroleum Corporation in 1994. In 1997, gains were realized
primarily from the sale of oil and gas properties.
(c) In 1994, there was other income from the settlement of litigation
regarding a former property operator of $120,090.
Year 2000 Compliance. Midland does not expect that the cost of converting
its computer system to Year 2000 compliance will be material to its financial
condition. Midland believes it will be able to achieve Year 2000 compliance by
the end of 1998 for an amount less than $10,000, and it does not currently
anticipate any disruption in its operations as the result of any failure by
Midland to be in compliance. Midland does not currently have any information
concerning the Year 2000 compliance status of its customers and vendors.
Results of Operations -- Years ended December 31, 1995, 1996 and 1997
During 1996, oil and gas sales increased from $5,147,033 in 1995 to
$6,958,491; an increase of $1,811,458 or 35%. Oil production increased from
166,652 Bbls to 215,913 Bbls; an increase of 49,261 Bbls or 30%. Gas production
decreased from 1,268,772 Mcf to 1,002,482 Mcf; a decrease of 266,290 Mcf or 21%.
Sales and net production increases resulted from price increases as well as from
production from wells drilled and completed in the Jameson Field, and the
Wallace and Wilson properties in late 1995 and early 1996. Average gas prices
61
65
increased from $1.79 per Mcf in 1995 to $2.39 per Mcf in 1996. Oil prices
increased from $17.28 per Bbl in 1995 to $21.15 per Bbl in 1996.
During 1997, oil and gas sales decreased from $6,958,491 to $6,396,249; a
decrease of $562,242, or 8%. Oil production decreased from 215,913 Bbls to
192,580 Bbls; a decrease of 23,333 Bbls, or 11%. Gas production decreased from
1,002,482 Mcf to 988,109 Mcf; a decrease of 14,373, or 1%. The purchase of
Summit resulted in production increases of 7,959 Bbls and 72,711 Mcf. However,
this increase, as well as increases from new wells drilled in 1997, were more
than offset by production declines on most wells. Average oil prices declined
from $21.15 in 1996 to $19.74 in 1997. Average gas prices increased from $2.39
in 1996 to $2.63 in 1997.
For 1997, Midland's share of income from an oil and gas limited partnership
was $72,275 which included oil and gas sales of $119,356 from approximately
6,400 Bbls of oil produced. There was no similar item in 1996.
Property operations income, which is comprised of administrative overhead
fees charged to third parties who own interests in properties for which Midland
serves as operator, increased from $111,862 in 1996 to $119,012, an increase of
$7,150, or 6%.
In 1996, production costs increased from $2,509,854 in 1995 to $2,981,837,
an increase of $471,983 or 19%. This increase is attributable primarily to
additional producing wells as discussed above, as well as to production taxes
increasing as a result of increased oil and gas prices. In 1997, production
costs increased from $2,981,837 in 1996 to $3,088,886, an increase of $107,049
or 4%. This was due to major repairs and workovers conducted in 1997, partially
offset by decreased production costs resulting from the sale of Redfish Bay.
During 1997 and 1996, exploration costs and abandonments were $943,294 and
$766,855, respectively, which were incurred in connection with the 3-D
exploration projects discussed above. These amounts include dry hole costs of
$796,852 in 1997 and $416,892 in 1996. Abandonment costs in 1997 were comprised
of expired and worthless leasehold acreage totaling $93,760.
In 1996, depreciation depletion and amortization (DD&A) was $1,306,287 as
compared to $1,033,905 in 1995, for an increase of $272,382 or 26%. This was due
primarily to an increase in property investments resulting from the completion
of additional wells and to the acquisition of Summit. In 1997, DD&A was
$1,964,658, an increase of $658,371 from 1996, or 50%. This was due to (i) lower
oil and gas reserves at December 31, 1997, which was due primarily to lower oil
and gas prices at December 31, 1997, and (ii) to less than desired economic
success on some wells drilled in 1997.
In 1996, general and administrative (G&A) expenses increased from
$1,049,904 in 1995 to $1,295,298, an increase of $245,394 or 23%. This increase
was attributable primarily to the write off in 1996 of approximately $115,000 of
acquisition costs associated with an attempt to acquire another public
independent oil and gas company, as well as to increased labor costs associated
with Midland's relocation from Midland, Texas, to Houston, Texas. In 1997, G&A
expenses were $1,451,404 for an increase of $156,106, or 12%, over 1996. This
was due primarily to increased legal and consulting fees, and to non-cash stock
based compensation expense of $217,484. These costs were partially offset by
lower costs in other areas due to cost reduction measures.
Impairment losses were $1,020,670 in 1995, $114,904 in 1996 and $1,277,342
in 1997. Impairments are recognized when estimated future net cash flows on
individual properties are less than their net capitalized cost. When this
situation exists, impairment losses are recognized on each such property as the
difference between the property's net capitalized cost and its estimated fair
value. This is required by accounting rules even though aggregate reserve values
far exceed net capitalized costs for all properties taken as a whole.
In 1997, there were gains of $462,571 primarily from the sales of oil and
gas properties, including $349,000 from the sale of the Redfish Bay property.
Midland also sold all of its Colorado working interests. These sales were made
so that Midland could focus its resources on its west Texas property interests.
The cash proceeds from these two sales, which totaled approximately $2,200,000,
were used to reduce bank debt.
In 1996, interest expenses increased to $722,447, an increase of $110,860,
or 18% from 1995. This increase is attributable to additional borrowings to
consummate the Summit acquisition and for property
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acquisitions and development projects in 1996. In 1997, interest increased to
$970,430, an increase of $247,983, or 34%, due primarily to additional
borrowings to fund Midland's drilling program in 1997 and to pay $84,800 to
close an interest rate swap contract.
In 1995, the net loss was $737,031 primarily resulting from an impairment
loss of $1,020,670, the loss on sale of properties and equipment of $102,984 and
the incurrence of exploration costs totaling $198,453: In 1996, net income was
$22,122, due primarily to higher prices for oil and gas production and lower
impairment losses, partially offset by increases in production costs, G&A
expenses and other factors discussed above. In 1997, the net loss was
$1,883,382, due primarily to property impairments, DD&A, lower oil and gas
production, exploratory dry holes and other factors discussed above.
Results of Operations -- Six Months Ended June 30, 1998 and 1997
Net loss increased from $82,483 in the first half of 1997 to $565,769 in
the first half of 1998. Individual categories of income and expenses are
discussed below.
Oil and gas sales decreased from $3,346,815 in the first six months of 1997
to $2,182,394 in the same period of 1998. This decrease of $1,164,421 or 35%
resulted from decreased oil and gas prices and gas production. Oil and gas
production quantities were 94,791 Bbls and 515,982 Mcf in 1997 and 94,714 Bbls
and 435,522 Mcf in 1998, a decrease of 77 Bbls and a decrease of 80,460 Mcf or
16%. The decline in gas production is due primarily to properties sold in
December 1997, as well as to normal production declines on most properties.
Average gas prices decreased from $2.62 per Mcf in 1997 to $2.01 per Mcf in
1998, while average oil prices decreased from $20.91 per Bbl in 1997 to $13.78
per Bbl in 1998.
In the first six months of 1997, the Company's share of net income from an
oil and gas limited partnership was $99,007 which included oil revenue of
$115,875 from 6,195 Bbls of production. There was no similar item in 1998.
Production costs decreased from $1,449,529 in the first six months of 1997
to $1,416,724 for the same period of 1998, a decrease of $32,805 or 2%.
In the first half of 1997, exploration costs were $360,284, which included
$332,194 in exploratory dry hole costs and $28,090 in geological and geophysical
costs. In the first half of 1998, exploration costs were $4,709 and costs of
plugging uneconomical wells was $39,808.
G&A decreased from $817,183 in the first six months of 1997 to $574,837 in
the same period of 1998, a decrease of $242,346 or 42%. These totals included
non-cash stock based compensation charges of $117,047 in 1997 and $55,398 in
1998. Other reductions resulted from cost curtailment measures instituted in the
fourth quarter of 1997.
DD&A based on production and other methods increased from $634,233 in the
first six months of 1997 to $678,255 in the same period of 1998, an increase of
$44,022 or 7%, due primarily to lower reserve quantity estimates.
At June 30, 1997, the Company provided for impairment losses on its oil and
gas properties of $356,000. There was no similar item in 1998.
In the first half of 1997, the Company reported gains from sales of
property of $376,505 of which $349,079 was from the sale of the Redfish Bay
property in February of 1997. The gain from asset sales in the first half of
1998 was $10,048.
BUSINESS AND PROPERTIES OF MIDLAND
Business Description
Midland is an independent oil and gas company engaged primarily in the
exploration and development of domestic oil and gas. Midland, incorporated June
5, 1989, was organized in 1990 with the issue of common
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stock and warrants in exchange for the partnership interests of seven former
public oil and gas limited partnerships.
Midland's initial emphasis was on acquisition and exploitation of oil and
gas properties. In 1995, Midland changed its emphasis to exploration, utilizing
3-D seismic technology.
On December 20, 1996, Midland completed the acquisition of Summit Petroleum
Corporation, an affiliate, for cash. (See Note F. Related Parties, to
Consolidated Financial Statements)
Although Midland's principal properties are located in Texas, Midland also
owns working interest and minor royalty leasehold interests in developed and
undeveloped oil and gas acreage in Illinois and Colorado.
Properties
Reserves. The estimates of Midland's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Commission and Financial Accounting Standards
Board. The estimates of December 31, 1997 are based on evaluations prepared by
Williamson Petroleum Consultants, Inc., independent petroleum engineers. The
estimates as of December 31, 1996 and 1995, are based on evaluations prepared by
E. Ralph Green and Associates, independent petroleum engineers. For information
concerning costs incurred by Midland for oil and gas operations, net revenues
from oil and gas production, estimated future net revenues attributable to
Midland's oil reserves and present value of future net revenues on a 10%
discount rate and changes therein, see Notes to Midland's consolidated financial
statements. Midland emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are subject to change as
further information becomes available.
Midland's proved reserves totaled 5.0 million BOE at December 31, 1997 with
an PV10 of $17.8 million. Reserves decreased 16% versus year end 1996. Oil
reserves were 2.7 MBOE (a 7% decrease from 1996) while gas reserves were 13.9
Bcf (a 24% decrease from 1996).
On a BOE basis Midland's proved reserves at December 31, 1997 are 67%
proved developed with 33% being proved undeveloped. 53% of Midland's reserves
are oil and 47% are gas. Over 99% of Midland's reserve value is attributable to
operated properties. Only 1% of Midland's reserve value is attributable to
properties operated by others.
The following table summarizes the estimated proved reserves and estimated
future cash flows associated with Midland's oil and gas properties as estimated
in accordance with the definitional requirements under rule 4-10(a) of
Regulation S-X.
1997 AVERAGE DAILY
PROVED RESERVES AS OF DECEMBER 31, 1997 PRODUCTION
--------------------------------------- ----------------------
NATURAL PV10 NATURAL
OIL GAS VALUE OIL GAS
(MBbls) (MMcf) MBOE (000) (Bbls) (Mcf) BOE
-------- -------- ------ -------- ------ ------- ---
Total Net to Midland's................... 2,655 13,860 4,965 $17,765 528 2,707 979
In estimating oil reserves for 1997, a price of $16.52 per barrel was used,
which is the average actual price in effect for Midland's oil production on
January 1, 1998. In estimating gas reserves for 1997, a price of $2.36 per Mcf
was used, based on prices in effect for Midland's gas on January 1, 1998.
As an operator of domestic oil and gas properties, Midland has filed Form
EIA-23, "Annual Survey of Oil and Gas Reserves," with the Department of Energy
as required by Public Law 93-275 and Public Law 95-91. There are differences
between the reserves reported on Form EIA-23 and the reserves reported herein.
These differences are due to the fact that Form EIA-23 requires and operator to
report on total reserves attributable to wells which are operated by it without
regard to ownership. The reserves reported herein are based on Midland's net
ownership interest therein.
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Production. Midland's production for 1997 averaged 979 BOE per day.
Production decreased during the year from 1,064 BOE per day in January 1997 to
986 BOE per day average for December 1997 representing a 7% decrease for the
year. Based on end of the year production rates Midland's proved reserves to
production ratio is 13.8 years on a BOE basis. This ratio was up from 12.9 years
for year end 1996.
Description of Properties. Midland's principal properties are located in
Texas. Midland also owns working interest and minor royalty leasehold interests
in developed and undeveloped oil and gas acreage in Illinois and Colorado.
Midland has no properties outside the United States. The following is a general
description of Midland's principal properties.
PERMIAN BASIN
Chalk Mountain 3-D Seismic Exploration and Development Project
Midland held acreage adjoining a project generated by Texland Oil & Gas Co.
as a 3-D seismic exploration project in July 1996 in Sterling, Tom Green and
Reagan Counties, Texas. Midland has acquired a 52.75% working interest in
approximately 3,300 acres in this project. During 1997, Midland invested
approximately $2,000,000 in acquisition costs and drilling of three exploratory
wells and one development well in this project. One of these wells was
successful in the Fusselman formation. One of the wells established production
in the Canyon formation, but due to low production volume, additional Canyon
wells are not economically justified. Two of these wells were dry holes. In the
first quarter of 1998, Midland acquired additional acreage in the project based
on review of 3-D seismic data.
Latigo 3-D Seismic Exploration and Development Project
This project was defined and acquired as a 3-D seismic exploration project
in 1995 in the Northwest Shelf area of the Permian Basin in Hockley County,
Texas. The seismic survey covered 12 square miles and resulted in the leasing of
approximately 4,700 acres. Two successful exploratory wells were drilled in this
project in 1997 at a cost to Midland of approximately $1,568,000. Average daily
production from the discoveries drilled in this project in 1997 was 163 BOPD.
Midland owns a 55% working interest in this project.
Sunburst 3-D Seismic Exploration and Development Project
The Sunburst project was acquired as a 3-D seismic exploration project in
1995 in the Northwest Shelf area of the Permian Basin in Terry County, Texas.
The prospect was defined with a 14-square mile seismic survey and resulted in
the leasing of approximately 3,640 acres. In 1996, two exploratory wells were
drilled in this project at a cost to Midland of approximately $660,000, with one
completed in the Clearfork area. Average daily production from this well in 1997
was 11 BOE. Neither of these wells produced in economic quantities and in April
1998, Midland sold most of its interest in this project for $200,000 and
retained a 6.875% working interest with Midland's share of the cost of drilling
the next well being paid by the purchaser.
Lakota 3-D Seismic Exploration and Development Project
The Lakota project was acquired as a 3-D seismic exploration project in
1995 in the Northwest Shelf area of the Permian Basin in Terry County, Texas.
The prospect was defined with a 14-square mile seismic survey and resulted in
the leasing of approximately 2,480 acres. In 1997, one exploratory well was
completed in this project as a Wolfcamp discovery at a cost to the company of
$316,000. Midland owns a 30% working interest in this project. Average daily
production from this well in 1997 was 14 BOE. Due to lack of economic success,
no additional wells are currently planned in this project.
Rhoda Walker (Cherry Canyon) Field
This field is located in Ward County, Texas, in which Midland has an
interest in nine wells which are operated by Midland with a combined average
production rate in 1997 of approximately 100 BOPD and 143 MCFD, subject to
normal declines. During the fourth quarter of 1995, three Rhoda Walker Field
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development wells were drilled at a cost to Midland of approximately $880,000.
These wells increased oil and gas production from this field by 140%. Midland
owns a 100% working interest in this project.
Ackerly (Dean) Field
This field is located in Dawson County, Texas, in which Midland has an
interest in two wells which are operated by Midland. These wells combined had a
1997 average production rate of approximately 41 BOPD and 20 MCFD gross
production before royalty burdens. Midland owns a 100% working interest in this
project.
Jameson (Strawn) Field
This field is located in Coke and Sterling Counties, Texas in which Midland
has an interest in 58 active wells which are operated by Midland with a combined
1997 average production rate of approximately 120 BOPD and 1,500 MCFD. At the
time Midland acquired the Jameson properties in 1992, there were 21 gross wells
which were shut-in for various reasons by the former operator. Midland has
returned 15 gross wells to production and has converted nearly 40% of the wells
from producing via conventional pumping unit to a less expensive plunger lift
method of artificial lift.
In April and August 1996, Midland completed two field extension development
wells at an aggregate cost of approximately $700,000. Average aggregate gross
production rates in 1997 from these wells was approximately 45 BOPD and 250
MCFD. Effective June 1, 1996, Midland acquired various additional royalty
interests in this field for approximately $500,000. Midland owns a 100% working
interest in this project and net revenue interests on individual leases range
from 90% to 92%.
Cope Waterflood Unit and Advanced Reservoir Management Project
The Cope Unit is located in Sterling County, Texas. This project
encompasses 2,032 gross acres and at present has 21 gross active wells, seven of
which are injectors. At the time Midland acquired the Cope Unit in 1990,
production had declined to 100 BOPD. Several shut-in wells were reactivated with
total unit production immediately improving to 137 BOPD.
In early 1995, Midland began a joint project with the federal government's
Los Alamos National Laboratory to develop computerized 3-D reservoir modeling
and simulation of Midland-operated Cope Waterflood Unit. Completed in 1997, the
simulation model is being utilized to improve reservoir management, potentially
enhance oil production by locating bypassed oil, determining new infill drilling
locations and designing optimum waterflood injection patterns for increased oil
recovery.
Effective May 1, 1996, Midland acquired an additional 15.75% working
interest for approximately $79,000, and now owns approximately 77% of the
working interest in this property. The Cope Unit produces from the Spraberry
formation. In June 1996, Midland drilled a replacement well for one of the
producing wells in the unit which was producing mostly water. The Cope Unit oil
production has been maintained at approximately 125 barrels of oil per day and
the unit's produced water has been reduced substantially.
Other Properties
In August 1994, Midland acquired working interests in certain oil and gas
properties with 19 gross wells in Coke and Howard Counties, Texas, for
$1,950,000, which was adjusted for revenues and expenses through the closing
date. These wells are operated by Midland and in 1997 had a combined average
production rate of approximately 62 BOPD and 215 MCFD, subject to normal
declines. Midland owns a 100% working interest in these properties.
In May 1995, Midland acquired a 50% working interest and operations in
three State tracts in Redfish Bay Field, Nueces County, Texas in return for a
commitment to expend $1,000,000 in capital expenditures over two years. In
February 1997, Midland sold its interests in this field for $1,647,000. Midland
realized a gain on this sale of approximately $349,000.
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TEXAS GULF COAST
Copano Bay 3-D Seismic Exploration and Development Project
The Copano Bay property is located in Aransas County, Texas, approximately
50 miles northeast of Corpus Christi. The leasehold encompasses 2,355 gross
acres and currently has eight gross producing wells. At the time Midland
acquired Copano Bay in 1991, it was producing approximately 65 BOPD and 465
MCFD. Midland conducted several workovers, recompletions and re-entries, and
increased production to average 52 BOPD and 828 MCFD in 1996 and 54 BOPD and 729
MCFD in 1997. During 1995, 1996 and 1997, Copano Bay properties accounted for
approximately 9%, 5% and 6%, respectively, of Midland's total oil production and
approximately 28%, 16% and 16%, respectively, of Midland's total gas production.
Effective June 1, 1996, Midland acquired an additional 5% working interest
in this property for approximately $177,000, and now owns approximately 68% of
the working interest in this property.
In 1997, a 3-D seismic survey was conducted covering a portion of
Midland-owned acreage and, in the beginning of 1998, a second 3-D seismic survey
was conducted covering the remainder of the acreage. Both seismic surveys were
conducted at no cost to Midland and the survey data is currently being
processed. When processing is completed, Midland will be allowed to review the
data to determine if any of the data is of any value to Midland. If Midland
determines this data has any value, Midland will be allowed to purchase the
data.
In addition to the above described properties, Midland owns and operates 21
leases located within a 150-mile radius of Midland, Texas, containing 21 gross
producing wells on 2,778 gross acres. These wells are produced from the Yates,
Spraberry and Pennsylvanian formations at depths ranging from 1,800 feet to
9,000 feet. The production is heavily weighted to oil and some leases have
additional development opportunities.
Finding Cost. Midland's acquisition and finding cost for 1997 was $5.73 per
BOE as compared to the 1996 and 1995 finding costs of $6.68 and $3.96 per BOE
respectively. The average acquisition and finding cost for the three year period
was $5.38 per BOE.
Oil and Gas Mix. Midland's reserves were 53% oil and 47% gas at December
31, 1997 and its production mix was 54% oil and 46% gas during 1997.
Drilling Activities. The following table sets forth the number of gross and
net productive and dry wells in which Midland had an interest that were drilled
and completed during the years ended December 31, 1997, 1996, and 1995. This
information should not be considered indicative of future performance, nor
should it be assumed that there is necessarily any correlation between the
number of productive wells drilled and the oil and gas reserves generated
thereby or the costs to Midland of productive wells compared with the costs of
dry wells.
GROSS WELLS NET WELLS
------------------ ------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Productive wells
Development.................................. 1 3 4 0.8 2.8 3.7
Exploratory.................................. 5 1 0 2.7 0.6 0
Dry holes
Development.................................. 0 0 0 0 0 0
Exploratory.................................. 2 2 0 1.6 1.7 0
-- -- --- --- --- ---
Total................................ 8 6 4 5.1 5.1 3.7
Success ratio(a)............................... 75% 67% 100% 69% 67% 100%
- ---------------
(a) Represents those wells that were successfully completed as productive
wells.
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Marketing of Production and Significant Purchasers. Oil and gas production
from Midland's properties is marketed consistent with usual and customary
industry practices which include the sale of oil at the wellhead to third
parties and the sale of gas at the wellhead to third parties. Sales prices for
both oil and gas production are negotiated based on factors normally considered
in the industry such as the spot price for gas or the posted price for oil,
distance from the well to the pipeline, well pressure, estimated reserves,
quality of the gas or oil and prevailing supply conditions.
During 1997, Midland had sales of oil and gas to marketed its natural gas
and natural gas products to three purchasers that accounted for 10% or more of
Midland's revenues. Those purchasers and their respective percentages were AMOCO
Production Company (12%), Sun Refining Co. (15%), and Western Gas Resources
(18%). Because there is a ready market for oil and gas, Midland is of the
opinion that the loss of any one purchaser would not have an adverse effect on
its ability to sell its oil and gas production.
Hedging Activities. Midland engaged in no oil or gas commodity price
hedging activities in 1997.
Production, Price and Cost Data. The table below sets forth production,
price and cost data with respect to Midland's properties for the years ended
December 31, 1997, 1996 and 1995. These amounts are calculated without making
pro forma adjustments for any acquisitions, divestitures or drilling activity
that occurred during the respective years.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
OIL(a):
Production (Bbls).............................. 192,580 215,913 166,652
Revenue........................................ $3,801,850 $4,566,130 $2,879,973
Average Bbls per day........................... 528 591 457
Average Sales price per Bbl.................... $ 19.74 $ 21.15 $ 17.28
GAS(b):
Production (Mcf)............................... 988,109 1,002,482 1,268,772
Revenue........................................ $2,594,399 $2,392,361 $2,267,060
Average Mcf per day............................ 2,709 2,746 3,476
Average sales price per Mcf.................... $ 2.63 $ 2.39 $ 1.79
PRODUCTION COSTS:
Production cost................................ $3,088,886 $2,981,837 $2,509,854
Equivalent Bbls(c)............................. 357,265 382,993 378,114
Production cost per equivalent Bbl............. $ 8.65 $ 7.79 $ 6.64
Production cost per sales dollar............... $ 0.48 $ 0.43 $ 0.49
TOTAL REVENUES......................... $6,396,249 $6,958,491 $5,147,033
- ---------------
(a) Includes condensate.
(b) Includes natural gas liquids.
(c) Gas production is converted to equivalent Bbls at the rate of 6 Mcf per
Bbl, representing the estimated relative energy content of natural gas to
oil.
Productive Wells. The following table sets forth the number of productive
oil and gas wells attributable to Midland's properties as of December 31, 1997,
1996 and 1995.
GROSS PRODUCTIVE WELLS NET PRODUCTIVE WELLS
---------------------- ----------------------
OIL GAS TOTAL OIL GAS TOTAL
---- ---- ------ ---- ---- ------
December 31, 1997.......................... 173 9 182 121 7 128
December 31, 1996.......................... 184 39 223 118 19 137
December 31, 1995.......................... 172 19 191 109 10 119
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(a) Producing wells consist of producing wells and wells capable of production,
including shut-in wells. One or more completions in the same well bore are
counted as one well.
(b) The number of gross wells is the total number of wells in which a working
interest is owned.
(c) The number of net wells is the sum of the fractional working interests
owned in gross wells expressed as whole numbers and fractions thereof.
Leasehold Acreage. The following table sets forth information concerning
Midland's developed and undeveloped leasehold acreage as of December 31, 1997.
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
GROSS(b) NET(c)
--------- -------
Developed Acreage(a)........................................ 20,409 15,828
Undeveloped Acreage(d)...................................... 12,732 6,937
Net Royalty Acreage......................................... 4,399
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(a) Developed acreage is acreage spaced for or assignable to productive wells.
(b) A gross acre is an acre in which a working interest is owned. The number of
gross acres is the total number of acres in which a working interest is
owned.
(c) A net acre is deemed to exist when the sum of fractional ownership working
interests in gross acres equals one. The number of net acres is the sum of
the fractional working interests owned in gross acres expressed as whole
numbers and fractions thereof.
(d) Undeveloped acreage is oil and gas acreage on which wells have not been
drilled or to which no Proved Reserves other than Proved Undeveloped
Reserves have been attributed.
Office Property
On July 11, 1995, Midland's office building located in Midland, Texas was
sold to an unrelated third party and, in September 1995, Midland moved its
executive offices to leased space located at 16701 Greenspoint Park Drive, Suite
200, Houston, Texas 77060. In November 1995, Midland purchased a 3,750 square
foot building and 2.0 acres of land located at 3419 Hwy. 158, Midland, Texas,
from a partnership of which Mr. Warley was a 50% owner, for use as a district
office, warehouse and equipment yard. During 1997 Midland moved its executive
offices to 616 F.M. 1960 West, Suite 600, Houston, Texas 77090, which it
currently occupies under a lease expiring in 2002. The company also sold its
district office and relocated in leased space in Midland, Texas.
Contract Operating Agreement
Effective as of June 1, 1998, Midland's wholly owned, operating subsidiary,
MRO, and the Vista Operator, entered into a Contract Operating Agreement (herein
so called) which provides, among other things, that the Operator will provide
various contract operating services for and on behalf of Midland's oil and gas
properties through October 31, 1998 and on a month-to-month basis thereafter
unless otherwise terminated by either party upon 30 days' prior written notice.
For a more detailed description of such agreement, see "The Merger -- Other
Agreements" and "Certain Transactions."
Competition and Markets
Competition. The oil and gas industry is highly competitive. A large number
of companies and individuals engage in the exploration for and development of
oil and gas properties, and there is a high degree of competition for oil and
gas properties suitable for development or exploration. Acquisitions of oil and
gas properties have been an important element of Midland's growth. The principal
competitive factors in the acquisition of oil and gas properties include the
staff and data necessary to identify, investigate and purchase
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such properties and the financial resources necessary to acquire and develop
them. Many of Midland's competitors are substantially larger and have greater
financial and other resources than Midland.
Markets. Midland's ability to produce and market oil and gas profitably
depends on numerous factors beyond Midland's control. The effect of these
factors cannot be accurately predicted or anticipated. In recent years,
worldwide oil production capacity and gas production capacity in certain areas
of the United States have exceeded demand, with resulting declines in the price
of oil and gas. Although Midland cannot predict the occurrence of events that
may affect oil and gas prices or the degree to which oil and gas prices will be
affected, it is possible that prices for any oil or gas that Midland produces
will be lower than those currently available. Any significant decline in the
price of oil or gas would adversely affect Midland's revenues, profitability and
cash flow and could, under certain circumstances, result in a reduction in the
carrying value of Midland's oil and gas properties.
Governmental Regulation
Midland's oil and gas exploration, production and marketing activities are
subject to extensive laws, rules and regulations promulgated by federal and
state legislatures and agencies. Failure to comply with such laws, rules and
regulations can result in substantial penalties. The legislative and regulatory
burden on the oil and gas industry increases Midland's cost of doing business
and affects its profitability. Although Midland believes it is in substantial
compliance with all applicable laws and regulations, because those laws and
regulations are frequently amended, interpreted and reinterpreted, Midland is
unable to predict the future cost or impact of complying with such laws and
regulations.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. These
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells and the regulation
of spacing, plugging and abandonment of such wells.
The Federal Energy Regulatory Commission ("FERC") regulates interstate gas
transportation rates and service conditions, which affect the marketing of gas
produced by Midland, as well as the revenues received by Midland for sales of
such production. Since the mid-1980s, FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A, 636-B and 636-C ("Order 636"), that have
significantly altered the marketing and transportation of gas. Order 636
mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed and the provision of open-access
transportation on a nondiscriminatory basis. One of FERC's purposes in issuing
the order was to increase competition within all phases of the gas industry.
Numerous parties have filed petitions for review of Order 636, as well as orders
in individual pipeline restructuring proceedings. In July 1996, Order 636 was
generally upheld on appeal, and the portions remanded for further action do not
appear to materially affect Midland. Because Order 636 may be modified as a
result of the appeals, it is difficult to predict the ultimate impact of the
orders on Midland and its gas marketing efforts. Generally, Order 636 has
eliminated or substantially reduced the interstate pipelines' traditional role
as wholesalers of gas and has substantially increased competition and volatility
in gas markets.
The FERC frequently reexamines its transportation-related policies,
including the terms and conditions under which interstate pipeline shippers may
release interstate pipeline capacity for resale in the secondary market, the
appropriateness of the use of negotiated and market-based rates, and the
implementation of additional standardized terms and conditions for interstate
gas transmission. In April 1998, the FERC issued a new rule to further
standardize pipeline transportation tariffs that could adversely affect the
reliability of scheduled interruptible transportation service on some pipelines.
While any resulting FERC action would affect Midland only indirectly, any new
rules and policy statements may have the effect of enhancing competition in gas
markets or affecting the cost or availability of pipeline transportation.
The price Midland receives from the sale of oil and gas is affected by the
cost of transporting products to markets. Effective January 1, 1995, FERC
implemented regulations establishing an indexing system for
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transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. Midland is not able
to predict with certainty the effect, if any, of these regulations on its
operations. However, the regulations may increase transportation costs or reduce
well head prices for oil and gas. See "Risk Factors -- Governmental Regulation
and Environmental Matters."
Environmental Matters
Midland's operations and properties are, like the oil and gas industry in
general, subject to extensive and changing federal, state and local laws and
regulations relating to environmental protection, including the generation,
storage, handling, emission, transportation and discharge of materials into the
environment, and relating to safety and health. The recent trend in
environmental legislation and regulation generally is toward stricter standards,
and this trend will likely continue. These laws and regulations may require the
acquisition of a permit or other authorization before construction or drilling
commences and for certain other activities; limit or prohibit construction,
drilling and other activities on certain lands lying within wilderness and other
protected areas; and impose substantial liabilities for pollution resulting from
Midland's operations. The permits required for various of Midland's operations
are subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines or injunction, or both. In the
opinion of management, Midland is in substantial compliance with current
applicable environmental laws and regulations, and Midland has no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on
Midland, as well as the oil and gas industry in general.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and comparable state statutes impose strict and arguably joint and
several liability on owners and operators of certain sites and on persons who
dispose of or arranged for the disposal of "hazardous substances" found at such
sites. Under CERCLA, such persons may be subject to liability for the costs of
cleaning up the hazardous substances, for damages to natural resources and for
the costs of certain health studies. Furthermore, it is not uncommon for the
neighboring land owners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances related
into the environment. The Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes govern the disposal of "solid waste" and "hazardous
waste" and authorize imposition of substantial fines and penalties for
noncompliance. Although CERCLA currently excludes petroleum from its definition
of "hazardous substance," state laws affecting Midland's operations impose
clean-up liability relating to petroleum and petroleum related products. In
addition, although RCRA classifies certain oil field wastes as "non-hazardous,"
such exploration and production wastes could be reclassified as hazardous wastes
thereby making such wastes subject to more stringent handling, disposal and
cleanup requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as Midland, to prepare and implement spill
prevention, control countermeasure and response plans relating to the possible
discharge of oil into surface waters. The Oil Pollution Act of 1990, as amended
("OPA"), contains numerous requirements relating to the prevention of and
response to oil spills into waters of the United States. For onshore and
offshore facilities that may affect waters of the United States, the OPA
requires an operator to demonstrate financial responsibility. Regulations are
currently being developed under federal and state laws concerning oil pollution
prevention and other matters that may impose additional regulatory burdens on
Midland. In addition, the Clean Water Act and analogous state laws require
permits to be obtained to authorize discharge into surface waters or to
construct facilities in wetland areas. With respect to certain of its
operations, Midland is required to maintain such permits or meet general permit
requirements. The Environmental Pollution Agency ("EPA") recently adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group or seek
coverage under an EPA general permit. Midland believes that it will be able to
obtain, or be included under, such permits, where necessary, and to make minor
modifications to existing facilities and operations that would not have a
material effect on Midland.
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Midland has acquired leasehold interests in numerous properties that for
many years have produced oil and gas. Although the previous owners of these
interests have used operating and disposal practices that were standard in the
industry at the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties. In addition, some of Midland's properties
are operated by third parties over whom Midland has no control. Notwithstanding
Midland's lack of control over properties operated by others, the failure of the
operator to comply with applicable environmental regulations may, in certain
circumstances, adversely impact Midland. See "Risk Factors -- Governmental
Regulation and Environmental Matters."
Employees
On September 11, 1998, Midland had 8 full-time employees, none of which are
subject to collective bargaining arrangements. From time to time, Midland
utilizes the services of independent contractors to perform various field and
administrative services. Experienced personnel are available in all disciplines
should the need to hire additional staff arise.
Litigation
Midland is a defendant in a lawsuit filed on July 31, 1995, which is
currently pending in the 238th Judicial District Court of Midland County, Texas,
styled Manna Oil & Gas, Inc., Dobbs Oil & Gas, Inc. v. Midland Resources, Inc.,
Miresco, Inc. Midland Resources Operating Company, Inc., Cause No. 40,677. The
case involves certain Gulf Coast properties located in Copano Bay wherein
Midland owns a 68% working interest and is the operator of the properties. The
plaintiffs (1) seek a declarative judgment that Midland has failed to meet the
standards and procedures set out in the Operating Agreement; (2) are attempting
to recover approximately $230,000; (3) seek an accounting for the years
1993-1995; and (4) seek attorney fees and costs. Midland believes it has a
defensible position with respect to all of the Plaintiffs' claims and intends to
defend this case very aggressively.
Midland filed a counterclaim against Manna Oil and Gas, Inc. ("Manna") in
which Midland is seeking specific performance of an oral contract that Midland
entered into with Manna, whereby Midland and Manna agreed that if either party
acquired any additional property interest or contract rights of any kind in the
properties that are the subject of the underlying lawsuit that said party would
offer to convey to the other party their proportionate ownership in such newly
acquired property interest or contract rights. In the alternative, Midland
claims that Manna breached such contract, and Midland is seeking monetary
damages, resulting from said breach of contract, as well as attorney fees and
court costs. Management believes that the ultimate resolution of this matter
will not have a material adverse effect on Midland.
MANAGEMENT OF MIDLAND
Directors and Executive Officers
Set forth below is certain information concerning the directors and
executive officers of Midland.
NAME AGE POSITION
---- --- --------
Deas H. Warley III... 55 Director
Robert R. Donnelly... 49 Director and President
Darrell M. Dillard... 50 Director
Sam R. Brock......... 52 Director
Wayne M. Whitaker.... 50 Director and Chairman
Chief Financial Officer and Vice President of
Howard E. Ehler...... 54 Finance
Marilyn D. Wade...... 46 Secretary and Administrative Manager
Set below is a description of the background of the directors and executive
officers of Midland.
Deas H. (Gene) Warley III has been employed in the oil and gas industry
since 1979. Mr. Warley was the Chairman and President of Midland from its
inception in July 1990 until March 27, 1998. Mr. Warley was the Chairman and
President of Summit Petroleum Corporation, a public oil and gas corporation
until acquired by
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Midland in December 1996. Mr. Warley received a Bachelor of Science Degree in
Engineering from Arizona State University in 1971 and Master of Science Degree
in Engineering from the Air Force Institute of Technology in 1973. Mr. Warley is
a registered Professional Engineer in the state of Texas. He is a member of the
Independent Petroleum Association of America, the Permian Basin Petroleum
Association, the North Texas Oil and Gas Association, the Society of Petroleum
Engineers and the National Petroleum Counsel.
Robert R. Donnelly was elected a director of Midland in July 1990 and
President on March 27, 1998. Mr. Donnelly has been the Corporate Vice President
and Treasurer of Eastland Oil Company since 1988, responsible for gas contracts,
land department, accounting and administration; from 1985 until 1988 he was Vice
President in charge of land management; and from 1983 until 1985 he was land
manager and in charge of partnership relations. Mr. Donnelly has 18 years of
experience in various domestic and international land and land management
positions with major and independent oil and gas companies. He graduated from
the University of Texas in 1973 with a Bachelor of Arts Degree in Economics and
is a Certified Professional Landman. He has served as Director of the
Independent Petroleum Association of America, the Permian Basin Association of
Petroleum Landsmen, and the West Texas Producers Forum.
Darrell M. Dillard was elected as a director in July 1994. He was Vice
President from April 1995 and Chief Financial Officer from December 1995, in
each case until February 1997. He is an independent Certified Public Accountant
who has been engaged in public and industry accounting for the oil and gas
industry in Midland, Texas since 1980. Prior to 1980, Mr. Dillard worked for the
U.S. Department of Treasury. He served from 1981 to 1982 on the board of
directors and as treasurer for a large independent oil and gas exploration and
production company with operations in various states. He is a member of the
American Institute of Certified Public Accountants, the Texas Society of
Certified Public Accountants, the Petroleum Accountants Society, and the
Independent Petroleum Association of America. Mr. Dillard graduated from
Midwestern State University with a Bachelor's degree in Business Administration
in Accounting in 1975. Mr. Dillard has been a director of Summit Petroleum
Corporation since 1995.
Sam R. Brock was elected as a director on April 10, 1995. He has been
active in the oil and gas industry since 1974. From February 1994 until the
present he has owned and operated NRG Consultants, Inc., a commercial crude oil
trading and transportation consulting company. and since June 1997 he has been
an officer of Citation Crude Oil Marketing, Inc. a crude oil purchasing company.
From 1987 until 1994 he was Vice President -- Gathering Division of Phibro
Energy USA, Inc., a subsidiary of Solomon Brothers, Inc. From 1980 until 1986 he
was President and majority stockholder of NRG Gathering Company, a private oil
and gas gathering company, that was sold in 1986 to Tesoro Petroleum
Corporation. Mr. Brock graduated from Texas Tech University with a Bachelor's
degree in marketing in 1969.
Wayne M. Whitaker was elected as a director in January 1996, Chairman of
Midland on March 27, 1998 and has been a partner in the firm Michener, Larimore,
Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk, L.L.P. (and its
predecessor firms) since 1978. He received his business and law degrees from
Baylor University in 1971, and his Master of Laws from Southern Methodist
University in 1972. From 1972 until 1978 he worked for the Securities and
Exchange Commission in Fort Worth, Texas. Mr. Whitaker has been a director of
Summit Petroleum Corporation since 1995.
Howard E. Ehler joined Midland as Chief Financial Officer and Vice
President of Finance on February 14, 1997. Mr. Ehler is a Certified Public
Accountant and, prior to joining Midland, had been engaged in public accounting
for 30 years, with emphasis in auditing and consulting in the oil and gas
industry. Mr. Ehler was formerly a partner with the firm of Grant Thornton LLP.
He is a member of the American Institute of Certified Public Accountants and the
Texas Society of Certified Public Accountants. Mr. Ehler received a BBA degree
from Texas Tech University in 1966.
Marilyn D. Wade who has served as Secretary and Administrative Manager of
Midland since 1992, has been employed in various accounting, administrative and
management positions. Ms. Wade served as Administrative Manager of MRO since
April 1992. Prior to joining MRO, Ms. Wade was the accountant and office manager
with Callaway Oil and Gas from 1988, was self-employed during 1987 and 1988, and
was employed by Midland Resources, Inc. (not the registrant) from 1984 to 1987.
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Committees of the Board
The Midland Board has established a Compensation Committee, an Audit
Committee, a Nominating Committee and an Executive Committee. The Compensation
Committee reviews and recommends salaries of the officers and employment
arrangement of the president. The Compensation Committee consists of Messrs.
Brock and Donnelly. The Audit Committee's primary responsibilities are to (i)
recommend an independent auditor for selection by the Midland Board, (ii) review
the arrangements and scope of the independent auditor's examination, and (iii)
review the findings and recommendations of the independent auditor concerning
internal accounting procedures and controls. The Audit Committee consists of
Messrs. Dillard, Donnelly and Whitaker. The Nominating Committee reviews the
qualifications of director candidates on the basis of recognized achievements
and their ability to bring skills and experiences to the deliberations of the
Midland Board. It also recommends qualified candidates to the Midland Board,
including the slate of nominees submitted to the stockholders at the annual
meeting of stockholders. The Nominating Committee consists of Messrs. Brock,
Dillard and Warley. The Executive Committee has such authority as is granted to
it by the Midland Board from time to time. The Executive Committee consists of
Messrs. Dillard, Warley and Whitaker.
Director Compensation
During the first quarter of 1997, directors who were not officers or
employees of Midland each received a fee of $3,000, and directors who were
employees or officers of Midland received $100 per meeting, and each director
was reimbursed for expenses incurred in attending meetings. Midland also had the
1995 Directors' Stock Option Plan until February 1997, under which directors who
were not employees of Midland received options to acquire an aggregate of 20,000
shares at $2.75 per share and 30,000 at $3.75 per share. Effective February 25,
1997, the Midland Board adopted the 1997 Board of Directors Stock Incentive
Plan, terminated the 1995 Directors' Stock Option Plan and terminated the $3,000
quarterly director's fee effective beginning with the second quarter of 1997.
Each non-employee director received $3,000 as a directors fee in 1997 and Mr.
Warley received a total of $300 for directors fees in 1997. Midland stockholders
ratified the 1997 Board of Directors Stock Incentive Plan at the 1997 Annual
Meeting of Stockholders held May 29, 1997.
Options to the below listed individuals have been granted on the terms
indicated. Options to purchase certain shares of Midland Common Stock ("Shares")
upon the attainment of specified criteria are denominated "Bonus Options." On
February 25, 1997, the date of the grant of the options, the last reported trade
of Midland Common Stock as reported in The Wall Street Journal for NASDAQ
Small-Cap Issues was $3.75 and at December 31, 1997 such last reported trade was
$2.125.
NUMBER OF NUMBER OF BONUS
NAME OPTION SHARES OPTION SHARES EXERCISE PRICE EXPIRATION
---- ------------- --------------- -------------- ----------
Darrell M. Dillard(1)............ 200,000 50,000 $3.00 03/31/02
Robert R. Donnelly(1)............ 200,000 50,000 $3.00 03/31/02
Wayne M. Whitaker(1)............. 200,000 50,000 $3.00 03/31/02
Sam R. Brock(1).................. 200,000 50,000 $3.00 03/31/02
John Q. Adams(2)................. 150,000 25,000 $3.00 03/31/02
Marilyn D. Wade(3)............... 50,000 10,000 $3.00 03/31/02
- ---------------
(1) Director
(2) Advisory member of Board of Directors
(3) Corporate Secretary, employee
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Vesting Schedule:
25% of the Option Shares vest and become exercisable upon the
Shares trading three out of five consecutive trading days at
or above $6.50;
50% of the Option Shares vest and become exercisable upon the
Shares trading three out of five consecutive trading days at
or above $7.50;
25% of the Option Shares vest and become exercisable upon the
Shares trading three out of five consecutive trading days at
or above $8.50; and
100% of the Bonus Option Shares vest and become exercisable upon
the Shares trading three out of five consecutive trading
days at or above $10.00.
During 1997 Shares traded three out of five consecutive trading days at or
above $6.50 and 25% of the Option Shares vested and became exercisable subject
to the further restrictions as follows:
(a) No Option Shares may be exercised prior to March 1, 1998;
(b) Up to 1/3 of Option Shares that have vested may be exercised at
any time on and after March 1, 1998;
(c) Up to an additional 1/3 of Option Shares that have vested may be
exercised at any time on and after March 1, 1999;
(d) Up to an additional 1/3 of Option Shares that have vested may be
exercised at any time on and after March 1, 2000; and
(e) Bonus Option Shares that have vested may be exercised at any time.
Notwithstanding the above vesting schedule, all Options, including Bonus
Options, vest and become exercisable upon a Change in Control. The term "Change
in Control" shall mean (i) if (A) Deas H. Warley III shall have beneficial
ownership of fewer than 40% of the number of shares of Midland Common Stock (on
a fully diluted basis) beneficially owned by him on January 1, 1997, after
taking into account any subdivision or combination of Midland Common Stock, at
any time prior to the first anniversary of the grant of the Options, or (B) at
any time prior to the second anniversary of the grant of the Options Deas H.
Warley III shall have beneficial ownership of fewer than 30% of the number of
shares of Midland Common Stock beneficially owned by him on January 1, 1997,
after taking into account any subdivision or combination of Midland Common
Stock, (it being understood that Deas H. Warley III shall be deemed to have
beneficial ownership of any shares held by any member of his immediate family or
the trustee of any trust created for the benefit of any such family member), or
(ii) the acquisition in one or more transactions of Midland Common Stock by any
Person or group (within the meaning of Section 13(d)(3) of the Exchange Act)
together with any affiliate of such Person or member of such group of beneficial
ownership, direct or indirect, of securities of Midland representing 25% or more
of the combined voting power of Midland's then outstanding voting securities or
that amount of securities of Midland entitling such Person or group to elect a
majority of the members of the Midland Board, or (iii) the sale, transfer or
other disposition in one or more transactions of all or substantially all of the
assets of Midland or (iv) the merger or consolidation of Midland with or into
another Person, other than a wholly-owned subsidiary of Midland or (v) Midland
proceeds to acquire its common stock (or undertakes a corporate reorganization
or recapitalization or other action) if the effect of such acquisition (or other
action) would be either (1) to reduce substantially or to eliminate any public
market for the shares of Midland Common Stock or (2) to remove Midland from
registration under the Securities Exchange Act of 1934 ("Exchange Act") or (3)
to require Midland to make a filing under Section 13(e) of the Exchange Act or
(4) to cause a delisting of Midland Common Stock from the National Association
of Securities Dealers, Inc. Automated Quotation System (unless such stock is
delisted as a result of being listed on a national securities exchange) or to
cause a delisting of Midland Common Stock from a national securities exchange,
or (vi) either Midland and/or one or more of the significant subsidiaries of
Midland is materially or completely liquidated or is the subject of any
voluntary or involuntary dissolution or winding up.
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Compensation Committee Interlocks and Insider Participation
Midland's Compensation Committee consists of Messrs. Brock and Donnelly and
all determinations concerning executive compensation for Midland's executive
officers are made by the Compensation Committee. The Compensation Committee
members abstained from participation in compensation determinations concerning
their own compensation. None of the members of the Compensation Committee has
served on the board of directors or on the compensation committee of any other
entity, any of whose officers served on the Midland Board.
Executive Compensation
None of the officers of Midland receive direct compensation from Midland
for their service in those capacities. Officers of Midland are also officers of
MRO and receive compensation from that company. As reflected in the table below,
Mr. Warley was the chief executive officer of Midland and no other officer of
Midland received salary and bonus of $100,000 or more during 1997.
SUMMARY COMPENSATION TABLE
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($)(1) COMPENSATION ($)(2)
------------------ ---- ---------- ------------------- -------------------
Deas H. Warley III..................... 1997 214,419 0 10,300(3)
President, Chairman(4) 1996 224,840 5,693 17,774
1995 217,350 8,797 19,071
- ---------------
(1) Amounts deferred at the election of the named executive officer pursuant to
a plan established under Section 401(k) of the Internal Revenue Code.
(2) For 1997 includes, discretionary amounts contributed by Company under the
plan established under Section 401(k) of the Internal Revenue Code of $0 for
Mr. Warley.
(3) Includes Director fees of $300 and health care reimbursement of $10,000 for
1997.
(4) Mr. Warley's position as president and chairman terminated March 27, 1998.
Mr. Warley's employment contract and his ceasing to be president and
chairman is described under "Certain Transactions."
The following table provides the specified information for Midland's chief
executive officer during 1997. Mr. Warley's option exercise price is $2.375 per
share and the closing sales price of the Midland Common Stock on December 31,
1997 was $2.125.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE MONEY OPTIONS
SHARES ACQUIRED VALUE OPTION AT FY-END (#) AT FY-END ($)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------- ------------------------- -------------------------
Deas H. Warley III......... 0 0 15,000/0 $0/0
Employee Benefit Plans
Midland has two employee stock option plans. The 1994 Midland Resources,
Inc. Long-Term Incentive Plan reserved a total of 300,000 shares of Midland
Common Stock for awards under the plan. As of June 15, 1998, 113,000 options
were outstanding with a weighted average exercise price of $2.95 and 119,300
options were available for issuance. If not exercised, these options are
scheduled to expire in years 1999 through 2001. The 1996 Midland Resources, Inc.
Long-Term Incentive Plan reserved a total of 400,000 shares of Midland Common
Stock for awards under the plan. As of June 15, 1998, 205,000 options were
outstanding with a weighted average exercise price of $3.02 and 193,000 options
were available for issuance. If not exercised, these options are scheduled to
expire in years 2001 through 2003.
Midland, through MRO has a plan (including an employee stock ownership plan
provision) adopted under Section 401(k) of the Code that is open to all
employees.
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Indemnification of Midland Officers and Directors
As provided in the Merger Agreement, at the Effective Time, Vista will
enter into indemnification agreements with each of the directors and officers of
Midland pursuant to which Vista will agree to indemnify and hold harmless each
such director and officer against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
arising out of the fact that he was a director or officer of Midland or any of
its subsidiaries prior to the Effective Time, to the full extent permitted under
Delaware law, Midland's Bylaws and the indemnification agreements.
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THE VISTA PARTNERSHIP
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF THE VISTA PARTNERSHIP
The following table sets forth selected consolidated financial information
of the Vista Partnership for the six months ended June 30, 1998 and 1997, and
for the years ended December 31, 1997 and 1996 and the period from inception
(September 21, 1995) to December 31, 1995. This data should be read in
conjunction with the Consolidated Financial Statements of the Vista Partnership
and the related notes thereto incorporated herein by reference.
FOR THE PERIOD
FROM INCEPTION
SIX MONTHS ENDED (SEPT. 21,
JUNE 30, YEAR ENDED DECEMBER 31, 1995)
------------------------- -------------------------- TO DEC. 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ----------- --------------
(UNAUDITED)
REVENUES:
Oil and gas sales............................ $ 4,057,279 $ 3,633,274 $ 8,874,961 $ 5,537,720 $ 1,348,647
----------- ----------- ------------ ----------- -----------
Total revenues......................... 4,057,279 3,633,274 8,874,961 5,537,720 1,348,647
----------- ----------- ------------ ----------- -----------
COSTS AND EXPENSES:
Lease operating.............................. 1,939,530 1,672,260 3,688,695 2,544,567 728,540
Exploration costs............................ -- 58,600 97,211 273,843 --
Depreciation, depletion and amortization..... 962,026 932,192 2,169,098 1,272,316 308,132
General and administrative................... 620,665 475,640 987,020 581,048 208,509
Amortization of unit option awards........... 192,177 264,594 315,518 -- --
----------- ----------- ------------ ----------- -----------
Total costs and expenses............... 3,714,398 3,403,286 7,257,542 4,671,774 1,245,181
----------- ----------- ------------ ----------- -----------
Operating income....................... 342,881 229,988 1,617,419 865,946 103,466
----------- ----------- ------------ ----------- -----------
Loss on sale of property..................... (192,898) (7,247) (87,678) (56,738) --
Interest expense............................. (713,961) (394,169) (1,048,009) (476,363) (77,093)
Other income (loss), net..................... 40,291 63,856 115,949 61,437 33,684
----------- ----------- ------------ ----------- -----------
NET INCOME (LOSS) BEFORE TAXES(1).............. (523,687) (107,572) 597,681 394,282 60,057
----------- ----------- ------------ ----------- -----------
Pro forma benefit (provision) for taxes...... 183,290 37,650 (211,720) (139,284) (21,190)
----------- ----------- ------------ ----------- -----------
NET INCOME (LOSS).............................. $ (340,397) $ (69,922) $ 385,961 $ 254,998 $ 38,867
=========== =========== ============ =========== ===========
CASH FLOW DATA:
EBITDAEX(2).................................... 1,304,907 1,220,780 3,883,728 2,412,105 411,598
Cash flows from operating activities........... 625,976 1,677,619 3,469,638 2,072,649 195,878
Cash flows from investing activities........... (1,585,830) (4,379,753) (12,648,815) (7,046,720) (7,948,840)
Cash flows from financing activities........... 500,000 2,184,923 9,189,095 5,015,077 8,265,167
Capital expenditures........................... 1,717,694 (4,379,753) 13,038,815 7,417,091 7,720,478
Ratio of earnings to fixed charges(3).......... -- -- 1.6x 1.8x 1.8x
BALANCE SHEET DATA (end of period):
Working capital................................ 158,777 (490,950) 421,132 613,666 648,130
Property, plant, and equipment, net............ 25,234,284 17,982,188 24,870,766 14,523,202 9,076,679
Total assets................................... 26,989,793 19,150,432 27,036,103 16,259,340 10,364,620
Long-term obligations.......................... 18,400,000 10,800,000 17,900,000 8,615,077 3,600,000
Owners' equity................................. 7,365,142 6,940,475 7,696,652 6,783,453 6,389,171
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(1) The pro forma benefit (provision) for taxes is the amount that would have
been recorded in the financial statements had the Vista Partnership been a
taxable entity.
(2) The Vista Partnership believes that EBITDAEX may provide additional
information about the Vista Partnership's discretionary cash flow and its
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDAEX is a financial measure commonly
used in the oil and gas industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measures of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of a company's profitability or
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liquidity. Because EBITDAEX excludes some, but not all, items that affect
net income and these measures may vary among companies, the EBITDAEX data
presented above may not be comparable to similarly titled measures of other
companies. EBITDAEX (as used herein) is calculated by adding depletion,
depreciation and amortization, and exploration costs to operating income.
Exploration costs represent discretionary cost items. Therefore, exploration
costs have been added back in order to present a discretionary cash flow for
the Vista Partnership. Interest includes accrued interest expense and
amortization of deferred financing costs.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before taxes plus fixed charges. Fixed charges
consist of interest expense. For the six months ended June 30, 1998,
earnings were insufficient to cover fixed charges by $0.5 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE VISTA PARTNERSHIP
General
Financial Performance For the Six Months Ended June 30, 1998. The Vista
Partnership reported a net loss of $340,000 for the first six months of 1998 as
compared to a net loss of $70,000 for the same period in 1997. Average daily oil
production increased 39% to 1,303 Bbls per day for the first six months of 1998
from 939 Bbls per day for the same period of 1997, and average daily gas
production increased 81% to 2,641 Mcf per day from 1,458 Mcf per day for the
same period. As discussed more fully in "-- Results of Operations" below, the
Vista Partnership's financial performance for the first six months of 1998 was
negatively impacted by the following items: (i) dramatically lower (27%) oil
prices and lower (4%) gas prices received; (ii) increase in gross production
costs due to the addition of properties as a result of the E.G. Acquisition (as
defined below) made during the third quarter of 1997; (iii) an increase in
interest expense as a result of the additional indebtedness incurred in respect
of the E.G. Acquisition; and (iv) an increase in depletion expense attributable
to the additional properties acquired in the E.G. Acquisition.
Net cash provided by operating activities decreased 63% to $626,000 for the
first six months of 1998 as compared to $1,678,000 for the same period in 1997.
This decrease was primarily attributable to significantly lower commodity prices
for oil and gas and increased production costs and interest expense as a result
of the additional indebtedness incurred in respect of the E.G. Acquisition.
The Vista Partnership strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. The Vista Partnership's total book capitalization at June
30, 1998 was $25.8 million, consisting of total long-term debt of $18.4 million
and partners' equity of $7.4 million. Debt as a percentage of total book
capitalization was 71% at June 30, 1998, which was essentially the same as at
December 31, 1997. The Vista Partnership's debt level is currently high due to
significant borrowings under its bank credit facility for its 1997 acquisitions
and certain drilling and exploitation projects. As the Vista Partnership's
borrowing base under its bank credit facility has grown due to the success of
its acquisition and exploitation efforts, the Vista Partnership has been able to
fund all of its acquisitions and its drilling and exploitation programs from
borrowings under its bank credit facility and cash flow from operations without
raising additional equity capital.
Financial Performance For the Year Ended December 31, 1997. The Vista
Partnership reported net income of $597,681 (inclusive of a $315,518 non-cash,
non-operating charge for amortization of employee unit option awards) for the
year ended December 31, 1997 as compared to net income of $394,282 for the year
ended December 31, 1996. The Vista Partnership's net income for the year ended
December 31, 1997 was positively impacted by the following items: (i)
significantly increased oil and gas revenue attributable to increased production
resulting from the success of the Vista Partnership's drilling program and the
addition of a significant group of properties acquired in the E.G. Acquisition
in the third quarter of 1997; and (ii) a decrease in exploration expenses due to
fewer write offs of expired acreage and less dry hole expenses.
Net cash provided by operating activities increased 67% to $3.5 million for
the year ended December 31, 1997 as compared to $2.1 million for the year ended
December 31, 1996. This increase was primarily attributable to (i) significantly
increased oil and gas revenue attributable to increased production resulting
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from the success of the Vista Partnership's drilling program and the addition of
a significant group of properties acquired in the E.G. Acquisition in the third
quarter of 1997; and (ii) the decrease in exploration expenses due to fewer
write offs of expired acreage and less dry hole expenses.
Long-term debt increased by $9.3 million to $17.9 million at December 31,
1997 from $8.6 million at December 31, 1996 principally due to borrowings made
in connection with each of the acquisitions made by the Vista Partnership in
1997 (approximately $7.4 million) and to fund that portion of the Vista
Partnership's capital budget for drilling and exploitation projects that was not
funded from cash flow (approximately $1.9 million). Consequently, the Vista
Partnership's long-term debt to total book capitalization increased to an
historically high level of 70% at December 31, 1997 from 56% at December 31,
1996.
Significant Activities During the Six Months Ended June 30, 1998
Drilling Activities. During 1998, the Vista Partnership has continued its
emphasis on development, exploration and production activities, with a primary
focus on the exploitation of its current portfolio of drilling locations. This
portfolio was significantly enhanced and expanded by the major acquisitions
completed in 1995, 1996 and 1997 and the Vista Partnership's 1997 drilling
program. These activities have added a significant number of new locations and
opportunities to which new proved undeveloped reserves have been assigned. The
Vista Partnership believes that its current portfolio of undeveloped prospects
and projects provides attractive development and exploration opportunities for
at least the next two to four years. Of the total 1998 capital expenditure
drilling budget of $5.8 million, the Vista Partnership has allocated $4.9
million to exploitation and development activities and $900,000 to exploration
activities. The Vista Partnership does not budget for oil and gas property
acquisitions as they are made on a case by case basis as opportunities arise.
This capital expenditure drilling budget reflects the Vista Partnership's plans
to drill approximately 16 oil and gas wells in 1998. The Vista Partnership
currently expects to fund its 1998 capital expenditure budget primarily with
internally generated cash flow, borrowings under its bank credit facility and
proceeds from the sale of non-strategic assets.
During the first six months of 1998, the Vista Partnership participated in
the drilling and completion of seven gross development wells and no exploration
wells. None of these wells were in progress at December 31, 1997. Of the total
wells completed during the six months ended June 30, 1998, all seven were
completed successfully which resulted in a 100% success rate. No wells were
drilling at June 30, 1998.
Acquisition Activities. Although various acquisition candidates were
evaluated during the first six months of 1998, no material acquisitions were
made during such time period.
Significant Activities During 1997
Drilling Activities. The Vista Partnership continues to realize the
benefits of its focused activities in the development and exploitation of its
existing core areas. The Vista Partnership devotes significant efforts to
exploitation and exploration of its existing property base and believes that
substantial additional opportunities remain. During 1997, the Vista Partnership
participated in the drilling and completion of 23 gross exploration and
development wells (20 of which were operated by the Vista Partnership). The
Vista Partnership's total capital expenditures during 1997 for exploration and
development activities were $4.7 million.
Acquisition Activities. In addition to acquiring various additional small
working interests and overriding royalty interests in properties already owned
and operated by the Vista Partnership (total purchase prices of about $200,000),
the Vista Partnership closed two significant producing property acquisitions in
1997. In May 1997, the Vista Partnership acquired all of the interests of
Coastal Oil and Gas Corporation in three producing leases located in Howard
Glasscock Field, Howard County, Texas, for a net purchase price of $1.1 million
(the "Coastal Acquisition"). The interests acquired were attributable to leases
already owned and operated by the Vista Partnership. Effective as of July 1,
1997, the Vista Partnership acquired substantially all of the producing oil and
gas properties (representing working interests ranging from 25% to 100% in
approximately 44 wells located in West Texas, South Texas, and Southeastern New
Mexico) from E. G. Operating, a division of FGL, Inc. for a net purchase price
of $6.1 million (the "E.G. Acquisition"). All of the
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Vista Partnership's 1997 acquisitions were funded through a combination of cash
on hand and proceeds from long-term borrowings under its bank credit facility.
Asset Dispositions. From time to time, the Vista Partnership disposes of
non-strategic assets in order to raise capital for other activities, reduce
indebtedness or eliminate costs associated with non-strategic assets. During
1997, the Vista Partnership sold certain non-strategic assets for a total net
consideration of $390,000, which resulted in a book loss of $87,678.
Proved Reserves. The Vista Partnership's proved reserves totaled 9.1
million BOE at December 31, 1997, 5.7 million BOE at December 31, 1996, and 3.0
million BOE at December 31, 1995. Total proved reserves increased 59% in 1997
and 90% in 1996. Oil reserves at year end 1997 were 7.2 million Bbls compared to
4.5 million Bbls at year end 1996 and 2.2 million Bbls at year end 1995 (a 60%
increase from 1996 to 1997 and a 200% increase from 1995 to 1996). Natural gas
reserves at year end 1997 were 11.3 Bcf compared to 7.2 Bcf at year end 1996 and
4.8 Bcf at year end 1995 (a 57% increase from 1996 to 1997 and a 50% increase
from 1995 to 1996).
Reserve Replacement. For three years, since inception of the company, the
Vista Partnership has been able to more than replace its annual production
volumes with proved reserves of crude oil and natural gas. During 1997 Vista
added 3,895 MBOE of reserves resulting in reserve replacement of 728% of annual
production. The reserve replacement rate in 1996 was 919%. Of the 3,895 MBOE of
reserves added in 1997, 1,675 MBOE was added through drilling, remedial work and
secondary recovery projects, 1,788 MBOE was added through acquisitions of proved
reserves, and 432 MBOE was added as a result of revisions. Reserve revisions are
a result of either changes in current estimates of reserves or changes in
estimates of reserves that are economical to produce given the current pricing
conditions. The Vista Partnership's reserves as of December 31, 1997 were
estimated using a price of $16.10 per Bbl and $2.01 per Mcf. Should prices
either rise or decline in future years, reserves may be revised either upward or
downward for quantities which may or may not be economical to produce.
Finding Cost. The Vista Partnership's acquisition and finding cost for 1997
was $3.17 per BOE as compared to the 1996 and 1995 finding costs of $2.55 and
$2.90 per BOE, respectively. The average acquisition and finding cost for the
three-year period was $2.90 per BOE.
Cost Reductions. Production costs (being lease operating expenses and
production taxes) per BOE declined 3.9% (from $7.18 to $6.90) for the year ended
December 31, 1997, as compared to the year ended December 31, 1996. This decline
is a result of the Vista Partnership's continued emphasis on cost control
efforts and the disposition of certain high-cost, non-strategic oil and gas
properties during 1997. The Vista Partnership expects production costs per BOE
to continue to decline as further cost reductions are implemented and additional
high-cost, non-strategic properties are sold.
Commodity Prices and Hedging Activities. The Vista Partnership was
negatively impacted by slightly lower oil and gas prices during 1997. In 1997,
the Vista Partnership received an average oil price of $17.63 per Bbl and an
average gas price of $2.22 per Mcf, representing a decrease of 2% for oil and a
slight increase for gas, respectively, from 1996. The oil and gas prices that
the Vista Partnership reports is based on the actual prices received for the
commodities adjusted by the results of the Vista Partnership's hedging
activities. The Vista Partnership periodically enters into commodity derivative
contracts (i.e., swaps and collars) in order to (i) reduce the effect of the
volatility of price changes on the commodities the Vista Partnership produces
and sells, (ii) support the Vista Partnership's annual capital budgeting and
expenditure plans, and (iii) lock in prices to protect the economics related to
certain capital projects. During 1997, the Vista Partnership's hedging
activities reduced the average price received for oil by 3%. The Vista
Partnership engaged in no gas hedging activities in 1997.
Capitalization. The Vista Partnership strives to maintain its outstanding
indebtedness at a moderate level in order to provide sufficient financial
flexibility for future opportunities. The Vista Partnership's total book
capitalization at December 31, 1997, was $25.6 million, consisting of total
long-term debt of $17.9 million and partners' equity of $7.7 million. Debt as a
percentage of total capitalization was 70% at December 31, 1997, up from 56% at
December 31, 1996. This increase is primarily due to borrowings made in
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connection with each of the acquisitions made by the Vista Partnership in 1997
(approximately $7.4 million) and to fund that portion of the Vista Partnership's
capital budget for drilling and exploitation projects that was not funded from
cash flow (approximately $1.9 million).
Legal Actions. The only legal matter in which the Vista Partnership is or
has been involved concerns the bankruptcy of a drilling contractor engaged by
the Vista Partnership to drill several wells on a turnkey basis in late 1996.
The Vista Partnership still holds $208,060 owed under the subject turnkey
drilling contract. Claims have been made by various subcontract vendors for the
monies held by the Vista Partnership. On November 11, 1997, a company claiming
to own the invoices of the bankrupt drilling contractor through a factoring
arrangement filed suit in state district court in Midland County seeking to
collect the monies due under the subject turnkey drilling contract (the
"Southwest Action"). Upon motion by the Vista Partnership, the district court on
January 2, 1998, abated the legal action by the plaintiff pending the results of
the bankruptcy proceedings and a determination as to which, if any, claimants
including the plaintiff are entitled to the monies held by the Vista
Partnership. The Vista Partnership carries the entire $208,060 as an account
payable on its balance sheet.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Oil and Gas Production.
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
---------- ----------
Revenues.................................................... $4,057,279 $3,633,274
Costs and expenses:
Production costs.......................................... 1,939,530 1,672,260
Depletion................................................. 962,026 932,192
Exploration costs......................................... -- 58,600
---------- ----------
2,901,556 2,663,052
---------- ----------
Operating profit (excluding general and administrative
expenses and income taxes)............................. $1,155,723 $ 970,222
========== ==========
Production:
Oil (Bbls)................................................ 235,773 169,975
Gas (Mcf)................................................. 477,990 263,929
Total (BOE)....................................... 315,438 213,963
Average Daily Production:
Oil (Bbls)................................................ 1,303 939
Gas (Mcf)................................................. 2,641 1,458
---------- ----------
Total (BOE)....................................... 1,743 1,182
Average Oil Price (Per Bbl)................................. $ 13.28 $ 18.22
Average Gas Price (Per Mcf)................................. $ 1.92 $ 2.01
Costs (Per BOE):
Lease operating expense................................... $ 5.10 $ 6.52
Production taxes.......................................... $ 1.05 $ 1.29
---------- ----------
Total production costs............................ $ 6.15 $ 7.81
Depletion................................................. $ 3.05 $ 4.36
Oil and Gas Revenues. Revenues from oil and gas operations totaled $4.0
million in the first six months of 1998 compared to $3.6 million in the first
six months of 1997, representing an increase of 11%. The increase is primarily
attributable to significant increases in production due to the Vista
Partnership's successful acquisition and exploitation activities in 1997, offset
by significantly decreased average prices being received for both oil and gas
production. The average oil prices received for the six months ended June 30,
1998, decreased 27% (from $18.22 to $13.28 for the six months ended June 30,
1997 and 1998, respectively), while
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the average gas price received decreased 4% (from $2.01 to $1.92 for the six
months ended June 30, 1997 and 1998, respectively).
Average daily oil production increased 39% from 939 Bbls for the first six
months of 1997 to 1,303 Bbls for the same period of 1998, and average daily gas
production increased 81% from 1,458 Mcf to 2,641 Mcf for the same period.
Approximately 62% of period to period increases in oil and gas production is
attributable to properties acquired in acquisitions and 38% is attributable to
existing properties.
Hedging Activities. The oil and gas prices that the Vista Partnership
reports is based on the actual prices received for the commodities adjusted for
the results of any of the Vista Partnership's hedging activities. The Vista
Partnership periodically enters into commodity derivative contracts (i.e., swaps
and collars) in order to (i) reduce the effect of the volatility of price
changes on the commodities the Vista Partnership produces and sells, (ii)
support the Vista Partnership's annual capital budgeting and expenditure plans,
and (iii) lock in prices to protect the economics related to certain capital
projects. Set forth below is the contract amount and material terms of all crude
oil hedging instruments held by the Vista Partnership at June 30, 1998 (monthly
volumes are expressed in Bbls and all prices are expressed in the calendar
monthly average of daily NYMEX closing prices for Light Sweet Crude Oil):
TRADE TYPE MONTHLY PUT CALL
DATE TRANSACTION VOLUME FLOOR PRICE CEILING PRICE TERM
- -------- ----------- ------- ------------ ------------- ------------------
12-15-97 Collar 10,000 $ 18.00 Bbl $ 19.805 Bbl 4-1-98 to 12-31-98
12-15-97 Collar 10,000 $ 18.50 Bbl $ 19.280 Bbl 4-1-98 to 3-31-99
Set forth below is the contract amount and material terms of all NYMEX
natural gas hedging instruments held by the Vista Partnership at June 30, 1998
(monthly volumes are expressed in MMBtus and prices are expressed in the monthly
NYMEX (Henry Heb) closing price for natural gas):
TRADE TYPE MONTHLY PUT CALL
DATE TRANSACTION VOLUME FLOOR PRICE CEILING PRICE TERM
- -------- ----------- ------- ------------ ------------- ------------------
4-5-98 Collar 80,000 $2.20 MMBtu $2.49 MMBtu 4-1-98 to 9-30-98
Set forth below is the contract amount and material terms of each natural
gas basis swap held by the Vista Partnership at June 30, 1998 (monthly volumes
are expressed in MMBtus):
TRADE TYPE MONTHLY
DATE TRANSACTION VOLUME SWAP PRICE TERM
- -------- ----------- ------- ---------- ------------------
4-5-98 Basis swap 40,000 Houston Ship Channel (NYMEX 4-1-98 to 9-30-98
(Henry Hub) minus $0.0275
MMBtu)
4-5-98 Basis swap 40,000 Permian Basis (El Paso) 4-1-98 to 9-30-98
(NYMEX (Henry Hub) minus
$0.20 MMBtu)
Production Costs. Total production costs (inclusive of all lease operating
expenses and production taxes) per BOE decreased 21% to $6.15 during the six
months ended June 30, 1998, as compared to production costs per BOE of $7.81
during the same period of 1997. These reductions are primarily due to the Vista
Partnership's continued and concentrated efforts to evaluate and reduce all
operating costs, the addition of higher margin properties acquired by Vista in
the E.G. Acquisition, and the sale of certain high operating cost properties
during 1997.
Exploration Costs. Exploration costs (which includes abandonments, dry hole
costs, geological and geophysical costs) decreased to $0 during the first six
months of 1998 from $63,856 during the same period in 1997 because the Vista
Partnership did not incur any dry hole costs or expired acreage costs in the
first six months of 1998.
General and Administrative Expense. General and administrative expense was
$620,665 for the six months ended June 30, 1998, as compared to $475,640 for the
six months ended June 30, 1997,
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representing a 30% increase. Such increase was primarily due to the costs
associated with the hiring of additional employees in 1997 as the Vista
Partnership's business has grown.
Amortization of Unit Option Awards. The amortization of unit option awards
was $192,177 for the six months ended June 30, 1998, as compared to $264,594 for
the six months ended June 30, 1997. Vista estimates the compensation associated
with the option awards based on estimated fair value less exercise price.
Estimated compensation expense is recorded over the vesting period and will be
adjusted prospectively as the estimated fair value of the options changes.
Interest Expense. Interest expense for the six months ended June 30, 1998
increased to $713,961 as compared to $394,169 for the comparable period in 1997,
representing an 81% increase. This increase is primarily due to additional
borrowings made in connection with each of the acquisitions made by the Vista
Partnership in 1997 (approximately $7.4 million) and to fund that portion of the
Vista Partnership's capital budget for drilling and exploitation projects that
was not funded from cash flow (approximately $1.9 million).
Depletion, Depreciation and Amortization Expense. Depletion expense per BOE
declined to $3.05 during the first six months of 1998 from $4.36 per BOE during
the same period of 1997. The decrease in depletion expense per BOE during 1998
is primarily related to increases in oil and gas reserves on certain properties
which resulted in slightly lower depletion rates for such properties.
Income Taxes. Since the Vista Partnership's legal structure is that of a
limited partnership, it records no federal income taxes as these taxes are the
responsibility of the individual partners.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND FOR
THE PERIOD FROM INCEPTION (SEPTEMBER 21, 1995) TO DECEMBER 31, 1995
Oil and Gas Production.
1997 1996 1995
----------- ----------- -----------
Revenues................................... $ 8,874,961 $ 5,537,720 $ 1,348,647
Costs and expenses:
Production costs......................... 3,688,695 2,544,567 728,540
Depletion................................ 2,169,098 1,272,316 308,132
Exploration costs........................ 97,211 273,843 --
----------- ----------- -----------
5,955,004 4,090,726 1,036,672
----------- ----------- -----------
Operating profit (excluding general and
administrative expenses and income
taxes)................................ $ 2,919,957 $ 1,446,994 $ 311,975
=========== =========== ===========
Production:
Oil (Bbls)............................... 403,812 253,321 68,211
Gas (Mcf)................................ 784,298 458,278 156,515
Total (BOE)...................... 534,528 329,701 94,297
Average Daily Production:
Oil (Bbls)............................... 1,107 693 444
Gas (Mcf)................................ 2,148 1,255 1,020
----------- ----------- -----------
Total (BOE)...................... 1,465 902 614
Average Oil Price (Per Bbl)................ $ 17.63 $ 18.04 $ 15.70
Average Gas Price (Per Mcf)................ $ 2.22 $ 2.19 $ 1.75
Costs (Per BOE):
Lease operating expense.................. $ 5.62 $ 6.35 $ 6.12
Production taxes......................... $ 1.28 $ 1.37 $ 1.61
----------- ----------- -----------
Total production costs........... $ 6.90 $ 7.72 $ 7.73
Depletion................................ $ 4.06 $ 3.86 $ 3.27
Oil and Gas Revenues. Revenues from oil and gas operations totaled $8.9
million in 1997, $5.5 million in 1996 and $1.3 million in 1995, representing a
60% increase from 1996 to 1997 and a 310% increase from 1995 to 1996. The
increase from 1996 to 1997 is primarily attributable to significant increases in
production due to the Vista Partnership's successful acquisition and
exploitation activities in 1996 and 1997, offset by significantly decreased
average prices being received for oil production. Due to the Vista Partnership's
formation in September 1995, 1995 production consists of a short year.
Accordingly, the increase from 1995 to 1996 is primarily due to 1996 being a
full year of production and, to a lesser extent, additional oil and gas sales
resulting from successful acquisition and drilling activities in 1996. The
average oil prices received for the year ended December 31, 1997 decreased 2%
(from $18.04 in 1996 to $17.63 in 1997), while the average gas price received
increased slightly (from $2.19 in 1996 to $2.22 in 1997). The average oil prices
received for the year ended December 31, 1996 increased 15% (from $15.70 in 1995
to $18.04 in 1996), while the average gas price received increased 25% (from
$1.75 in 1995 to $2.19 in 1996).
Average daily oil production increased 60% from 693 Bbls for the year ended
December 31, 1996 to 1107 Bbls for the year ended December 31, 1997, and average
daily gas production increased 71% from 1255 Mcf to 2148 Mcf for the same
period. Such increases from 1996 to 1997 are attributable approximately 70% to
properties acquired in acquisitions and 30% to existing properties. Average
daily oil production increased 56% from 444 Bbls for the year ended December 31,
1995 to 693 Bbls for the year ended December 31, 1996, and average daily gas
production increased 23% from 1020 Mcf to 1255 Mcf for the same period. Such
increases from 1995 to 1996 are attributable approximately 72% to properties
acquired in acquisitions and 28% to existing properties.
Hedging Activities. From time to time, the Vista Partnership has utilized
hedging transactions with respect to a portion of its oil and gas production to
achieve a more predictable cash flow, as well as to reduce
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its exposure to price fluctuations. While the use of these hedging arrangements
limits the downside risk of price declines, such use may also limit any benefits
which may be derived from price increases. The oil and gas prices that the Vista
Partnership reports are based on the actual prices received for the commodities
adjusted for the results of any Vista Partnership hedging activities.
The Vista Partnership uses various financial instruments, such as swaps and
collars, whereby monthly settlements are based on differences between the prices
specified in the instruments and the settlement prices of certain futures
contracts quoted on the NYMEX or certain other indices. Generally, when the
applicable settlement price is less than the price specified in the contract,
the Vista Partnership receives a settlement from the counterparty based on the
difference. Similarly, when the applicable settlement price is higher than the
specified price, the Vista Partnership pays the counterparty based on the
difference. The instruments utilized by the Vista Partnership differ from
futures contracts in that there is not a contractual obligation which requires
or allows for the future physical delivery of the hedged products.
The Vista Partnership has entered into collar arrangements for 90,000
barrels of crude oil production for the period from April 1998 through December
1998 at a floor price of $18.00 per Bbl and a ceiling price of $19.805 per Bbl.
In addition, the Vista Partnership has hedged 120,000 barrels of oil production
from April 1998 through March 1999 under collar arrangements with a floor price
of $18.50 per Bbl and a ceiling price of $19.280 per Bbl. The Vista Partnership
has entered into a collar arrangement for 480,000 MMbtu of natural gas from
April 1998 through September 1998 at a floor price of $2.20 per MMBtu and a
ceiling price of $2.49 per MMBtu. The Vista Partnership also has in place two
basis swaps for the same April 1998 through September 1998 time period. The two
basis swaps are: (i) Houston Ship Channel Basis for 40,000 MMBtu per month at a
fixed price of NYMEX Henry Hub minus $0.0275 per MMBtu; and (ii) Permian Basin
(El Paso) Basis for 40,000 MMBtu per month at a fixed price of NYMEX Henry Hub
minus $0.20 per MMBtu.
Production Costs. Total production costs per BOE decreased 11% (from $7.72
in 1996 to $6.90 in 1997). This significant reduction is primarily due to the
Vista Partnership's continued and concentrated efforts to evaluate and reduce
all operating costs, the addition of higher margin properties acquired in the
E.G. Acquisition, and the sale of certain high operating cost properties. Total
production costs per BOE remained flat in 1996 as compared to 1995 (from $7.73
in 1995 to $7.72 in 1996).
Exploration Costs. Exploration costs (which include abandonments, dry hole
costs and geological and geophysical costs) have not historically been a
material cost to the Vista Partnership. Such costs were $97,211, $273,843 and $0
in 1997, 1996 and 1995, respectively.
General and Administrative Expenses. General and administrative expense
increased 70% in 1997 (from $581,048 in 1996 to $987,020 in 1997). Such increase
was primarily due to the costs associated with the hiring of additional
employees in 1997 as the Vista Partnership's business has grown. General
administrative expenses per BOE were $1.85, $1.76, and $2.21 in 1997, 1996 and
1995 respectively.
Amortization of Unit Option Awards. The amortization of unit option awards
was $315,518, 0 and 0 in 1997, 1996 and 1995, respectively. Estimated
compensation expense changes as the estimated fair value of the options change.
The estimated compensation expense is recognized over the vesting period.
Interest Expense. Interest expense totaled $1,048,009, in 1997, $476,363 in
1996 and $77,093 in 1995, representing a 120% increase from 1996 to 1997 and a
518% increase from 1995 to 1996. These increases are a result of increased
borrowings under the Vista Partnership's bank credit facility. As the Vista
Partnership's borrowing base under its bank credit facility has grown due to the
success of its acquisition and exploitation efforts, the Vista Partnership has
been able to fund all of its acquisitions and its drilling and exploitation
programs from borrowings under its bank credit facility and cash flow from
operations without raising additional equity capital.
Depletion, Depreciation and Amortization Expense. Depletion expense per BOE
was $4.06 in 1997, $3.86 in 1996 and $3.27 in 1995, representing a 5% increase
from 1996 to 1997 and a 18% increase from 1995 to 1996 These increases are
primarily related to the addition of shorter life properties in the E.G.
Acquisition.
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Income Taxes. Since the Vista Partnership's legal structure is that of a
limited partnership it records no federal income taxes as these taxes are the
responsibility of the individual partners.
Capital Commitments, Capital Resources and Liquidity
Capital Commitments. The Vista Partnership's primary needs for cash are for
acquisitions, development and exploration of oil and gas properties, repayment
of principal and interest on outstanding indebtedness and working capital
obligations. The Vista Partnership's cash expenditures during the first quarter
of 1998 for additions to oil and gas properties totaled $659,782, all of which
related to developmental drilling and exploitation activities. No acquisitions
were made during the first quarter of 1998.
The Vista Partnership's cash expenditures during 1997, 1996 and 1995 for
additions to oil and gas properties (inclusive of producing property
acquisitions) totaled $12.1 million, $6.7 million and $9.3 million,
respectively. The 1997 amount includes $4.7 million for development and
exploratory drilling, the majority of which was spent in the Permian Basin.
The Vista Partnership's 1998 capital expenditure drilling budget is set at
$5.8 million. Pursuant to this budget $4.9 million has been allocated to
exploitation and development activities and $900,000 to exploration activities.
The Vista Partnership does not budget for oil and gas property acquisitions as
they are made on a case by case basis as opportunities arise. The 1998 budget
reflects the Vista Partnership's plans to drill approximately 17 oil and gas
wells in 1998. The Vista Partnership currently expects to fund its 1998 capital
expenditure budget primarily with internally generated cash flow, borrowings
under its bank credit facility and proceeds from the sale of non-strategic
assets.
Capital Resources. The Vista Partnership's primary capital resources are
net cash provided by operating activities, borrowings under its bank credit
facility and proceeds from the sale of non-strategic assets.
Financing Activities. The Vista Partnership had $18.4 million outstanding
under the Credit Facility at June 30, 1998, with a borrowing base thereunder of
$22.3 million, leaving unused availability of $3.9 million. The weighted average
interest rate for the six months ended June 30, 1998 on the Vista Partnership's
indebtedness was 7.67% as compared to 8.20% for the six months ended June 30,
1997 (taking into account the effect of an interest rate swap). On August 15,
1997, the Vista Partnership entered into the Credit Facility, which has a
current borrowing base of $22.3 million and an additional $1.0 million letter of
credit facility. The Vista Partnership has two options with respect to interest
rate elections on borrowings under the Credit Facility. The Vista Partnership
may either elect an interest rate equal to the bank's prime rate plus 35 basis
points or LIBOR plus 175 basis points (if amounts outstanding are greater than
50% of the then current borrowing base) or 150 basis points (if amounts
outstanding are 50% or less of the then current borrowing base). The LIBOR-based
option provides for one-, two-, three- or six-month periods. The weighted
average interest rate for the year ended December 31, 1997 on the Vista
Partnership's indebtedness was 7.76% as compared to 7.99% for the year ended
December 31, 1996 and 7.95% for the year ended December 31, 1995.
Liquidity. At June 30, 1998, the Vista Partnership had cash of $67,275 on
hand compared to $527,129 at December 31, 1997 and $517,211 at December 31,
1996. The Vista Partnership's ratio of current assets to current liabilities was
1.19 at June 30, 1998, 1.13 at December 31, 1997 and 1.71 at December 31, 1996.
Year 2000 Compliance. Vista does not expect that the cost of converting its
computer system to Year 2000 compliance will be material to its financial
condition. Vista believes it will be able to achieve Year 2000 compliance by the
end of 1998 for an amount less than $10,000, and it does not currently
anticipate any disruption in its operations as the result of any failure by
Vista to be in compliance. Vista does not currently have any information
concerning the Year 2000 compliance status of its customers and vendors.
BUSINESS AND PROPERTIES OF THE VISTA PARTNERSHIP
Business Description
General. The Vista Partnership is a privately held independent oil and gas
exploration and production company with operations and properties located in the
Permian Basin of West Texas and Southeastern New
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Mexico and the onshore Gulf Coast region of South Texas. The Vista Partnership
and its operating subsidiary, Vista Resources, Inc., were formed by management
of the Vista Partnership and various affiliates of NGP in September 1995 to
focus on acquisitions and exploitation drilling primarily in the Permian Basin
of West Texas and Southeast New Mexico.
The Vista Partnership's main corporate objective is to rapidly expand
reserve base, production capacity, cash flow and earnings in order to
substantially grow the equity value of the company on a per unit of ownership
basis. The Vista Partnership pursues its objectives through a program of
acquisitions of producing oil and gas properties and the exploitation of such
properties primarily through developmental and exploratory drilling coupled with
a concentrated and continuous effort to reduce expenses on a BOE basis at all
levels of its business.
The Vista Partnership had approximately 9.1 million BOE of total proved
reserves at December 31, 1997 and PV10 of approximately $38.6 million. Oil
reserves at year end 1997 were 7.2 million Bbls and natural gas reserves at year
end 1997 were 11.3 Bcf. On a BOE basis 52% of the Vista Partnership's total
proved reserves at December 31, 1997 are proved developed reserves. The Vista
Partnership operates 92% of its total proved reserves. The reserve-to-production
ratio associated with the Vista Partnership's proved reserves is 14 years on a
BOE basis.
Financial Management. The Vista Partnership strives to maintain its
outstanding indebtedness at a moderate level in order to provide financial
flexibility for future acquisition, development and exploration opportunities.
As with any growing organization, the Vista Partnership has experienced various
levels of debt in recent years as it has responded to strategic opportunities.
In 1997, the Vista Partnership's debt increased significantly due to borrowings
made in connection with each of its acquisitions in 1997 ($7.4 million) and to
fund that portion of its capital budget for drilling and exploitation projects
that was not funded from cash flow ($1.9 million). Debt is currently 71% of
total book capitalization. Nevertheless, management's objective of maintaining a
flexible structure and strengthening the Vista Partnership's financial position
dictates reducing debt through an increase in equity capital, the divestiture of
non-strategic assets or a combination of the two in order to maintain debt to
total capitalization of approximately 50%.
Properties
Reserves. The estimates of the Vista Partnership's proved oil and gas
reserves, which are located entirely within the United States, were prepared in
accordance with the guidelines established by the Commission and Financial
Accounting Standards Board. The estimates of December 31, 1997, 1996 and 1995
are based on evaluations prepared by the Vista Partnership. For information
concerning costs incurred by the Vista Partnership for oil and gas operations,
net revenues from oil and gas production, estimated future net revenues
attributable to the Vista Partnership's oil reserves and present value of future
net revenues on a 10% discount rate and changes therein, see Notes to the Vista
Partnership's consolidated financial statements. The Vista Partnership
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are subject to change as further
information becomes available.
The Vista Partnership's proved reserves totaled 9.1 million BOE at December
31, 1997 with a PV10 of $38.6 million. Reserves increased 59% versus year end
1996. Oil reserves were 7.2 million BOE (a 59% increase over 1996) while gas
reserves were 11.3 BCF (a 57% increase over 1996).
On a BOE basis, the Vista Partnership's reserves at January 1, 1998 are 52%
proved developed with 48% proved undeveloped. Seventy-nine percent of the Vista
Partnership's reserves are oil and 21% are gas. The Vista Partnership prefers to
operate the properties it owns because operational efficiencies are a key part
of the acquisitions targeted by the Vista Partnership. Over 92% of the Vista
Partnership's reserve value is attributable to operated properties. Only 8% of
the Vista Partnership's reserve value is attributable to properties operated by
others.
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The following table summarizes the estimated proved reserves and estimated
future cash flows associated with the Vista Partnership's oil and gas properties
as estimated in accordance with the definitional requirements under rule 4-10(a)
of Regulation S-X.
PROVED RESERVES AS OF DECEMBER 31, 1997 1997 AVERAGE DAILY PRODUCTION
------------------------------------------ ------------------------------
NATURAL PV 10 NATURAL
OIL GAS VALUE OIL GAS
(MBbls) (MMcf) MBOE (000) (Bbls) (Mcf) (BOE)
------- --------- ------- -------- -------- --------- -------
7,217 11,295 9,100 38,581 1,107 2,148 1,465
Reserve Replacement and Production. For three years, since inception of the
company, the Vista Partnership has been able to more than replace its annual
production volumes with proved reserves of crude oil and natural gas. During
1997, the Vista Partnership added 3,895 MBOE of reserves, resulting in reserve
replacement of 728% of annual production. The reserve replacement rate in 1996
was 919%. Of the 3,895 MBOE of reserves added in 1997, 1,675 MBOE was added
through drilling, remedial work and secondary recovery projects, 1,788 MBOE was
added through acquisitions of proved reserves, and 432 MBOE was added as a
result of revisions. Reserve revisions are a result of either changes in current
estimates of reserves or changes in estimates of reserves which are economical
to produce given the current pricing conditions. For January 1, 1998, the Vista
Partnership received an average oil price of $16.10 per Bbl and an average gas
price of $2.01 per Mcf. Should prices either rise or decline in future years,
reserves may be revised either upward or downward for quantities that may or may
not be economical to produce.
The Vista Partnership's production for 1997 averaged 1,463 BOE per day.
Production increased during the year from 1,100 per day in January 1997 to 1,800
BOE per day average for December 1997, representing a 63% increase for the year.
Based on end of the year production rates, the Vista Partnership's proved
reserves to production ratio is 14 years on a BOE basis. This ratio was up from
11 years for year end 1996.
Description of Properties. The Vista Partnership manages its oil and gas
properties based on geographic areas or producing provinces. The Vista
Partnership's two main areas of producing properties include the Permian Basin
and the onshore Gulf Coast area of South Texas. Approximately 90% of the Vista
Partnership's proved reserves are located in the Permian Basin and 10% are
located in the onshore Gulf Coast area of South Texas. The Vista Partnership has
no properties outside the United States and has no properties in offshore
waters.
PERMIAN BASIN
The Vista Partnership has a large percentage of its Permian Basin reserves
in several prolific fields, including Howard Glasscock, Sharon Ridge, Cowden
North and Keystone. Cumulative production from these four fields to January 1,
1998 is over 1.3 billion barrels of oil plus 780 billion cubic feet of natural
gas. Each of these large fields can be characterized by multiple reservoirs with
substantial primary and secondary reserves remaining to be recovered. The Vista
Partnership is attracted to these types of fields due to the huge reserve base
remaining and the long lived nature of the reserves, as well as the economies of
scale afforded by establishing core areas of operations.
Howard -- Glasscock Field, Howard County, Texas
This field is located 60 miles east of Midland, Texas and was discovered in
1925. The field has produced over 435 million barrels of oil from wells less
than 4,000 feet deep. The Vista Partnership owns a 100% working interest in
eight of the nine leases (1,155 net acres) it operates in this field. The field
contains Vista's greatest concentration of both proved producing reserves (895
MBOE net) and proved undeveloped reserves (2,615 MBOE net). Accordingly, the
Vista Partnership plans to continue to devote a substantial portion of its
capital budget and operating resources to the ongoing development of these low
risk reserves. Since acquiring these leases less than three years ago, the Vista
Partnership has increased gross production by over 300% and expanded or
initiated new secondary recovery projects in the Glorieta formation on the Chalk
"A," E.O. Chalk and H.R. Clay leases, in the San Andres formation on the G.O.
Chalk lease, and in the Middle Clearfork formation on the Douthit, Reed "D" and
G.O. Chalk leases. In addition to future production
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increases from secondary recovery projects, the Vista Partnership expects
continued growth in production in this area from development drilling of the San
Andres formation on the G.O. Chalk, Chalk "A" and H.R. Clay leases. The Vista
Partnership owns an interest in 58 producing wells in this field.
Sharon Ridge Field, Scurry County, Texas
This field is located 80 miles northeast of Midland and has produced over
100 million barrels of oil from depths as shallow as 1700 feet. The Vista
Partnership owns a 100% working interest in the two leases (227 net acres) it
operates in this field, the Hardee lease and the House lease. These two adjacent
properties are located in the middle of the Sharon Ridge (1700 foot) field and
are surrounded by successful waterfloods. Since acquiring these properties in
1996, the Vista Partnership has successfully drilled the remaining locations
(nine wells) and implemented a full scale waterflood on the two leases. As of
January 1998, through infill drilling and early secondary response, production
has increased over 300% and Vista expects a continued gradual increase in
production as the reservoir is repressured and oil is swept towards the
producing wells. The Vista Partnership operates 17 producing wells in this field
with net proved producing reserves of 424 MBOE.
Cowden North Field, Andrews County, Texas
Although the majority of this field is located in Ector County, the Vista
Partnership owns Cowden North leases located in Andrews County, approximately 30
miles northwest of Midland, Texas. The Vista Partnership's most significant
lease in this field is the Block 9 Unit. This 1,120-acre Grayburg and San Andres
unit has produced over 2.35 million barrels of oil from 29 wells since
production began in 1959. Since acquiring this property in 1996, the Vista
Partnership has drilled three new producing wells which have increased
production by over 50%. The unit has eight producing wells with net proved
producing reserves of 262 MBOE. Four proved undeveloped locations (246 MBOE net)
remain to be drilled as well as several probable locations. The Vista
Partnership owns a 100% working interest (1,120 net acres) in this property.
Keystone Field, Winkler County, Texas
Keystone field is located 50 miles west of Midland and produces from nine
different formations with depths ranging from 3,000 feet to 9,000 feet. Since
discovery in 1927, the various reservoirs of Keystone field have produced over
319 million barrels of oil and 691 billion cubic feet of natural gas. The Vista
Partnership owns a 100% working interest in each of the two leases it operates
in the field, the Waddell lease (2,232 net acres, 35 producing wells) and the
Keystone Cattle Company lease (640 net acres, 21 producing wells). The Waddell
lease has net proved developed producing reserves of 478 MBOE and net proved
undeveloped reserves of 43 MBOE. As part of the ongoing process of high grading
the Vista Partnership's properties, the Keystone Cattle Company lease has been
identified as a likely candidate for future divestment.
Other Permian Basin Properties
One field with significant unproved reserve potential is the Caprito field
in Ward County, Texas. The Vista Partnership owns a 100% working interest in six
operated leases (1,884 net acres, 12 producing wells) in the field as well as a
9.4% non operated working interest in an additional nine leases (180 net acres,
nine producing wells) operated by Titan Exploration Inc. In addition to the
proved developed producing reserves (179 MBOE net from operated and non
operated) and proved undeveloped reserves (281 MBOE net) from this field, the
HBP acreage is located in the War Wink trend which has produced several recent
significant lower Cherry Canyon discoveries. These lower Cherry Canyon sands are
approximately 300 feet below the existing Cherry Canyon producing interval in
the Caprito field.
In Lea County, New Mexico, the Vista Partnership owns a 100% working
interest in two Queen sand waterflood units (collectively, 1,880 net acres, 34
producing wells) which produce from a depth of 3,400 feet. Proved producing
reserves for the two units are 190 MBOE net. Each of the two units have multiple
20-acre infill drilling locations that the Vista Partnership believes can be
developed during periods with favorable commodity prices.
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TEXAS GULF COAST
Generally
The Vista Partnership acquired several properties in the onshore Gulf Coast
area of South Texas in 1997 as part of the E.G. Acquisition. The Vista
Partnership plans to continue to add reserves in this gas rich province through
acquisitions and drilling. This area is the subject of very active 3-D seismic
acquisition and exploratory drilling by the industry. The Vista Partnership
intends to enhance the asset value of its existing acreage position in this area
by utilizing 3-D seismic when appropriate as well as expand its acreage
positions to pursue additional opportunities.
North Rucias Field, Brooks County, Texas
The Vista Partnership owns a 50% working interest in the Huerta lease (323
net acres, 1 well) and a 46% working interest in the Deluna lease (298 net
acres, 1 well) in this 70+ Bcf gas field which produces from the Vicksburg
formation at an approximate depth of 10,000 feet. Net proved developed producing
reserves from these two leases are 72 MBOE. The Vista Partnership is currently
purchasing existing 3-D seismic data and additional leasehold acreage in this
area to identify additional drilling opportunities, both on its own acreage and
on outside acreage, in this geologically complex reservoir. Drilling results in
this Vicksburg trend utilizing 3-D seismic have been very good with exploration
activity continuing on all sides of the Vista Partnership's acreage.
Orange Hill, South Field, Austin County, Texas
The Hillboldt lease (916 net acres) has one lower Wilcox well (net proved
developed producing reserves of 268 MBOE) in which the Vista Partnership owns a
91% working interest. The Vista Partnership has contributed some of its acreage
and entered into an Area of Mutual Interest agreement with another company for
the purpose of drilling additional lower Wilcox wells (net proved undeveloped
reserves of 385 MBOE) with the first well scheduled to begin in the summer of
1998. Recent Wilcox completions in this area are having success by adding more
productive sands and using larger stimulations than previous wells. In addition
to the Wilcox, the Vista Partnership plans to increase gas production by
exploiting a known shallow Frio sand with a second quarter 1998 well (net proved
undeveloped reserves of 43 MBOE) which will be a twin to the existing well.
Finding Cost. The Vista Partnership's acquisition and finding cost for 1997
was $3.17 per BOE as compared to the 1996 and 1995 finding costs of $2.55 and
$2.90 per BOE, respectively. The average acquisition and finding cost for the
three-year period was $2.90 per BOE.
Oil and Gas Mix. The Vista Partnership's reserves were 79% oil and 21% gas
at January 1, 1998 and its production mix was 76% oil and 24% gas during 1997.
Reserve and production mix may vary somewhat on a short-term basis as the Vista
Partnership takes advantage of market conditions and specific acquisition and
development opportunities. Management believes that a relative mix of
approximately 50% oil and 50% gas is in the best long-term interests of the
Vista Partnership and its equity owners. The Vista Partnership intends to
continue to look for opportunities to increase its gas reserves to achieve its
objective of a closer to 50-50 mix.
Drilling Activities. The Vista Partnership seeks to increase its oil and
gas reserves, production and cash flow by concentrating on drilling low-risk
development wells and by conducting additional development activities such as
recompletions on existing wells. In 1997, the company spent approximately $4.7
million on drilling and exploitation. The Vista Partnership has increased its
drilling budget in each of the last three years and projects a drilling budget
of $5.8 million for developmental and exploratory drilling and other
exploitation activities in 1998. At December 31, 1997, the Vista Partnership had
over 40 drilling locations to which proved reserves had been assigned. The vast
majority of these locations are on leases operated by the Vista Partnership and
located in several large fields in the Permian Basin of West Texas and
Southeastern New Mexico.
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Production. The following table sets forth the number of gross and net
productive and dry wells in which the Vista Partnership had an interest that
were drilled and completed during the years ended December 31, 1997 and 1996 and
the period from inception (September 21, 1995) to December 31, 1995. This
information should not be considered indicative of future performance, nor
should it be assumed that there is necessarily any correlation between the
number of productive wells drilled and the oil and gas reserves generated
thereby or the costs to the Vista Partnership of productive wells compared to
the costs of dry wells.
GROSS WELLS NET WELLS
------------------ ------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Productive Wells
Development.................................. 18 15 0 17.5 10.5 0
Exploratory.................................. 1 1 0 0.2 0.2 0
Dry Holes
Development.................................. 0 1 0 0.0 0.2 0
Exploratory.................................. 4 1 0 0.5 0.1 0
Total................................ 23 18 0 18.2 11 0
--- --- -- ---- ---- --
Success ratio(a)............................... 83% 89% -- 97% 97% --
- ---------------
(a) Represents those wells that were successfully completed as productive
wells.
Exploratory Activities. The Vista Partnership is selective with its
exploration budget and prefers exploration opportunities that have multiple well
potential with no less than 1 MMBOE of reserve potential in plays or areas that
the company views as having the ability to provide a near-term impact on the
equity value of the Vista Partnership. Since the primary component of Vista's
business plan is to acquire and exploit producing properties, exploration
activities represent approximately 15% of the Vista Partnership's annual capital
budget; however, that is not to say that the Vista Partnership does not
recognize the importance of exploration, but rather uses exploration as a value
enhancing tool to its existing asset base. The Vista Partnership has
successfully utilized 3-D seismic to record at least one new field discovery in
each of the last two years and plans to continue to apply this technology in its
exploration efforts. The Vista Partnership's expansion into the onshore Gulf
Coast region of South Texas was a deliberate move into a producing province that
can produce a high success rate on exploration efforts and add significant gas
reserves. Exploratory drilling involves greater risks of dry holes and loss of
capital than development drilling or enhanced recovery activities.
Marketing of Production and Significant Purchasers. Oil and gas production
from the Vista Partnership's properties is marketed consistent with usual and
customary industry practices which include the sale of oil at the wellhead to
third parties and the sale of gas at the wellhead to third parties. Sales prices
for both oil and gas production are negotiated based on factors normally
considered in the industry, such as the spot price for gas or the posted price
for oil, distance from the well to the pipeline, well pressure, estimated
reserves, quality of the gas or oil and prevailing supply conditions.
During 1997, the Vista Partnership marketed its natural gas and natural gas
products to a number of third party purchasers, none of which accounted for 10%
or more of the Vista Partnership's revenues. Oil sales are likewise made to a
number of third party purchasers. The primary purchasers of the company's crude
oil are Genesis Crude Oil, L.P. ("Genesis"), Fina Oil and Chemical Company
("Fina") and Sun Company, Inc. ("Sun"). Approximately 20%, 19% and 18% of the
Vista Partnership's 1997 oil sales volumes were made to Genesis, Fina and Sun,
respectively. The Vista Partnership is of the opinion that the loss of any one
purchaser would not have an adverse effect on its ability to sell its oil and
gas production.
Hedging Activities. The Vista Partnership periodically enters into
commodity derivative contracts (i.e., swaps and collars) in order to (i) reduce
the effect of the volatility of price changes on the commodities the Vista
Partnership produces and sells, (ii) support the Vista Partnership's annual
capital budgeting and expenditure plans, and (iii) lock in prices to protect the
economics related to certain capital projects. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Vista
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Partnership -- Results of Operations for the Six Months Ended June 30, 1998 and
1997 -- Hedging Activities."
Production, Price and Cost Data. The table below sets forth production,
price and cost data with respect to the Vista Partnership's properties for the
years ended December 31, 1997 and 1996 and the period from inception (September
21, 1995) to December 31, 1995. These amounts are calculated without making pro
forma adjustments for any acquisitions, divestitures or drilling activity that
occurred during the respective years.
1997 1996 1995
---------- ---------- ----------
Revenues......................................... $8,874,961 $5,537,720 $1,348,647
Costs and expenses:
Production costs............................... 3,688,695 2,544,567 728,540
Depletion...................................... 2,169,098 1,272,316 308,132
Exploration costs.............................. 97,211 273,843 --
---------- ---------- ----------
5,955,004 4,090,726 1,036,672
---------- ---------- ----------
Operating profit (excluding general and
administrative expenses and income taxes)... $2,919,957 $1,446,994 $ 311,975
========== ========== ==========
Production:
Oil (Bbls)..................................... 403,812 253,321 68,211
Gas (Mcf)...................................... 784,298 458,278 156,515
Total (BOE)............................ 534,528 329,701 94,297
Average Daily Production:
Oil (Bbls)..................................... 1,107 693 444
Gas (Mcf)...................................... 2,148 1,255 1,020
---------- ---------- ----------
Total (BOE)............................ 1,465 902 614
Average Oil Price (Per Bbl)...................... $ 17.63 $ 18.04 $ 15.70
Average Gas Price (Per Mcf)...................... $ 2.22 $ 2.19 $ 1.75
Costs (Per BOE):
Lease operating expense........................ $ 5.62 $ 6.35 $ 6.12
Production taxes............................... $ 1.28 $ 1.37 $ 1.61
---------- ---------- ----------
Total production costs................. $ 6.90 $ 7.72 $ 7.73
Depletion...................................... $ 4.06 $ 3.86 $ 3.27
Productive Wells. The following table sets forth the number of productive
oil and gas wells attributable to the Vista Partnership's properties as of
December 31, 1997, 1996 and 1995.
GROSS PRODUCTIVE WELLS NET PRODUCTIVE WELLS
---------------------- ----------------------
OIL GAS TOTAL OIL GAS TOTAL
---- ---- ------ ----- ---- -----
1997................................... 280 35 315 231.8 14.2 246.0
1996................................... 278 30 308 215.6 11.9 227.5
1995................................... 223 26 249 133.2 13.2 146.4
- ---------------
(a) Producing wells consist of producing wells and wells capable of production,
including shut-in wells. One or more completions in the same well bore are
counted as one well.
Leasehold Acreage. The following table sets forth information concerning
the Vista Partnership's developed and undeveloped leasehold acreage as of
December 31, 1997.
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
- ----------------------- -----------------------
GROSS ACRES NET ACRES GROSS ACRES NET ACRES
- ----------- --------- ----------- ---------
22,377 11,922 16,421 10,181
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Material Agreements
Contract Operating Agreement. Effective as of June 1, 1998, Midland's
wholly owned, operating subsidiary, MRO, and the Vista Operator, entered into a
Contract Operating Agreement (herein so called) which provides, among other
things, that the Operator will provide various contract operating services for
and on behalf of Midland's oil and gas properties through October 31, 1998 and
on a month-to-month basis thereafter unless otherwise terminated by either party
upon 30 days' prior written notice. For a more detailed description of such
agreement, see "The Merger -- Other Agreements" and "Certain Transactions."
Financial Advisory Agreement. Contemporaneously with the closing of the
Merger, Vista will enter into an Advisory Services Agreement with NGP. Pursuant
to the Advisory Services Agreement, Vista will pay NGP $75,000 per year and
reimburse NGP for certain expenses in consideration for certain consulting and
financial analysis services to be provided by NGP and its representatives.
Competition and Markets
Competition. The oil and gas industry is highly competitive. A large number
of companies and individuals engage in the exploration for and development of
oil and gas properties, and there is a high degree of competition for oil and
gas properties suitable for development or exploration. Acquisitions of oil and
gas properties have been an important element of the Vista Partnership's growth,
and Vista intends to continue to acquire oil and gas properties. The principal
competitive factors in the acquisition of oil and gas properties include the
staff and data necessary to identify, investigate and purchase such properties
and the financial resources necessary to acquire and develop them. Many of the
Vista Partnership's competitors are substantially larger and have greater
financial and other resources than the Vista Partnership.
Markets. The Vista Partnership's ability to produce and market oil and gas
profitably depends on numerous factors beyond the Vista Partnership's control.
The effect of these factors cannot be accurately predicted or anticipated. In
recent years, worldwide oil production capacity and gas production capacity in
certain areas of the United States have exceeded demand, with resulting declines
in the price of oil and gas. Although the Vista Partnership cannot predict the
occurrence of events that may affect oil and gas prices or the degree to which
oil and gas prices will be affected, it is possible that prices for any oil or
gas that the Vista Partnership produces will be lower than those currently
available. Any significant decline in the price of oil or gas would adversely
affect the Vista Partnership's revenues, profitability and cash flow and could,
under certain circumstances, result in a reduction in the carrying value of the
Vista Partnership's oil and gas properties.
Governmental Regulation
The Vista Partnership's oil and gas exploration, production and marketing
activities are subject to extensive laws, rules and regulations promulgated by
federal and state legislatures and agencies. Failure to comply with such laws,
rules and regulations can result in substantial penalties. The legislative and
regulatory burden on the oil and gas industry increases the Vista Partnership's
cost of doing business and affects its profitability. Although the Vista
Partnership believes it is in substantial compliance with all applicable laws
and regulations, because those laws and regulations are frequently amended,
interpreted and reinterpreted, the Vista Partnership is unable to predict the
future cost or impact of complying with such laws and regulations.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. These
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells and the regulation
of spacing, plugging and abandonment of such wells.
The FERC regulates interstate gas transportation rates and service
conditions, which affect the marketing of gas produced by the Vista Partnership,
as well as the revenues received by the Vista Partnership for sales of such
production. Since the mid-1980s, FERC has issued a series of orders, Order 636,
that have significantly altered the marketing and transportation of gas. Order
636 mandates a fundamental restructuring of interstate
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pipeline sales and transportation service, including the unbundling by
interstate pipelines of the sale, transportation, storage and other components
of the city-gate sales services such pipelines previously performed and the
provision of open-access transportation on a nondiscriminatory basis. One of
FERC's purposes in issuing the order was to increase competition within all
phases of the gas industry. Numerous parties have filed petitions for review of
Order 636, as well as orders in individual pipeline restructuring proceedings.
In July 1996, Order 636 was generally upheld on appeal, and the portions
remanded for further action do not appear to materially affect the Vista
Partnership. Because Order 636 may be modified as a result of the appeals, it is
difficult to predict the ultimate impact of the orders on the Vista Partnership
and its gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as wholesalers
of gas and has substantially increased competition and volatility in gas
markets.
The FERC frequently reexamines its transportation-related policies,
including the terms and conditions under which interstate pipeline shippers may
release interstate pipeline capacity for resale in the secondary market, the
appropriateness of the use of negotiated and market-based rates, and the
implementation of additional standardized terms and conditions for interstate
gas transmission. In April 1998, the FERC issued a new rule to further
standardize pipeline transportation tariffs that could adversely affect the
reliability of scheduled interruptible transportation service on some pipelines.
While any resulting FERC action would affect the Vista Partnership only
indirectly, any new rules and policy statements may have the effect of enhancing
competition in gas markets or affecting the cost or availability of pipeline
transportation.
The price the Vista Partnership receives from the sale of oil and gas is
affected by the cost of transporting products to markets. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. The Vista
Partnership is not able to predict with certainty the effect, if any, of these
regulations on its operations. However, the regulations may increase
transportation costs or reduce well head prices for oil and gas. See "Risk
Factors -- Governmental Regulation and Environmental Matters."
Environmental Matters
The Vista Partnership's operations and properties are, like the oil and gas
industry in general, subject to extensive and changing federal, state and local
laws and regulations relating to environmental protection, including the
generation, storage, handling, emission, transportation and discharge of
materials into the environment, and relating to safety and health. The recent
trend in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue. These laws and regulations may
require the acquisition of a permit or other authorization before construction
or drilling commences and for certain other activities; limit or prohibit
construction, drilling and other activities on certain lands lying within
wilderness and other protected areas; and impose substantial liabilities for
pollution resulting from the Vista Partnership's operations. The permits
required for various of the Vista Partnership's operations are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations are subject to fines or injunction, or both. In the opinion of
management, the Vista Partnership is in substantial compliance with current
applicable environmental laws and regulations, and the Vista Partnership has no
material commitments for capital expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental laws
and regulations or in interpretations thereof could have a significant impact on
the Vista Partnership, as well as the oil and gas industry in general.
CERCLA and comparable state statutes impose strict and arguably joint and
several liability on owners and operators of certain sites and on persons who
dispose of or arranged for the disposal of "hazardous substances" found at such
sites. Under CERCLA, such persons may be subject to liability for the costs of
cleaning up the hazardous substances, for damages to natural resources and for
the costs of certain health studies. Furthermore, it is not uncommon for the
neighboring land owners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances related
into the environment. RCRA and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting the
Vista
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Partnership's operations impose clean-up liability relating to petroleum and
petroleum related products. In addition, although RCRA classifies certain oil
field wastes as "non-hazardous," such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling, disposal and cleanup requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Vista Partnership, to prepare and
implement spill prevention, control countermeasure and response plans relating
to the possible discharge of oil into surface waters. OPA contains numerous
requirements relating to the prevention of and response to oil spills into
waters of the United States. For onshore and offshore facilities that may affect
waters of the United States, the OPA requires an operator to demonstrate
financial responsibility. Regulations are currently being developed under
federal and state laws concerning oil pollution prevention and other matters
that may impose additional regulatory burdens on the Vista Partnership. In
addition, the Clean Water Act and analogous state laws require permits to be
obtained to authorize discharge into surface waters or to construct facilities
in wetland areas. With respect to certain of its operations, the Vista
Partnership is required to maintain such permits or meet general permit
requirements. The EPA recently adopted regulations concerning discharges of
storm water runoff. This program requires covered facilities to obtain
individual permits, participate in a group or seek coverage under an EPA general
permit. The Vista Partnership believes that it will be able to obtain, or be
included under, such permits, where necessary, and to make minor modifications
to existing facilities and operations that would not have a material effect on
the Vista Partnership.
The Vista Partnership has acquired leasehold interests in numerous
properties that for many years have produced oil and gas. Although the previous
owners of these interests have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties. In addition, some of the
Vista Partnership's properties are operated by third parties over whom the Vista
Partnership has no control. Notwithstanding the Vista Partnership's lack of
control over properties operated by others, the failure of the operator to
comply with applicable environmental regulations may, in certain circumstances,
adversely impact the Vista Partnership. See "Risk Factors -- Governmental
Regulation and Environmental Matters."
Employees
On September 11, 1998, the Vista Partnership had 23 full-time employees.
None is represented by any labor union. The Vista Partnership believes that its
relations with its employees are good.
Litigation
The Vista Partnership is not a party to any material legal proceedings.
MANAGEMENT OF THE VISTA PARTNERSHIP
Directors and Executive Officers
The Vista Partnership is managed by the board of directors of the General
Partner. Set forth below is certain information concerning the current directors
and executive officers of the General Partner.
NAME AGE POSITION
---- --- --------
C. Randall Hill... 39 Chairman of the Board and Chief Executive Officer
Steven D. Gray.... 39 President and Director
Kenneth A. 35 Director
Hersh...........
David R. Albin.... 39 Director
John S. Foster.... 40 Director
Set forth below is a description of the backgrounds of the current
directors and executive officers of the General Partner.
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C. Randall Hill, a graduate of the University of New Mexico with a B.B.A.
and the University of Tulsa with a J.D., has served as Chairman of the Board and
Chief Executive Officer of the General Partner of the Vista Partnership and its
predecessor, Lobo Resources, Inc., since its inception in December 1992. From
1985 through November 1992, Mr. Hill practiced law with the law firms of Weil,
Gotshal & Manges and Johnson & Swanson in Dallas, Texas.
Steven D. Gray, a graduate of Texas Tech University with a B.S. degree in
Petroleum Engineering, has served as President and a director of the General
Partner of the Vista Partnership and its predecessor, Lobo Resources, Inc.,
since its inception in December 1992. From 1982 to 1989, Mr. Gray held several
petroleum engineering positions with Texas Oil and Gas Corp. From 1989 to 1992,
Mr. Gray was a petroleum operations and reservoir engineer with Bettis, Boyle
and Stovall, a privately held, independent oil and gas company in Graham, Texas.
Kenneth A. Hersh, a graduate of Princeton University with a B.A. and
Stanford University Graduate School of Business with an M.B.A., has served as a
director of the General Partner since its inception in 1995. Since 1989, Mr.
Hersh has been a manager of the NGP investment funds, which were organized to
make direct equity investments in the oil and gas industry. From 1985 to 1987,
Mr. Hersh was employed as a member of the energy group of Morgan Stanley & Co.
investment banking division. Mr. Hersh serves as a director of Pioneer Natural
Resources Company, HS Resources, Inc., Titan Exploration, Inc. and Petroglyph
Energy, Inc.
David R. Albin, a graduate of Stanford University with a B.S. in Physics
and Stanford University Graduate School of Business with an M.B.A., has served
as a director of the General Partner since its inception in 1995. Since 1988,
Mr. Albin has been a manager of the NGP investment funds, which were organized
to make direct equity investments in the oil and gas industry. From December
1984 until November 1988, Mr. Albin was employed by Bass Investment Limited
Partnership, where he was also responsible for portfolio management. Mr. Albin
serves as a director of Titan Exploration, Inc. and Petroglyph Energy, Inc.
John S. Foster, a graduate of Williams College with a B.A. and New York
University's Stern School of Business with an M.B.A., has served as a director
of the General Partner since its inception in 1995. Since April 1989, Mr. Foster
has been the chief financial officer of the NGP investment funds, which were
organized to make direct equity investments in the oil and gas industry. From
August 1986 to March 1989, Mr. Foster was employed in the corporate bond
research department of Credit Suisse First Boston Corporation, where he focused
on the oil and gas industry.
Committees of the Board
No official committees of the board of directors of the General Partner
have been established.
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Director Compensation
Pursuant to Article 3, Section 11 of the bylaws of the General Partner,
each non-employee director of the General Partner receives an annual directors
fee of $10,000, paid quarterly in arrears, and is also entitled to be reimbursed
by the General Partner for all reasonable out-of-pocket expenses incurred in
connection with his services as a director of the General Partner.
Executive Compensation
VISTA PARTNERSHIP
CONTRIBUTION TO
EMPLOYMENT RETIREMENT
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ACCOUNTS
--------------------------- ---- ---------- --------- ---------------------
C. Randall Hill...................... 1997 $110,000 $25,000 $2,200
1996 $105,000 $15,000 --
1995 $ 17,500 -- --
Steven D. Gray....................... 1997 $110,000 $25,000 $2,200
1996 $105,000 $15,000 --
1995 $ 17,500 -- --
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CERTAIN TERMS OF THE MERGER AGREEMENT, THE VISTA EXCHANGE AGREEMENT AND THE
MIDLAND EXCHANGE AGREEMENT
THE FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, THE VISTA EXCHANGE
AGREEMENT AND THE MIDLAND EXCHANGE AGREEMENT, COPIES OF WHICH ARE ATTACHED AS
APPENDICES A, B AND C, RESPECTIVELY, TO THIS PROXY STATEMENT/PROSPECTUS AND ARE
INCORPORATED BY REFERENCE HEREIN.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger
by the stockholders of Midland and the satisfaction or waiver of the other
conditions to the Merger, Merger Sub will be merged with and into Midland in
accordance with Texas law, whereupon the separate existence of Merger Sub will
cease and Midland will be the Surviving Subsidiary of the Merger. At the
Effective Time, the conversion of Midland Common Stock will be effected as
described below. The Articles of Incorporation of Midland, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
of the Surviving Subsidiary. The Bylaws of Merger Sub, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Subsidiary.
As a result of the Merger, (a) each issued and outstanding share of Midland
Common Stock will be converted into the right to receive one share of Vista
Common Stock, (b) each Midland Stock Option (other than the Midland Exchange
Stock Options) and each outstanding Midland Warrant shall remain outstanding
following the Effective Time, at which time such options and warrants will be
assumed by Vista and will be exercisable for shares of Vista Common Stock and
(c) each Midland Common Stock Warrant shall remain outstanding following the
Effective Time, at which time such warrants will be assumed by Vista and will be
exercisable for shares of Vista Common Stock.
EFFECTIVE TIME
Following the adoption of the Merger Agreement and subject to satisfaction
or waiver of certain terms and conditions, including conditions to closing,
contained in the Merger Agreement, the Merger will become effective immediately
upon the filing of the Articles of Merger with the Texas Secretary of State, or
at such later time specified in the Articles of Merger.
CERTAIN TERMS OF THE VISTA EXCHANGE AGREEMENT AND THE MIDLAND EXCHANGE AGREEMENT
The Vista Exchange. During May and June of 1998, and as contemplated by the
Merger Agreement, the holders of all of the outstanding GP Common Stock and the
holders of all of the outstanding Partnership Interests entered into the Vista
Exchange Agreement. Pursuant to the terms of such agreement, at the Effective
Time, without any action on the part of any holder thereof, (a) each share of GP
Common Stock that is issued and outstanding prior to the Effective Time shall be
exchanged for (i) a number of shares of Vista Common Stock equal to the Vista GP
Conversion Stock Number (being 1.60089817) and (ii) a Vista Warrant that is
exercisable for a number of shares of Vista Common Stock equal to the Vista GP
Conversion Warrant Number (being 1.16511028) and (b) each Partnership Interest
that is issued and outstanding prior to the Effective Time shall be exchanged
for (i) a number of shares of Vista Common Stock equal to the Vista LP
Conversion Stock Number (being 117,674.06) and (ii) a Vista Warrant that is
exercisable for a number of shares of Vista Common Stock equal to the Vista LP
Conversion Warrant Number (being 85,641.46). As provided in the Vista Exchange
Agreement, any fractional Partnership Interest shall be likewise exchanged on a
pro rata basis.
Pursuant to the terms of the Vista Exchange Agreement, the holders of GP
Common Stock and Partnership Interests will receive 11,778,479 shares of Vista
Common Stock, representing 72.5% of such shares outstanding at the Effective
Time, and warrants exercisable for 8,564,146 shares of Vista Common Stock,
representing 34.5% of such shares outstanding at the Effective Time (assuming
for purposes of this calculation exercise of all such warrants as of such time).
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The Midland Exchange. During May and June of 1998, and as contemplated by
the Merger Agreement, Sam R. Brock, a director of Midland, Darrell M. Dillard, a
director of Midland, Robert R. Donnelly, president and a director of Midland,
Wayne M. Whitaker, a director of Midland, John Q. Adams, an advisory director of
Midland and Marilyn D. Wade, corporate secretary of Midland, who hold all issued
and outstanding Midland Exchange Stock Options granted pursuant to the Midland
Directors Plan, and 137,931 options granted pursuant to the Midland Incentive
Plan, entered into the Midland Exchange Agreement. Pursuant to the terms of such
agreement, at the Effective Time, without any action on the part of any holder
thereof, each Midland Exchange Stock Option will be exchanged for a Vista
Warrant that is exercisable for that whole number of shares of Vista Common
Stock (to the nearest whole share) equal to the product of (x) .725 times (y)
the number of shares of Vista Common Stock into which the shares of Midland
Common Stock subject to such Midland Exchange Stock Option would be converted
pursuant to the Merger. Pursuant to the Midland Exchange Agreement, no payment
shall be made for fractional interests. Pursuant to the terms of the Midland
Exchange Agreement, each Midland Exchange Stock Option subject thereto shall be
terminated immediately following its exchange for a Vista Warrant.
Pursuant to the terms of the Midland Exchange Agreement, the holders of
Midland Exchange Stock Options will receive warrants exercisable for 995,375
shares of Vista Common Stock, representing 5.8% of such shares outstanding at
the Effective Time (assuming for purposes of this calculation exercise of all
such warrants as of such time).
CONDITIONS TO THE MERGER
Conditions to Obligation of Each Party to Effect the Merger
The respective obligation of the Vista Partnership, Vista and Midland to
effect the Merger is subject to the satisfaction prior to consummation of the
Merger of the following conditions:
Midland Stockholder Approval. The Merger and the Merger Agreement shall
have been approved and adopted by the holders of at least two-thirds of the
outstanding shares of Midland Common Stock. Directors and executive officers of
Midland, and their affiliates, hold 21.7% of the outstanding shares of Midland
Common Stock entitled to vote on the Merger Agreement and the Merger.
Fairness Opinion. The fairness opinion delivered by Dain Rauscher shall
have been confirmed in writing and shall not have been withdrawn, revoked or
modified.
Tax Opinion. The tax opinion from Arthur Andersen LLP to Midland regarding
the federal income tax consequences of the Merger shall not have been withdrawn,
revoked or modified
Stock Exchange Listing. The shares of Vista Common Stock issuable pursuant
to the Merger and the Vista Exchange and the shares of Vista Common Stock to be
issued upon exercise of stock options or warrants shall have been authorized for
listing on the ASE, subject to official notice of issuance.
Other Approvals. All governmental consents, approvals, permits and
authorizations required to have been obtained prior to the Effective Time shall
have been made or obtained.
Securities Law Matters. The Registration Statement shall have become
effective under the Securities Act and shall be effective at the Effective Time,
and no stop order suspending such effectiveness shall have been issued, no
action, suit, proceeding or investigation by the Commission to suspend such
effectiveness shall have been initiated and be continuing, and all necessary
approvals under state securities laws relating to the issuance or trading of the
Vista Common Stock to be issued in the Merger and the Vista Exchange shall have
been received.
No Injunctions or Restraints. No temporary restraining order, preliminary
or permanent injunction, or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger and the Vista Exchange shall be in effect.
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Additional Conditions to Obligations of the Vista Partnership and Vista
The obligations of the Vista Partnership and Vista to effect the Merger are
subject to the satisfaction of the following conditions, any or all of which may
be waived in whole or in part by the Vista Partnership:
Representations and Warranties. Each of the representations and warranties
of Midland set forth in the Merger Agreement shall be true and correct in all
material respects (provided that any representation or warranty of Midland
contained therein that is qualified by a materiality standard or a material
adverse effect qualification shall not be further qualified thereby) as of the
date of the Merger Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made on
and as of the Closing Date, and the Vista Partnership shall have received a
certificate signed on behalf of Midland by the chief executive officer and the
chief financial officer to such effect.
Performance of Covenants and Agreements. Midland shall have performed in
all material respects all covenants and agreements required to be performed by
it under the Merger Agreement at or prior to the Closing Date, and the Vista
Partnership shall have received a certificate signed on behalf of Midland by the
chief executive officer and the chief financial officer of Midland to such
effect.
Accounting Comfort Letter. The Vista Partnership shall have received a
letter from Grant Thornton LLP, Midland's independent auditors, of the kind
contemplated by the Statement of Auditing Standards with respect to Letters to
Underwriters promulgated by the American Institute of Certified Public
Accountants, dated as of a date within two business days prior to the Closing
Date, in form and substance reasonably satisfactory to the Vista Partnership, in
connection with the procedures undertaken by them with respect to the financial
statements of Midland and its consolidated subsidiaries included (or
incorporated by reference) in the Registration Statement and the other matters
contemplated by such Statement of Auditing Standards and customarily included in
similar letters relating to transactions similar to the Merger.
Midland Option Exercise Agreements. Midland shall have received an Option
Exercise Agreement executed by each of the holders of issued and outstanding
Midland Stock Options who is an executive officer or director of Midland.
Additional Conditions to Obligation of Midland
The obligation of Midland to effect the Merger is subject to the
satisfaction of the following conditions, any or all of which may be waived in
whole or in part by Midland:
Representations and Warranties. Each of the representations and warranties
of the Vista Partnership, Vista and Merger Sub set forth in the Merger Agreement
shall be true and correct in all material respects (provided that any
representation or warranty of the Vista Partnership, Vista or Merger Sub
contained therein that is qualified by a materiality standard or a material
adverse effect qualification shall not be further qualified thereby) as of the
date of the Merger Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made on
and as of the closing Date, and Midland shall have received a certificate signed
on behalf of the Vista Partnership by the General Partner to such effect.
Performance of Covenants and Agreements. The Vista Partnership, Vista and
Merger Sub shall have performed in all material respects all covenants and
agreements required to be performed by them under the Merger Agreement at or
prior to the Closing Date, and Midland shall have received a certificate signed
on behalf of the Vista Partnership by the General Partner to such effect.
Accounting Comfort Letter. Midland shall have received a letter from Arthur
Andersen LLP, the Vista Partnership's independent certified public accountants,
of the kind contemplated by the Statement of Auditing Standards with respect to
Letters to Underwriters promulgated by the American Institute of Certified
Public Accountants, dated as of a date within two business days prior to the
Closing Date, in form and substance reasonably satisfactory to Midland, in
connection with the procedures undertaken by them with respect to the financial
statements of the Vista Partnership and its consolidated subsidiaries included
in the Registration
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Statement and the other matters contemplated by such Statement of Auditing
Standards and customarily included in similar letters relating to transactions
similar to the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
each of the Vista Partnership and Midland relating to, among other things, (i)
each of their and certain of their respective subsidiaries' organization and
similar corporate matters, (ii) each of their capital structures and the capital
structures of Vista and Merger Sub, (iii) the authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters with respect to the Vista Partnership, Vista, Merger Sub and Midland,
and the absence of conflicts, violations of or defaults under the charters, as
amended, or bylaws, as amended of each of the Vista Partnership and Midland, or
any loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
the Vista Partnership or Midland or any of their respective subsidiaries, or any
joint venture or other ownership arrangement of the Vista Partnership or
Midland, (iv) the documents and reports filed by Midland with the Commission and
the accuracy of the information contained therein, (v) the accuracy of the
information provided by each of them with respect to the Registration Statement
and this Proxy Statement/Prospectus, (vi) the absence of certain events,
changes, or effects, (vii) the absence of undisclosed material liabilities,
(viii) compliance with certain laws, (ix) litigation, (x) taxes, (xi) retirement
and other employee plans and matters relating to the Employee Retirement Income
Security Act of 1974, as amended, (xii) labor matters, (xiii) intellectual
property matters, (xiv) environmental matters, (xv) the maintenance of
insurance, (xvi) title to their respective properties, (xvii) their respective
reserve reports, (xviii) their respective oil and gas operations, (xix) their
respective sales and purchases agreements, (xx) Midland's fairness opinion from
Dain Rauscher, (xxi) the stockholder vote by Midland stockholders required to
approve the Merger Agreement, and (xxii) broker's or similar fees.
CERTAIN COVENANTS; CONDUCT OF BUSINESS OF THE VISTA PARTNERSHIP AND MIDLAND
During the period from the date of the Merger Agreement and continuing
until the Effective Time, (i) the Vista Partnership agrees as to itself and
Vista (except as expressly contemplated or permitted by the Merger Agreement, or
to the extent that Midland shall otherwise consent in writing) and (ii) Midland
agrees as to itself and its subsidiaries (except as expressly contemplated or
permitted by the Merger Agreement, or to the extent that Vista shall otherwise
consent in writing) (for purposes of this section, Vista and Midland each being
a "Party") as follows:
Ordinary Course. Each Party and its subsidiaries shall carry on its
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted and shall use all commercially reasonable efforts
to preserve intact its present business organizations, keep available the
services of its current officers and employees and endeavor to preserve its
relationships with customers, suppliers and others having business dealings with
it to the end that its goodwill and ongoing business shall not be impaired in
any material respect at the Effective Time.
Dividends, Changes in Stock. Except as contemplated by the Merger
Agreement, neither Party shall, nor shall either Party permit its subsidiaries
to, (i) split, combine or reclassify any of its outstanding capital stock,
partnership interests or other securities, (ii) declare, set aside or pay any
dividends or other distributions (whether payable in cash, property or
securities) with respect to its capital stock, or (iii) purchase, cancel,
retire, redeem or otherwise acquire any of its outstanding equity securities or
other securities.
Issuance of Securities. Neither Party shall, nor shall either Party permit
its subsidiaries to, issue, sell or agree to issue or sell any securities,
including its capital stock or other equity securities, any rights, options or
warrants to acquire its equity securities, or securities convertible into or
exchangeable or exercisable for its equity securities (other than shares of
Midland Common Stock issued pursuant to the exercise of any outstanding Midland
stock options or warrants).
Governing Documents. No Party shall amend its certificate or articles of
incorporation or bylaws or other organizational documents.
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No Acquisitions. Neither Party shall, nor shall either Party permit its
subsidiaries to, acquire any corporation, partnership or other business entity
or any interest therein (other than interests in joint ventures, joint operation
or ownership arrangements or tax partnerships acquired in the ordinary course of
business).
No Dispositions. Neither Party shall, nor shall either Party permit its
subsidiaries to, (i) sell, lease, sublease, transfer, or otherwise dispose of or
mortgage, pledge or otherwise encumber any oil and gas interests that,
individually or in the aggregate, have a value at the time of such sale, lease,
sublease, transfer of disposition of $50,000 or more or any other assets that,
individually or in the aggregate, have a value at the time of such sale, lease,
sublease, transfer or disposition of $50,000 or more (other than the sale of
hydrocarbons in the ordinary course of business), (ii) farm-out any oil and gas
interest of the Vista Partnership or Midland, as applicable, or interest
therein, (iii) sell, transfer or otherwise dispose of or mortgage, pledge or
otherwise encumber any securities of any other person or (iv) make any material
loans, advances or capital contributions to, or investments in, any person
(other than loans or advances in the ordinary course of business and consistent
with past practices).
No Dissolution, Etc. Neither Party shall, nor shall either Party permit its
subsidiaries to, liquidate, wind-up or dissolve (or suffer any liquidation or
dissolution).
Indebtedness. Neither Party shall, nor shall either Party permit its
subsidiaries to, (i) incur any indebtedness for borrowed money or any other
obligation or liability (other than current liabilities incurred in the ordinary
course of business and consistent with past practices) in excess of its then
current borrowing capacity under its existing senior bank facilities, (ii)
assume, endorse (other than endorsements of negotiable instruments in the
ordinary course of business), guarantee or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the liabilities or
obligations of any person or (iii) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing.
Certain Employee Matters. Neither Party shall, nor shall either Party
permit its subsidiaries to, (i) enter into, or otherwise become liable or
obligated under or pursuant to (x) any employee benefit, pension or other plan,
(y) any other stock option, stock purchase, incentive or deferred compensation
plans or arrangements or other fringe benefit plan or (z) any consulting,
employment, severance, termination or similar agreement with any person, or
amend or extend any such plan, arrangement or agreement, (ii) hire any key
employee, except for payments made pursuant to terms disclosed in the Merger
Agreement, grant, or otherwise become liable for or obligated to pay, any
severance or termination payments, bonuses or increases in compensation or
benefits (other than payments, bonuses or increases that are mandated by the
terms of written agreements existing as of the date hereof or that are paid in
the ordinary course of business, consistent with past practices, and not
individually or in the aggregate material in amount) to, or forgive any
indebtedness of, any employee or consultant or (iii) enter into any contract,
agreement, commitment or arrangement to do any of the foregoing.
Insurance. Each Party shall, and shall cause its subsidiaries to, maintain
in full force and effect the policies or binders of insurance described in the
Merger Agreement.
Affiliate Transactions. Neither Party shall, nor shall either Party permit
its subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any assets,
unless otherwise permitted by the Merger Agreement, or the rendering of any
service) with any affiliate of such Party (other than any of its Subsidiaries)
on terms that are less favorable to such Party or any of its subsidiaries, as
the case may be, than those that could be obtained at the time from unaffiliated
third parties.
No Solicitation by the Vista Partnership. From and after the date of the
Merger Agreement, the Vista Partnership will not, and will not authorize or
permit any of its directors, officers, general partner, employees, agents,
advisors (including legal, accounting and financial advisors), affiliates or
other representatives or those of any of its subsidiaries (collectively, "Vista
Partnership Representatives") to, directly or indirectly, solicit or encourage
(including by way of providing information) any prospective acquiror or the
invitation or submission of any inquiries, proposals or offers or any other
efforts or attempts that constitute, or may reasonably be expected to lead to,
any proposal or offer, other than a proposal or offer by Midland or any of its
affiliates, for, or that could be reasonably expected to lead to, a tender or
exchange offer, a merger,
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consolidation or other business combination involving the Vista Partnership or
Vista or any proposal to acquire in any manner a substantial equity interest in,
or any substantial portion of the assets of, the Vista Partnership or Vista (a
"Vista Acquisition Proposal") from any person or engage in any discussions or
negotiations with respect thereto or otherwise cooperate with or assist or
participate in, or facilitate any such proposal; provided, however, that,
notwithstanding any other provision of the Merger Agreement, the General Partner
may take and disclose to the limited partners of the Vista Partnership a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act. The
Vista Partnership shall immediately cease and cause to be terminated any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Vista Partnership or
any Vista Partnership Representatives with respect to any Vista Acquisition
Proposal existing on the date of the Merger Agreement. The Vista Partnership
will promptly notify in writing Midland of any receipt by the Vista Partnership
or Vista of a request from a third party for information concerning the Vista
Partnership or Vista and its business, properties and assets or the receipt of
any Vista Acquisition Proposal, including the identity of the person or group
requesting such information or making such Vista Acquisition Proposal, and the
material terms and conditions of any Vista Acquisition Proposal.
No Solicitation by Midland. From and after the date of the Merger
Agreement, Midland will not, and will not authorize or permit any of its
directors, officers, general partner, employees, agents, advisors (including
legal, accounting and financial advisors), affiliates or other representatives
or those of any of its subsidiaries (collectively, "Midland Representatives")
to, directly or indirectly, solicit or encourage (including by way of providing
information) any prospective acquiror or the invitation or submission of any
inquiries, proposals or offers or any other efforts or attempts that constitute,
or may reasonably be expected to lead to, any proposal or offer, other than a
proposal or offer by the Vista Partnership or any of its affiliates, for, or
that could be reasonably expected to lead to, a tender or exchange offer, a
merger, consolidation or other business combination involving Midland or any of
its subsidiaries or any proposal to acquire in any manner a substantial equity
interest in, or any substantial portion of the assets of, Midland or any of its
subsidiaries (a "Midland Acquisition Proposal") from any person or engage in any
discussions or negotiations with respect thereto or otherwise cooperate with or
assist or participate in, or facilitate any such proposal; provided, however,
that, notwithstanding any other provision of the Merger Agreement, Midland's
Board of Directors may take and disclose to the stockholders of Midland a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act.
Midland shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted heretofore by Midland or any Midland Representatives
with respect to any Midland Acquisition Proposal existing on the date of the
Merger Agreement. Midland will promptly notify in writing the Vista Partnership
of any receipt by Midland or any of its subsidiaries of a request from a third
party for information concerning Midland (or any of its subsidiaries) and its
business, properties and assets or the receipt of any Midland Acquisition
Proposal, including the identity of the person or group requesting such
information or making such Midland Acquisition Proposal, and the material terms
and conditions of any Midland Acquisition Proposal.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, the Vista Partnership, Vista and Midland
have agreed that (i) they will cooperate and promptly prepare the Registration
Statement and the Vista Partnership shall cause Vista to file the Registration
Statement with the Commission at the earliest practicable date, (ii) they will
each afford to the other access to their respective officers, properties and
other information as the other party may reasonably request, (iii) Midland will
call a meeting of its stockholders to be held as promptly as practicable, (iv)
the Vista Partnership and Midland will each provide a list of persons who may be
"affiliates" as defined in Rule 145 of the Securities Act, and shall use its
reasonable best efforts to obtain from each person an undertaking not to
transfer shares of Vista Common Stock issued to such person pursuant to the
Merger except pursuant to an effective registration statement or in compliance
with Rule 145, (v) Vista will use its reasonable best efforts to cause the
shares of Vista Common Stock to be issued in the Merger to be approved for
listing on the ASE, subject to official notice of issuance, (vi) they will
consult with each other regarding the issuance of press releases or any other
public statements, (vii) they will notify each other of any action reasonably
likely to result in any of the respective representations and warranties being
untrue or inaccurate or
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in any of the conditions to the Merger not being satisfied, (viii) after the
Effective Time, Vista will file with the Commission a registration statement on
Form S-8 with respect to shares of Vista Common Stock to be issued upon exercise
of the Midland Stock Options, (ix) Vista shall enter into registration rights
agreements with (a) each of the stockholders of the General Partner and each of
the limited partners of Vista immediately prior to the Vista Exchange and (b)
each holder of a Midland Exchange Stock Option, (x) Midland shall obtain written
resignations from each of its officers and directors effective as of the
Effective Time, (xi) Vista shall approve and adopt the Vista Energy Resources,
Inc. 1998 Key Employees Stock Option Plan (the "Vista Long-Term Incentive
Plan"), (xii) Midland will use its reasonable best efforts to cause each of the
holders of issued and outstanding Midland Stock Options (other than Midland
Exchange Stock Options) to execute an Option Exercise Agreement and (xiii) for a
period of one year following the Effective Time, except for the grant of options
pursuant to the terms of the Vista Long-Term Incentive Plan and the issuance of
shares of Vista Common Stock underlying such options or the Vista Warrants,
Vista shall not issue shares of Vista Common Stock to any affiliate of Vista for
consideration that is less than fair market value of the securities issued.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto at any time
before or after approval of the Merger and the Merger Agreement by the
stockholders of Midland and the Vista Exchange by the partners of the Vista
Partnership, provided, however, that after any such approval, no amendment shall
be made that by law requires further approval by such stockholders or partners
without such further approval. The Merger Agreement may not be amended except by
a written instrument signed on behalf of each of the parties thereto.
At any time prior to the Effective Time, the parties to the Merger
Agreement may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
thereto, (ii) waive any inaccuracies in the representations and warranties
contained therein or in any document delivered pursuant thereto, and (iii) waive
performance of any of the covenants or agreements, or satisfaction of any of the
conditions, contained therein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after approval of the
Merger and the Merger Agreement by the stockholders of Midland:
(a) By mutual written consent of Vista and Midland;
(b) By either Midland or the Vista Partnership if (i) the Merger has not
been consummated by October 30, 1998 (provided, however, that the right to
terminate the Merger Agreement pursuant to this clause (i) shall not be
available to any party whose breach of any representation or warranty or failure
to perform any covenant or agreement under the Merger Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before such
date), (ii) any Governmental Entity shall have issued an order, decree, or
ruling or taken any other action permanently restraining, enjoining, or
otherwise prohibiting the Merger and such order, decree, ruling, or other action
shall have become final and nonappealable (provided, however, that the right to
terminate the Merger Agreement pursuant to this clause (ii) shall not be
available to any party until such party has used all reasonable efforts to
remove such injunction, order, or decree), or (iii) any required approval of the
stockholders or partners of a party, as applicable, shall not have been obtained
by reason of the failure to obtain the required vote upon a vote held at a duly
held meeting of stockholders of Midland, or at any adjournment thereof
(provided, however, that Midland shall not have the right to terminate the
Merger Agreement pursuant to this clause (iii) if the Vista Partnership then has
the right to terminate the Merger Agreement pursuant to subsection (e) described
below);
(c) By the Vista Partnership if (i) there has been a breach of the
representations and warranties made by Midland in the Merger Agreement or (ii)
Midland has failed to comply in any material respect with any of
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its covenants or agreements contained in the Merger Agreement and such failure
has not been, or cannot be, cured within a reasonable time after notice and
demand for cure thereof which period in no event shall extend beyond October 30,
1998.
(d) By Midland if (i) there has been a breach of the representations and
warranties made by the Vista Partnership, Vista or Merger Sub in the Merger
Agreement, (ii) the Vista Partnership, Vista or Merger Sub has failed to comply
in any material respect with any of its covenants or agreements contained in the
Merger Agreement, and, in either such case, such breach or failure has not been,
or cannot be, cured within a reasonable time after notice and a demand for cure
thereof which period in no event shall extend beyond October 30, 1998;
(e) By the Vista Partnership if (i) the Midland Board shall have failed to
recommend adoption of the Merger and the Merger Agreement at the time the Proxy
Statement/Prospectus is first mailed to stockholders of Midland or shall have
amended or withdrawn any such recommendation and such recommendation is not
reinstated in its prior form within five business days after such amendment or
withdrawal or (ii) (x) the stockholders of Midland fail to duly and validly
adopt the Merger and the Merger Agreement at the Midland Meeting or any
adjournment thereof or (y) the Midland Meeting does not occur for any reason
(other than as a result of a breach of this Agreement by the Vista Partnership)
prior to October 29, 1998 (and if this Agreement is terminated pursuant to this
subsection, the Vista Partnership shall have the right to receive from Midland,
and Midland agrees to pay to the Vista Partnership, an amount of cash equal to
$400,000, which amount shall be inclusive of expenses (in an amount up to
$300,000) as set forth in the Merger Agreement);
(f) By the Vista Partnership after June 22, 1998, if on such date Midland
shall not have received an Option Exercise Agreement executed by each of the
holders of issued and outstanding Midland Stock Options who is an executive
officer of director of Midland;
(g) By Midland after June 22, 1998, if on such date the Vista Partnership
shall not have received an Exchange Agreement from each holder of GP Common
Stock and each holder of a Partnership Interest.
EXPENSES AND TERMINATION FEE
Each party to the Merger Agreement is required to pay all fees and expenses
incurred by it in connection with the Merger Agreement and the consummation of
the transactions contemplated thereby, whether or not the Merger and the Vista
Exchange shall be consummated, except that (i) the fees and expenses (including
fees and expenses of such parties' attorneys and accountants) incurred by a
party terminating the Merger Agreement and the transactions contemplated therein
(including fees and expenses incurred in connection with the preparation and
filing of the Registration Statement with the Commission and the fees and
expenses incurred in connection with the printing, mailing and distribution of
the Proxy Statement/Prospectus) shall be reimbursed, borne and paid (a) if the
Merger Agreement is terminated by Midland pursuant to item (d) of
"-- Termination," by the Vista Partnership up to $300,000, and (b) if the Merger
Agreement is terminated by the Vista Partnership pursuant to item (c) of
"-- Termination," by Midland up to $300,000 and (ii) if the Merger and the Vista
Exchange are consummated all fees and expenses (including fees and expenses of
such parties' attorneys and accountants) incident to preparing for, entering
into and carrying out the Merger Agreement and the consummation of the
transactions contemplated thereby shall be borne and paid by Vista. The
provisions for reimbursement of fees and expenses in the Merger Agreement shall
be in addition to and not a limitation upon the liabilities or obligations of a
party as a result of a termination pursuant to items (c) or (d) of
"-- Termination."
If the Merger Agreement is terminated pursuant to section (e) above, the
Vista Partnership shall have the right to receive from Midland, and Midland
agrees to pay to the Vista Partnership, an amount of cash equal to $400,000,
which amount shall be inclusive of expenses (in an amount up to $300,000) as set
forth in the Merger Agreement).
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INDEMNIFICATION
Indemnification by the Surviving Subsidiary. The Merger Agreement provides
that from and after the Effective Time, the Surviving Subsidiary shall indemnify
and hold harmless each person and shall advance expenses incurred by each person
who is, has been at any time prior to the date hereof, or becomes prior to the
Effective Time an officer or director of Midland or any of its subsidiaries
(collectively, the "Midland Indemnified Parties") against all losses, claims,
damages, liabilities, costs or expenses (including attorney's fees), judgments,
and amounts paid in settlement in connection with any claim, action, suit,
proceeding, or investigation arising out of or pertaining to acts or omissions,
or alleged acts or omissions, by him in his capacity as an officer or director
of Midland or any of its subsidiaries, which acts or omissions occurred prior to
the Effective Time, to the full extent permitted by applicable law and by the
Bylaws of Midland in effect prior to the Effective Time, which Bylaws make
mandatory the indemnification of and advancement of expenses to all Midland
Indemnified Parties to the full extent permitted by the TBCA (as defined
herein). The procedures associated with such indemnification shall be the same
as those associated with the Midland Indemnified Parties' indemnification from
Midland or any of its respective subsidiaries, as the case may be, immediately
prior to the Effective Time (provided, however, that the determination that such
indemnification is permissible under the TBCA shall be made by special legal
counsel selected by the Board of Directors as set forth in the TBCA, such
selection to be subject to the consent of a majority of the Midland Indemnified
Parties in such instance, which consent may not be unreasonably withheld; and,
further provided, however, that the Surviving Subsidiary shall be under no
obligation to deposit trust funds pursuant to any "change-in-control" or similar
provisions). Midland hereby agrees that, from and after the date hereof until
the Effective Time, it will not (and it will cause each of its subsidiaries not
to) amend, modify, or otherwise alter any contractual provision under which any
Midland Indemnified Party is entitled to indemnification from Midland or any of
its subsidiaries, as the case may be, at the time of the execution of the Merger
Agreement. The indemnification provisions of the Merger Agreement are intended
to be for the benefit of, and shall be enforceable by, the parties hereto and
each Midland Indemnified Party and their respective heirs and representatives.
Indemnification by the Vista Partnership. From and after the Effective
Time, the Vista Partnership shall indemnify and hold harmless each person or
entity, and shall advance expenses incurred by each person or entity who is, has
been at any time prior to the date hereof, or becomes prior to the Effective
Time an officer, director or partner of the General Partner, the Vista
Partnership or any of its subsidiaries (collectively, the "Vista Indemnified
Parties") against all losses, claims, damages, liabilities, costs or expenses
(including attorney's fees), judgments, and amounts paid in settlement in
connection with any claim, action, suit, proceeding, or investigation arising
out of or pertaining to acts or omissions, or alleged acts or omissions, by such
Vista Indemnified Party in his or its capacity as an officer, director, or
partner of the General Partner, Vista or any of its subsidiaries, which acts or
omissions occurred prior to the Effective Time to the full extent permitted by
applicable law. The procedures associated with such indemnification shall be the
same as those associated with the Vista Indemnified Parties' indemnification
from the Vista Partnership or any of its subsidiaries, as the case may be,
immediately prior to the Effective Time (provided, however, that the Vista
Partnership shall be under no obligation to deposit trust funds pursuant to any
"change-in-control" or similar provisions). The Vista Partnership hereby agrees
that, from and after the date hereof until the Effective Time, it will not (and
it will cause each of its subsidiaries not to) amend, modify, or otherwise alter
any contractual provision under which any Vista Indemnified Party is entitled to
indemnification from the Vista Partnership or any of its subsidiaries at the
time of the execution of the Merger Agreement. The indemnification provisions of
the Merger Agreement are intended to be for the benefit of, and shall be
enforceable by, the parties hereto and each Vista Indemnified Party and their
respective heirs and representatives.
Indemnification of Vista Officers and Directors. As provided in the Merger
Agreement, at the Effective Time, Vista will enter into indemnification
agreements with each of the directors and officers of Vista pursuant to which
Vista will agree to indemnify and hold harmless each such director and officer
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities arising out of the fact that he is
a director or officer of Vista or any of its subsidiaries, to the full extent
permitted under Delaware law, Vista's Bylaws and the indemnification agreements.
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Indemnification of Midland Officers and Directors. As provided in the
Merger Agreement, at the Effective Time, Vista will enter into indemnification
agreements with each of the directors and officers of Midland pursuant to which
Vista will agree to indemnify and hold harmless each such director and officer
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities arising out of the fact that he
was a director or officer of Midland or any of its subsidiaries prior to the
Effective Time, to the full extent permitted under Delaware law, Midland's
Bylaws and the indemnification agreements.
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OWNERSHIP OF MIDLAND AND VISTA COMMON STOCK
Midland. The following table sets forth (i) as of September 11, 1998, the
number and percentage of the outstanding shares of Midland Common Stock that is
beneficially owned by the directors and executive officers of Midland, as well
as by each person or entity known by Midland to beneficially own more than 5% of
the Midland Common Stock and (ii) the number and percentage of the outstanding
shares of Vista Common Stock owned by such persons after the Merger. Except as
otherwise indicated below, Midland believes that each individual or entity named
has sole investment and voting power with respect to shares of Midland Common
Stock indicated as beneficially owned by them.
SHARES OF MIDLAND BENEFICIALLY OWNED
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED SHARES OF VISTA
---------------------- ----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- --------- ----------
Deas H. Warley III................................... 829,017 18.03% 829,017 5.1%
8920 Woodlane, Magnolia, Texas 77354
Robbie Jean Warley................................... 784,383 17.05% 784,383 4.8%
94 Mountain Road, Glastonbury, Conn. 06033
Robert R. Donnelly................................... 42,965 * 207,550 1.26%
415 West Wall, Suite 1415, Midland, Texas 79701
Sam R. Brock......................................... 41,665 * 206,250 1.25%
2277 S. Kirkwood, Suite 401, Houston, Texas 77077
Darrell M. Dillard................................... 96,305 2.12% 260,890 1.58%
415 West Wall, Suite 1510, Midland, Texas 79701
Wayne M. Whitaker.................................... 39,965 * 204,550 1.24%
301 Commerce Street, Suite 3500, Fort Worth, Texas
76102
John Q. Adams........................................ 250,200 5.58% 364,575 2.23%
2350 Airport Frwy, Suite 280, Bedford, Texas 76022
All officers and directors as a group (7 persons).... 1,235,014 24.84% 3,068,715 17.34%
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* Represents less than 1%
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Vista. The following table sets forth as of the Effective Time the number
and percentage of the outstanding shares of Vista Common Stock (including shares
represented by Vista Warrants) that will be beneficially owned by the directors
and executive officers of Vista, as well as by each person or entity known by
Vista that will beneficially own more than 5% of the outstanding Vista Common
Stock.
SHARES OF VISTA
COMMON STOCK
BENEFICIALLY OWNED
----------------------
NUMBER PERCENTAGE
--------- ----------
Natural Gas Partners II, L.P.
777 Main Street, Suite 2250, Fort Worth, Texas 76102...... 6,121,439 32.52%
Natural Gas Partners III, L.P.
777 Main Street, Suite 2250, Fort Worth, Texas 76102...... 8,366,608 42.32%
C. Randall Hill
550 West Texas Avenue, Suite 700, Midland, Texas 79701.... 1,468,476 8.71%
Steven D. Gray
550 West Texas Avenue, Suite 700, Midland, Texas 79701.... 1,468,476 8.71%
R. Cory Richards
550 West Texas Avenue, Suite 700, Midland, Texas 79701.... 803,492 4.84%
Kenneth A. Hersh
777 Main Street, Suite 2250, Fort Worth, Texas 76102...... --(1) --
David R. Albin
100 N. Guadalupe, Suite 205, Santa Fe, New Mexico 87501... --(1) --
John S. Foster
500 West Putnam Avenue, 4th Floor, Greenwich, Connecticut --(1) --
06830..................................................
John Q. Adams
2350 Airport Freeway, Suite 280, Bedford, Texas 76022..... 364,575 2.23%
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(1) Messrs. Hersh, Albin and Foster are principal owners and managers of NGP and
may be deemed to beneficially own, or otherwise control, the voting of all
or some portion of the shares of Vista Common Stock owned by Natural Gas
Partners II, L.P. and Natural Gas Partners III, L.P.
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CERTAIN TRANSACTIONS
Effective as of June 1, 1998, Midland's wholly owned, operating subsidiary,
MRO, and the Vista Operator entered into a Contract Operating Agreement (herein
so called) which provides, among other things, that the Operator will provide
various contract operating services for and on behalf of Midland's oil and gas
properties through October 31, 1998 and on a month-to-month basis thereafter
unless otherwise terminated by either party upon 30 days' prior written notice.
The services to be provided shall be as requested by Midland and shall include,
without limitation, field operations services, engineering supervision and
analysis, geological review and analysis, land and legal analysis, well site
supervision for drilling activities, and accounting and production overview and
supervision. All field level services shall be charged to Midland on an actual
cost basis as incurred by the Operator, engineering and geological review and
supervision shall be charged at a flat rate of $400 per day with a half day
minimum charge, and limited general and administrative assistance will be
charged at a flat rate of $1,500 per month (which increases to $3,000 per month
on November 1, 1998). Any general and administrative services requested by
Midland beyond the limited services set out in the Contract Operating Agreement
shall be charged on agreed upon hourly rates for the number and type of Operator
employees utilized by Midland.
Contemporaneously with the closing of the Merger, Vista will enter into an
Advisory Services Agreement with NGP. Pursuant to the Advisory Services
Agreement, Vista will pay NGP $75,000 per year on a year-to-year basis and
reimburse NGP for certain expenses in consideration for certain consulting and
financial analysis services to be provided by NGP and its representatives.
During 1996, Midland conducted a cash tender offer for all of the common
stock and options of Summit Petroleum Corporation ("Summit"), a public oil and
gas corporation of which Mr. Warley was President, Treasurer and Chairman and
owned approximately 37.5% of its common stock, and Darrell M. Dillard and Wayne
M. Whitaker were directors, stockholders and option holders. Midland completed
the acquisition of Summit through a merger with a wholly owned subsidiary in
December 1996. Midland received a fairness opinion regarding the tender offer
price of $.70 per share (net of any option exercise prices). As a result of this
offer Messrs. Warley, Dillard and Whitaker received total proceeds of $660,000,
$31,875 and $49,375, respectively.
$479,647 of the proceeds due Mr. Warley from the Summit tender offer
discussed above, were used to repay the balance outstanding under a promissory
note of Mr. Warley due Midland that was entered into in December 1995, whereby
Mr. Warley borrowed $582,805 under an 18-month term note bearing 7.5 % interest,
secured by 287,947 shares of Midland Common Stock. The original proceeds of this
loan were used by Mr. Warley to exercise 233,122 warrants to buy Midland Common
Stock at $2.50 per share that were received in 1990 upon the formation of
Midland.
Midland purchased a building and land in Midland County, Texas for $78,996
from Mr. Warley and another individual for use as a district office, effective
November 1, 1995. Mr. Warley and the other individual each financed 50% of the
purchase price less the down payment of $10,496. The two $34,250 ten-year notes
bore interest at 7.5% and were payable in equal monthly installments of $407,
each. The cost to Midland was based on an independent written appraisal and
certain improvements completed before the property was purchased. The balance of
the note payable to Mr. Warley was netted against his $582,805 note payable
discussed above, together with a cash payment of $95,000, leaving a balance of
$453,641 on Mr. Warley's note due Midland.
Until Midland acquired Summit, MRO had a management agreement with Summit.
Total management fees charged Summit for 1996 were $45,000.
Mr. Warley had a five-year employment contract with Midland that was
terminated by the Midland Board on March 27, 1998. As of that date, the
employment contract provided for an annual salary of $247,963 with a minimum 5%
semi-annual adjustment. Mr. Warley waived such adjustments for 1997. In
addition, the contract provided for medical reimbursement of up to $10,000 for
non-insurance covered medical expenses, disability payments of one-half the
annual salary for 10 years and a covenant not to compete with Midland for six
months. The term of the agreement extended for an additional five years each
January 1, unless notice was
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given by either Mr. Warley or Midland. Following termination of Mr. Warley's
contract and pending the conclusion of negotiations with respect to the Merger
Agreement, Midland and Mr. Warley agreed to Midland paying Mr. Warley one-half
of his former monthly salary and providing him the use of a company vehicle. On
May 22, 1998, Midland and Mr. Warley executed that certain Warley Settlement
Agreement, to be effective March 27, 1998, containing the following principal
terms: (i) from March 27, 1998, through either the consummation or termination
of the Merger Agreement, Midland shall pay Warley the sum of $11,390 per month;
(ii) on the effective date of the Merger, Midland agrees to pay to Warley the
sum of $1,300,000 (reduced by a payment of $100,000 made by Midland to Marilyn
D. Wade on behalf of Mr. Warley pursuant to the Wade Release (as defined
below)), payable $20,000 a month over sixty (60) months, provided that, after
one year, either Midland or Warley may elect to have such amount paid as a lump
sum (using a discount factor of six percent (6%)); (iii) Warley's existing
Midland stock options for 15,000 shares shall expire on the 120th day following
the effective date of the Merger; (iv) Warley agrees to support the Merger and
to take or refrain from taking actions as contemplated by the Merger Agreement;
and (v) Warley and Midland mutually release one another from all claims which
either party may have (including a release by Warley of Midland's directors and
officers) except pursuant to such Agreement and pursuant to confidentiality and
non-compete provisions in Warley's employment agreement and Warley's rights to
indemnification as officer and director of Midland.
Mr. Whitaker, a director since 1996, is a partner in the law firm of
Michener, Larimore, Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk, L.L.P.
During 1997 and 1996 Midland paid $126,278 and $85,749 respectively, to that
firm for legal services and costs.
Mr. Dillard, a director since 1994, served as Chief Financial Officer
during the period October 31, 1995 until February 1997. Midland paid Mr. Dillard
$46,001 and $4,000 respectively, during 1997 and 1996 for accounting and
consulting services, and officer compensation of $66,543 in 1996.
Mr. Donnelly, a director since 1990, was until November 1997 a partner in
EOC Services Co., which provided oilfield services to Midland and that firm was
paid $26,449 in 1997.
Mr. Brock, a director since 1995, is an officer of Citation Crude Oil
Marketing, Inc. a company which provided crude oil marketing services to Midland
in 1997 and that firm was paid $14,000.
On January 14, 1997 Midland formed Chalk Mountain Exploration, Ltd.
("Partnership"), a Texas limited partnership, and became its general partner,
and sold to that limited partnership certain 3-D seismic data and related
leases. With respect to the specific 3-D seismic project, Midland sold that data
and 100% of its interest in the related leases for $383,975, which represented
its total cost in such project. In addition to providing the funding for the
purchase of the 3-D seismic data and lease costs, the limited partners provided
$366,025 to drill the first exploratory well to completion, with Midland
providing $407,597 for 100% of the completion costs. After the initial
exploratory well, Midland and the limited partners shared costs equally. In
exchange for providing the initial $750,000 of funding to the Partnership, the
limited partners received 50% of its profits and Midland as general partner
received 50%. Two additional exploratory wells and one development well were
drilled in 1997 with Midland bearing 50% of the cost of the drilling of these
wells ($958,164) and the limited partners bearing 50% of such costs, with the
limited partners electing not to participate in the completion of one such
exploratory well. Further, Midland contributed $406,250 as its 50% of additional
acreage costs in 1997. Messrs. Dillard, Whitaker and Adams were limited
partners. Midland acts as operator on the leases and supervises the drilling of
any wells, for which it receives fees from the limited partnership which are
customary within the industry. Effective July 1, 1997 Midland and Mr. Dillard
exchanged substantially all their partnership interests for the direct
assignment of an equivalent working interest in the related leases and Mr.
Whitaker exchanged all of his Partnership interest in exchange for an equivalent
working interest. Thereafter effective October 1, 1997 Messrs. Whitaker and
Dillard sold their working interests in the related wells and leases to Midland
for $57,848 and $87,031 and 5,000 unregistered shares and 10,040 unregistered
shares respectively. Mr. Dillard's sale also included his remaining limited
partner interest in the Partnership. Effective December 31, 1997 Midland
withdrew as the General Partner and conveyed all of its Partnership interest
back to the Partnership in settlement of a dispute involving reimbursement of
the cost of a well drilled through a zone not owned by the Partnership.
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On May 22, 1998, Midland, Mr. Warley, and Marilyn Wade executed that
certain Release and Hold Harmless Agreement (the "Wade Release") containing the
following principal terms and provisions: (i) Wade agrees to resign her
employment upon consummation of the Merger; (ii) Warley agrees to pay the sum of
$100,000 to Wade upon consummation of the Merger, which payment Midland has
agreed to pay to Wade on behalf of Warley under the Warley Settlement Agreement;
(iii) upon execution of the Wade release, Midland granted Wade options to
purchase 137,931 shares of Midland Common Stock at $2.6875 per share; (iv)
within three (3) business days after Wade's resignation, Midland agrees to pay
the sum of $56,590; and (v) Wade releases Warley, Midland and Midland's
directors and officers from all claims which she may have against them.
DESCRIPTION OF VISTA CAPITAL STOCK
The authorized capital stock of Vista consists of 50,000,000 shares of
common stock, par value $.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share.
VISTA COMMON STOCK
All shares of Vista Common Stock issued in the Merger will be fully paid
and nonassessable. The holders of Vista Common Stock are entitled to one vote
for each share held on all matters submitted to a vote of common stockholders.
The Vista Common Stock does not have cumulative voting rights or preemptive
rights.
Subject to the rights of the holders of any class of capital stock of Vista
having any preference or priority over the Vista Common Stock, the holders of
Vista Common Stock are entitled to dividends in such amounts as may be declared
by the Vista Board from time to time out of any funds legally available for such
payments and, in the event of liquidation, to share ratably in the assets of
Vista remaining after provision for any liquidation preferences on any
outstanding preferred stock ranking prior to the Vista Common Stock.
VISTA PREFERRED STOCK
The Vista Board, without further stockholder action, is authorized to issue
up to 10,000,000 shares of preferred stock, par value $.01 per share ("Vista
Preferred Stock") in one or more series and to fix and determine as to any
series all the relative rights and preferences of shares in the series,
including voting rights, dividend rights, liquidation preferences, terms of
redemption and conversion rights.
Although Vista has no present intention to issue shares of Vista Preferred
Stock, the issuance of shares of Vista Preferred Stock, or the issuance of
rights to purchase such shares, could be used to discourage an unsolicited
acquisition proposal. For instance, the issuance of a series of Vista Preferred
Stock might impede a business combination by including class voting rights that
would enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would provide
a required percentage vote of the stockholders. In addition, under certain
circumstances, the issuance of Vista Preferred Stock could adversely affect the
voting power of the holders of the Vista Common Stock. Although the Vista Board
is required to make any determination to issue such stock based on its judgment
as to the best interests of the stockholders of Vista, the Vista Board could act
in a manner that would discourage an acquisition attempt or other transaction in
that some or a majority of the stockholders might believe to be in their best
interest or in which stockholders might receive a premium for their stock over
the then market price of such stock. The Vista Board does not at present intend
to seek stockholder approval prior to any issuance of currently authorized
stock, unless otherwise required by law or the regulations of the exchange on
which the Vista Common Stock is listed.
DELAWARE ANTI-TAKEOVER STATUTE
Vista is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
Vista's outstanding voting stock) from engaging in a "business combination" (as
defined in Section 203) with Vista for three years following the date that
person becomes an interested stockholder
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unless (a) before that person became an interested stockholder, Vista's Board of
Directors approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination, (b) upon completion
of the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of Vista
voting stock outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of Vista and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer),
or (c) following the transaction in which that person became an interested
stockholder, the business combination is approved by Vista's Board of Directors
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding Vista voting stock not owned
by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving Vista and a
person who was not an interested stockholder during the previous three years or
who became an interested stockholder with the approval of a majority of Vista's
directors, if that extraordinary transaction is approved or not opposed by a
majority of the directors who were directors before any person became an
interested stockholder in the previous three years or who were recommended for
election or elected to succeed such directors by a majority of such directors
then in office.
Section 203 will not be applicable to Vista by reason of consummation of
the Merger or consummation of any of the other the transactions contemplated by
the Merger Agreement. In addition, none of the holders of Vista Common Stock
subsequent to the Effective Time will become an interested stockholder as a
result of such transactions.
VISTA STOCK OPTION PLAN
The description set forth below represents a summary of the principal terms
and conditions of the Vista Stock Option Plan and does not purport to be
complete. Such description is qualified in its entirety by reference to the
Vista Energy Resources, Inc. 1998 Key Employee Stock Option Plan (the "Vista
Stock Option Plan"), a copy of which is attached as Appendix E to this Proxy
Statement/Prospectus.
GENERAL
Vista may grant awards with respect to shares of Vista Common Stock under
the Vista Stock Option Plan to officers, directors and employees of Vista or any
parent or subsidiary corporation of Vista. At the Effective Time, Vista is
expected to have six directors and approximately 24 employees. The awards under
the Vista Stock Option Plan include (i) incentive stock options qualified as
such under U.S. federal income tax laws and (ii) stock options that do not
qualify as incentive stock options. The number of shares of Vista Common Stock
that may be subject to outstanding awards under the Vista Stock Option Plan is
900,000.
The Board of Directors of Vista or any committee designated by it may
administer the Vista Stock Option Plan (as used for the Vista Stock Option Plan,
the "Committee"). The Committee has broad discretion to administer the Vista
Stock Option Plan, interpret its provisions and adopt policies for implementing
the Vista Stock Option Plan. This discretion includes the ability to select the
recipient of an award, determine the type and amount of each award, establish
the terms of each award, accelerate vesting or exercisability of an award,
determine whether performance conditions have been satisfied and otherwise
modify or amend any award under the Vista Stock Option Plan. Nevertheless, no
awards for more than 250,000 shares may be granted to any one employee in a
calendar year.
AWARDS
The Committee determines the exercise price of each option granted under
the Vista Stock Option Plan. The exercise price for an incentive stock option
must not be less than the fair market value of the Vista Common Stock on the
date of grant. Stock options may be exercised as the Committee determines, but
not later than ten years from the date of grant in the case of incentive stock
options. At the discretion of the
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Committee, holders may use shares of stock to pay the exercise price, including
shares issuable upon exercise of the option.
OTHER PROVISIONS
At the Committee's discretion and subject to conditions that the Committee
may impose, a participant's tax withholding with respect to an award may be
satisfied by the withholding of shares of Vista Common Stock issuable pursuant
to the award or the delivery of previously owned shares of Vista Common Stock,
in either case based on the fair market value of the shares.
If a change of control shall occur or Vista shall enter into an agreement
providing for a change of control, then the Committee may declare any or all
options outstanding under the Vista Stock Option Plan to be exercisable in full
at such time or times as the Committee shall determine. Each option accelerated
by the Committee pursuant to the preceding sentence shall terminate on such date
(not later than the stated exercise date) as the Committee shall determine.
Without stockholder approval, the Vista Board may not amend the Vista Stock
Option Plan to increase the total number of shares of Vista Common Stock that
may be issued under the Vista Stock Option Plan. Otherwise, the Vista Board may
at any time alter, amend, modify, suspend or terminate the Vista Stock Option
Plan. No award may be issued under the Vista Stock Option Plan after the tenth
anniversary of stockholder approval of the plan.
TAX IMPLICATION OF AWARDS
Set forth below is a summary of the federal income tax consequences to
employees, directors and other participants in the Vista Stock Option Plan
("Vista Employees") and to Vista as a result of the grant and exercise of awards
under the Vista Stock Option Plan. This summary is based on statutory
provisions, Treasury regulations thereunder, judicial consents and IRS rulings
in effect on the date hereof.
Nonqualified Stock Options; Incentive Stock Options. Vista Employees will
not realize taxable income upon the grant of a non-qualified stock option
("NQSO"). Upon the exercise of a NQSO, a Vista Employee will recognize ordinary
compensation income (subject to withholding by Vista) in an amount equal to the
excess of (i) the amount of cash and the fair market value of Vista Common Stock
received, over (ii) the exercise price (if any) paid therefor. A Vista Employee
will generally have a tax basis in any shares of Vista Common Stock received
pursuant to the cash exercise of a NQSO, that equals the fair market value of
such shares on the date of exercise. Subject to the discussion under "-- Tax
Code Limitations on Deductibility," Vista (or a subsidiary) will be entitled to
a deduction for federal income tax purposes that corresponds as to timing and
amount with the compensation income recognized by a Vista Employee under the
foregoing rules.
Vista Employees eligible to receive an incentive stock option ("ISO") will
not have taxable income on the grant of an ISO. Upon the exercise of an ISO, a
Vista Employee will not have taxable income, although the excess of the fair
market value of the shares of Vista Common Stock received upon exercise of the
ISO ("ISO Stock") over the exercise price will increase the alternative minimum
taxable income of the Vista Employee, which may cause such Vista Employee to
incur alternative minimum tax. The payment of any alternative minimum tax
attributable to the exercise of an ISO would be allowed as a credit against the
Vista Employee's regular tax liability in a later year to the extent the Vista
Employee's regular tax liability is in excess of the alternative minimum tax for
that year.
Upon the disposition of ISO Stock that has been held for the requisite
holding period (generally, at least two years from the date of grant and one
year from the date of exercise of the ISO), a Vista Employee will generally
recognize capital gain (or loss) equal to the excess (or shortfall) of the
amount received in the disposition over the exercise price paid by the Vista
Employee for the ISO Stock. However, if a Vista Employee disposes of ISO Stock
that has not been held for the requisite holding period (a "disqualifying
disposition"), the Vista Employee will recognize ordinary compensation income in
the year of the disqualifying disposition in an amount equal to the amount by
which the fair market value of the ISO Stock at the time of exercise of the ISO
(or, if less, the amount realized in the case of an arm's length disqualifying
disposition
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to an unrelated party) exceeds the exercise price paid by the Vista Employee for
such ISO Stock. A Vista Employee would also recognize capital gain to the extent
the amount realized in the disqualifying disposition exceeds the fair market
value of the ISO stock on the exercise date. If the exercise price paid for the
ISO Stock exceeds the amount realized (in the case of an arm's-length
disposition to an unrelated party), such excess would ordinarily constitute a
capital loss.
Vista and its subsidiaries will generally not be entitled to any federal
income tax deduction upon the grant or exercise of an ISO, unless a Vista
Employee makes a disqualifying disposition of the ISO Stock. If a Vista Employee
makes a disqualifying disposition, Vista (or a subsidiary) will then, subject to
the discussion below under "-- Tax Code Limitations on Deductibility," be
entitled to a tax deduction that corresponds as to timing and amount with the
compensation income recognized by a Vista Employee under the rules described in
the preceding paragraph.
Under current rulings, if a Vista Employee transfers previously held shares
of Vista Common Stock (other than ISO Stock that has not been held for the
requisite holding period) in satisfaction of part or all of the exercise price
of an NQSO or ISO, no additional gain will be recognized on the transfer of such
previously held shares in satisfaction of the NQSO or ISO exercise price
(although a Vista Employee would still recognize ordinary compensation income
upon exercise of an NQSO in the manner described above). Moreover, that number
of shares of Vista Common Stock received upon exercise which equals the number
of shares of previously held Vista Common Stock surrendered therefor in
satisfaction of the NQSO or ISO exercise price will have a tax basis that
equals, and a holding period that includes, the tax basis and holding period of
the previously held shares of Vista Common Stock surrendered in satisfaction of
the NQSO or ISO exercise price. Any additional shares of Vista Common Stock
received upon exercise will have a tax basis that equals the amount of cash (if
any) paid by the Vista Employee, plus the amount of compensation income
recognized by the Vista Employee's transfer of previously held Vista Common
Stock in full or partial satisfaction of the exercise price of an ISO or NQSO,
the tax consequences of the reload option will be as provided above for an ISO
or NQSO, depending on whether the reload option itself is an ISO or NQSO.
A Vista Employee will be subject to withholding for federal, and generally
for state and local, income taxes at the time he recognizes income under the
rules described above with respect to Vista Common Stock or cash received.
Dividends that are received by a Vista Employee prior to the time that the Vista
Common Stock is taxed to the Vista Employee under the rules described in the
preceding paragraph are taxed as additional compensation, not as dividend
income. The tax basis of a Vista Employee in the Vista Common Stock received
will equal the amount recognized by him as compensation income under the rules
described in the preceding paragraph, and the Vista Employee's holding period in
those shares will commence on the date of receipt of the shares.
Subject to the discussion immediately below, Vista (or a subsidiary) will
be entitled to a deduction for federal income tax purposes that corresponds as
to timing and amount with the compensation income recognized by a Vista Employee
under the foregoing rules.
Tax Code Limitations and Deductibility. In order for the amounts described
above to be deductible by Vista (or a subsidiary), such amounts must constitute
reasonable compensation for services rendered or to be rendered and must be
ordinary and necessary business expenses. The ability of Vista (or a subsidiary)
to obtain a deduction for future payments under the Vista Stock Option Plan
could also be limited by the golden parachute payment rules of Section 280G of
the Code, which prevent the deductibility of certain excess parachute payments
made in connection with a change in control of an employer-corporation. Finally,
the ability of Vista (or a subsidiary) to obtain a deduction for amounts paid
under the Vista Stock Option Plan could be limited by Section 162(m) of the
Code, which limits the deductibility, for federal income tax purposes, of
compensation paid to certain executive officers of Vista to $1 million with
respect to any such officer during any taxable year of Vista. However, an
exception applies to this limitation in the case of certain performance-based
compensation. The Vista Stock Option Plan is intended to satisfy the
requirements for the performance-based exception. Vista intends to comply with
the requirements of the Code with respect to awards under the Vista Stock Option
Plan so as to be eligible for the performance-based exception, but Vista
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may, in its sole discretion, determine that in one or more cases it is in its
best interests to not satisfy the requirements for the performance-based
exception.
REGISTRATION RIGHTS FOR VISTA STOCKHOLDERS
The Merger Agreement provides that contemporaneously with the Closing,
Vista shall enter into separate registration rights agreements (collectively,
the "Registration Rights Agreements") with each of the stockholders of the
General Partner and each of the limited partners of the Vista Partnership
immediately prior to the Vista Exchange and with each holder of a Midland
Exchange Stock Option covering (i) with respect to the Vista securityholders,
the resale of shares of Vista Common Stock to be received by such
securityholders pursuant to the terms of the Vista Exchange Agreement, together
with all shares of Vista Common Stock issuable to such securityholders upon the
exercise of an Exchange Warrant, (ii) with respect to the Midland
securityholders, the resale of shares of Vista Common Stock issuable to such
securityholders upon the exercise of an Exchange Warrant and (iii) any
securities issued or issuable in respect of any such shares by way of any stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise
((i), (ii) and (iii) above collectively referred to as the "Registrable
Shares").
The Registration Rights Agreements provide that the holders of more than
50% of the Registrable Shares outstanding may, at any time after the first
anniversary of the Effective Time, require Vista to effect the registration
under the Securities Act of Registrable Shares on no more than two occasions by
means of a "shelf" registration statement for an offering to be made on a
continuous basis under the Securities Act, subject to certain limitations. The
Registration Rights Agreements also provide certain "piggyback" registration
rights to the holders of Registrable Shares whenever Vista proposes to register
an offering of any of its capital stock under the Securities Act, subject to
certain exceptions, including pro rata reduction if, in the reasonable opinion
of the managing underwriter(s) of the offering, such a reduction is necessary to
prevent an adverse effect on the marketability or offering price of all the
securities proposed to be offered in the offering.
The Registration Rights Agreements contain customary provisions regarding
the payment of expenses by Vista and regarding mutual indemnification agreements
between Vista and the holders of Registrable Shares for certain securities law
violations.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain provisions affecting, and the
differences between the rights of holders of the capital stock of Vista and
Midland, respectively. Since Midland is a Texas corporation and Vista is a
Delaware corporation, the differences between the rights of Midland stockholders
and the Vista stockholders will arise from the various differences between the
Texas Business Corporation Act ("TBCA") and the Delaware General Corporation Law
("DGCL") as well as from the differences between the various provisions of the
Midland Articles of Incorporation ("Midland Charter") and the Midland Bylaws
("Midland Bylaws") and the Vista Certificate of Incorporation ("Vista Charter")
and Vista Bylaws ("Vista Bylaws"). The following summary is qualified in its
entirety by reference to the TBCA, the DGCL, the complete text of the Midland
Charter and Bylaws and the Vista Charter and Bylaws. The Vista Charter and the
Vista Bylaws have been filed as exhibits to this Proxy Statement/Prospectus. See
"Available Information."
As a result of the Merger, holders of Midland Common Stock will become
holders of Vista Common Stock. The rights of all former Midland stockholders
will thereafter be governed by the Vista Charter, the Vista Bylaws and the DGCL.
The rights of the holders of Midland Common Stock are currently governed by the
Midland Charter, the Midland Bylaws and the TBCA. The following summary, which
does not purport to be a complete statement of the general differences among the
rights of stockholders of Midland and Vista, sets forth certain differences
between the Midland Charter and the Vista Charter, the Midland Bylaws and the
Vista Bylaws and the TBCA and the DGCL.
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AUTHORIZED CAPITAL STOCK
Midland. Midland's authorized capital stock consists of 100,000,000 shares
of common stock, par value $.001 per share. Midland has not authorized the
issuance of shares of preferred stock.
Vista. Vista's authorized capital stock consists of 60,000,000 shares,
divided into 50,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share.
VOTING
Midland. Each share of Midland Common Stock entitles the holder to one vote
on each matter submitted to stockholders.
Vista. Each share of Vista Common Stock entitles the holder to one vote on
each matter submitted to stockholders. Each share of Vista Preferred Stock, when
and if designated and issued, will entitle the holder to such voting rights as
shall be specified in the certificate of designations establishing such shares.
SPECIAL MEETINGS OF STOCKHOLDERS
Midland. The Midland Bylaws provide that a special meeting of stockholders
may be called by the chairman of the Midland Board, the president, any one of
the directors or the holders of not less than one-tenth of all the shares having
voting power at such meeting.
Vista. The Vista Bylaws provide that a special meeting of stockholders may
be called only by the Vista Board.
DIRECTORS
Midland. The Midland Bylaws provide that the number of directors shall be
not less than three nor more than 11. The exact number of directors shall be
five until changed, within the preceding limits, by resolutions amending such
exact number, duly adopted by at least 75% of the entire Midland Board, or the
affirmative vote of the stockholders holding a majority of the shares entitled
to vote on the election of directors; and provided that no decrease shall effect
a shortening of the term of any incumbent director. The stockholders do not have
the right to cumulate their votes in the election of directors.
Vista. The Vista Charter provides for a Board of Directors consisting of a
number of members to be determined by the resolution of the Board of Directors,
but will in no event be less than two or more than 21. The stockholders do not
have the right to cumulate their votes in the election of directors.
REMOVAL OF DIRECTORS
Midland. The Midland Bylaws provide that at any special meeting called for
such purpose, any director or the entire Board of Directors may be removed from
office, with or without cause, by the affirmative vote of a majority of the
shares present in person or by proxy and entitled to vote at such meeting.
Vista. The Vista Bylaws provide that a director may be removed only for
cause and by an affirmative vote of a majority of the shares entitled to vote
thereon cast at the annual meeting of the stockholders or any special meeting of
stockholders called expressly for that purpose by a majority of the members of
the Board of Directors serving at the time of that vote.
VACANCIES ON THE BOARD OF DIRECTORS
Midland. The Midland Bylaws provide that any vacancy occurring in the Board
of Directors may be filled by the vote of a majority of the remaining directors,
though less than a quorum. A director elected to fill a vacancy shall be elected
for the unexpired term of his predecessor in office. Any position on the Board
of Directors to be filled by reason of an increase in the number of directors
shall be filled by the vote of a majority of the directors, election at an
annual meeting of the stockholders, or at a special meeting of stockholders,
duly
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called for such purpose, provided that the Board of Directors may fill no more
than two such directorships between any two successive annual meetings of the
stockholders.
Vista. The Vista Bylaws provide that any vacancy occurring in the Board of
Directors or any directorship to be filled by reason of an increase in the
number of directors may be filled (a) by no less than a majority of the
remaining directors then in office, though less than a quorum, for a term of
office continuing only until the next election of one or more directors by the
stockholders or (b) by election at an annual or special meeting of stockholders
called for that purpose.
MERGERS AND OTHER FUNDAMENTAL TRANSACTIONS
Midland. The TBCA generally requires that a merger, consolidation, sale of
all or substantially all of the assets or dissolution of a corporation be
approved by the holders of at least two-thirds of the outstanding shares of
stock entitled to vote, unless such corporation's articles of incorporation
provide otherwise. The Midland Charter contains no such provision; therefore,
the TBCA provision described above applies to Midland.
Vista. Under the DGCL, mergers, consolidations or sales of substantially
all of the assets or dissolution of a corporation generally must be approved by
the holders of at least a majority of all outstanding shares of stock entitled
to vote, unless the certificate of incorporation requires approval by a greater
number of shares of stock. The Vista Charter contains no such provision;
therefore, the DGCL provision described above applies to Vista.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Midland. Article 4.02 of the TBCA provides that an amendment to a
corporation's articles of incorporation must be approved by the board of
directors and by the affirmative vote of holders of at least two-thirds of the
outstanding shares entitled to vote, unless the corporation's articles of
incorporation provide otherwise. The Midland Charter contains no such provision,
therefore, the TBCA provision described above applies to Midland.
Vista. Section 242 of the DGCL provides that an amendment to a
corporation's certificate of incorporation must be approved by the board of
directors and by the affirmative vote of the holders of at least a majority of
the outstanding stock entitled to vote thereon. The Vista Charter contains no
such provision, therefore, the DGCL provision described above applies to Vista.
AMENDMENTS TO BYLAWS
Midland. The Midland Bylaws provide that the Midland Bylaws may be altered,
amended or repealed, or new bylaws may be adopted, by the Midland Board at any
duly held meeting or by the holders of a majority of the shares represented at
any duly held meeting of stockholders.
Vista. The Vista Bylaws provide that the Vista Bylaws may be amended or
repealed, or new bylaws may be adopted, by the affirmative vote of a majority of
the directors present at any meeting of the Vista Board at which a quorum is
present or by unanimous written consent of all the directors, unless (a) by
statute or the Vista Charter the power is reserved exclusively to the
stockholders in whole or in part, or (b) the stockholders in amending, repealing
or adopting a particular bylaw expressly provide that the Vista Board may not
amend or repeal that bylaw. Notwithstanding any provision of law that might
otherwise permit lesser or no vote, but in addition to any affirmative vote of
the holders of any particular class or series of the capital stock of Vista
required by law or by the Vista Charter, the Vista Bylaws shall not be altered,
amended or repealed by the stockholders of Vista except in accordance with the
Vista Bylaws and by the vote of the holders of not less than a majority in
voting power of the outstanding shares of stock then entitled to vote upon the
election of directors, voting together as a single class.
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DISSENTERS' RIGHTS
Under Texas law, holders of Midland Common Stock will not be entitled to
any dissenter's rights in connection with the Merger. Section 5.11 of the Texas
Business Corporation Act provides that stockholders have the right to dissent
from any plan of merger that requires stockholder approval. Notwithstanding the
foregoing, however, Section 5.11 provides that a stockholder shall not have the
right to dissent from a plan of merger if (i) the stockholder is not required to
accept for the stockholder's shares any consideration that is different from the
consideration to be provided to any other stockholder and (ii) the stockholder
will receive as consideration shares of stock that are listed, or authorized for
listing upon official notice of issuance, on a national securities exchange.
LEGAL MATTERS
The validity of the Vista Common Stock be to issued in the Merger has been
passed upon for Vista by Vinson & Elkins L.L.P., Dallas, Texas.
TAX OPINION
Arthur Andersen LLP will issue an opinion to Midland regarding the federal
income tax consequences of the Merger.
EXPERTS
The consolidated balance sheets of Midland as of December 31, 1997 and
1996, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the years then ended, have been included herein in
reliance on the report of Grant Thornton LLP, independent public accountants,
given on the authority of that firm as experts in auditing and accounting.
The consolidated financial statements for the year ended December 31, 1995
of Midland included in this Proxy Statement/Prospectus have been audited by
Ernst & Young LLP, independent auditors, as indicated in their report with
respect thereto, and are included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The Consolidated Financial Statements of the Vista Partnership included in
this Proxy Statement/ Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The statements of revenues and direct operating expenses of E.G. Operating,
a division of FGL, Inc., for the six months ended June 30, 1997 and year ended
December 31, 1996 included in this Proxy Statement/Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The estimates of Midland's proved reserves as of December 31, 1997 set
forth in this Proxy Statement/ Prospectus are based upon a reserve report
prepared by Williamson Petroleum Consultants, Inc., independent petroleum
consultants, and are included herein upon the authority of such firm as experts
with respect to such matters covered by such report.
STOCKHOLDER PROPOSALS
Midland will not hold a 1998 annual meeting of stockholders unless the
Merger is not consummated. If the Merger is consummated, stockholders of Vista
may submit proposals to be included in Vista's proxy materials and considered
for stockholder approval
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GLOSSARY OF TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry in this Proxy Statement/Prospectus.
"Bbl" means a barrel of oil and condensate or natural gas liquids.
"Bcf" means billion cubic feet of natural gas.
"BOE" means one barrel of oil equivalent.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil
and gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which Midland or the Vista Partnership has a working interest.
"Infill Drilling" means drilling of an additional well or additional wells
in order to more adequately drain a reservoir.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"MMBbls" means millions of barrels of oil.
"MMBOE" means millions of barrels of oil equivalents.
"MMBtu" means one million "British Thermal Units," which means the quantity
of heat required to raise the temperature of one pound of water by one degree
Fahrenheit.
"MMcf" means million cubic feet of natural gas.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by
Midland or the Vista Partnership, as the case may be.
"Net production" means production that is owned by Midland or the Vista
Partnership, as the case may be, less royalties and production due others.
"Oil" means crude oil or condensate.
"Oil equivalents" means a volume, expressed in Bbls of oil, that includes
not only oil but also natural gas and natural gas liquids converted to an
equivalent quantity of oil on an energy equivalent basis. Equivalent oil
reserves are based on the conversion factor of 6 Mcf of gas per barrel of
liquids.
"Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions (i.e., prices and costs as of
the date the
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estimate is made). Prices include consideration of changes in existing prices
provided by contractual arrangements, but not on escalation based upon future
conditions.
i. Reservoirs are considered proved if economic productivity is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserve"; (B) crude oil, natural gas
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics or
economic factors; (C) crude oil, natural gas and natural gas liquids that
may occur in undrilled prospects; and (D) crude oil, natural gas and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage is limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances are estimates for proved undeveloped reserves
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
"PV10" means the present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with Commission
guidelines, net of estimated production and future development costs, using
prices and costs as of the date of estimation without future escalation, except
as otherwise provided by contract, without giving effect to non-property related
expenses such as general and administrative expenses, debt service, future
income tax expense and depreciation, depletion and amortization, and discounted
using an annual discount rate of 10%.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
PAGE
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VISTA ENERGY RESOURCES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 and 1996............................. F-3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 and the years ended
December 31, 1997 and 1996 and the period from
inception (September 21, 1995) to December 31, 1995.... F-4
Consolidated Statements of Owners' Equity for the three
months ended March 31, 1998 and the years ended
December 31, 1997 and 1996 and the period from
inception (September 21, 1995) to December 31, 1995.... F-5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 and the years ended
December 31, 1997 and 1996 and the period from
inception (September 21, 1995) to December 31, 1995.... F-6
Notes to Consolidated Financial Statements................ F-7
Report of Independent Public Accountants regarding E.G.
Operating.............................................. F-18
Statements of Revenues and Direct Operating Expenses of
E.G. Operating for the six months ended June 30, 1997
and year ended December 31, 1996....................... F-19
Notes to Statements of Revenues and Direct Operating
Expenses of E.G. Operating............................. F-20
MIDLAND RESOURCES, INC. AND SUBSIDIARIES:
Report of Independent Certified Public Accountants........ F-22
Report of Independent Auditors............................ F-23
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 and 1996............................. F-24
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995....................... F-25
Consolidated Statements of Stockholders' Equity for the
quarter ended March 31, 1998 and the years ended
December 31, 1997, 1996, 1995 and 1994................. F-26
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995....................... F-27
Notes to Consolidated Financial Statements................ F-28
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the conversion transaction discussed in Note 1 to Vista Energy
Resources, Inc.'s consolidated financial statements is effected, we expect to be
in a position to render the following audit report.
To the Board of Directors of
Vista Energy Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Vista
Energy Resources, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, owners' equity, and cash flows for the
years ended December 31, 1997 and 1996, and for the period from inception
(September 21, 1995), to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vista Energy Resources, Inc. as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997 and
1996, and for the period from inception (September 21, 1995), to December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 16, 1998
F-2
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VISTA ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents........................ $ 67,275 $ 527,129 $ 517,211
Accounts receivable
Oil and gas sales............................. 1,025,812 1,113,302 811,404
Trade......................................... 246,020 136,633 72,936
Other............................................ 44,321 83,519 72,925
----------- ----------- -----------
1,383,428 1,860,583 1,474,476
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, based on successful
efforts accounting............................ 29,136,894 27,943,634 15,861,035
Other............................................ 411,883 373,258 134,199
----------- ----------- -----------
29,548,777 28,316,892 15,995,234
----------- ----------- -----------
Less accumulated depreciation, depletion and
amortization.................................. (4,314,493) (3,446,126) (1,472,032)
----------- ----------- -----------
Property and equipment, net................... 25,234,284 24,870,766 14,523,202
----------- ----------- -----------
OTHER ASSETS....................................... 372,081 304,754 261,662
----------- ----------- -----------
$26,989,793 $27,036,103 $16,259,340
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............ $ 1,224,651 $ 1,439,451 $ 860,810
----------- ----------- -----------
1,224,651 1,439,451 860,810
----------- ----------- -----------
LONG-TERM DEBT..................................... 18,400,000 17,900,000 8,615,077
COMMITMENTS AND CONTINGENCIES...................... -- -- --
OWNERS' EQUITY..................................... 7,365,142 7,696,652 6,783,453
----------- ----------- -----------
$26,989,793 $27,036,103 $16,259,340
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
129
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
SIX MONTHS ENDED FROM INCEPTION
JUNE 30, YEAR ENDED DECEMBER 31, (SEPTEMBER 21, 1995)
----------------------- ------------------------ TO DECEMBER 31,
1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- --------------------
(UNAUDITED)
REVENUES:
Oil and gas sales....... $4,057,279 $3,633,274 $ 8,874,961 $5,537,720 $1,348,647
---------- ---------- ----------- ---------- ----------
Total
revenues...... 4,057,279 3,633,274 8,874,961 5,537,720 1,348,647
---------- ---------- ----------- ---------- ----------
COSTS AND EXPENSES:
Lease operating......... 1,939,530 1,672,260 3,688,695 2,544,567 728,540
Exploration costs....... -- 58,600 97,211 273,843
Depreciation, depletion
and amortization..... 962,026 932,192 2,169,098 1,272,316 308,132
General and
administrative....... 620,665 475,640 987,020 581,048 208,509
Amortization of unit
option awards........ 192,177 264,594 315,518 -- --
---------- ---------- ----------- ---------- ----------
Total costs and
expenses...... 3,714,398 3,403,286 7,257,542 4,671,774 1,245,181
---------- ---------- ----------- ---------- ----------
Operating
income........ 342,881 229,988 1,617,419 865,946 103,466
---------- ---------- ----------- ---------- ----------
Loss on sale of
property............. (192,898) (7,247) (87,678) (56,738) --
Interest expense........ (713,961) (394,169) (1,048,009) (476,363) (77,093)
Other income, net....... 40,291 63,856 115,949 61,437 33,684
---------- ---------- ----------- ---------- ----------
NET INCOME (LOSS) BEFORE
TAXES................... (523,687) (107,572) 597,681 394,282 60,057
---------- ---------- ----------- ---------- ----------
Pro forma benefit
(provision) for
taxes................ 183,290 37,650 (211,720) (139,284) (21,190)
---------- ---------- ----------- ---------- ----------
NET INCOME (LOSS)......... $ (340,397) $ (69,922) $ 385,961 $ 254,998 $ 38,867
========== ========== =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
130
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY
BALANCE, September 21, 1995................................. $ --
Net income before taxes................................... 60,057
Contributions............................................. 6,329,114
----------
BALANCE, December 31, 1995.................................. 6,389,171
Net income before taxes................................... 394,282
----------
BALANCE, December 31, 1996.................................. 6,783,453
Net income before taxes................................... 597,681
Unit option awards........................................ 315,518
----------
BALANCE, December 31, 1997.................................. 7,696,652
Net loss before taxes (unaudited)......................... (523,687)
Unit option awards (unaudited)............................ 192,177
----------
BALANCE, March 31, 1998 (unaudited)......................... $7,365,142
==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
131
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
SIX MONTHS ENDED FROM INCEPTION
JUNE 30, YEAR ENDED DECEMBER 31, (SEPTEMBER 21, 1995)
------------------------- -------------------------- TO DECEMBER 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ----------- --------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) before taxes.......... $ (523,687) $ (107,572) $ 597,681 $ 394,282 $ 60,057
Adjustments to reconcile net income
before taxes to cash provided by
operating activities
Depreciation, depletion and
amortization....................... 962,026 933,192 2,169,098 1,272,316 308,132
Amortization of unit option awards.... 192,177 264,594 315,518 -- --
Exploration costs..................... -- -- 97,211 273,843 --
Loss on sale of property.............. 192,959 -- 87,678 56,738 --
Changes in working capital
Decrease (increase) in accounts
receivable......................... (21,897) 88,117 (365,595) (385,771) (199,307)
Increase in prepaid expenses.......... 39,198 (108,232) (10,594) (24,120) (48,805)
Decrease (increase) in accounts
payable............................ (218,670) 576,075 468,832 324,665 548
Decrease (increase) accrued
expenses........................... 3,870 31,445 109,809 160,696 75,253
----------- ----------- ------------ ----------- -----------
Net cash provided by operating
activities..................... 625,976 1,677,619 3,469,638 2,072,649 195,878
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..... (1,717,694) (4,379,753) (13,038,815) (7,417,091) (7,720,478)
Proceeds from sales of property and
equipment............................. 131,864 -- 390,000 390,371
Payment of organization costs........... -- -- -- (20,000) (264,362)
----------- ----------- ------------ ----------- -----------
Net cash used in investing
activities..................... (1,585,830) (4,379,753) (12,648,815) (7,046,720) (7,984,840)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner contributions................... -- -- -- -- 5,060,000
Payment of borrowings................... -- (115,077) -- -- (394,833)
Proceeds from issuance of debt.......... 500,000 2,300,000 9,703,572 5,415,077 3,600,000
Repayments of debt...................... -- -- (418,649) (400,000)
Payments of debt issuance cost.......... -- -- (95,828) -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by financing
activities..................... 500,000 2,184,923 9,189,095 5,015,077 8,265,167
----------- ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (459,854) (517,211) 9,918 41,006 476,205
CASH AND CASH EQUIVALENTS:
Beginning of period..................... 527,129 517,211 517,211 476,205 --
----------- ----------- ------------ ----------- -----------
End of period........................... $ 67,275 $ 0 $ 527,129 $ 517,211 $ 476,205
=========== =========== ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
132
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1. ORGANIZATION:
Organization
Vista Energy Resources, Inc. ("Vista" or the "Company") was incorporated in
Delaware in May 1998 for the purpose of consolidating and continuing the
activities previously conducted by Vista Resources Partners, L.P., a Texas
limited partnership (the "Partnership"). The Partnership was formed on September
21, 1995, for the purpose of acquiring interests in and further developing oil
and natural gas properties ("Properties").
Vista Resources I, Inc., a Texas corporation (the "General Partner"),
served as the sole general partner of the Partnership. Vista Resources, Inc., a
Texas corporation and a wholly owned subsidiary of the Company (the "Operator"),
serves as the operator of Properties in which the Company acquires or otherwise
owns operating working interests.
Pursuant to the terms of an Exchange Agreement dated June 15, 1998 (the
"Exchange Agreement"), the Company will acquire all of the outstanding
partnership interests of the Partnership and all of the outstanding shares of
the General Partner in exchange for shares of Common Stock of the Company (the
"Conversion"). The Conversion and other transactions contemplated by the
Exchange Agreement will be consummated immediately prior to the closing of the
merger (the "Merger") with Midland Resources, Inc. ("Midland"). The Conversion
will be accounted for as a transfer of assets and liabilities between affiliates
under common control and will result in no change in carrying values of these
assets and liabilities.
The accompanying consolidated financial statements include the balances and
results of operations associated with the Company, the Partnership and its
wholly owned subsidiary, Vista Resources, Inc., as of December 31, 1997, and
1996 and for the years ended December 31, 1997 and 1996, and the period from
inception (September 21, 1995), to December 31, 1995. All significant
intercompany transactions and balances have been eliminated in preparation of
the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
Accounts Receivable
Trade receivables represent billings to other working interest owners for
their share of costs on wells for which the Company serves as the operator.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil
and gas properties whereby costs of productive wells, developmental dry holes,
and productive leases are capitalized and amortized on a
F-7
133
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unit-of-production basis over the respective properties' remaining proved
reserves. Amortization of capitalized costs of oil and gas properties is
provided on a prospect-by-prospect basis.
Leasehold costs are capitalized when incurred. Unproved oil and gas
properties with significant acquisition costs are periodically assessed and any
impairment in value is charged to exploration costs. The costs of unproved
properties which are not individually significant are assessed periodically in
the aggregate based on historical experience, and any impairment in value is
charged to exploration costs. The Company recorded $97,211, $273,843 and $0 of
such impairments in 1997, 1996 and 1995, respectively. The costs of unproved
properties which are determined to be productive are transferred to proved oil
and gas properties.
Exploration costs, such as geological and geophysical expenses and annual
delay rentals, are charged to expense as incurred. Exploratory drilling costs,
if any, including the costs, if any, including the cost of stratigraphic test
wells, are initially capitalized but charged to expense if and when the well is
determined to be unsuccessful.
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that proved
oil and gas properties be assessed for an impairment in their carrying value
whenever events or changes in circumstances indicate that such carrying value
may not be recoverable. SFAS No. 121 requires that this assessment be performed
by comparing the future net cash flows and net carrying value of oil and gas
properties. This assessment must generally be performed on a property by
property basis. No such impairment of the carrying value of oil and gas
properties was required in 1997, 1996 or 1995.
Other Property and Equipment
Other property and equipment are comprised of furniture, fixtures and
automobiles. These items are amortized on a straight-line basis over their
estimated useful lives, which range from five to seven years.
Other Assets
Other assets are primarily comprised of organization costs and deferred
debt issuance costs and are presented net of accumulated amortization in the
financial statements. Organization costs are being amortized on a straight-line
basis over five years. Debt issuance costs are amortized over the life of the
related debt agreements.
Revenue Recognition Policy
Revenues are recorded when products have been delivered and services have
been performed. The Company uses the sales method to account for gas imbalances.
Under this method, revenue is recognized based on the cash received rather than
the Company's proportionate share of gas produced. The Company's imbalances at
June 30, 1998 and December 31, 1997 and 1996 were not significant.
Income Taxes
Prior to the Conversion, the results of operations of the Company were
included in the tax returns of its owners. As a result, tax strategies were
implemented that are not necessarily reflective of strategies the Company would
have implemented. In addition, the tax net operating losses generated by the
Company during the period from its inception to date of the Conversion will not
be available to the Company to offset future taxable income as such benefit
accrued to the owners.
In conjunction with the Conversion, the Company will adopt SFAS No. 109,
"Accounting for Income Taxes," which provides for determining and recording
deferred income tax assets or liabilities based on
F-8
134
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities using enacted tax rates. SFAS No. 109
requires that the net deferred tax liabilities of the Company on the date of the
Conversion be recognized as a component of income tax expense. The Company will
be required to recognize approximately $930,000 in deferred tax liabilities and
income tax expense on the date of the Conversion.
Upon the Conversion, the Company will become taxable as a corporation. Pro
forma income tax information for the years ended December 31, 1997 and 1996 and
for the period from inception (September 21, 1995) to December 31, 1995,
presented in the accompanying consolidated statements of operations and in Note
7, reflects the income tax expense (benefit) and net income (loss) as if all
Partnership income had been subject to corporate federal income tax, exclusive
of the effects of recording the Company's net deferred tax liabilities upon the
Conversion.
Statement of Cash Flows
Cash paid for interest for the years ended December 31, 1997 and 1996 and
for the period from inception (September 21, 1995) to December 31, 1995 was
$702,251, $240,414 and $1,840, respectively.
Interim Financial Information
In the opinion of the Company, the accompanying consolidated financial
statements as of and for the three month periods ended March 31, 1998 and 1997,
which have not been audited by independent public accountants, contain all
adjustments necessary to present fairly the Company's consolidated financial
position, the results of its operations and its cash flows for the periods
reported. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions are eliminated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Certain prior
amounts have been reclassified to conform to 1998 presentation. It is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and footnotes thereto included herein. The
results of operations for the three months ended March 31, 1998 and 1997 are not
necessarily indicative of the results to be expected for a full year.
Other
Certain amounts in the prior periods' financial statements have been
reclassified to conform with the current year presentation.
3. SIGNIFICANT ACQUISITIONS OF OIL AND GAS PROPERTIES AND OTHER ASSETS:
1997 Acquisitions
In addition to acquiring various additional small working interests and
overriding royalty interests in properties already owned and operated by the
Company, the Company closed two significant producing property acquisitions in
1997. In May 1997, the Company acquired all of the interests of Coastal Oil and
Gas Corporation in three producing leases located in the Howard Glasscock Field,
Howard County, Texas, for a net purchase price of $1,110,920. The interests
acquired were attributable to leases in which the Company already owned
interests and which were operated by the Operator. Effective as of July 1, 1997,
the Company acquired substantially all of the producing oil and gas properties
(representing working interests ranging from 25% to 100% in approximately 44
wells located in West Texas, South Texas, East Texas and Southeastern New
Mexico) from E.G. Operating, a division of FGL, Inc., for a net purchase price
of $6,088,073. All of the Company's 1997 acquisitions were funded through a
combination of proceeds from long-term borrowings and cash on hand.
F-9
135
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 Acquisitions
In addition to acquiring various additional small working interest in oil
and gas properties already owned and operated by the Company, the Company closed
two significant producing property acquisitions in 1996. Effective as of June 1,
1996, the Company acquired 100% of the working interest in two producing leases
(14 wells) located in the Sharon Ridge Field, Scurry County, Texas, for a net
purchase price of $446,798. Effective as of July 1, 1996, the Company acquired
producing oil and gas properties (representing working interests ranging from
1.4% to 100% in approximately 137 wells located in West Texas and Southeastern
New Mexico) from Merit Energy Company and certain of its partnership affiliates
for a net purchase price of $4,149,754. All of the Company's 1996 acquisitions
were funded through a combination of proceeds from long-term borrowings and cash
provided by operating activities.
1995 Acquisitions
Effective September 27, 1995, the Company acquired assets comprised
primarily of producing oil and gas properties from J. McShane, Inc. and certain
of its affiliates and co-working interest owners for total consideration of
$7,497,727. The oil and gas assets acquired represent interests in approximately
170 producing wells primarily in the Permian Basin of West Texas and
Southeastern New Mexico. The acquisition was funded through a combination of
capital contributions and proceeds from long-term borrowings.
The 1997, 1996, and 1995 acquisitions were accounted for utilizing the
purchase method of accounting. The accompanying consolidated statements of
operations include the results of operations from the acquired properties
beginning on the dates that the acquisitions were closed. The following table
summarizes the unaudited pro forma effect on the Company's consolidated
statements of operations as if the acquisitions consummated in 1997 had been
closed on January 1, 1997. Future results may differ substantially from pro
forma due to changes in prices received for oil and gas sold, production
declines and other factors. Therefore, the pro forma amounts should not be
considered indicative of future operations.
1997
PRO FORMA
-----------
(UNAUDITED)
Total Revenues.......................................... $10,265,739
===========
Net Income.............................................. $ 845,212
===========
4. SALE OF OIL AND GAS PROPERTIES:
During 1997, the Company sold certain oil and gas properties for a total
net consideration of $390,000, which resulted in a book loss of $87,678. During
1996, the Company sold certain oil and gas properties for total net
consideration of $390,371, which resulted in a book loss of $56,738. The Company
sold no oil and gas properties in 1995.
F-10
136
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OIL AND GAS PRODUCING ACTIVITIES:
Set forth below is certain information regarding the aggregate capitalized
costs of oil and gas properties and costs incurred in oil and gas property
acquisition, development and exploration activities:
Capitalized Costs
AS OF DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Proved properties......................................... $27,797,268 $15,733,964
Unproved properties....................................... 146,366 127,071
Accumulated depreciation, depletion and amortization...... (3,396,901) (1,444,887)
----------- -----------
$24,546,733 $14,416,148
=========== ===========
Costs Incurred
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (SEPTEMBER 21, 1995)
------------------------ TO DECEMBER 31,
1997 1996 1995
----------- ---------- --------------------
Property acquisitions:
Proved properties....................... $ 7,217,464 $4,840,602 $8,664,889
Unproved properties..................... 19,295 -- 397,522
Development costs......................... 5,381,429 2,433,838 138,581
Exploration costs......................... 176,792 359,763 --
----------- ---------- ----------
$12,794,980 $7,634,203 $9,200,992
=========== ========== ==========
6. LONG-TERM DEBT:
As of December 31, 1997, $17,900,000 was outstanding under a $50,000,000
revolving line of credit note (the "Note") with Union Bank of California ("Union
Bank") subject to a borrowing base which is redetermined on a semi-annual basis
beginning April 1, 1998. The Credit Agreement pursuant to which the Note was
originally issued was amended effective as of August 15, 1997 (as further
amended from time to time, the "Credit Agreement"), to, among other things,
provide for an increase in the facility amount of the Credit Agreement from
$15,000,000 to $50,000,000. The borrowing base at December 31, 1997, was
$19,000,000. Borrowings under the Note are to be used for the acquisition and
development of Properties and for other Company purposes.
The Company has two options with respect to interest rate elections on
borrowings under the Note. The Company may either elect an interest rate equal
to (i) Union Bank's reference rate plus 35 basis points ("Prime Basis") or (ii)
a Eurodollar rate (i.e., London Interbank Offered Rate) plus 175 basis points
(if amounts outstanding are 50% or less of the then current borrowing base), in
either case, as adjusted for Union Bank's Reserve Percentage under Regulation D
of the Board of Governors of the Federal Reserve System with respect to
Eurocurrency liabilities ("LIBOR Basis"). The LIBOR Basis option provides for
one-, two-, three-or six-months periods. At year end the Company had the
following amounts outstanding:
AMOUNT RATE ELECTION RATE TERM
- ------ ------------- ------- --------------------
$4,500,000......................... LIBOR Basis 7.59375% 10/01/97 to 03/31/98
$5,100,000......................... LIBOR Basis 7.65234% 11/29/97 to 05/28/98
$7,900,000......................... LIBOR Basis 7.56250% 08/20/97 to 02/19/98
$400,000........................... Prime Basis 8.85000% Not Applicable
F-11
137
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Company had accrued interest thereunder of
$345,758.
Unless otherwise extended by Union Bank, the Note converts to a three-year
fully amortizing term loan at March 31, 1999.
The obligations of the Company under the Credit Agreement and Note are
secured by a first lien deed of trust on the Company's interests in certain of
its Properties.
The Credit Agreement includes covenants which, among other things, restrict
the incurrence of additional indebtedness and the sale or acquisition of oil and
gas properties above certain levels without the consent of the lender.
Effective as of December 23, 1997, the Company entered into an interest
rate swap accounted for as a hedge with any realized gains or losses
appropriately recorded as interest expense. (See Note 11 for further discussion
of hedge accounting.) with Union Bank. The swap consists of $10,000,000 notional
amount of indebtedness at a fixed swap rate of 6.021% three month LIBOR for the
partnership. The term of this swap ends on December 23, 1999.
7. EMPLOYEE STOCK OPTIONS:
Effective September 26, 1995, the Board of Directors of the General Partner
adopted the original Option Plan (the "Plan") for certain officers and employees
of the Partnership and the Operator. The Plan authorizes the grant of options to
acquire units of limited partnership interests in the Partnership ("Units").
Effective April 1, 1997, the Board of Directors of the General Partner amended
and restated the Plan in order to provide for additional options to be added to
the Plan (the "Amended Plan"). As of December 31, 1997, the Amended Plan
provided for future awards of options of up to 165,000 Units.
The Amended Plan provides for the issuance of 1,580,321 options in six
separate series with an initial exercise price of $1 (series A-D or "$1
options") and $2 (series E-F or "$2 options") which was to be increased 10% per
annum from the initial plan adoption date of September 26, 1995, for the $1
options and April 1, 1997, for the $2 options. Option A series, covering 550,358
units, was to vest at a rate of one-third of the options at each of the dates of
April 1, 1998, 1999 and 2000. Option B, C, D, and E series were to vest on the
dates that the Board determines that the current value of partnership units had
increased by a factor of 3, 4, 5, and 6, respectively, or on the date that such
per unit amounts of cash or other assets have been or are authorized to be
distributed to the partners. Option B, C, D, and E series cover 152,877,
159,826, 167,260, and 350,000, respectively.
The following table summarizes Unit activity during 1995, 1996 and 1997,
under the Amended Plan:
WEIGHTED
NUMBER OF AVERAGE
UNITS EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
Outstanding at September 21, 1995............. -- $ -- $ --
Granted..................................... 1,030,321 $ 1.00 $1.01
---------
Outstanding at January 1, 1996................ 1,030,321 $ 1.03 $1.01
Granted..................................... -- $ -- $ --
---------
Outstanding at January 1, 1997................ 1,030,321 $ 1.13 $1.08
Granted..................................... 385,000 $ 2.00 $2.02
---------
Outstanding at December 31, 1997.............. 1,415,321 $1.24 to $2.15 $1.49
=========
Exercisable at December 31, 1997.............. 366,905 $ 1.24 $1.19
=========
F-12
138
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarized information about the Amended Plan at
December 31, 1997:
NUMBER OF UNITS REMAINING LIFE NUMBER OF UNITS
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISABLE
- -------------- --------------- -------------- ---------------
$1.24 1,030,321 3.7 366,905
2.15 385,000 3.7 --
--------------- ---------------
1,415,321 3.7 366,905
=============== ===============
The Company accounts for the Units issued under the Amended Plan under
Accounting Principles Board Opinion No. 25. Based on an estimated fair value of
$2 per unit, the Company recorded a noncash charge for the expected value of the
vested $1 options in the amount of $315,518 for the year ended December 31,
1997. Estimated compensation expense is recorded over the vesting period and
will be adjusted prospectively as the estimated fair value of options changes.
Had compensation cost for the Amended Plan been determined consistent with
Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation," the Company would not have reported any compensation
cost related to the Amended Plan for any periods presented in the accompanying
Consolidated Statements of Operations.
8. LEASE COMMITMENTS:
The Operator, for the benefit of itself, the Partnership and the General
Partner, leases 7,505 square feet of office space at 550 West Texas Avenue,
Suite 700 Midland, Texas from Fasken Center, Ltd. under an office lease dated
October 10, 1996 (as amended from time to time, the "Lease"). The Lease is a
typical office lease containing standard and customary lease provisions and runs
from January 1, 1997, through August 31, 2002. The rental payments due under the
Lease are as follows:
PERIOD AMOUNT
------ --------
January 1, 1997 - August 31, 1997........................ $ --
September 1, 1997 - August 31, 1998...................... 50,523
September 1, 1998 - August 31, 1999...................... 50,523
September 1, 1999 - August 31, 2000...................... 55,538
September 1, 2000 - August 31, 2001...................... 55,537
September 1, 2001 - August 31, 2002...................... 55,537
--------
$267,658
========
9. SIGNIFICANT CUSTOMERS:
During 1997, 1996 and 1995, sales to customers that individually accounted
for 10% or more of the Company's oil and gas sales accounted for 57%, 54% and
45%, respectively, as follows:
1997:................................. 20% to one customer,
19% to one customer, and
18% to one customer
1996:................................. 14% to one customer, and
40% to one customer
1995:................................. 11% to one customer, and
34% to one customer
Management does not believe that the loss of any one customer would have a
significant impact on the Company's results of operations.
F-13
139
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PRO FORMA INCOME TAXES: (UNAUDITED)
The pro forma effective income tax rate for the Company was different than
the statutory federal income tax rate for the periods shown below due to the
following:
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (SEPTEMBER 21, 1995)
----------------------- TO DECEMBER 31,
1997 1996 1995
---------- ---------- --------------------
Pro forma income tax expense at the federal
statutory rate of 35%....................... $209,188 $137,999 $21,020
Other......................................... 2,532 1,285 170
-------- -------- -------
Pro forma income tax expense........ $211,720 $139,284 $21,190
======== ======== =======
Components of pro forma income tax expense are as follows:
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (SEPTEMBER 21, 1995)
----------------------- TO DECEMBER 31,
1997 1996 1995
---------- ---------- --------------------
Current....................................... $ -- $ -- $12,279
Deferred...................................... 211,720 139,284 8,911
-------- -------- -------
$211,720 $139,284 $21,190
======== ======== =======
Deferred tax assets and liabilities are the results of temporary
differences between the financial statement carrying values and tax bases of
assets and liabilities. The Company's pro forma net deferred tax liability
positions are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ---------- --------
Deferred Tax Liabilities:
Property and equipment......................... $ 2,900,251 $1,464,787 $581,814
Deferred Tax Assets:
Other.......................................... (573) (786) --
Net operating losses............................. (1,966,860) (742,903) --
----------- ---------- --------
Pro forma net deferred tax liability........... $ 932,818 $ 721,098 $581,814
=========== ========== ========
11. PRICE RISK MANAGEMENT:
The Company periodically uses derivative financial instruments to manage
crude oil and natural gas price risk. These instruments qualify as hedges under
generally accepted accounting principles and are properly recorded as oil and
gas sales in the statements of operations. In order to qualify for hedge
accounting, each financial instrument must be initially designated as a hedge,
must appropriately reduce the price risk and must have correlation to the
commodity being hedged. If an instrument does not qualify as a hedge, then it is
accounted for as a speculative transaction, with any unrealized gains or losses
being reflected in the statement. It is the Company's policy not to engage in
speculative transactions of this nature. If a financial instrument designated as
a hedge is sold, extinguished or terminated before it matures, then the realized
gain or loss is
F-14
140
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred and amortized to oil and gas sales over the original life of the
financial instrument. The Partnership's realized gains and losses attributable
to its price risk management activities are as follows:
1997 1996 1995
-------- -------- -------
Realized losses....................................... $200,828 $601,430 $34,200
Set forth below is the contract amount and terms of all instruments held
for price risk management purposes at December 31, 1997 and 1996 (all quantities
are expressed in crude oil barrels ("Bbl") and all prices are expressed in the
calendar monthly average of daily NYMEX closing prices for Light Sweet Crude
Oil):
TYPE MONTHLY PUT CALL
TRADE DATE TRANSACTION VOLUME FLOOR PRICE CEILING PRICE TERM
---------- ----------- ------- ----------- ------------- ----------------------------------
December 15, 1997.............. Collar 10,000 $18.00 Bbl $19.805 Bbl April 1, 1998 to December 31, 1998
December 15, 1997.............. Collar 10,000 $18.50 Bbl $19.280 Bbl April 1, 1998 to March 31, 1999
12. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED):
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ----------
1997
Total revenues................. $2,054,168 $1,639,844 $2,469,147 $2,711,802 $8,874,961
========== ========== ========== ========== ==========
Net income..................... $ 238,834 $ 102,141 $ 441,929 $ (185,223) $ 597,681
========== ========== ========== ========== ==========
1996
Total revenues................. $ 962,705 $ 861,839 $1,677,934 $2,035,242 $5,537,720
========== ========== ========== ========== ==========
Net income..................... $ 44,465 $ 11,498 $ 88,034 $ 250,285 $ 394,282
========== ========== ========== ========== ==========
13. OIL AND GAS RESERVES INFORMATION (UNAUDITED):
The estimates of proved oil and gas reserves utilized in the preparation of
the financial statements were estimated by the Company in accordance with
guidelines established by the Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve reports be
prepared under existing economic and operating conditions with no provision for
price and cost escalation except by contractual agreement. All of the Company's
reserves are located onshore in or offshore to the continental United States.
Future prices received for production and future production costs may vary,
perhaps significantly, from the prices and costs assumed for purposes of these
estimates. There can be no assurance that the proved reserves will be developed
within the periods indicated or that prices and costs will remain constant.
There can be no assurance that actual production will equal the estimated
amounts used in the preparation of reserve projections. In accordance with the
Securities and Exchange Commission's guidelines, the Company's estimates of
future net cash flows from the Company's proved properties and the represent
value thereof are made using oil and natural gas sales prices in effect as of
the dates of such estimates and are held constant throughout the life of the
properties. Average prices used in estimating the future net cash flows at
December 31, 1997, 1996 and 1995 were as follows: $16.10, $23.55 and $17.49 per
barrel for oil in 1997, 1996 and 1995, respectively, and $2.01, $3.43 and $1.84
per Mcf for natural gas in 1997, 1996 and 1995, respectively.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. oil and gas reserve engineering must be recognized as
a subjective process of estimating underground accumulations of oil and gas that
cannot be
F-15
141
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measured in an exact way, and estimates of other engineers might differ
materially from those shown below. The accuracy of any reserve estimate is a
function of the quality of available data and engineering and estimate may
justify revisions. Accordingly, reserves estimates are often materially
different from the quantities of oil and gas that are ultimately recovered.
Reserve estimates are integral in management's analysis of impairments of oil
and gas properties and the calculation of depreciation, depletion and
amortization on those properties.
The following unaudited table sets forth proved oil and gas reserves at
December 31, 1997, 1996 and 1995:
1997 1996 1995
---------------------- --------------------- ---------------------
OIL GAS OIL GAS OIL GAS
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
--------- ---------- --------- --------- --------- ---------
Proved Reserves:
Beginning of year......... 4,540,419 7,185,636 2,230,190 4,837,030 -- --
Revisions of previous
estimates(1)........... 1,304,819 (969,377) 548,009 (458,198) -- --
Extensions and
discoveries............ 1,161,953 205,859 28,442
Purchases of minerals in
place.................. 762,282 6,206,929 1,838,595 3,339,214 2,298,401 4,993,545
Sales of minerals in
place.................. (148,902) (343,565) (46,455) (126,680) -- --
Production................ (403,812) (784,298) (235,779) (434,172) (68,211) (156,515)
--------- ---------- --------- --------- --------- ---------
End of year............... 7,216,559 11,295,325 4,540,419 7,185,636 2,230,190 4,837,030
========= ========== ========= ========= ========= =========
Proved Developed Reserves:
Beginning of year......... 3,092,149 5,510,499 1,352,870 3,893,360 -- --
--------- ---------- --------- --------- --------- ---------
End of year............... 3,559,850 7,090,902 3,092,149 5,510,499 1,352,870 3,893,360
========= ========== ========= ========= ========= =========
- ---------------
(1) Proved reserves have historically been revised upward as a result of
successful in-field drilling and implementation of secondary recovery
projects which result in the reclassification of "probable" reserves to the
"proved" category. Other less significant revisions occurred and are
attributable to properties Vista purchased which, as a result of additional
in-depth geological and engineering reviews, were determined to have
additional proved reserves (i.e., more than were originally identified at
the time of purchase). Vista has made similar disclosure in Note 13 of this
Proxy Statement/Prospectus.
The following table sets forth the standardized measure of discounted
future net cash flows relating to proved reserves at December 31, 1997 and 1996:
1997 1996
------------ ------------
Cash Flows Relating to Proved Reserves:
Future cash flows...................................... $131,921,276 $125,076,627
Future costs:
Production.......................................... (45,194,356) (47,139,363)
Development......................................... (12,371,206) (6,835,546)
------------ ------------
Future net cash flows.................................. 74,355,714 71,101,718
10% discount factor.................................... (35,775,170) (30,250,175)
------------ ------------
Standardized measure of discounted future net cash
flows.................................................. $ 38,580,544 $ 40,851,543
============ ============
F-16
142
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had the Company been a taxable entity at December 31, 1997, the future
income taxes would have been $14,127,288 on an undiscounted basis and $7,770,008
on a discounted basis, and the standardized measure of discounted future net
cash flows at December 31, 1997 would have been $36,990,032.
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved reserves for the years ended
December 31, 1997 and 1996 and for the period from inception (September 21,
1995) to December 31, 1995:
1997 1996 1995
----------- ----------- -----------
Standardized Measure, Beginning of Year............... $40,851,543 $17,242,730 $ --
Net change in sales prices, net of production
costs............................................ (12,557,771) 6,601,987
Development costs incurred during the year which
were previously estimated........................ 5,073,000 2,033,000
Revisions of quantity estimates..................... 6,325,872 4,182,057 --
Extensions, discoveries and improved recovery, net
of future production and development costs....... 2,382,351 1,485,041
Accretion of discount............................... 4,085,154 1,724,273 --
Change in future development costs.................. (4,116,068) (2,598,316) --
Change in timing and other.......................... (5,394,793) (4,484,968) --
Purchases of reserves in place...................... 8,289,041 17,756,033 17,862,837
Sales of reserves in place.......................... (1,171,519) (97,141) --
Sales, net of production costs...................... (5,186,266) (2,993,153) (620,107)
----------- ----------- -----------
Standardized measure, end of year..................... $38,580,544 $40,851,543 $17,242,730
=========== =========== ===========
F-17
143
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Vista Resources Partners, L.P.
We have audited the accompanying statements of revenues and direct
operating expenses of the E.G. Acquisition (see Note 1) for the six months ended
June 30, 1997, and the year ended December 31, 1996. These financial statements
are the responsibility of the management of Vista Resources Partners, L.P. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such statements present fairly, in all material respects,
the revenues and direct operating expenses of the E.G. Acquisition described in
Note 1 for the six months ended June 30, 1997, and the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 25, 1998
F-18
144
E.G. ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
REVENUES:
Oil and gas............................................... $1,271,288 $2,601,594
---------- ----------
Total revenues.................................... 1,271,288 2,601,594
---------- ----------
DIRECT OPERATING EXPENSES:
Lease operating and production taxes...................... 469,216 924,113
---------- ----------
Total direct operating expenses................... 469,216 924,113
---------- ----------
EXCESS OF REVENUES OVER DIRECT OPERATING EXPENSES........... $ 802,072 $1,677,481
========== ==========
The accompanying notes are an integral part of this financial statement.
F-19
145
E.G. ACQUISITION
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION:
Effective July 1, 1997, Vista Resources Partners, L.P. ("Vista") acquired
substantially all of the producing oil and gas properties (representing working
interests ranging from 25% to 100% in approximately 44 wells located in West
Texas, South Texas, East Texas and Southeastern New Mexico) from E.G. Operating,
a division of FGL, Inc., for a net purchase price of $6,088,073. All of Vista's
1997 acquisitions were funded through a combination of proceeds from long-term
borrowings and cash on hand.
The items of "direct operating expenses" included in the accompanying
statements of revenues and direct operating expense include all costs incurred
which are necessary for the production, marketing and distribution of the
products produced from the subject properties including, without limitation,
costs and expenses of field separation; treatment; dehydration; direct overhead
charges (other than costs associated with general corporate activities); pumper,
roustabout and field supervision labor; meter calibrations; engineering
supervision charges; fuel and electricity; valves, connections and other minor
equipment repair; oil and lubricants; major repairs (both downhole and surface);
rental tools and equipment; pipe inspection; trucking; reservoir testing;
pressure testing; well plugging; site remediation; operator bonding; insurance
charges; salt water disposal; water injection and pressure maintenance; gas
compression; hot oil and hot water treatments; filing fees; make-up water
purchases; electrician charges; mud and chemicals; pulling and workover units;
other miscellaneous supplies and services; and severance, ad valorem and other
production related taxes and charges. The accompanying statements of revenues
and direct operating expenses do not include costs associated with general
corporate activities, interest income or expense, a provision for depreciation,
depletion and amortization or any provision for income taxes because the subject
properties acquired by Vista from EG Operating represent only a portion of a
business and such items of revenue, income, cost and expense are not necessarily
indicative of the costs to be incurred by Vista.
Historical financial information reflecting financial position, results of
operations and cash flows of the E.G. Acquisition is not presented because the
entire acquisition cost was assigned to the oil and gas property interests.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED):
Reserve information presented below has been estimated by Vista's internal
engineers using December 31, 1997, prices and costs which were utilized in
Vista's reserve estimates as of December 31, 1997. No reserve estimates using
assumptions required by the Financial Accounting Standards Board were prepared
as of July 1, 1997, by Vista. Proved reserves are estimated quantities of crude
oil and natural gas which, based on geologic and engineering data, are estimated
to be reasonably recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are those
which are expected to be recovered through existing wells with existing
equipment and operating methods. Because of inherent uncertainties and the
limited nature of reservoir data, such estimates are subject to change as
additional information becomes available.
Proved Oil and Gas Reserves at June 30, 1997
OIL (Bbls) GAS (Mcf)
---------- ---------
(IN THOUSANDS)
Proved reserves.............................. 748 6,179
Proved developed reserves.................... 507 3,589
F-20
146
E.G. ACQUISITION
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves
The standardized measure of discounted future net cash flows ("Standardized
Measure") is prepared using assumptions required by the Financial Accounting
Standards Board. Such assumptions include the use of year-end prices for oil and
gas and year-end costs for estimated future development and production
expenditures to produce year-end estimated proved reserves. Discounted future
net cash flows are calculated using a 10% rate.
The Standardized Measure does not represent Vista's estimate of future net
cash flows or the value of proved oil and gas reserves acquired from E.G.
Operating. Probable and possible reserves, which may become proved in the
future, are excluded from the calculations. Furthermore, year-end prices, used
to determine the standardized measure of discounted cash flows, are influenced
by seasonable demand and other factors and may not be the most representative in
estimating future revenues or reserve data. As previously stated, Vista used
December 31, 1997, pricing and cost information in determining standardized
measure at June 30, 1997, as no comparable estimates were available. Prices
utilized for the standardized measure at June 30, 1997, were $16.10/Bbl for oil
and $2.01/Mcf for gas.
Standardized Measure of Discounted Future Net Cash Flows at June 30, 1997
(IN THOUSANDS)
Future cash inflows.................................... $24,457,004
Future costs:
Production........................................... 8,236,551
Development.......................................... 2,671,544
Future net cash inflows................................ 13,548,909
10% annual discount.................................... 6,601,186
-----------
Standardized measure of discounted future net cash
flows before income taxes............................ $ 6,947,723
===========
F-21
147
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated balance sheets of Midland
Resources, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Midland Resources, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years ended December 31, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
March 13, 1998, except as to
Note N as to which the date is
April 9, 1998
F-22
148
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Midland Resources, Inc. and subsidiary
for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of their
operations and cash flows of Midland Resources, Inc. and subsidiary for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in 1995.
ERNST & YOUNG LLP
Fort Worth, Texas
March 5, 1996
F-23
149
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
JUNE 30, -------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
Current assets:
Cash................................................. $ 56,673 $ 150,890 $ 366,677
Accounts receivable:
Oil and gas sales................................. 417,062 670,093 834,269
Related parties................................... -- 60,822 360,479
Sales of properties............................... -- 563,757 --
Property operations and other..................... 271,234 296,052 359,600
Property held for sale............................... -- 200,000 1,241,515
Reimbursable merger costs and other.................. 356,616 57,531 104,180
Deferred tax asset................................... 37,000 37,000 378,000
----------- ----------- -----------
Total current assets......................... 1,138,585 2,036,145 3,644,720
Property and equipment, at cost...................... 29,787,275 29,210,699 27,889,580
Less accumulated depreciation, depletion and
amortization...................................... 16,613,114 15,975,838 14,076,100
----------- ----------- -----------
Property and equipment, net.................. 13,174,161 13,234,861 13,813,480
Deferred tax asset................................... 1,302,684 1,011,193 --
Goodwill, net of amortization of $106,754 in 1997 and
$80,067 in 1996................................... 707,240 720,584 747,271
Contracts and leases, net of amortization of $84,352
in 1997 and $78,411 in 1996....................... 188,422 199,116 414,633
Non-current note receivable.......................... 294,387 302,490 317,759
Other assets......................................... 101,553 116,094 38,783
----------- ----------- -----------
Total assets................................. $16,907,032 $17,620,483 $18,976,646
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................... $ 900,000 $ 583,481 $ 1,680,830
Accounts payable and accrued expenses................ 726,529 981,202 1,194,344
Drilling advances.................................... -- -- 393,254
----------- ----------- -----------
Total current liabilities.................... 1,626,529 1,564,683 3,268,428
Long-term debt......................................... 8,856,319 9,115,370 7,166,421
Deferred tax liability................................. -- -- 47,044
Payable for the purchase of subsidiary and other....... 205,554 221,404 317,493
----------- ----------- -----------
Total liabilities............................ 10,688,402 10,901,457 10,799,386
Stockholders' equity:
Preferred stock, $0.01 par value; 20,000,000 shares
authorized, none issued........................... -- -- --
Common stock, $0.001 par value; 80,000,000 shares
authorized; 4,463,499 and 4,401,031 shares issued
in 1997 and 1996, respectively.................... 4,468 4,463 4,401
Additional paid in capital........................... 8,497,772 8,487,801 7,898,199
Unearned compensation................................ (109,119) (164,516) --
Retained earnings (deficit).......................... (2,174,491) (1,608,722) 274,660
----------- ----------- -----------
Total stockholders' equity................... 6,218,630 6,719,026 8,177,260
----------- ----------- -----------
Total liabilities and stockholders' equity... $16,907,032 $17,620,483 $18,976,646
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
150
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
Operating revenue:
Oil and gas sales............. $2,182,394 $3,346,815 $ 6,396,249 $6,958,491 $5,147,033
Management income............. -- -- -- 45,000 102,000
Property operations income.... 51,855 51,150 119,012 111,862 81,036
Partnership income............ -- 99,007 72,275 -- --
Other......................... 15,497 8,655 12,951 26,372 48,105
---------- ---------- ----------- ---------- ----------
Total operating
revenue............. 2,249,746 3,505,627 6,600,487 7,141,725 5,378,174
Operating costs and expenses:
Oil and gas production........ 1,416,724 1,449,529 3,088,886 2,981,837 2,509,854
Exploration costs:
Dry holes.................. -- 332,194 796,852 416,892 --
Geological and
geophysical.............. 4,709 28,090 52,682 349,963 198,453
Depreciation, depletion and
amortization............... 678,255 634,233 1,964,658 1,306,287 1,033,905
Abandonment costs............. 39,808 -- 93,760 -- 3,000
General and administrative.... 574,837 817,183 1,451,404 1,295,298 1,049,904
Impairment of properties...... -- 356,000 1,277,342 114,904 1,020,670
---------- ---------- ----------- ---------- ----------
Total operating costs
and expenses........ 2,714,333 3,617,229 8,725,584 6,465,181 5,815,786
---------- ---------- ----------- ---------- ----------
(464,587) (111,602) (2,125,097) 676,544 (437,612)
Other income and (expenses):
Gain (loss) on sale of
property and equipment..... 10,048 376,505 462,571 36,308 (102,984)
Interest income............... 14,038 18,155 32,337 61,997 19,374
Other income.................. -- -- -- -- 19,537
Interest expense.............. (416,759) (410,832) (970,430) (722,447) (611,587)
---------- ---------- ----------- ---------- ----------
Total other income and
expenses............ (392,673) (16,172) (475,522) (624,142) (675,660)
---------- ---------- ----------- ---------- ----------
Income (loss) before income
taxes......................... (857,260) (127,774) (2,600,619) 52,402 (1,113,272)
Income taxes:
Deferred federal income tax
expense (benefit).......... (291,491) (45,291) (717,237) 30,280 (376,241)
---------- ---------- ----------- ---------- ----------
Net income (loss)............... $ (565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031)
========== ========== =========== ========== ==========
Earnings (loss) per share:
Basic......................... $ (0.13) $ (.02) $ (0.42) $ 0.01 $ (0.22)
========== ========== =========== ========== ==========
Diluted....................... $ (0.13) $ (.02) $ (0.42) $ 0.01 $ (0.22)
========== ========== =========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
151
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED TREASURY NOTE
------------------ PAID IN EARNINGS STOCK RECEIVABLE UNEARNED
SHARES AMOUNT CAPITAL (DEFICIT) AT COST OFFICER/DIRECTOR COMPENSATION
--------- ------ ---------- ----------- -------- ---------------- ------------
Balances at December 31, 1994... 3,374,522 $3,375 $5,404,109 $ 989,569 $(25,465) $ -- $ --
Stock options exercised......... 22,000 22 51,072 -- -- -- --
Warrants exercised.............. 997,009 997 2,399,787 -- -- (453,641) --
Warrants redeemed............... -- -- (63,373) -- -- --
Treasury stock contributed to
ESOP (5,000 shares)........... -- -- 2,577 -- 10,412 -- --
Warrants issued to bank......... -- -- 65,622 -- -- -- --
Net loss........................ -- -- -- (737,031) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balances at December 31, 1995... 4,393,531 4,394 7,859,794 252,538 (15,053) (453,641) --
Stock options exercised......... 7,500 7 17,805 -- -- -- --
Additional proceeds from 1995
warrants exercised............ -- -- 9,191 -- -- -- --
Treasury stock contributed to
ESOP (7,300 shares)........... -- -- 11,409 -- 15,053 -- --
Reduction of note receivable
officer/director.............. -- -- -- -- -- 453,641 --
Net income...................... -- -- -- 22,122 -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balances at December 31, 1996... 4,401,031 4,401 7,898,199 274,660 -- -- --
Stock options exercised......... 36,000 36 109,276 -- -- -- --
Warrants exercised.............. 11,428 11 45,701 -- -- -- --
Stock issued for property....... 15,040 15 52,625 -- -- -- --
Stock-based compensation........ -- -- 382,000 -- -- -- (382,000)
Amortization of unearned
compensation.................. -- -- -- -- -- -- 217,484
Net loss........................ -- -- -- (1,883,382) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balances at December 31, 1997... 4,463,499 4,463 8,487,801 (1,608,722) -- -- (164,516)
Stock options exercised......... 4,200 5 9,971 -- -- -- --
Amortization of stock-based
compensation (unaudited)...... -- -- -- -- -- -- 55,397
Net loss (unaudited)............ -- -- -- (565,769) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balance at June 30, 1998
(unaudited)................... 4,467,699 $4,468 $8,497,772 $(2,174,491) $ -- $ -- $(109,119)
========= ====== ========== =========== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
152
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).................... $(565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031)
Depreciation, depletion and
amortization....................... 678,255 634,233 1,964,658 1,306,287 1,033,905
Abandonments and exploratory dry
holes.............................. -- 332,194 890,612 416,892 --
Impairment of properties............. -- 356,000 1,277,342 114,904 1,020,670
(Gain) loss on sale of properties and
equipment.......................... (10,048) (374,654) (462,571) (36,308) 102,984
Noncash stock-based compensation..... 55,398 117,047 217,484 -- --
Deferred income tax expense
(benefit).......................... (291,491) (45,291) (717,237) 30,280 (376,241)
Partnership distributions in excess
of income.......................... -- -- 45,875 -- --
(Increase) decrease in accounts
receivable related to operations... 338,671 111,302 166,902 (265,521) (58,418)
Decrease (increase) in other current
assets............................. (2,753) 20,277 22,610 (8,300) (62,798)
Increase (decrease) in accounts
payable and accrued expenses
related to operations.............. (254,673) 711,451 (213,142) 218,581 182,293
Decrease in note receivable.......... -- -- -- -- 28,456
Other................................ 27,922 20,774 84,310 94,704 20,963
--------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities......................... (24,488) 1,800,850 1,393,461 1,893,641 1,154,783
Cash flows from investing activities:
Additions to oil and gas
properties......................... (620,370) (1,540,045) (2,588,150) (3,714,110) (2,720,590)
Additions to other property and
equipment.......................... (2,145) (17,417) (17,765) (40,554) (159,805)
Investment in limited partnership.... -- (1,566,151) (1,536,130) -- --
Sale and salvage recoveries on oil
and gas properties................. 802,805 1,672,982 1,657,385 32,975 --
Sale of other property and
equipment.......................... -- -- 205,851 1,000 14,120
Reimbursable partnership
expenditures....................... -- 360,479 360,479 (360,479) --
Purchase of marketable securities.... -- -- -- (326,155) --
Sale of marketable securities........ -- -- -- 350,332 --
Purchase of Summit, less cash
acquired........................... (15,850) (104,792) (89,139) (1,217,280) --
Loan origination costs and other..... (309,093) -- (119,219) -- --
--------- ----------- ----------- ----------- -----------
Net cash used in investing
activities......................... (144,653) (1,194,944) (2,126,688) (5,274,271) (2,866,275)
Cash flows from financing activities:
Net proceeds from warrants
exercised.......................... 9,975 31,364 45,712 9,191 1,830,997
Collections on note receivable from
officer/director................... -- -- -- -- 95,000
Warrant redemptions.................. -- -- -- -- (63,373)
Net proceeds from options
exercised.......................... -- 83,563 109,312 29,221 51,094
Borrowings on long-term debt......... 720,000 1,056,250 2,617,250 3,770,000 1,821,000
Principal payments on long-term
debt............................... (662,532) (1,677,035) (1,876,849) (983,067) (1,826,056)
Drilling advances.................... -- (393,254) (393,254) 393,254 --
Other................................ 7,481 6,909 15,269 14,098 (9,515)
--------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities......................... 74,924 (892,203) 517,440 3,232,697 1,899,147
--------- ----------- ----------- ----------- -----------
Increase (decrease) in cash............ (94,217) (286,297) (215,787) (147,933) 187,655
Cash, beginning of year................ 150,890 366,677 366,677 514,610 326,955
--------- ----------- ----------- ----------- -----------
Cash, end of year...................... $ 56,673 $ 80,380 $ 150,890 $ 366,677 $ 514,610
========= =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
153
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Midland Resources, Inc. ("Company"), was organized in 1990 with the issue
of common stock and warrants in exchange for oil and gas partnership interests.
The Company and its wholly owned subsidiaries are headquartered in Houston,
Texas. The Company is involved in the acquisition, exploration, development and
production of oil and gas and owns producing properties and undeveloped acreage
and royalty interests in Texas, Illinois and Colorado. The majority of its
activities are centered in the Permian Basin of West Texas. Midland Resources
Operating Company Inc. ("MRO"), a wholly owned subsidiary, is in the business of
oil and gas property operations. Summit Petroleum Corporation ("Summit") is a
wholly owned subsidiary engaged in oil and gas acquisition, exploration,
development and production. (See Note B.)
Principles of Consolidation
The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company balance
sheet accounts have been eliminated in consolidation. All significant
inter-company transactions have been eliminated from the consolidated statements
of operations and cash flows for the years ended December 31, 1997, 1996 and
1995.
Reclassifications
Certain reclassifications have been made to conform to the 1997
presentation.
Oil and Gas Operations
The Company follows the "successful efforts" method of accounting for oil
and gas properties. All costs associated with the acquisition and development of
proved oil and gas properties are capitalized.
Costs associated with exploratory drilling are capitalized pending
evaluation of drilling results. Costs of exploratory wells which do not find
proved results are expensed. Geological, geophysical and delay rental costs are
expensed as incurred.
Depreciation, depletion and amortization of oil and gas properties is
computed on a property-by-property basis using the units-of-production method
based upon estimated oil and gas reserve quantities.
Oil and gas revenues are recognized under the sales method at the point of
delivery to the purchaser. No significant over or under produced positions
between the Company and its working interest partners exist.
During the fourth quarter of 1995, the Company adopted the provisions of
the Financial Accounting Standards Board's Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"). FAS 121 requires impairment losses to be recognized on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by these assets are less than
the assets' carrying amount. It also requires assets held for sale to be valued
at the lesser of their original carrying amount or fair value. Estimated fair
value of oil and gas properties is based on estimates of future net cash flows,
discounted at appropriate rates, prepared by independent petroleum engineers.
Concurrent with the adoption and decision to market certain oil and gas
properties, the Company recognized a write-down of $1,020,670. In 1996 and 1997,
the Company recognized losses of $114,904 and $1,277,342, respectively, on its
oil and gas properties. In addition, in 1997, the Company recognized abandonment
losses of $93,760 resulting from expired and worthless leasehold acreage.
F-28
154
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Property and Equipment
All other property and equipment is depreciated on the straight-line method
over lives ranging from 5 to 6 years.
Intangible Assets
Goodwill is amortized on the straight-line method over 30 years. Property
operating contracts are amortized on the straight-line method over the lives of
the respective oil and gas properties which range from 3 to 19 years. The
carrying amounts and amortization lives of goodwill and property operating
contracts are evaluated annually. These costs are combined with net capitalized
oil and gas property costs in testing for impairment.
Accounting for Stock Options
The Company accounts for employee stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, whereby compensation costs are recognized only in situations
where stock compensatory plans award intrinsic value to recipients at the date
of grant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The most
significant estimates affecting the Company's financial statements are the
determination of hydrocarbon reserves, the estimated useful lives of depreciable
and amortizable assets, and the fair value of assets held for sale.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future
tax consequences of differences between the financial statement carrying amounts
of assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates applicable to the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings (Loss) Per Common Share
Effective December 31, 1997, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 for all
periods presented. Basic earnings per share is calculated by dividing net income
by the weighted average number of common shares outstanding during each year.
Dilutive earnings per share is calculated by dividing net income by the weighted
average number of common and dilutive potential common shares. Stock options and
warrants may be potential dilutive common shares and are therefore considered in
the earnings per share calculation, if dilutive. The number of dilutive
potential common shares is determined using the treasury stock method. Shares
used to compute basic and diluted earnings (loss) per share were 4,433,113,
4,395,414 and 3,381,592 in 1997, 1996 and 1995, respectively. Dilutive potential
shares (options and warrants) not included in these computations because either
their effect was antidilutive, or dilution was immaterial, were 2,754,094,
2,726,022 and 2,572,522 in 1997, 1996 and 1995, respectively.
F-29
155
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Benefits
Prior to 1995, the Company maintained a 401(k) Plan which covered
substantially all full-time employees. In 1995, the Board of Directors
authorized the restatement of the plan as the Midland Resources Operating
Company, Inc. 401(k) Employee's Stock Ownership Plan and Trust and the
contribution of 5,000 shares of treasury stock to the restated plan. An
additional 7,300 shares of treasury stock were contributed in 1996. As of
December 31, 1995 and 1996, all shares had been allocated to participants in the
plan. The Company matches employee contributions up to 3 percent of gross
salary. The expense related to the Company's contributions and plan
administration was $26,517, $50,092, and $25,985 in 1997, 1996 and 1995,
respectively.
Financial Instruments
The carrying amount of cash approximates fair value. Interest rates
associated with substantially all the Company's long-term debt are linked to
current market rates. As a result, management believes that the carrying amount
approximates the fair value of the Company's credit facilities.
Interim Financial Statements
The financial statements as of June 30, 1998 and 1997 and for the six month
periods then ended, included herein, are unaudited. These financial statements
include all adjustments, (consisting only of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair presentation of
the financial statements for these periods. The results of operations for these
three month periods are not necessarily indicative of the results for a full
year.
NOTE B. PURCHASE OF SUBSIDIARY CORPORATION
On September 18, 1996, the Company, through MRI Acquisition Corp. (a wholly
owned subsidiary), acquired 81.5% of the issued and outstanding common stock and
all outstanding stock options of Summit Petroleum Corporation (See Note F.) for
cash of $1,081,188 and cancellation of a note receivable from an
officer/stockholder of both the Company and Summit of $479,648. In December
1996, the Summit stockholders approved a plan of merger whereby Summit became a
wholly owned subsidiary of the Company. Pursuant to this plan, stockholders
possessing the remaining 18.5% interest (443,633 shares), upon tendering their
shares, receive $0.70 per share. During 1997, payments of $89,139 were made for
127,341 shares tendered. The Company's liability for the purchase of these
remaining shares, which is being funded through long-term borrowings under the
Company's revolving credit agreement (See Note C.), is included as a non-
current liability in the accompanying balance sheet. The purchase price ($0.70
per share and $0.6375 per option) was based on the fair value of Summit's net
assets as determined by the Board of Directors of each respective corporation.
The transaction was subject to a fairness opinion provided by a recognized
investment banking firm relative to these values. In addition to the purchase
price, the Company incurred $139,254 in costs directly related to this
acquisition, resulting in a total investment through December 31, 1997, of
$2,010,633. This acquisition is accounted for under the purchase method of
accounting, which provides that the results of operations are combined from the
date of acquisition (September 18, 1996). In December 1996, MRI Acquisition
Corp. was dissolved and Summit became a wholly-owned subsidiary of the Company.
F-30
156
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the allocation of the cost to the assets
acquired and liabilities assumed in this acquisition:
Current assets, including cash of $3,162.................... $ 155,742
Current liabilities......................................... (250,701)
Oil and gas properties...................................... 2,408,259
Other assets................................................ 20,773
Contracts and leases........................................ 200,000
Deferred income tax liability (non-current)................. (279,729)
Long-term debt.............................................. (243,711)
----------
Total............................................. $2,010,633
==========
The following is a summary of the pro forma results of operations as though
this transaction had occurred on January 1, 1995.
1996 1995
---------- ----------
Total revenue............................................... $7,749,621 $5,921,767
========== ==========
Net income (loss)........................................... $ (7,396) $ (889,623)
========== ==========
Loss per weighted average common share:
Basic..................................................... $ -- $ (0.26)
========== ==========
Diluted................................................... $ -- $ (0.26)
========== ==========
NOTE C. LONG-TERM DEBT
The Company's long-term debt consisted of the following at December 31,
1997 and 1996:
1997 1996
---------- ----------
$30 million revolving credit agreement with Compass Bank,
expiring December 1, 1999................................. $9,651,615 $ --
Credit facility with First Union National Bank
Principal balance......................................... -- 8,500,000
Less discount thereon..................................... -- (25,863)
Note payable to First Union National Bank................... -- 324,711
Other, primarily secured monthly installment notes.......... 47,236 48,403
---------- ----------
9,698,851 8,847,251
Less portion due within one year............................ 583,481 1,680,830
---------- ----------
Long-Term Portion........................................... $9,115,370 $7,166,421
========== ==========
In December, 1997 the Company entered into a revolving credit agreement
with Compass Bank (Compass) which provides for a credit facility of $30 million
and an initial borrowing base of $10,500,000. Concurrent with the execution of
this agreement, the Company's outstanding debt to First Union National Bank
(FUNB) in the amount of $9,151,615 was paid by an advance under the Compass
agreement. Amounts borrowed under the Compass agreement are collateralized by a
first lien on substantially all of the Company's oil and gas properties.
Interest under this agreement is payable monthly at an annual rate which, at the
Company's option, is equal to either (a) the Compass prime lending rate (8.5% at
December 31, 1997) or (b) the London Interbank Offered Rate, plus 2.5%. In
addition, a commitment fee equal to 1/2% per annum on the unused portion of the
borrowing base is required. The borrowing base is reduced at the rate of
$120,000 per
F-31
157
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
month beginning February 1, 1998 and is subject to redetermination on each April
1st and October 1st. This agreement also requires that the Company maintain
certain financial ratios and generally restricts the Company's ability to incur
debt, sell assets, materially change the nature of the Company's business
structure or pay dividends.
Future maturities of long term debt at December 31, 1997 are as follows:
1998..................................................... $ 583,481
1999..................................................... 9,100,918
2000..................................................... 11,083
2001..................................................... 3,369
----------
$9,698,851
==========
NOTE D. ISSUANCE OF COMMON STOCK AND WARRANTS
In November 1990, the Company issued 2,264,522 shares of common stock, as
discussed in Note A, based on an exchange value of $2.00 per share. For each
share of common stock issued, two warrants were issued entitling the holder to
purchase one share of common stock at $2.50 and one share at $4.00 during the
period from November 1990 to November 2002. On October 6, 1995, the 90 day
common stock market price requirement (as defined in the Warrant Agreement) was
met and the Company called its $2.50 warrants. Holders of record on December 22,
1995 received a redemption payment of $0.05 per warrant for aggregate payments
of $63,373, which was charged to additional paid in capital. 997,009 of the
$2.50 warrants were exercised. As of December 31, 1997, 11,428 of the $4.00
warrants had been exercised.
The warrants are subject to certain antidilution provisions contained in
the warrant agreement, which could cause adjustments to the exercise price and
the number of shares issuable.
The Company has two employee stock option plans which reserve an aggregate
of 700,000 shares of common stock for issuance to officers and other key
employees. As of December 31, 1997 options to acquire 260,000 shares at prices
ranging from $2.375 to $4.00 were outstanding under these plans with scheduled
expiration dates of 1998 through 2002. As of December 31, 1997, 376,500 shares
were available for future grant.
Under the Midland Resources, Inc. 1995 Directors' Stock Option Plan, 20,000
stock options with a five year term were granted to directors in 1995. As of
December 31, 1995, all 20,000 options were outstanding under this plan. In 1996,
an additional 30,000 stock options were granted to directors. Each option
entitles the holder to purchase one share of common stock for the fair market
value of common stock on the date of the grant of the option. As of December 31,
1997, 50,000 options were outstanding under this plan at exercise prices ranging
from $2.75 to $3.75 and 50,000 options were available for future grant. Options
outstanding at December 31, 1997, if not exercised, are scheduled to expire in
1999 through 2001.
In May 1997, the Stockholders ratified the Midland Resources, Inc. 1997
Board of Directors Stock Incentive Plan under which 1,000,000 options were
issued to non-employee directors, 175,000 options were issued to the advisory
director and 60,000 were issued to the corporate secretary, all to acquire
shares at $3.00 per share. These options are vested as certain stipulated
trading prices for the Company's common stock are achieved and, exercisability
is further restricted by time delay provisions which limited the number of
vested shares that may be exercised each year beginning in March 1998. As of
December 31, 1997, 247,000 of these options were vested. Upon a change of
control, as defined, all of these options became exercisable. These options, if
not exercised, expire in March, 2002. Also in February, 1997, the Company issued
a five year warrant to purchase 50,000 shares to a consultant for future
services. These options and warrants are expected to give rise to the
recognition of compensation expenses of up to $616,250 through year 2000. In
1997, stock-based compensation expense of $217,484 was recognized in connection
with these issuances.
F-32
158
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1995, the Company issued 150,000 warrants to purchase common stock
at $4.00 per share for a term of seven years to FUNB. In exchange the Company's
credit facility loan agreement was amended to reduce the interest rate by 0.75%
and allow 25% of its borrowing base to be used for working capital purposes. The
fair value of the warrants at the date of grant was recorded as debt discount
and additional paid in capital. None of these warrants have been exercised as of
December 31, 1997.
Warrants to purchase an additional 70,000 shares of common stock were
issued in 1994 through 1996 in exchange for investment banking and other
services, with exercise prices ranging from $2.50 to $2.875.
Effective January 1, 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123, which provides for
an alternative method to valuation of the compensation element of stock based
compensation plans. The Company applies APB 25 and related Interpretations in
accounting for employee stock-based compensation. Had compensation costs been
determined based on the fair value at the grant dates for awards consistent with
the method of FASB Statement 123, the Company's net income (loss) and related
per share amounts would have been reduced to the pro forma amounts indicated
below:
1997 1996 1995
----------- --------- ---------
Net income (loss):
As reported.................................... $(1,883,382) $ 22,122 $(737,031)
Pro forma...................................... (2,078,360) (245,366) (859,861)
Earnings (loss) per share
As reported:
Basic....................................... $ (0.42) $ 0.01 $ (0.22)
Diluted..................................... (0.42) 0.01 (0.22)
Pro forma:
Basic....................................... $ (0.47) $ (0.06) $ (0.25)
Diluted..................................... (0.47) (0.06) (0.25)
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants issued in 1997, 1996 and 1995:
Expected volatility.................................. 61% to 110%
Risk free rate....................................... 6.02% to 6.49%
Expected life of options............................. 3 to 5 years
Expected dividend yield.............................. 0%
F-33
159
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and changes therein during the years then ended is
presented below:
EMPLOYEE PLANS DIRECTOR PLANS
-------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- --------- ----------------
Year ended December 31, 1995:
Outstanding, January 1, 1995............ -- -- -- --
Granted................................. 115,000 $2.48 20,000 $2.75
Expired................................. -- -- -- --
Exercised............................... (22,000) 2.38 -- --
Outstanding, December 31, 1995.......... 93,000 $2.48 20,000 $2.75
------- ----- --------- -----
Options exercisable at December 31,
1995................................. 93,000 $2.48 20,000 $2.75
======= ===== ========= =====
Weighted average fair value of options
granted during 1995.................. $2.15 $2.04
===== =====
Year ended December 31, 1996:
Outstanding, January 1, 1996............ 93,000 $2.48 20,000 $2.75
Granted................................. 188,000 3.45 30,000 3.75
Expired................................. (22,000) 2.92 -- --
Exercised............................... (7,500) 2.38 -- --
Outstanding, December 31, 1996.......... 251,500 $3.18 50,000 $3.35
------- ----- --------- -----
Options exercisable at December 31,
1996................................. 191,500 $3.01 50,000 $3.35
======= ===== ========= =====
Weighted average fair value of options
granted during 1996.................. $2.70 $3.01
===== =====
Year ended December 31, 1997:
Outstanding, January 1, 1997............ 251,500 $3.18 50,000 $3.35
Granted................................. 123,000 3.33 1,235,000 3.00
Expired................................. (78,500) 3.16 -- --
Exercised............................... (36,000) 3.06 -- --
Outstanding, December 31, 1997.......... 260,000 3.18 1,285,000 3.01
------- ----- --------- -----
Options exercisable at December 31,
1997................................. 181,000 $3.07 50,000 $3.00
======= ===== ========= =====
Weighted average fair value of options
granted during 1997.................. $2.05 $0.25
===== =====
F-34
160
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of stock purchase warrants at December 31, 1995,
1996 and 1997, and changes therein during the years then ended is presented
below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICES
---------- ----------------
Year ended December 31, 1995:
Outstanding, January 1, 1995............................ 4,554,044 $3.24
Issued.................................................. 170,000 3.87
Expired/redeemed........................................ (1,267,513) 2.50
Exercised............................................... (997,009) 2.50
Outstanding, December 31, 1995.......................... 2,459,522 3.97
---------- -----
Warrants exercisable at December 31, 1995............... 2,459,522 $3.97
========== =====
Weighted average fair value of warrants issued during
1995................................................. $0.44
=====
Year ended December 31, 1996:
Outstanding, January 1, 1996............................ 2,459,522 $3.97
Issued.................................................. 25,000 3.25
Expired................................................. -- --
Exercised............................................... -- --
Outstanding, December 31, 1996.......................... 2,484,522 3.97
---------- -----
Warrants exercisable at December 31, 1996............... 2,484,522 $3.97
========== =====
Weighted average fair value of warrants issued during
1996................................................. $0.45
=====
Year ended December 31, 1997:
Outstanding, January 1, 1997............................ 2,484,522 $3.97
Issued.................................................. 50,000 3.00
Expired................................................. -- --
Exercised............................................... (11,428) 4.00
Outstanding, December 31, 1997.......................... 2,523,094 3.89
---------- -----
Warrants exercisable at December 31, 1997............... 2,523,094 $3.89
========== =====
Weighted average fair value of warrants issued during
1997................................................. $0.45
=====
NOTE E. MAJOR CUSTOMERS
The Company and its subsidiaries operate exclusively within the United
States and their revenues and operating income are derived predominately from
the oil and gas industry. Oil and gas production is sold to various purchasers
and the receivables are generally uncollateralized. The Company has not
experienced significant credit losses on its oil and gas accounts and management
is of the opinion that significant credit risk does not exist. Management is of
the opinion that the loss of any one purchaser would not have an adverse effect
on the ability of the Company to sell its oil and gas production.
In 1997, three purchasers accounted for 18%, 15% and 12%, respectively, of
total oil and gas revenues. In 1996, three purchasers accounted for 18%, 12% and
15%, respectively, of total oil and gas revenues. In 1995, four purchasers
accounted for 18%, 17%, 11% and 11%, respectively, of total oil and gas
revenues.
NOTE F. RELATED PARTIES
Until December 1993, MRO was owned 80% by the Company's then President and
Chairman of the Board of Directors, Mr. Deas H. Warley III and 20% by a former
Vice President and Board Member, Sal J.
F-35
161
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pagano. Mr. Warley currently owns approximately 16% of the Company's outstanding
common stock and 5% of the related $4.00 warrants.
Effective November 1, 1995, the Company purchased a building and land in
Midland County, Texas, for $78,996 from Mr. Warley and another individual for
use as a district office. Mr. Warley and the other individual each financed 50%
of the purchase price less the down payment of $10,496. The two $34,250 ten year
notes bore interest at 7.5% and were payable in equal monthly installments of
$407 each. The cost to the Company was based on an independent written appraisal
and certain improvements completed before the property was purchased. This
property was sold in 1997 at a gain of $46,500.
In December 1995, Mr. Warley borrowed $582,805 from the Company under an
eighteen month term note bearing 7.5% interest, secured by 287,947 shares of the
Company's common stock. Mr. Warley used these funds to exercise his 233,122
warrants to buy common stock at $2.50 per share. The balance of the note payable
to Mr. Warley discussed above was netted against this note receivable and he
made a cash payment of $95,000 leaving a balance of $453,641 at December 31,
1995. This amount was reflected in the financial statements as a reduction of
stockholders' equity at December 31, 1995. This note was paid in full in
September 1996 by offsetting the balance of $479,648 against the payment to Mr.
Warley for his stock and options in Summit Petroleum Corporation (See Note B.).
During 1995, Summit participated with the Company in the acquisition of
certain oil and gas leases and seismic options in the Sunburst Project, Terry
County, Texas, and the Latigo and Lakota Projects, Hockley County, Texas in
exchange for a commitment from the Company and Summit to expend certain monies
in connection with acquiring an interest in certain oil and gas leases, seismic
options, conducting 3-D geological surveys, interpretation of 3-D seismic data
and the drilling of two or more test wells. Summit acquired its five percent
interest working interest in proportion to its share of the commitment.
Effective September 1, 1995, Summit participated with the Company in the
acquisition of additional working interests in certain Redfish Bay properties in
Nueces County, Texas. Summit acquired its four percent working interest on the
same basis as the Company.
The amounts due from a related party at December 31, 1996, represents
reimbursements due for certain acquisition and exploration costs from a limited
partnership, formed in January, 1997, for which the Company served as general
partner. Amounts due from a related party at December 31, 1997 represents
amounts due from this partnership for property operations and drilling costs.
The limited partnership group was initially comprised of 19 individuals of which
18 were also stockholders of the Company. In addition, two of these individuals
are directors of the Company. During 1997, the Company's interest was assigned
to the Company in the form of oil and gas property interests and, effective
December 31, 1997 the Company withdrew from the partnership.
During 1997, the Company acquired working interests from two directors and
a partnership interest from one of these directors for cash consideration of
$144,879 and 15,040 shares of common stock valued at $52,625.
NOTE G. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation arising in the ordinary course of
business. Management believes the ultimate resolution of these matters will not
have a material effect on the consolidated financial statements (see Note N.).
F-36
162
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases its executive office space and a field office under
noncancellable operating leases expiring in 2002. Rental expense was $34,560 in
1995, $92,088 in 1996, and $93,988 in 1997. Future minimum rental commitments,
as of December 31, 1997, for these leases are as follows:
1998..................................................... $117,216
1999..................................................... 117,216
2000..................................................... 117,216
2001..................................................... 117,216
2002..................................................... 78,144
--------
$547,008
========
NOTE H. INCOME TAXES
The deferred tax assets and liabilities reflected in the consolidated
balance sheets as December 31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Deferred tax assets:
Tax loss carry-forwards................................... $1,214,957 $1,193,719
Less valuation allowance............................... (146,385) --
Other..................................................... 80,579 9,405
1,149,151 1,203,124
Deferred tax liabilities:
Property and equipment.................................... 33,259 619,975
Property held for sale.................................... -- 108,317
Contracts and leases...................................... 67,699 143,876
---------- ----------
100,958 872,168
---------- ----------
Net deferred tax asset...................................... $1,048,193 $ 330,956
========== ==========
For income tax purposes, the Company has net losses of approximately
$2,963,000 available for carryforward which, if not utilized, will begin to
expire in 2005. Management has determined that, based on future expectations, it
is more likely than not that the Company's future taxable income will be
sufficient to fully utilize these losses prior to their expiration. In addition,
the Company has losses of approximately $610,000 which, if not utilized, will
begin to expire in 1998. Management has determined that, based on future
expectations, it is more likely than not, that approximately $431,000 of this
amount will not be utilized and, accordingly, has established a valuation
allowance.
A reconciliation of the provision for income taxes to the income taxes
computed using the federal statutory rate for the years 1997, 1996 and 1995
follows:
1997 1996 1995
--------- ------- ---------
Amount computed using statutory tax................. $(884,211) $17,817 $(378,513)
Increase (reduction) in taxes resulting from:
Valuation allowance against tax loss
carry-forwards................................. 146,385 -- --
--------- ------- ---------
Nondeductible expenses............................ 10,886 2,642 2,400
All other......................................... 9,703 9,821 (128)
Federal income tax (benefit)........................ $(717,237) $30,280 $(376,241)
F-37
163
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996, is comprised of the
following:
1997 1996
----------- -----------
Producing oil and gas properties........................... $27,041,136 $25,809,221
Non-producing oil and gas properties....................... 1,582,364 1,127,605
Transportation equipment................................... 215,749 282,532
Computer equipment and software............................ 244,138 229,155
Office furniture and equipment............................. 96,732 94,299
Land and buildings......................................... 14,000 96,545
Leasehold improvements..................................... 1,347 9,014
Wells in progress.......................................... 15,233 241,209
----------- -----------
$29,210,699 $27,889,580
=========== ===========
NOTE J. HEDGING ACTIVITIES
Effective March 1, 1995, the Company entered into a one year gas swap
agreement to hedge against a portion of the price risk associated with gas price
declines. This agreement covers approximately 50% of the Company's total
estimated gas production. The Company's price under this agreement is a minimum
of $1.50 per Mcf with a 40% participation in prices over $1.50. This swap
agreement expired in February, 1996, and the Company has not entered into
another contract. Losses under this contract were $21,109 and $25,860 for 1995
and 1996, respectively. Gains or losses relating to the swap agreement are
measured, settled and recognized at the end of each month as part of oil and gas
sales.
NOTE K. OIL AND GAS INFORMATION
Capitalized costs related to the Company's oil and gas producing activities
are as follows:
1997 1996
----------- -----------
Proved producing properties subject to depreciation,
depletion and amortization............................... $27,041,136 $25,809,221
Less accumulated depreciation, depletion and
amortization............................................. 15,634,206 13,769,157
----------- -----------
11,406,930 12,040,064
Wells in progress.......................................... 15,233 241,209
Non-producing properties................................... 1,582,364 1,127,605
----------- -----------
Net capitalized cost....................................... $13,004,527 $13,408,878
=========== ===========
F-38
164
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of costs incurred in acquisition, development and exploration of
oil and gas properties is as follows:
1997 1996 1995
---------- ---------- ----------
Incurred directly:
Acquisition costs -- Proven properties......... $ 57,116 $2,391,228 $ 510,832
Acquisition costs -- Unproven properties....... 296,928 922,607 198,124
Development costs.............................. 1,645,774 2,368,448 2,011,634
Exploration costs.............................. 849,534 766,855 198,453
Share of limited partnership expenditures:
Acquisition -- Unproven properties............. $ 539,935 $ -- $ --
Development costs.............................. 932,197 -- --
Exploration costs.............................. 2,050 -- --
Depreciation, depletion and amortization per equivalent barrel of oil
produced (gas is converted to equivalent barrels at the rate of 6 Mcf per
barrel) are as follows:
1997 1996 1995
----- ----- -----
Depreciation, depletion and amortization:
Based on production....................................... $4.95 $2.91 $2.73
NOTE L. CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
1997 1996 1995
-------- -------- --------
Cash paid during the year for:
Interest.................................................. $896,760 $625,948 $560,456
Income taxes.............................................. -- -- 30,272
Significant non-cash activities:
Issuance of stock for property............................ 52,625 -- --
Issuance of warrants to bank.............................. -- -- 75,000
Note receivable from sale of building..................... -- -- 344,875
Note payable from purchase of district office, warehouse
and yard............................................... -- -- 68,500
Note receivable from officer/director for exercise of
warrants, net of note payable.......................... -- -- 548,641
Treasury stock contributed to ESOP........................ -- 26,462 12,989
Development costs incurred, unpaid at year end............ -- 110,700 --
Non-cash reduction in note receivable officer/director.... -- 479,648 --
Proceeds from property sales not collected at year end.... 563,757 -- --
NOTE M. OIL AND GAS RESERVES (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Securities and Exchange Commission and Financial
Accounting Standards Board which require that reserve estimates be prepared
under existing economic and operating conditions, with no provision for price
and cost escalators, except by contractual agreement. These estimates as of
December 31, 1997 are based on evaluations prepared by Williamson Petroleum
Consultants, Inc., Independent Petroleum Engineers. The estimates as of December
31, 1996 and 1995 are based on evaluations prepared by E. Ralph Green and
Associates, Independent Petroleum Engineers.
F-39
165
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management emphasizes that reserve estimates are inherently imprecise and
are expected to change as new information is available and as economic
conditions in the industry change.
Changes in proved reserve quantities (UNAUDITED):
OIL (BBLS) GAS (MCF)
---------- ----------
Proved reserves, December 31, 1994.......................... 2,177,756 17,060,521
Extensions, discoveries and improved recovery............... 298,140 370,722
Revision of previous estimates.............................. 8,285 760,412
Purchase of minerals-in-place............................... 70,080 1,545,859
Production.................................................. (166,652) (1,268,772)
--------- ----------
Proved reserves, December 31, 1995.......................... 2,387,609 18,468,742
Sales of minerals-in-place.................................. (1,521) (16,519)
Extensions, discoveries and improved recovery............... 279,444 223,243
Revision of previous estimates.............................. 171,677 (1,124,321)
Purchase of minerals-in-place............................... 44,528 327,466
Purchase of Summit.......................................... 175,656 1,418,424
Production.................................................. (215,913) (1,002,482)
--------- ----------
Proved reserves, December 31, 1996.......................... 2,841,480 18,294,553
Sales of minerals-in-place.................................. (252,087) (1,826,629)
Extensions, discoveries and improved recovery............... 549,834 349,664
Revision of previous estimates.............................. (291,648) (1,969,860)
Production.................................................. (192,580) (988,109)
--------- ----------
Proved reserves, December 31, 1997.......................... 2,654,999 13,859,619
--------- ----------
Proved developed reserves (UNAUDITED):
December 31, 1995......................................... 1,918,557 14,131,580
December 31, 1996......................................... 2,061,974 13,821,400
December 31, 1997......................................... 1,732,544 9,533,072
The significant revision of estimated quantities of gas in 1997 is
attributable to lower gas prices in effect at year end, which adversely affects
the projected economic lives of the properties. The average gas price at
December 31, 1996 was $3.72 per Mcf, compared to $2.36 at December 31, 1997. In
1996, the gas revision of estimates was attributable to the results of drilling
which failed to prove the existence of previous reserve estimates in two fields.
Standardized measure of discounted future net cash flows relating to proved
reserves (UNAUDITED):
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ------------ -----------
Future cash inflows.......................... $76,605,194 $139,037,425 $79,172,668
Future production costs...................... 34,210,308 51,857,027 38,818,603
Future development costs..................... 8,039,963 7,231,324 5,691,375
Future income taxes(a)....................... 5,521,700 18,372,157 7,360,573
----------- ------------ -----------
Future net cash flows........................ 28,833,223 61,576,917 27,302,117
Annual discount (10%) for estimated timing of
cash flows................................. 13,251,251 29,984,568 13,001,409
----------- ------------ -----------
Standardized measure of discounted future net
cash flows................................. $15,581,972 $ 31,592,349 $14,300,708
=========== ============ ===========
F-40
166
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Future income taxes are computed at current statutory rates on future net
cash flows before income taxes less the income tax bases of the oil and gas
properties, available loss carry-forwards, and statutory depletion
carry-forwards.
Changes in standardized measure of discounted future net cash flows from
proved reserves (UNAUDITED):
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
Sales of oil and gas produced, net of
production costs........................... $ (2,398,872) $(4,722,529) $(2,386,779)
Net changes in price and production.......... (20,928,554) 19,074,149 1,539,078
Previously estimated development costs
incurred................................... -- 35,190 120,474
Revisions of estimated future development
costs...................................... (202,755) (84,478) 124,763
Revision of quantity estimates............... (2,752,686) 167,303 722,631
Purchases of minerals-in-place............... -- 840,715 1,070,857
Acquisition of Summit........................ -- 2,875,995 --
Sales of minerals-in-place................... (2,336,161) (31,888) --
Extensions and discoveries................... 2,520,441 1,857,974 2,114,257
Net change in income taxes................... 6,042,379 (4,838,537) (514,350)
Accretion of discount........................ 3,981,784 1,768,766 1,541,954
Changes in timing of estimated cash flows and
other...................................... 64,047 348,981 (2,579,120)
------------ ----------- -----------
Changes in standardized measure.............. (16,010,377) 17,291,641 1,753,765
Standardized measure, beginning of year...... 31,592,349 14,300,708 12,546,943
------------ ----------- -----------
Standardized measure, end of year............ $ 15,581,972 $31,592,349 $14,300,708
============ =========== ===========
NOTE N. SUBSEQUENT EVENT (SECOND PARAGRAPH IS UNAUDITED)
On April 9, 1998, The Board of Directors approved a plan to combine with
Vista Resources Partners, L.P., a Midland, Texas based entity engaged in oil and
gas exploration and production. Consummation of any transaction pursuant to
these negotiations depends upon the satisfaction or waiver of a number of
conditions, including, without limitation, stockholder approval, execution of a
definitive agreement and receipt of a fairness opinion.
The Company has been involved in pending litigation, the nature of which is
a claim for damages arising from the Company's actions as operator of certain
properties in which the plaintiff has an interest, and removal of the Company as
operator of the properties. The plaintiff had not specified a damage amount
until subsequent to April 1998, at which time damages of $230,000 were claimed.
The Company has filed a counterclaim against the plaintiff. Management believes
the ultimate resolution of this matter will not have a material adverse effect
on the Company.
F-41
167
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
VISTA RESOURCES PARTNERS, L.P.,
MIDLAND RESOURCES, INC.,
VISTA ENERGY RESOURCES, INC.,
AND
MIDLAND MERGER CO.
DATED AS OF MAY 22, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
168
TABLE OF CONTENTS
PAGE NO.
--------
ARTICLE 1
DEFINITIONS
1.1 Defined Terms..................................................... A-7
1.2 References and Titles............................................. A-13
ARTICLE 2
THE MERGER AND EXCHANGES
2.1 The Midland Merger................................................ A-14
2.2 Effect of the Midland Merger...................................... A-14
2.3 Certificates of Incorporation of Newco, Midland and Newco Sub..... A-14
2.4 Bylaws............................................................ A-14
2.5 Directors......................................................... A-14
2.6 Officers.......................................................... A-15
2.7 Effect on Securities.............................................. A-15
2.8 Vista Exchange Agreements......................................... A-16
2.9 Adjustments....................................................... A-17
2.10 Exchange of Certificates.......................................... A-17
2.11 Closing........................................................... A-20
2.12 Effective Time of the Merger...................................... A-20
2.13 Shareholder Approvals Obtained.................................... A-20
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Midland......................... A-20
(a) Organization, Standing and Power............................ A-20
(b) Capital Structure........................................... A-21
(c) Authority; No Violations; Consents and Approvals............ A-22
(d) SEC Documents............................................... A-23
(e) Information Supplied........................................ A-23
(f) Absence of Certain Changes or Events........................ A-24
(g) No Undisclosed Material Liabilities......................... A-24
(h) No Default.................................................. A-24
(i) Compliance with Applicable Laws............................. A-24
(j) Litigation.................................................. A-25
(k) Taxes....................................................... A-25
(l) Employee Benefit Matters.................................... A-27
(m) Labor Matters............................................... A-28
(n) Intangible Property......................................... A-29
(o) Environmental Matters....................................... A-29
(p) Insurance................................................... A-31
(q) Absence of Certain Changes or Events........................ A-31
(r) Governmental Regulation..................................... A-32
(s) No Restrictions............................................. A-32
(t) Audits and Settlements...................................... A-33
(u) Employment Contracts and Benefits........................... A-33
(v) Accounts Receivable......................................... A-33
(w) Title to Assets............................................. A-33
(x) Midland Engineering Report.................................. A-33
A-2
169
PAGE NO.
--------
(y) Oil and Gas Operations...................................... A-34
(z) Hydrocarbon Sales and Purchase Agreements................... A-34
(aa) Financial and Commodity Hedging............................. A-35
(bb) Committed Capital Expenditures.............................. A-35
(cc) Business Relations.......................................... A-35
(dd) Books and Records........................................... A-35
(ee) Brokers..................................................... A-35
(ff) Vote Required............................................... A-36
(gg) Disclosure and Investigation................................ A-36
(hh) Fairness Opinion............................................ A-36
3.2 Representations and Warranties of Vista........................... A-36
(a) Organization, Standing and Power............................ A-36
(b) Capital Structure........................................... A-36
(c) Authority; No Violations; Consents and Approvals............ A-37
(d) Financial Statements and Material Agreements................ A-38
(e) Information Supplied........................................ A-38
(f) Absence of Certain Changes or Events........................ A-38
(g) No Undisclosed Material Liabilities......................... A-38
(h) No Default.................................................. A-39
(i) Compliance with Applicable Laws............................. A-39
(j) Litigation.................................................. A-39
(k) Taxes....................................................... A-39
(l) Employee Benefit Matters.................................... A-41
(m) Labor Matters............................................... A-42
(n) Intangible Property......................................... A-43
(o) Environmental Matters....................................... A-43
(p) Insurance................................................... A-44
(q) Absence of Certain Changes or Events........................ A-44
(r) Governmental Regulation..................................... A-45
(s) No Restrictions............................................. A-45
(t) Audits and Settlements...................................... A-46
(u) Employment Contracts and Benefits........................... A-46
(v) Accounts Receivable......................................... A-46
(w) Title to Assets............................................. A-46
(x) Vista Engineering Report.................................... A-46
(y) Oil and Gas Operations...................................... A-47
(z) Hydrocarbon Sales and Purchase Agreements................... A-47
(aa) Financial and Commodity Hedging............................. A-48
(bb) Committed Capital Expenditures.............................. A-48
(cc) Business Relations.......................................... A-48
(dd) Books and Records........................................... A-48
(ee) Brokers..................................................... A-49
(ff) Disclosure and Investigation................................ A-49
3.3 Representations and Warranties of Newco and Merger Sub............ A-49
(a) Organization, Standing and Corporate Power.................. A-49
(b) Capital Structure........................................... A-49
(c) Authority; No Violations; Consents and Approvals............ A-50
(d) No Prior Activities......................................... A-50
A-3
170
PAGE NO.
--------
ARTICLE 4
COVENANTS
4.1 Conduct of Business by Vista and Midland Pending Closing.......... A-50
4.2 Access to Assets, Personnel, and Information...................... A-53
4.3 No Solicitation by Midland........................................ A-55
4.4 No Solicitation by Vista.......................................... A-56
4.5 Midland Shareholders Meeting...................................... A-56
4.6 S-4 and Proxy Statement........................................... A-57
4.7 Stock Exchange Listing............................................ A-58
4.8 Additional Arrangements........................................... A-58
4.9 Agreements of Rule 145 Affiliates................................. A-58
4.10 Public Announcements.............................................. A-58
4.11 Notification of Certain Matters................................... A-59
4.12 Payment of Expenses............................................... A-59
4.13 Indemnification................................................... A-59
4.14 Indemnification Agreements........................................ A-60
4.15 Registration of Shares to be Issued Pursuant to Stock Options..... A-60
4.16 Registration Rights Agreement..................................... A-60
4.17 Resignations of Officers and Directors of Midland................. A-61
4.18 Newco Long-Term Incentive Plan.................................... A-61
4.19 Midland Option Exercise Agreements................................ A-61
4.20 Transactions with Affiliates...................................... A-61
ARTICLE 5
CONDITIONS
5.1 Conditions to Each Party's Obligation to Effect the Merger........ A-61
(a) Shareholder Approval........................................ A-61
(b) Fairness Opinion............................................ A-61
(c) Tax Opinion................................................. A-61
(d) Exchange Listing............................................ A-61
(e) Other Approvals............................................. A-61
(f) Securities Law Matters...................................... A-62
(g) No Injunctions or Restraints................................ A-62
5.2 Conditions of Obligations of Vista, Newco, and Merger Sub......... A-62
(a) Representations and Warranties.............................. A-62
(b) Performance of Covenants and Agreements..................... A-62
(c) Comfort Letter.............................................. A-62
(d) Dissenters' Rights.......................................... A-62
(e) Legal Opinion............................................... A-62
(f) No Adverse Change........................................... A-62
(g) Midland Option Exercise Agreements.......................... A-63
5.3 Conditions of Obligations of Midland.............................. A-63
(a) Representations and Warranties.............................. A-63
(b) Performance of Covenants and Agreements..................... A-63
(c) Legal Opinion............................................... A-63
(d) Comfort Letter.............................................. A-63
(e) No Adverse Change........................................... A-63
(f) Exchange Agreements......................................... A-63
A-4
171
PAGE NO.
--------
ARTICLE 6
TERMINATION
6.1 Termination Rights................................................ A-64
6.2 Effect of Termination............................................. A-65
ARTICLE 7
MISCELLANEOUS
7.1 Amendment......................................................... A-65
7.2 Extension; Waiver................................................. A-65
7.3 Nonsurvival of Representations, Warranties, Covenants, and
Agreements........................................................ A-65
7.4 Notices........................................................... A-65
7.5 Counterparts...................................................... A-66
7.6 Severability...................................................... A-66
7.7 Entire Agreement; No Third Party Beneficiaries.................... A-66
7.8 Applicable Law.................................................... A-66
7.9 No Remedy in Certain Circumstances................................ A-66
7.10 Enforcement of Agreement.......................................... A-66
7.11 Assignment........................................................ A-67
7.12 Waivers........................................................... A-67
7.13 Certain Provisions Inapplicable................................... A-67
7.14 Termination of Letter of Intent and Confidentiality Agreement..... A-67
EXHIBITS:
Exhibit A -- Form of Midland Exchange Agreement
Exhibit B -- Form of Midland Voting Agreement
Exhibit C -- Form of Newco Warrant
Exhibit D -- Form of Midland Option Exercise Agreement
Exhibit E -- Form of Vista Exchange Agreement
Exhibit 3.3(a) -- Newco Certificate of Incorporation and Bylaws
Exhibit 4.9(a) -- Form of Vista Affiliate's Agreement
Exhibit 4.9(b) -- Form of Midland Affiliate's Agreement
-- Form of Indemnification Agreement for Vista Officers and
Exhibit 4.14(a) Directors
-- Form of Indemnification Agreement for Midland Officers
Exhibit 4.14(b) and Directors
Exhibit 4.16(a) -- Form of Vista Registration Rights Agreement
Exhibit 4.16(b) -- Form of Midland Registration Rights Agreement
Exhibit 4.17(a) -- Form of Termination Agreement for Howard E. Ehler
Exhibit 4.17(b) -- Form of Termination Agreement for Marilyn D. Wade
Exhibit 4.18 -- Form of Newco Long-Term Incentive Plan
Exhibit 5.2(e)(i) -- Midland Legal Opinion
Exhibit -- Midland 10b-5 Letter
5.2(e)(ii)
Exhibit 5.3(c)(i) -- Vista Legal Opinion
Exhibit -- Vista 10b-5 Letter
5.3(c)(ii)
DISCLOSURE SCHEDULES:
Midland Disclosure Schedule
Vista Disclosure Schedule
A-5
172
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into,
effective as of May 22, 1998, by and among Vista Resources Partners, L.P., a
Texas limited partnership ("Vista"), Midland Resources, Inc., a Texas
corporation ("Midland"), Vista Energy Resources, Inc., a Delaware corporation
and a direct wholly-owned subsidiary of Vista ("Newco"), and Midland Merger Co.,
a Texas corporation and a direct wholly-owned subsidiary of Newco ("Merger
Sub").
RECITALS
A. Vista and Midland have determined to engage in a strategic business
combination.
B. In furtherance thereof, Vista Resources I, Inc., the sole general
partner of Vista (the "General Partner"), has approved this Agreement and the
exchange (the "Vista GP Exchange") of shares of Newco common stock, $.01 par
value per share ("Newco Common Stock"), and warrants that are exercisable for
shares of Newco Common Stock ("Newco Warrants") for all of the outstanding
shares of common stock, $.01 par value per share, of the General Partner (the
"GP Common Stock") and the exchange (the "Vista LP Exchange" and, together with
the Vista GP Exchange, the "Vista Exchange") of shares of Newco Common Stock and
Newco Warrants for all of the outstanding Partnership Interests (as hereinafter
defined).
C. Contemporaneously with the execution and delivery of this Agreement,
Newco and each holder of a Midland Exchange Stock Option has entered into a
Midland Exchange Agreement pursuant to which such holder has agreed to exchange
(the "Midland Exchange") his Midland Exchange Stock Options for Newco Warrants.
D. In furtherance thereof, the respective Boards of Directors of Merger Sub
and Midland have approved this Agreement and the merger of Merger Sub with and
into Midland, with Midland being the surviving corporation (the "Midland
Merger").
E. In furtherance thereof, the Board of Directors of Newco has approved the
contribution of the Partnership Interests received by it pursuant to the Vista
LP Exchange to Vista LLC, a Delaware limited liability company and a direct
wholly-owned subsidiary of Newco ("Newco LLC"), effective immediately after the
Midland Merger and the Vista Exchange (the "Newco Contribution").
F. The respective Boards of Directors of Newco, Merger Sub and Midland have
determined that it is in the best interests of their respective shareholders or
stockholders (hereinafter referred to as "shareholders"), and the General
Partner has determined that it is in the best interests of the limited partners
of Vista, for the Midland Merger and the Vista Exchange to be effected upon the
terms and subject to the conditions of this Agreement.
G. For federal income tax purposes, it is intended that (a) the Vista
Exchange shall qualify as a transfer within the meaning of Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code"), (b) the Midland Merger
and the Midland Exchange shall qualify as a reorganization within the meaning of
Section 368(a) of the Code, and (c) this Agreement be, and is adopted as, a plan
of reorganization within the meaning of Treasury Regulation Section 1.368-1(c).
H. Contemporaneously with the execution and delivery of this Agreement,
Newco and each of Deas H. Warley III, Howard E. Ehler, Robert R. Donnelly, Sam
R. Brock, Wayne M. Whitaker, John Q. Adams and Darrell M. Dillard have entered
into separate Midland Voting Agreements (as hereinafter defined).
I. Vista, Newco, Merger Sub and Midland desire to make certain
representations, warranties, covenants and agreements in connection with the
Midland Merger and the Vista Exchange and also to prescribe various conditions
to the Midland Merger and the Vista Exchange.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth in this Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
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ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, each of the following terms
has the meaning given in this Section or in the Sections referred to below:
"Affiliate" means, with respect to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with such Person. For
purposes of this definition and this Agreement, the term "control" (and
correlative terms) means the power, whether by contract, equity ownership or
otherwise, to direct the policies or management of a Person.
"Affiliate Agreement" has the meaning specified in Section 4.9.
"Agreement" means this Agreement and Plan of Merger, as amended,
supplemented, or modified from time to time.
"Agreement of Limited Partnership" means the Agreement of Limited
Partnership for Vista dated as of September 26, 1995, by and among the General
Partner and the persons who have executed such agreement as limited partners.
"AMEX" means the American Stock Exchange or any successor thereto.
"Audited Financial Statements" has the meaning specified in Section 3.2(d).
"Closing" means the closing of the Midland Merger, the Midland Exchange and
the Vista Exchange and the consummation of the other transactions contemplated
by this Agreement.
"Closing Date" means the date on which the Closing occurs, which date shall
be the first business day following the day on which all of the conditions
provided for in Article 5 have been satisfied or waived as provided therein (or
such later date as is mutually agreed upon by the parties).
"Code" means the Internal Revenue Code of 1986, as amended.
"Defensible Title" means good and defensible right, title, and interest
that is (a) evidenced by an instrument or instruments filed of record in
accordance with the conveyance and recording laws of the applicable jurisdiction
to the extent necessary to prevail against competing claims of bona fide
purchasers for value without notice and (b) subject to Permitted Encumbrances,
free and clear of all Liens, claims, infringements, burdens, or other defects.
"DGCL" means the Delaware General Corporation Law, as amended.
"Effective Time" has the meaning specified in Section 2.12.
"Environmental Laws" has the meaning specified in Section 3.1(o)(i).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" has the meaning specified in Section 2.10(e)(ii).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall mean such agent as is reasonably satisfactory to
Newco and Midland.
"Exchange Fund" has the meaning specified in Section 2.10(a).
"Financial Statements" has the meaning specified in Section 3.2(d).
"First Union" has the meaning specified in Section 3.1(ee).
"Fully Diluted Basis" means as of the date of the calculation thereof the
sum of (a) the number of shares of Newco Common Stock then issued and
outstanding immediately after the Effective Time, plus (b) the number of shares
of Newco Common Stock, if any, issued after the Effective Time as a result of
the exercise of any Midland Stock Options (other than Midland Exchange Stock
Options), plus (c) the number of shares
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of Newco Common Stock issuable, whether at such time or upon the passage of time
or the occurrence of future events, upon exercise, conversion or exchange of all
Midland Exercisable Warrants outstanding as of the close of business on the
trading day immediately preceding the second business day immediately prior to
the Closing Date.
"GAAP" has the meaning specified in Section 3.1(d).
"General Partner" means has the meaning specified in the Recitals hereto.
"Governmental Action" means any authorization, application, approval,
consent, exemption. filing, license, notice, registration, permit, or other
requirement of, to, or with any Governmental Entity.
"Governmental Entity" has the meaning specified in Section 3.1(c)(iii).
"GP Certificate" means a certificate representing shares of GP Common
Stock.
"GP Common Stock" has the meaning specified in the Recitals hereto.
"Hazardous Materials" has the meaning specified in Section 3.1(o)(ii).
"Hydrocarbon Agreement" means any of the Hydrocarbon Sales Agreements, the
Hydrocarbon Purchase Agreements, and the Hydrocarbon Support Agreements.
"Hydrocarbon Purchase Agreement" means any material sales agreement,
purchase contract, or marketing agreement that is currently in effect and under
which Midland or any of its Subsidiaries (or Vista or Vista Sub, as applicable)
is a buyer of Hydrocarbons for resale (other than purchase agreements entered
into in the ordinary course of business with a term of three months or less,
terminable without penalty on 30 days' notice or less, which provide for a price
not greater than the market value price that would be paid pursuant to an
arm's-length contract for the same term with an unaffiliated third-party seller,
and which do not obligate the purchaser to take any specified quantity of
Hydrocarbons or to pay for any deficiencies in quantities of Hydrocarbons not
taken).
"Hydrocarbon Sales Agreement" means any material sales agreement, purchase
contract, or marketing agreement that is currently in effect and under which
Midland or any of its Subsidiaries (or Vista or Vista Sub, as applicable) is a
seller of Hydrocarbons (other than "spot" sales agreements entered into in the
ordinary course of business with a term of three months or less, terminable
without penalty on 30 days' notice or less, and which provide for a price not
less than the market value price that would be received pursuant to an
arm's-length contract for the same term with an unaffiliated third party
purchaser).
"Hydrocarbon Support Agreement" means any gathering, transportation,
treatment, compression, processing, or similar agreement that is currently in
effect and to which Midland or any of its Subsidiaries (or Vista or Vista Sub,
as applicable) is a party (other than gathering, transportation, treatment,
compression, processing, and similar agreements that have been entered into in
the ordinary course of business and which contain market value prices and terms
of the type found in gathering, transportation, treatment, compression,
processing, and similar agreements entered into between unaffiliated parties in
arm's length transactions).
"Hydrocarbons" means oil, condensate, gas, casinghead gas, and other liquid
or gaseous hydrocarbons.
"Indemnification Agreement" has the meaning specified in Section 4.14.
"IRS" means the Internal Revenue Service.
"Lien" means any lien, trust, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, claim, charge, detriment, option,
encumbrance, voting agreement, preemptive right, shareholder agreement, rights
of a vendor under any title retention or conditional sale agreement, or lease or
other arrangement substantially equivalent to any of the foregoing.
"Material Adverse Change" has the meaning specified in Section 3.1(a).
"Material Adverse Effect" has the meaning specified in Section 3.1(a).
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"Merger Sub" means Midland Merger Co., a Texas corporation and a direct
wholly-owned subsidiary of Newco.
"Midland" means Midland Resources, Inc., a Texas corporation.
"Midland Acquisition Proposal" has the meaning specified in Section 4.3(b).
"Midland Articles of Merger" has the meaning specified in Section 2.12.
"Midland Benefit Program or Agreement" has the meaning specified in Section
3.1(l).
"Midland Certificate" means a certificate representing shares of Midland
Common Stock.
"Midland Common Stock" means the common stock, par value $.001 per share,
of Midland.
"Midland Common Stock Warrant" means all Midland Stock Equivalents other
than the Midland Stock Options and Midland Warrants.
"Midland Conversion Number" means one.
"Midland Engineering Report" means the oil and gas reserve engineering
report concerning the Oil and Gas Interests of Midland as of January 1, 1998
prepared by Williamson Petroleum Consultants, Inc., and provided to Vista by or
on behalf of Midland.
"Midland Exchange" has the meaning specified in the Recitals hereto.
"Midland Exchange Agreement" means an Exchange Agreement in the form and
substance of Exhibit A hereto.
"Midland Exchange Stock Options" has the meaning set forth in Section
2.7(b)(v).
"Midland Exercisable Warrants" means all Midland Common Stock Warrants that
have an exercise price per share of Midland Common Stock that is equal to or
less than the closing price for a share of Midland Common Stock, as reported on
AMEX, on any of the five trading days immediately preceding the second business
day immediately prior to the Closing Date.
"Midland Financial Statements" has the meaning specified in Section 3.1(d).
"Midland Group" has the meaning specified in Section 3.1(l).
"Midland Indemnified Parties" has the meaning specified in Section 4.13(a).
"Midland Intangible Property" has the meaning set forth in Section 3.1(n).
"Midland Litigation" has the meaning set forth in Section 3.1(j).
"Midland Material Agreement" means (a) any written or oral agreement,
contract, commitment, or understanding to which Midland or any of its
Subsidiaries is a party, by which Midland is directly or indirectly bound, or to
which any asset of Midland or any of its Subsidiaries may be subject, the
termination or breach of which, individually or in the aggregate, would have or
could reasonably be expected to have a Material Adverse Effect on Midland or (b)
any instrument defining the rights of security holders, including an indenture,
or material contract that is required by Item 601 of Regulation S-K to be filed
with the SEC as an exhibit to Midland's Annual Report on Form 10-K for the year
ended December 31, 1997.
"Midland Meeting" means the meeting of the shareholders of Midland called
for the purpose of voting on the proposal to approve this Agreement and the
Midland Merger.
"Midland Merger" has the meaning specified in the Recitals hereto.
"Midland Option Exercise Agreement" means an Option Exercise Agreement in
the form and substance of Exhibit D hereto.
"Midland Order" has the meaning specified in Section 3.1(j).
"Midland Permits" has the meaning specified in Section 3.1(i).
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"Midland Plan" has the meaning specified in Section 3.1(l).
"Midland Preferred Stock" has the meaning set forth in Section 3.1(b).
"Midland Registration Rights Agreement" has the meaning specified in
Section 4.16(b).
"Midland SEC Documents" has the meaning specified in Section 3.1(d).
"Midland Stock Equivalents" means all rights, warrants (including the
Midland Warrants and Midland Common Stock Warrant), options (including the
Midland Stock Options) convertible securities or indebtedness, exchangeable
securities or other instruments, or other rights that (a) are outstanding
immediately after the Effective Time, (b) immediately prior to the Effective
Time, were exercisable for or convertible or exchangeable into, directly or
indirectly, shares of Midland Common Stock at the time of issuance or upon the
passage of time or occurrence of some future event and (c) immediately after the
Effective Time, are exercisable for or convertible or exchangeable into,
directly or indirectly, shares of Newco Common Stock upon the passage of time or
occurrence of some future event.
"Midland Stock Option" means an issued and outstanding option to acquire
shares of Midland Common Stock granted pursuant to any of the Midland Stock
Plans.
"Midland Stock Plans" has the meaning specified in Section 3.1(b).
"Midland Voting Agreement" means a Voting Agreement and Irrevocable Proxy
in the form and substance of Exhibit B hereto.
"Midland Warrant" means the warrants issued and outstanding under that
certain Warrant Agreement dated as of November 1, 1990 by and between Midland
and Stock Transfer Company of America, Inc.
"MM Surviving Corporation" has the meaning specified in Section 2.2.
"Nasdaq" means the Nasdaq National Market.
"Newco" means Vista Energy Resources, Inc., a Delaware corporation.
"Newco Common Stock" has the meaning specified in the Recitals hereto.
"Newco Contribution" has the meaning specified in the Recitals hereto.
"Newco Director Nominee" has the meaning specified in Section 2.5.
"Newco LLC" has the meaning specified in the Recitals hereto.
"Newco Long-Term Incentive Plan" has the meaning specified in Section 4.18.
"Newco Stock Certificate" means a certificate representing shares of Newco
Common Stock.
"Newco Warrant" means a warrant that is exercisable for shares of Newco
Common Stock and which is evidenced by an agreement in the form and substance of
Exhibit C hereto.
"Oil and Gas Interests" means direct and indirect interests in and rights
with respect to oil, gas, mineral, and related properties and assets of any kind
and nature, direct or indirect, including working, royalty, and overriding
royalty interests, production payments, operating rights, net profits interests,
other nonworking interests, and nonoperating interests; all interests in and
rights with respect to Hydrocarbons and other minerals or revenues therefrom and
all contracts in connection therewith and claims and rights thereto (including
all oil and gas leases, operating agreements, unitization and pooling agreements
and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil
and gas sales, exchange, and processing contracts and agreements, and in each
case, interests thereunder), surface interests, fee interests, reversionary
interests, reservations, and concessions; all easements, rights of way,
licenses, permits, leases, and other interests associated with, appurtenant to,
or necessary for the operation of any of the foregoing; and all interests in
equipment and machinery (including well equipment and machinery), oil and gas
production, gathering, transmission, treating, processing, and storage
facilities (including tanks, tank batteries, pipelines, and gathering systems),
pumps, water injection facilities, electric plants, gasoline and gas processing
plants,
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refineries, and other tangible personal property and fixtures associated with,
appurtenant to, or necessary for the operation of any of the foregoing.
References in this Agreement to "Oil and Gas Interests" of a specified Person
means the collective Oil and Gas Interests of such Person and its Subsidiaries.
"Party" has the meaning specified in Section 4.1.
"Partnership Interest" (and correlatives thereof) means, with respect to a
limited partner of Vista, each 1% interest in Vista based on sharing ratios
held, or to be held, of record by a limited partner as of the date of
determination.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Encumbrances" means (a) Liens for Taxes, assessments, or other
governmental charges or levies if the same shall not at the particular time in
question be due and delinquent or (if foreclosure, distraint, sale, or other
similar proceedings shall not have been commenced or, if commenced, shall have
been stayed) are being contested in good faith by appropriate proceedings and if
a specified Person or any of its Subsidiaries shall have set aside on its books
such reserves segregated to the extent required by sound accounting practices)
as may be required by GAAP or otherwise determined by its board of directors or
general partner to be adequate with respect thereto, (b) Liens of carriers,
warehousemen, mechanics, laborers, materialmen, landlords, vendors, workmen, and
operators arising by operation of law in the ordinary course of business or by a
written agreement existing as of the date hereof and necessary or incident to
the exploration, development, operation, and maintenance of Hydrocarbon
properties and related facilities and assets for sums not yet due or being
contested in good faith by appropriate proceedings, if such Person or any of its
Subsidiaries shall have set aside on its books such reserves (segregated to the
extent required by sound accounting practices) as may be required by GAAP or
otherwise determined by its board of directors or general partner to be adequate
with respect thereto, (c) Liens incurred in the ordinary course of business in
connection with worker's compensation, unemployment insurance, and other social
security legislation (other than ERISA), (d) Liens incurred in the ordinary
course of business to secure the performance of bids, tenders, trade contracts,
leases (statutory only), statutory obligations, surety and appeal bonds,
performance and return-of-money bonds, and other obligations of a like nature,
(e) Liens, easements, rights-of-way, restrictions, servitudes, permits,
conditions, covenants, exceptions, reservations, and other similar encumbrances
incurred in the ordinary course of business or existing on property and not in
the aggregate materially impairing the value of the assets of such Person or any
of its Subsidiaries or interfering with the ordinary conduct of such Person or
any of its Subsidiaries' business or rights to its assets, (f) Liens arising
pursuant to Section 9.319 of the Texas Business and Commerce Code and all other
similar Liens created or arising by operation of law to secure a party's
obligations as a purchaser of oil and gas, (g) all rights to consent by,
required notices to, filings with, or other actions by Governmental Entities to
the extent customarily obtained subsequent to the Closing for transactions
similar to the Midland Merger and the Vista Exchange, (h) farmout, carried
working interest, joint operating, unitization, hedging agreements, royalty,
overriding royalty, sales, and similar agreements relating to the exploration or
development of, or production from, Hydrocarbon properties entered into in the
ordinary course of business and not in violation of Section 4.1, (i) any
defects, irregularities, or deficiencies in title to easements, rights-of-way,
or other surface use agreements that do not have a Material Adverse Effect on
the value of any asset of such Person or any of its Subsidiaries, (j)
preferential rights to purchase and Third-Party Consents that would not be
activated or triggered by either the Midland Merger or the Vista Exchange and
the other transactions contemplated by this Agreement, (k) Liens approved in
writing by or on behalf of Vista, (l) in the case of Vista, Liens and security
interests securing Vista's senior credit facility and (m) in the case of
Midland, Liens and security interests securing Midland's senior credit facility.
"Person" means any natural person, corporation, limited or general
partnership, limited liability company, joint stock company, joint venture,
association, company, trust, bank, trust company, land trust, business trust, or
other entity or organization, whether or not a Governmental Entity.
"Providing Party" has the meaning specified in Section 4.2.
"Proxy Statement" has the meaning specified in Section 3.1(c)(iii).
"Release" has the meaning specified in Section 3.1(o)(iii).
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"Remedial Action" has the meaning set forth in Section 3.1(o)(iv).
"Representative" means, with respect to any Person, any director, officer,
general partner, employee, agent, advisor (including legal, accounting, and
financial advisors), Affiliate, or other representative of such Person or any of
its Subsidiaries.
"Requesting Party" has the meaning specified in Section 4.2.
"Responsible Officer" means, with respect to any corporation, the
President, the Chief Executive Officer, the Chief Operating Officer, the Chief
Financial Officer, or any Vice President or other member of executive management
of such corporation.
"Rule 145 Affiliates" has the meaning specified in Section 4.9.
"S-4" means the Registration Statement on Form S-4 to be filed by Newco in
connection with the issuance of Newco Common Stock pursuant to the Midland
Merger.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933.
"Subsidiary" (and correlatives thereof) means, with respect to any Person,
any corporation or other organization, whether incorporated or unincorporated,
of which (a) such Person or any other Subsidiary of such Person is a general
partner or (b) at least a majority of the securities or other interests having
by their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is, directly or indirectly, owned or
controlled by such Person or by any one or more of its Subsidiaries, or by such
Person and any one or more of its Subsidiaries.
"Tax" (and, with correlative meaning, "Taxes") has the meaning specified in
Section 3.1(k).
"Tax Returns" has the meaning specified in Section 3.1(k).
"TBCA" means the Texas Business Corporation Act, as amended.
"Termination Agreement" has the meaning specified in Section 4.17.
"Texas Secretary of State" means the Secretary of State of the State of
Texas.
"Third-Party Consent" means the consent or approval of any Person other
than Vista, Midland, Newco, Merger Sub, or any of their respective Subsidiaries,
or any Governmental Entity.
"Vista" means Vista Resources Partners, L.P., a Texas limited partnership.
"Vista Acquisition Proposal" has the meaning specified in Section 4.4(b).
"Vista Benefit Program or Agreement" has the meaning specified in Section
3.2(l).
"Vista Disclosure Schedule" means the Vista Disclosure Schedule attached
hereto and any documents listed on such Vista Disclosure Schedule and expressly
incorporated therein by reference, true and correct copies of which have been
delivered to Midland.
"Vista Engineering Report" means the oil and gas reserve engineering report
concerning the Oil and Gas Interests of Vista as of January 1, 1998 prepared by
Williamson Petroleum Consultants, Inc., and provided to Midland by or on behalf
of Vista.
"Vista Exchange" has the meaning specified in the Recitals hereto.
"Vista Exchange Agreement" means an Exchange Agreement in the form and
substance of Exhibit E hereto.
"Vista GP Conversion Stock Number" means 1.60089817, as such number may be
changed pursuant to Section 2.8.
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"Vista GP Conversion Warrant Number" means 1.16511028, as such number may
be changed pursuant to Section 2.8.
"Vista GP Exchange" has the meaning specified in the Recitals hereto.
"Vista Group" has the meaning specified in Section 3.2(l).
"Vista Indemnified Parties" has the meaning specified in Section 4.13(b).
"Vista Intangible Property" has the meaning specified in Section 3.2(n).
"Vista Litigation" has the meaning specified in Section 3.2(j).
"Vista LP Conversion Stock Number" means 117,674.06, as such number may be
changed pursuant to Section 2.8.
"Vista LP Conversion Warrant Number" means 85,641.46, as such number may be
changed pursuant to Section 2.8.
"Vista LP Exchange" has the meaning set forth in the Recitals hereto.
"Vista Material Agreement" means any instrument defining the rights of
security holders, including an indenture, or material contract that would be
required by Item 601 of Regulation S-K to be filed by Vista with the SEC if
Vista were subject to the periodic reporting requirements of Section 12(b),
12(g), or 15(d) of the Exchange Act.
"Vista Order" has the meaning specified in Section 3.2(j).
"Vista Permits" has the meaning specified in Section 3.2(i).
"Vista Plan" has the meaning specified in Section 3.2(l).
"Vista Registration Rights Agreement" has the meaning specified in Section
4.16(a).
"Vista Sub" means Vista Resources, Inc., a Texas corporation and a direct
wholly-owned subsidiary of Vista.
"Voting Debt" has the meaning specified in Section 3.1(b).
1.2 REFERENCES AND TITLES. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections, and other subdivisions refer to the
corresponding Exhibits, Schedules, Articles, Sections, subsections, and other
subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections, or other
subdivisions of this Agreement are for convenience only, do not constitute any
part of such Articles, Sections, subsections, or other subdivisions, and shall
be disregarded in construing the language contained in such subdivisions. The
words "this Agreement," "herein," "hereby," "hereunder," and "hereof," and words
of similar import, refer to this Agreement as a whole and not to any particular
subdivision unless expressly so limited. The words "this Section" and "this
subsection," and words of similar import, refer only to the Sections or
subsections hereof in which such words occur. The word "or" is not exclusive,
and the word "including" (in its various forms) means "including without
limitation." Pronouns in masculine, feminine, or neuter genders shall be
construed to state and include any other gender, and words, terms, and titles
(including terms defined herein) in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise expressly
requires.
As used in the representations and warranties contained in this Agreement,
the phrase "to the knowledge of" shall mean, with respect to a specified
representing party, that the Responsible Officers of such representing party,
individually or collectively, have conducted such investigations and inquiries
that they reasonably believe to be most likely to confirm the truth and accuracy
of the matter being represented and warranted (or have caused such
investigations and inquiries to be made under their supervision) and, after
evaluating the findings of such investigations and inquiries, either (a) know
that the matter being represented and warranted is true and accurate or (b) have
no reason to believe that the matter being represented and warranted is not true
and accurate.
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ARTICLE 2
THE MERGER AND EXCHANGES
2.1 THE MIDLAND MERGER. Subject to the terms and conditions set forth in
this Agreement, at the Effective Time (as hereinafter defined) Merger Sub shall
be merged with and into Midland in accordance with the provisions of this
Agreement and in accordance with the TBCA.
2.2 EFFECT OF THE MIDLAND MERGER. Upon the effectiveness of the Midland
Merger, the separate existence of Merger Sub shall cease and Midland, as the
surviving corporation in the Midland Merger (the "MM Surviving Corporation"),
shall continue its corporate existence under the laws of the State of Texas. The
Midland Merger shall have the effects specified in the TBCA.
2.3 CERTIFICATES OF INCORPORATION OF NEWCO, MIDLAND AND NEWCO SUB. The
Articles of Incorporation of Midland, as in effect immediately prior to the
Effective Time (as hereinafter defined) shall be the Articles of Incorporation
of the MM Surviving Corporation until thereafter amended in accordance with its
terms and as provided by applicable law.
2.4 BYLAWS. The Bylaws of Merger Sub in effect immediately prior to the
Midland Merger shall be the bylaws of the MM Surviving Corporation, until
thereafter amended in accordance with its terms and as provided by applicable
law. Newco and Merger Sub have delivered true and correct copies of their Bylaws
to each of Vista and Midland.
2.5 DIRECTORS. Immediately prior to the Closing, Vista shall take such
action as may be necessary as the then sole shareholder of Newco so as to cause
the directors of Newco at the Effective Time to be as set forth below:
C. Randall Hill
Steven D. Gray
Kenneth A. Hersh
David R. Albin
John S. Foster
Midland representative to be named by Midland's Board of Directors
prior to Closing Date
Vista as set forth in this Section 2.5 shall have the right to initially
nominate eight of the nine directors and Midland shall have the right to
initially nominate one of the nine directors who shall serve as directors of
Newco commencing as of the Effective Time. Each nominee for director of Newco
identified as such above (a "Newco Director Nominee") will hold office until the
1999 annual meeting of Newco, and in all cases, until his or her respective
successor is duly elected or appointed and qualified in the manner provided in
the Certificate of Incorporation or Bylaws of Newco, or as otherwise provided by
applicable law. If prior to the Effective Time a Newco Director Nominee selected
by Vista or Midland shall decline or be unable to serve as a director of Newco
or whose nomination shall be withdrawn by Vista or Midland, as applicable, then
Vista or Midland, as appropriate, shall be entitled to nominate a replacement
for such Newco Director Nominee, who shall thereafter become a Newco Director
Nominee, provided that such person shall be reasonably acceptable to each of the
other parties to this Agreement and this Agreement shall be amended by the
parties to the extent necessary to reflect such action.
The directors of the MM Surviving Corporation shall be the same as the
directors of Newco set forth in this Section 2.5.
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2.6 OFFICERS. The initial senior executive officers of Newco immediately
following the Effective Time shall be as set forth below:
C. Randall Hill............................. Chairman, Chief Executive Officer, Chief
Financial Officer, Treasurer and
Assistant Secretary
Steven D. Gray.............................. President, Assistant Treasurer and
Assistant Secretary
R. Cory Richards............................ Executive Vice President -- Exploration
and Secretary
Each such officer of Newco will hold office from the Effective Time until
his respective successor is duly elected or appointed and qualified in the
manner provided in the Certificate of Incorporation or Bylaws of Newco, or as
otherwise provided by applicable law. The names, titles, and responsibilities of
the other individuals who initially will hold officerships with Newco shall be
determined by Vista prior to the Effective Time, and the election of those
persons shall be considered by the Board of Directors of Newco immediately
following the Effective Time.
The officers of Merger Sub immediately prior to the Effective Time shall be
the initial officers of the MM Surviving Corporation until their respective
successors are duly elected or appointed and qualified in the manner provided in
the Certificate of Incorporation or Bylaws of the MM Surviving Corporation, or
as otherwise provided by applicable law.
2.7 EFFECT ON SECURITIES.
(a) MERGER SUB STOCK. At the Effective Time, by virtue of the Midland
Merger and without any action on the part of any holder thereof, each share
of Merger Sub Common Stock outstanding immediately prior to the Effective
Time shall be converted into and shall become one validly issued, fully
paid, and nonassessable share of common stock, par value $.01 per share, of
the MM Surviving Corporation.
(b) MIDLAND SECURITIES.
(i) CONVERSION. At the Effective Time, by virtue of the Midland
Merger and without any action on the part of any holder thereof (but
subject to the provisions of Section 2.10(e)), all shares of Midland
Common Stock that are issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive shares of
Newco Common Stock, with each such share of Midland Common Stock being
converted into a number of shares of Newco Common Stock equal to the
Midland Conversion Number. Each such share of Midland Common Stock, when
so converted, shall automatically be cancelled and retired, shall cease
to exist, and shall no longer be outstanding; and the holder of any
certificate representing any such shares shall cease to have any rights
with respect thereto, except the right to receive the shares of Newco
Common Stock to be issued in exchange therefor (along with any cash in
lieu of fractional shares of Newco Common Stock as provided in Section
2.10(e) and any unpaid dividends and distributions with respect to such
shares of Newco Common Stock as provided in Section 2.10(c)), without
interest, upon the surrender of such certificate in accordance with
Section 2.10.
(ii) MIDLAND TREASURY STOCK. At the Effective Time, by virtue of
the Midland Merger and without any action on the part of any holder
thereof, all shares of Midland Common Stock that are issued and held as
treasury stock shall be cancelled and retired and shall cease to exist
and no shares of Newco Common Stock, cash, or other consideration shall
be paid or payable in exchange therefor.
(iii) MIDLAND STOCK OPTIONS. All Midland Stock Options (other than
the Midland Exchange Stock Options) shall remain outstanding following
the Effective Time. At the Effective Time, by virtue of the Midland
Merger and without any action on the part of Midland or any holder
thereof, each such Midland Stock Option (other than the Midland Exchange
Stock Options) shall be
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assumed by Newco in such manner that Newco is a corporation assuming a
stock option in a transaction to which Section 424(a) applied within the
meaning of Section 424 of the Code or, to the extent that Section 424 of
the Code does not apply to any such Midland Stock Option (other than the
Midland Exchange Stock Options), would be such a corporation were
Section 424 applicable to such option. Subject to the terms of the
Midland Option Exercise Agreement, each Midland Stock Option (other than
the Midland Exchange Stock Options) assumed by Newco shall be
exercisable on the same terms and conditions as apply immediately prior
to the Effective Time, except that each such Midland Stock Option (other
than the Midland Exchange Stock Options) shall be exercisable for that
whole number of shares of Newco Common Stock (to the nearest whole
share) into which the number of shares of Midland Common Stock subject
to such Midland Stock Option (other than the Midland Exchange Stock
Options) immediately prior to the Effective Time would be converted
under paragraph (i) of this subsection and the option price per share of
Newco Common Stock shall be an amount equal to the option price per
share of Midland Common Stock subject to such Midland Stock Option
(other than the Midland Exchange Stock Options) in effect immediately
prior to the Effective Time divided by the Midland Conversion Number
(the option price per share, as so determined, being rounded upward to
the nearest full cent). No payment shall be made for fractional
interests.
(iv) MIDLAND WARRANTS AND MIDLAND COMMON STOCK WARRANTS. All
Midland Warrants and Midland Common Stock Warrants shall remain
outstanding following the Effective Time. At the Effective Time, by
virtue of the Midland Merger and without any action on the part of
Midland or any holder thereof, each such Midland Warrant and Midland
Common Stock Warrant shall be assumed by Newco and shall be exercisable
on the same terms and conditions as apply immediately prior to the
Effective Time, except that each Midland Warrant and Midland Common
Stock Warrant shall be exercisable for that number of shares of Newco
Common Stock into which the number of shares of Midland Common Stock
subject to such Midland Warrant or Midland Common Stock Warrant, as
applicable, immediately prior to the Effective Time would be converted
under paragraph (i) of this subsection. No payment shall be made for
fractional interests.
(v) MIDLAND EXCHANGE STOCK OPTIONS. Pursuant to the terms of the
Midland Exchange Agreement contemporaneously entered into between Newco
and each holder of the Midland Stock Options described on Schedule 2.7
of the Midland Disclosure Schedule (the "Midland Exchange Stock
Options"), at the Effective Time, without any action on the part of any
holder thereof, each Midland Exchange Stock Option will be exchanged for
a Newco Warrant that is exercisable for that whole number of shares of
Newco Common Stock (to the nearest whole share) equal to the product of
(x) .725 times (y) the number of shares of Newco Common Stock into which
the shares of Midland Common Stock subject to such Midland Exchange
Stock Option would be converted under paragraph (i) of this subsection.
Pursuant to the Midland Exchange Agreement, no payment shall be made for
fractional interests. Pursuant to the terms of the Midland Exchange
Agreement, each Midland Exchange Stock Option subject thereto shall be
terminated immediately following their exchange for a Newco Warrant.
2.8 VISTA EXCHANGE AGREEMENTS. Within 30 days from the date hereof, Newco
and Vista agree to cause Newco to enter into Vista Exchange Agreements in
connection with the Vista GP Exchange and the Vista LP Exchange, respectively,
with all of the holders of the GP Common Stock and all of the Partnership
Interests. Pursuant to such Vista Exchange Agreements at the Effective Time,
without any action on the part of any holder thereof, (a) each share of GP
Common Stock that is issued and outstanding prior to the Effective Time shall be
exchanged for (i) a number of shares of Newco Common Stock equal to the Vista GP
Conversion Stock Number and (ii) a Newco Warrant that is exercisable for a
number of shares of Newco Common Stock equal to the Vista GP Conversion Warrant
Number and (b) each Partnership Interest that is issued and outstanding prior to
the Effective Time shall be exchanged for (i) a number of shares of Newco Common
Stock equal to the Vista LP Conversion Stock Number and (ii) a Newco Warrant
that is exercisable for a number of shares of Newco Common Stock equal to the
Vista LP Conversion Warrant
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Number. As provided in the Exchange Agreement, any fractional Partnership
Interest shall be likewise exchanged on a pro rata basis.
2.9 ADJUSTMENTS. (a) The parties hereto mutually agree that,
notwithstanding anything in this Agreement to the contrary, each of the Vista GP
Conversion Stock Number, the Vista LP Conversion Stock Number, the Vista GP
Conversion Warrant Number and the Vista LP Conversion Warrant Number shall be
increased or decreased, as necessary, immediately prior to the Effective Time
such that (i) the aggregate percentage of shares of Newco Common Stock that the
holders of GP Common Stock and the holders of Partnership Interests shall be
entitled to receive at the Effective Time shall equal 72.5% of the shares of
Newco Common Stock that will be outstanding calculated on a Fully Diluted Basis
immediately after the Effective Time and (ii) the aggregate percentage of shares
of Newco Common Stock issuable upon exercise of the Newco Warrants that the
holders of GP Common Stock and the holders of Partnership Interests shall be
entitled to receive shall equal 72.5% of the shares of Newco Common Stock that
is issuable upon the exercise of (x) all Midland Warrants outstanding
immediately after the Effective Time, (y) all Newco Warrants issued pursuant to
the Midland Exchange and (z) all Newco Warrants issuable pursuant to the Vista
Exchange. Subject to Section 2.9(b), 2.9(c), any such adjustments to the Vista
GP Conversion Stock Number, the Vista LP Conversion Stock Number, the Vista GP
Conversion Warrant Number or the Vista LP Conversion Warrant Number shall be
made not later than two business days prior to the Closing and shall be
determined by Newco's independent auditors Arthur Andersen LLP.
(b) Pursuant to the Vista Exchange Agreements, effective as of the last day
of the fourth calendar month immediately following the calendar month in which
the Closing Date occurred, Newco shall cause its independent auditors Arthur
Anderson LLP to redetermine the Vista GP Conversion Stock Number and the Vista
LP Conversion Stock Number by redetermining, as of such date, Fully Diluted
Basis only to the extent necessary so as to reflect the number of shares of
Newco Common Stock, if any, issued after the Effective Time as a result of the
exercise of any Midland Stock Options. In the event any such adjustment to the
Vista GP Conversion Stock Number and the Vista LP Conversion Stock Number is
determined appropriate, then pursuant to the Vista Exchange Agreements, Newco
shall promptly issue to the prior holders of the GP Common Stock and Partnership
Interests their pro rata share of a number of shares of Newco Common Stock equal
to an amount equal to (i) the quotient realized by dividing (x) the number of
shares of Newco Common Stock issued after the Effective Time as a result of the
exercise of any Midland Stock Options by (y) .275 minus (ii) the number of
shares of Newco Common Stock described in clause (x) above.
(c) The parties hereto mutually agree that, notwithstanding anything in
this Agreement to the contrary, (i) at the Effective Time, by virtue of the
Midland Merger, the holders of shares of Midland Common Stock shall receive
shares of Newco Common Stock issued in exchange therefor equal to 27.5% of the
shares of Newco Common Stock that will be outstanding immediately after the
Effective Time (calculated giving effect to the shares of Newco Common Stock
issued as a result of the Vista Exchange), and (ii) immediately after the
Effective Time, the aggregate percentage of shares of Newco Common Stock
issuable upon exercise of (a) all Midland Warrants outstanding immediately after
the Effective Time, and (b) all Newco Warrants issued pursuant to the Midland
Exchange, shall equal 27.5% of the shares of Newco Common Stock that is issuable
upon exercise of (x) all Midland Warrants outstanding immediately after the
Effective Time, (y) all Newco Warrants issued pursuant to the Midland Exchange,
and (z) all Newco Warrants issuable pursuant to the Vista Exchange.
2.10 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE FUND. Immediately after the Effective Time, Newco shall
deposit with the Exchange Agent, for the benefit of the holders of shares
of Midland Common Stock and for exchange in accordance with this Agreement,
certificates representing the shares of Newco Common Stock to be issued in
exchange for shares of Midland Common Stock pursuant to Section 2.7. Such
shares of Newco Common Stock, together with any dividends or distributions
with respect thereto (as provided in subSection (c) of this Section 2.10),
are referred to herein as the "Exchange Fund." The Exchange Agent, pursuant
to irrevocable instructions consistent with the terms of this Agreement,
shall deliver the Newco Common Stock to be issued pursuant to Section 2.7
out of the Exchange Fund, and the Exchange
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Fund shall not be used for any other purpose. The Exchange Agent shall not
be entitled to vote or exercise any rights of ownership with respect to the
Newco Common Stock held by it from time to time hereunder, except that it
shall receive and hold all dividends or other distributions paid or
distributed with respect thereto for the account of Persons entitled
thereto.
(b) EXCHANGE PROCEDURES.
(i) As soon as reasonably practicable after the Effective Time,
Newco shall cause the Exchange Agent to mail to each holder of record of
a Midland Certificate that, immediately prior to the Effective Time,
represented shares of Midland Common Stock converted into Newco Common
Stock pursuant to Section 2.7 a letter of transmittal to be used to
effect the exchange of such Midland Certificate for a Newco Stock
Certificate and cash in lieu of fractional shares, along with
instructions for using such letter of transmittal to effect such
exchange. The letter of transmittal (or the instructions thereto) shall
specify that delivery of any Midland Certificate shall be effected, and
risk of loss and title thereto shall pass, only upon delivery of such
Midland Certificate to the Exchange Agent and shall be in such form and
have such other provisions as Newco may reasonably specify.
(ii) Upon delivery to the Exchange Agent of, together with the
surrender of a Midland Certificate, if applicable, a duly completed and
executed letter of transmittal and any other required documents
(including, in the case of any Rule 145 Affiliate, an Affiliate
Agreement from such Person as described in Section 4.9, if not
theretofore delivered to Newco), (A) the holder of such Midland
Certificate shall be entitled to receive in exchange therefor a Newco
Stock Certificate representing the number of whole shares of Newco
Common Stock that such holder has the right to receive pursuant to
Section 2.7, any cash in lieu of fractional shares of Newco Common Stock
as provided in subSection (e) of this Section, and any unpaid dividends
and distributions that such holder has the right to receive pursuant to
subSection (c) of this Section (after giving effect to any required
withholding of taxes) and (B) the Midland Certificate, if any, so
surrendered shall forthwith be cancelled. No interest shall be paid or
accrued on the cash in lieu of fractional shares and unpaid dividends
and distributions, if any, payable to holders of Midland Certificates.
(iii) In the event of a transfer of ownership of Midland Common
Stock that is not registered in the transfer records of Midland, a Newco
Stock Certificate representing the appropriate number of shares of Newco
Common Stock (along with any cash in lieu of fractional shares and any
unpaid dividends and distributions that such holder has the right to
receive) may be issued to a transferee if the Midland Certificate
representing such shares of Midland Common Stock is presented to the
Exchange Agent accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer
taxes have been paid.
(iv) Until surrendered as contemplated by this subsection, each
Midland Certificate shall be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender a Newco Stock
Certificate representing shares of Newco Common Stock (along with any
cash in lieu of fractional shares and any unpaid dividends and
distributions).
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to Newco Common Stock declared or made
after the Effective Time with a record date after the Effective Time shall
be paid to the holder of any unsurrendered Midland Certificate. Subject to
the effect of applicable laws, (i) at the time of the surrender of a
Midland Certificate for exchange in accordance with the provisions of this
Section, there shall be paid to the surrendering holder, without interest,
the amount of dividends or other distributions (having a record date after
the Effective Time but on or prior to surrender and a payment date on or
prior to surrender) theretofore paid with respect to the number of whole
shares of Newco Common Stock that such holder is entitled to receive (less
the amount of any withholding taxes that may be required with respect
thereto) and (ii) at the appropriate payment date, there shall be paid to
the surrendering holder, without interest, the amount of dividends or other
distributions (having a record date after the Effective Time but on or
prior to surrender and a payment
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date subsequent to surrender) payable with respect to the number of whole
shares of Newco Common Stock that such holder receives (less the amount of
any withholding taxes that may be required with respect thereto).
(d) NO FURTHER OWNERSHIP RIGHTS IN MIDLAND COMMON STOCK. All shares of
Newco Common Stock issued upon the surrender for exchange of shares of
Midland Common Stock in accordance with the terms hereof (including any
cash paid pursuant to subSection (c) or (e) of this Section) shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Midland Common Stock. After the Effective Time, there shall
be no further registration of transfers on the MM Surviving Corporation's
stock transfer books of the shares of Midland Common Stock that were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, a Midland Certificate is presented to the MM Surviving
Corporation for any reason, it shall be cancelled and exchanged as provided
in this Section.
(e) TREATMENT OF FRACTIONAL SHARES.
(i) No Newco Stock Certificates or scrip representing fractional
shares of Newco Common Stock shall be issued in the Midland Merger, and
except as provided in this subsection, no dividend or other
distribution, stock split, or interest shall relate to any such
fractional share and such fractional share shall not entitle the owner
thereof to vote or to any other rights of a shareholder of Newco.
(ii) As soon as practicable following the Effective Time, the
Exchange Agent shall determine the excess of (A) the number of whole
shares of Newco Common Stock delivered to the Exchange Agent by Newco
pursuant to subSection (a) of this Section over (B) the aggregate number
of whole shares of Newco Common Stock issuable to holders of Midland
Common Stock pursuant to Section 2.7 (such excess being referred to
herein as the "Excess Shares") and the Exchange Agent, as the agent for
the former holders of Midland Common Stock, shall sell the Excess Shares
at the prevailing prices on the securities exchange on which the shares
of Newco Common Stock are traded. The sale of the Excess Shares by the
Exchange Agent shall be executed on such securities exchange through one
or more member firms of such securities exchange and shall be executed
in round lots to the extent practicable. Newco shall pay all
commissions, transfer taxes, and other out-of-pocket transaction costs
incurred in connection with such sale of the Excess Shares.
(iii) In lieu of any fractional share of Newco Common Stock to
which a holder of Midland Common Stock would otherwise be entitled, such
holder, upon surrender of a Midland Certificate as described in this
Section, shall be paid an amount in cash (without interest) equal to
such holder's proportionate interest in the sum of (A) the net proceeds
from the sale of the Excess Shares in accordance with the provisions of
paragraph (2) of this subsection and (B) the aggregate dividends or
other distributions that are payable with respect to the Excess Shares
pursuant to subsection (c) of this Section, such proportionate interest
to be determined by dividing the amount of the fractional share
interests to which such holder would otherwise be entitled by the
aggregate amount of fractional share interests to which all holders of
Midland Common Stock would otherwise be entitled. Until the net proceeds
of the sale of Excess Shares (along with any dividends or distributions
with respect thereto have been distributed to the former shareholders of
Midland), the Exchange Agent will hold such amounts in trust for the
former holders of Midland Common Stock.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund and
cash held by the Exchange Agent in accordance with the terms of this
Section that remains unclaimed by the former shareholders of Midland for a
period of one year following the Effective Time shall be delivered to
Newco, upon demand. Thereafter, any former shareholders of Midland who have
not theretofore complied with the provisions of this Section shall look
only to Newco for payment of their claim for Newco Common Stock, any cash
in lieu of fractional shares of Newco Common Stock, and any dividends or
distributions with respect to Newco Common Stock (all without interest).
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(g) NO LIABILITY. None of Newco, the MM Surviving Corporation, the
Exchange Agent, or any other Person shall be liable to any former holder of
shares of Midland Common Stock for any amount properly delivered to any
public official pursuant to any applicable abandoned property, escheat, or
similar law. Any amounts remaining unclaimed by former holders of shares of
Midland Common Stock for a period of two years following the Effective Time
(or such earlier date immediately prior to the time at which such amounts
would otherwise escheat to or become property of any governmental entity)
shall, to the extent permitted by applicable law, become the property of
Newco free and clear of any claims or interest of any such holders or their
successors, assigns, or personal representative previously entitled
thereto.
(h) LOST, STOLEN, OR DESTROYED MIDLAND CERTIFICATES. If any Midland
Certificate shall have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the Person claiming such Midland Certificate
to be lost, stolen, or destroyed and, if required by Newco, the posting by
such Person of a bond in such reasonable amount as Newco may direct as an
indemnity against any claim that may be made against it with respect to
such Midland Certificate, the Exchange Agent shall issue in exchange for
such lost, stolen, or destroyed Midland Certificate the shares of Newco
Common Stock (along with any cash in lieu of fractional shares pursuant to
subsection (e) of this Section and any unpaid dividends and distributions
pursuant to subsection (c) of this Section) deliverable with respect
thereto pursuant to this Agreement.
2.11 CLOSING. The Closing shall take place on the Closing Date. The Closing
shall take place at such time as is agreed upon by Vista and Midland and shall
take place at the offices of Vinson & Elkins, L.L.P., 2001 Ross Avenue, Suite
3700, Dallas, Texas 75201, unless another place is agreed to by Vista and
Midland.
2.12 EFFECTIVE TIME OF THE MERGER. In connection with the Midland Merger,
the parties hereto will file with the Texas Secretary of State on the Closing
Date articles of merger (the "Midland Articles of Merger"). Notwithstanding
anything in this Section to the contrary, the articles of merger referred to in
this Section may be filed prior to the Closing Date or prior to the Closing so
long as it provides for an effective time that occurs on or after the Closing.
The Midland Merger shall become effective immediately upon the filing of the
Midland Articles of Merger with the Texas Secretary of State, or at such later
time specified in the Midland Articles of Merger (the "Effective Time").
2.13 SHAREHOLDER APPROVALS OBTAINED.
(a) Vista, in its capacity as the sole shareholder of Newco, by its
execution hereof, approves and adopts this Agreement and the transactions
contemplated hereby.
(b) Newco, in its capacity as the sole shareholder of Merger Sub, by
its execution hereof, approves and adopts this Agreement and the
transactions contemplated hereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF MIDLAND. Midland hereby represents
and warrants to Vista, Newco and Merger Sub as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of Midland and its
Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its state of incorporation
or organization, has all requisite power and authority to own, lease, and
operate its properties and to carry on its business as now being conducted,
and is duly qualified and in good standing to do business in each
jurisdiction in which the business it is conducting, or the operation,
ownership, or leasing of its properties, makes such qualification
necessary, other than in such jurisdictions where the failure so to qualify
would not have a Material Adverse Effect (as defined below) on Midland.
Midland has heretofore delivered to Vista and Newco complete and correct
copies of its and each of its Subsidiaries' Articles of Incorporation and
Bylaws, each as amended to date. The respective jurisdictions of
incorporation or organization of Midland's Subsidiaries are identified on
Schedule 3.1(a) of the
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Midland Disclosure Schedule. Other than Midland's Subsidiaries disclosed on
Schedule 3.1(a) of the Midland Disclosure Schedule, Midland has no other
Subsidiary. As used in this Agreement, a "Material Adverse Effect" or
"Material Adverse Change" shall mean, in respect of Midland or Vista, as
the case may be, any effect or change that is or, as far as can be
reasonably determined, may be materially adverse to the business,
operations, assets, condition (financial or otherwise) or results of
operations of such party and its Subsidiaries taken as a whole.
(b) CAPITAL STRUCTURE. As of the date hereof, the authorized capital
stock of Midland consists of 80,000,000 shares of Midland Common Stock and
20,000,000 shares of preferred stock, par value $.01 per share ("Midland
Preferred Stock"). At the close of business on April 30, 1998: (i)
4,463,499 shares of Midland Common Stock were issued and outstanding; (ii)
no shares of Midland Preferred Stock were issued and outstanding; (iii)
1,235,000, 236,500, and 398,000 Midland Common Stock were authorized and
available for grant pursuant to the Midland Resources, Inc. 1997 Board of
Directors' Stock Incentive Plan, the 1994 Midland Resources, Inc. Long-Term
Incentive Plan, and the 1996 Midland Resources, Inc. Long-Term Incentive
Plan (collectively, the "Midland Stock Plans"), respectively; (iv) 123,500,
236,500, and 398,000 shares of Midland Common Stock were reserved for
issuance pursuant to each of the Midland Stock Plans, respectively; (v)
1,603,000 shares of Midland Common Stock were subject to issuance under
Midland Options outstanding as of the date hereof; (vi) 2,253,094 shares of
Midland Common Stock were subject to issuance upon exercise of the Midland
Warrants; (vii) 2,253,094 shares of Midland Common Stock were reserved for
issuance upon exercise of the Midland Warrants; (viii) no shares of Midland
Common Stock were held by Midland in its treasury; (ix) 270,000 shares of
Midland Common Stock were subject to issuance upon exercise of the Midland
Common Stock Warrants, (x) 270,000 shares of Midland Common Stock were
reserved for issuance upon exercise of the Midland Common Stock Warrants
and (xi) no bonds, debentures, notes or other indebtedness having the right
to vote (or convertible into securities having the right to vote) ("Voting
Debt") on any matters on which shareholders of Midland may vote were issued
and outstanding. The Midland Resources, Inc. 1995 Board of Directors' Stock
Incentive Plan has been terminated, however, options for 50,000 shares of
Midland Common Stock issued thereunder prior to such termination remain
outstanding. All outstanding shares of Midland Common Stock are validly
issued, fully paid, and nonassessable and are not subject to preemptive
rights. Except as set forth on Schedule 3.1(b) of the Midland Disclosure
Schedule, all outstanding shares of capital stock of the Subsidiaries of
Midland are owned by Midland, or a direct or indirect wholly-owned
Subsidiary of Midland, free and clear of all Liens. Except as set forth in
this Section 3.1(b) or on Schedule 3.1(b) of the Midland Disclosure
Schedule, and except for changes since April 30, 1998 resulting from the
subsequent exercise of Midland Options, Midland Warrants, or Midland Common
Stock Warrants, there are outstanding: (A) no shares of capital stock,
Voting Debt or other voting securities of Midland; (B) no securities of
Midland or any Subsidiary of Midland convertible into or exchangeable for
shares of capital stock, Voting Debt or other voting securities of Midland
or any Subsidiary of Midland; and (C) no options, warrants, calls, rights
(including preemptive rights), commitments, or agreements to which Midland
or any Subsidiary of Midland is a party or by which it is bound in any case
obligating Midland or any Subsidiary of Midland to issue, deliver, sell,
purchase, redeem or acquire, or cause to be issued, delivered, sold,
purchased, redeemed or acquired, additional shares of capital stock or any
Voting Debt or other voting securities of Midland or of any Subsidiary of
Midland, or obligating Midland or any Subsidiary of Midland to grant,
extend, or enter into any such option, warrant, call, right, commitment, or
agreement. Except for the Midland Voting Agreements, there are not as of
the date hereof and there will not be at the Effective Time any shareholder
agreements, voting trusts or other agreements or understandings to which
Midland is a party or by which it is bound relating to the voting of any
shares of the capital stock of Midland that will limit in any way the
solicitation of proxies by or on behalf of Midland from, or the casting of
votes by, the shareholders of Midland with respect to the Midland Merger.
There are no restrictions on Midland to vote the stock of any of its
Subsidiaries. The exercise price or conversion price of each of the
outstanding Midland Warrants, Midland Common Stock Warrants, Midland
Options and other Midland Stock Equivalents is set forth on Schedule
3.1(b).
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(c) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) The Board of Directors of Midland has approved the Midland
Merger and this Agreement, and declared the Midland Merger and this
Agreement to be in the best interests of the shareholders of Midland.
The directors of Midland have advised Midland and Vista that they intend
(acting in their capacity as a shareholder of Midland and in accordance
with the applicable Midland Voting Agreement) to vote or cause to be
voted all of the shares of Midland Common Stock beneficially owned by
them and their affiliates in favor of approval of the Midland Merger and
this Agreement. Midland has all requisite corporate power and authority
to enter into this Agreement and, subject, with respect to consummation
of the Midland Merger, to approval of this Agreement and the Midland
Merger by the shareholders of Midland in accordance with the TBCA and
the Articles of Incorporation and Bylaws of Midland, to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part
of Midland, subject, with respect to consummation of the Midland Merger,
to approval of this Agreement and the Midland Merger by the shareholders
of Midland in accordance with the TBCA and the Articles of Incorporation
and Bylaws of Midland. This Agreement has been duly executed and
delivered by Midland and, subject, with respect to consummation of the
Midland Merger, to approval of this Agreement and the Midland Merger by
the shareholders of Midland in accordance with the TBCA and the Restated
Certificate of Incorporation and Restated Bylaws of Midland, and
assuming this Agreement constitutes the valid and binding obligation of
Vista, Newco and Merger Sub, constitutes a valid and binding obligation
of Midland enforceable in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization, moratorium
and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
(ii) Except as set forth on Schedule 3.1(c) of the Midland
Disclosure Schedule, the execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, conflict with, or result
in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination,
cancellation, or acceleration of any material obligation or to the loss
of a material benefit under, or give rise to a right of purchase under,
result in the creation of any Lien upon any of the properties or assets
of Midland or any of its Subsidiaries under, or otherwise result in a
material detriment to Midland or any of its Subsidiaries under, any
provision of (A) the Articles of Incorporation or Bylaws of Midland or
any provision of the comparable charter or organizational documents of
any of its Subsidiaries, (B) any loan or credit agreement, note, bond,
mortgage, indenture, lease, or other agreement, instrument, permit,
concession, franchise, or license applicable to Midland or any of its
Subsidiaries, (C) any joint venture or other ownership arrangement, or
(D) assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in Section 3.1(c)(iii) are duly and
timely obtained or made and the approval of the Midland Merger and this
Agreement by the shareholders of Midland has been obtained, any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Midland or any of its Subsidiaries or any of their
respective properties or assets, other than, in the case of clause (B)
or (C) in this subsection, any such conflicts, violations, defaults,
rights, Liens that, individually or in the aggregate, would not have a
Material Adverse Effect on Midland, materially impair the ability of
Midland to perform its obligations hereunder, or prevent the
consummation of any of the transactions contemplated hereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any court,
governmental, regulatory or administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (a
"Governmental Entity"), is required by or with respect to Midland or any
of its Subsidiaries in connection with the execution and delivery of
this Agreement by Midland or the consummation by Midland of the
transactions contemplated hereby, as to which the failure to obtain or
make would have a Material Adverse
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Effect on Midland, except for: (A) the filing with the SEC of (1) a
proxy statement in preliminary and definitive form relating to the
meeting of the shareholders of Midland to be held in connection with the
Midland Merger (the "Proxy Statement") and (2) such reports under
Section 13(a) of the Exchange Act and such other compliance with the
Exchange Act and the rules and regulations thereunder, as may be
required in connection with this Agreement and the transactions
contemplated hereby; (B) the filing of the Midland Articles of Merger
with the Texas Secretary of State; (C) filings with, and approval of,
the Nasdaq or the AMEX; (D) such filings and approvals as may be
required by any applicable state securities, "blue sky" or takeover
laws, or environmental laws; (E) such filings and approvals as may be
required by any foreign premerger notification, securities, corporate or
other law, rule or regulation; and (F) any such consent, approval,
order, authorization, registration, declaration, filing, or permit that
the failure to obtain or make would not, individually or in the
aggregate, have a Material Adverse Effect on Midland, materially impair
the ability of Midland to perform its obligations hereunder, or prevent
the consummation of any of the transactions contemplated hereby.
(d) SEC DOCUMENTS. Midland has made available to Vista a true and
complete copy of each report, schedule, registration statement, and
definitive proxy statement filed by Midland with the SEC since December 31,
1995 and prior to or on the date of this Agreement (the "Midland SEC
Documents"), which are all the documents (other than preliminary material)
that Midland was required to file with the SEC between December 31, 1995
and the date of this Agreement. As of their respective dates, the Midland
SEC Documents complied in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Midland SEC
Documents, and none of the Midland SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading. The
financial statements of Midland included in the Midland SEC Documents
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance
with generally accepted accounting principles in the United States ("GAAP")
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements,
as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present
in accordance with applicable requirements of GAAP (subject, in the case of
the unaudited statements, to normal, recurring adjustments, none of which
are material) the consolidated financial position of Midland and its
consolidated Subsidiaries as of their respective dates and the consolidated
results of operations and the consolidated cash flows of Midland and its
consolidated Subsidiaries for the periods presented therein. In addition,
Midland has made available to Vista the audited consolidated balance sheets
of Midland and its Subsidiaries as of December 31, 1997, together with the
audited consolidated statements of operations, shareholder's equity and
cash flows of Midland and its Subsidiaries for the year then ended (such
audited consolidated financial statements of Midland being referred to as
the "Midland Financial Statements"). The Midland Financial Statements were
prepared in accordance with GAAP applied on a consistent basis during the
periods involved and fairly present in accordance with applicable
requirements of GAAP the consolidated financial position of Midland and its
consolidated Subsidiaries as of its date and the consolidated results of
operations and the consolidated cash flows of Midland and its Subsidiaries
for the period presented therein. Except as disclosed in the Midland SEC
Documents, there are no agreements, arrangements, or understandings between
Midland and any party who is at the date of this Agreement or was at any
time prior to the date hereof but after December 31, 1995 an Affiliate of
Midland that are required to be disclosed in the Midland SEC Documents.
(e) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Midland for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Newco in
connection with the issuance of shares of Newco Common Stock in the Midland
Merger (the "S-4") will, at the time the S-4 becomes effective under the
Securities Act or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required
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to be stated therein or necessary to make the statements therein not
misleading, and none of the information supplied or to be supplied by
Midland and included or incorporated by reference in the Proxy Statement
will, at the date mailed to shareholders of Midland or at the time of the
meeting of such shareholders to be held in connection with the Midland
Merger or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event with respect to Midland or any of its
Subsidiaries, or with respect to other information supplied by Midland for
inclusion in the Proxy Statement or S-4, shall occur which is required to
be described in an amendment of, or a supplement to, the S-4 or the Proxy
Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the shareholders of Midland. The Proxy Statement, insofar
as it relates to Midland or its Subsidiaries or other information supplied
by Midland for inclusion therein, will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in, or
reflected in the financial statements included in the Midland SEC Documents
or in the Midland Financial Statements, or except as contemplated by this
Agreement, since December 31, 1997, there has not been: (i) any
declaration, setting aside, or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of
Midland's capital stock; (ii) any amendment of any material term of any
outstanding equity security of Midland or any Subsidiary of Midland; (iii)
any repurchase, redemption, or other acquisition by Midland or any
Subsidiary of Midland of any outstanding shares of capital stock or other
equity securities of, or other ownership interests in, Midland or any
Subsidiary of Midland; (iv) any material change in any method of accounting
or accounting practice or any tax method, practice, or election by Midland
or any Subsidiary of Midland; or (v) any other transaction, commitment,
dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) that is
reasonably likely to have a Material Adverse Effect on Midland, except for
general economic changes and changes that may affect the industries of
Midland or any of its Subsidiaries generally.
(g) NO UNDISCLOSED MATERIAL LIABILITIES. Except as disclosed on
Schedule 3.1(g)or as disclosed in the Midland SEC Documents or in the
Midland Financial Statements, as of the date hereof, there are no
liabilities of Midland or any of its Subsidiaries of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or
otherwise, that are reasonably likely to have a Material Adverse Effect on
Midland, other than: (i) liabilities adequately provided for on the balance
sheet of Midland dated as of December 31, 1997 (including the notes
thereto) contained in Midland's Annual Report on Form 10-KSB for the year
ended December 31, 1997; (ii) liabilities incurred in the ordinary course
of business subsequent to December 31, 1997; and (iii) liabilities under
this Agreement.
(h) NO DEFAULT. Except as disclosed on Schedule 3.1(h), neither
Midland nor any of its Subsidiaries is in default or violation (and no
event has occurred which, with notice or the lapse of time or both, would
constitute a default or violation) of any term, condition or provision of
(i) the Articles of Incorporation or Bylaws of Midland or the comparable
charter or organizational documents of any of its Subsidiaries, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, lease, or other
agreement, instrument, permit, concession, franchise, or license to which
Midland or any of its Subsidiaries is now a party or by which Midland or
any of its Subsidiaries or any of their respective properties or assets is
bound or (iii) any order, writ, injunction, decree, statute, rule, or
regulation applicable to Midland or any of its Subsidiaries, except in the
case of clauses (ii) and (iii) in this subsection for defaults or
violations which in the aggregate would not have a Material Adverse Effect
on Midland.
(i) COMPLIANCE WITH APPLICABLE LAWS. Midland and its Subsidiaries hold
all permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses (the "Midland Permits"), except where the
failure so to hold would not have a Material Adverse Effect on Midland.
Midland and its Subsidiaries are in
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compliance with the terms of the Midland Permits, except where the failure
so to comply would not have a Material Adverse Effect on Midland. Except as
disclosed in the Midland SEC Documents, the businesses of Midland and its
Subsidiaries are not being conducted in violation of any law, ordinance, or
regulation of any Governmental Entity, except for possible violations which
would not have a Material Adverse Effect on Midland. As of the date of this
Agreement, no investigation or review by any Governmental Entity with
respect to Midland or any of its Subsidiaries is pending and of which
Midland has knowledge or, to the knowledge (as hereinafter defined) of
Midland as of the date hereof, threatened, other than those the outcome of
which would not have a Material Adverse Effect on Midland.
(j) LITIGATION. Except as disclosed in the Midland SEC Documents or
Schedule 3.1(j) of the Midland Disclosure Schedule, as of the date of this
Agreement there is no suit, action or proceeding pending, or, to the
knowledge of Midland, threatened against or affecting Midland or any
Subsidiary of Midland ("Midland Litigation"), and Midland and its
Subsidiaries have no knowledge of any facts that are likely to give rise to
any Midland Litigation, that (in any case) is reasonably likely to have a
Material Adverse Effect on Midland, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against Midland or any Subsidiary of Midland ("Midland Order")
that is reasonably likely to have a Material Adverse Effect on Midland or
its ability to consummate the transactions contemplated by this Agreement.
Schedule 3.1(j) of the Midland Disclosure Schedule contains an accurate and
complete list of all suits, actions and proceedings pending or, to the
knowledge of Midland, threatened against or affecting Midland or any of its
Subsidiaries as of the date hereof.
(k) TAXES. Except as set forth on Schedule 3.1(k) of the Midland
Disclosure Schedule:
(i) Each of Midland, each of its Subsidiaries and any affiliated,
consolidated, combined, unitary or similar group of which Midland or any
of its Subsidiaries is or was a member has (A) duly filed on a timely
basis (taking into account any extensions) all U.S. federal income Tax
Returns (as hereinafter defined), and all other material Tax Returns,
required to be filed or sent by or with respect to it, (B) duly paid or
deposited on a timely basis all Taxes (as hereinafter defined) that are
shown to be due and payable on or with respect to such Tax Returns, and
all material Taxes that are otherwise due and payable (except for audit
adjustments not material in the aggregate or to the extent that
liability therefor is reserved for in Midland's most recent audited
financial statements) for which Midland or any of its Subsidiaries may
be liable, (C) established reserves that are adequate for the payment of
all material Taxes not yet due and payable with respect to the results
of operations of Midland and its Subsidiaries through the date hereof,
and (D) complied in all material respects with all applicable laws,
rules and regulations relating to the reporting, payment and withholding
of Taxes that are required to be withheld from payments to employees,
independent contractors, creditors, shareholders or any other third
party and has in all material respects timely withheld from employee
wages and paid over to the proper governmental authorities all amounts
required to be so withheld and paid over.
(ii) Schedule 3.1(k) of the Midland Disclosure Schedule sets forth
(A) the last taxable period through which the federal income Tax Returns
of Midland and any of its Subsidiaries have been audited by the IRS or
for which the statute of limitations for assessment has otherwise closed
and (B) any affiliated, consolidated, combined, unitary or similar group
or Tax Return in which Midland or any of its Subsidiaries is or has been
a member or joins or has joined in the filing. Except to the extent
being contested in good faith, all material deficiencies asserted as a
result of such examinations and any examination by any applicable taxing
authority have been paid, fully settled or adequately provided for in
Midland's most recent audited financial statements. Except as disclosed
in or adequately provided for in the Midland SEC Documents or disclosed
in Schedule 3.1(k) of the Midland Disclosure Schedule, no audits or
other administrative proceedings or court proceedings are presently
pending, or to the knowledge of Midland, threatened, with regard to any
Taxes for which Midland or any of its Subsidiaries would be liable, and
no material deficiency for any Taxes has been proposed, asserted or
assessed (whether by examination report or prior to completion of
examination by means of notices of proposed adjustment or other similar
requests or notices) pursuant to such
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examination against Midland or any of its Subsidiaries by any taxing
authority with respect to any period.
(iii) Neither Midland nor any of its Subsidiaries has executed or
entered into with the IRS or any taxing authority (A) any agreement or
other document extending or having the effect of extending the period
for assessment or collection of any income or franchise Taxes for which
Midland or any of its Subsidiaries would be liable or (B) a closing
agreement pursuant to Section 7121 of the Code or any similar provision
of state, local, foreign or other income tax law, which will require any
increase in taxable income or alternative minimum taxable income, or any
reduction in tax credits, for Midland or any of its Subsidiaries for any
taxable period ending after the Closing Date.
(iv) Except as set forth in the Midland SEC Documents or disclosed
in Schedule 3.1(k), neither Midland nor any of its Subsidiaries is a
party to an agreement that provides for the payment of any amount that
would constitute a "parachute payment" within the meaning of Section
280G of the Code or that would constitute compensation whose
deductibility is limited under Section 162(m) of the Code.
(v) Except as set forth in the Midland SEC Documents, neither
Midland nor any of its Subsidiaries is a party to, is bound by or has
any obligation under any tax sharing or allocation agreement or similar
agreement or arrangement.
(vi) There are no requests for rulings or outstanding subpoenas
from any taxing authority for information with respect to Taxes of
Midland or any of its Subsidiaries and, to the knowledge of Midland, no
material reassessments (for property or ad valorem Tax purposes) of any
assets or any property owned or leased by Midland or any of its
Subsidiaries have been proposed in written form.
(vii) Neither Midland nor any of its Subsidiaries has agreed to
make any adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of Midland or any of its Subsidiaries, and neither Midland nor any of
its Subsidiaries has any application pending with any taxing authority
requesting permission for any changes in any accounting method of
Midland or any of its Subsidiaries. To the knowledge of Midland, neither
the IRS nor any other taxing authority has proposed in writing, and
neither Midland nor any of its Subsidiaries is otherwise required to
make, any such adjustment or change in accounting method.
(viii) There are no material excess loss accounts or deferred
intercompany transactions between Midland and/or any of its Subsidiaries
within the meaning of Treas. Reg. Section 1.1502-13 or 1.1502-19,
respectively.
For purposes of this Agreement, "Tax" (and, with correlative meaning,
"Taxes") means (i) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, license, withholding on amounts paid by Midland or any
of its Subsidiaries (or Vista or any of its Subsidiaries, as applicable),
payroll, employment, excise, production, severance, stamp, occupation,
premium, property, environmental or windfall profit tax, custom, duty or
other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and/or any penalty, addition to tax
or additional amount imposed by any taxing authority, (ii) any liability of
Midland or any of its Subsidiaries (or Vista or any of its Subsidiaries, as
applicable) for the payment of any amounts of the type described in (i) as
a result of being a member of an affiliated or consolidated group, or
arrangement whereby liability of Midland or any of its Subsidiaries (or
Vista or any of its Subsidiaries, as applicable) for payment of such
amounts was determined or taken into account with reference to the
liability of any other person for any period and (iii) liability of Midland
or any of its Subsidiaries (or Vista or any of its Subsidiaries, as
applicable) with respect to the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation
to indemnify any other Person.
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"Tax Return" means all returns, declarations, reports, estimates,
information returns and statements required to be filed by or with respect
to Midland or any of its Subsidiaries (or Vista or any of its Subsidiaries,
as applicable) in respect of any Taxes, including, without limitation, (i)
any consolidated Federal Income Tax return in which Midland or any of its
Subsidiaries (or Vista or any of its Subsidiaries, as applicable) is
included and (ii) any state, local or foreign Income Tax returns filed on a
consolidated, combined or unitary basis (for purposes of determining tax
liability) in which Midland or any of its Subsidiaries (or Vista or any of
its Subsidiaries, as applicable) is included.
(l) EMPLOYEE BENEFIT MATTERS. (i) Schedule 3.1(l)(i) provides a
description of each of the following which is sponsored, maintained or
contributed to by Midland or one of its Subsidiaries (the "Midland Group")
for the benefit of the employees of the Midland Group, former employees of
the Midland Group, directors of the Midland Group, former directors of the
Midland Group, or any agents, consultants, or similar representatives
providing services to or for the Midland Group, or has been so sponsored,
maintained or contributed to within six years prior to the Closing Date for
the benefit of such individuals:
(A) each "employee benefit plan," as such term is defined in
Section 3(3) of ERISA (including, but not limited to, employee benefit
plans, such as foreign plans, which are not subject to the provisions of
ERISA) ("Midland Plan");
(B) except for the Midland Stock Option Plans, each personnel
policy, stock option plan, stock purchase plan, stock appreciation
rights, phantom stock plan, collective bargaining agreement, bonus plan
or arrangement, incentive award plan or arrangement, vacation policy,
severance pay plan, policy or agreement, deferred compensation agreement
or arrangement, executive compensation or supplemental income
arrangement, consulting agreement, employment agreement and each other
employee benefit plan, agreement, arrangement, program, practice or
understanding which is not described in Section 3.1(l)(i)(A) (together
with the Midland Stock Plans, the "Midland Benefit Program or
Agreement").
(ii) True, correct and complete copies of each of the Midland Plans,
related trusts, insurance or group annuity contracts and each other funding
or financing arrangement relating to any Midland Plan, including all
amendments thereto, have been furnished to Vista. There has also been
furnished to Vista, with respect to each Midland Plan required to file such
report and description, the most recent report on Form 5500 and the summary
plan description. True, correct and complete copies or descriptions of all
Midland Benefit Programs or Agreements have also been furnished to Vista. A
schedule of employer expenses with respect to each Midland Plan and Midland
Benefit Program or Agreement for the current plan year and past plan year
has been furnished to Vista along with any administration agreement
associated with any Midland Plan. Additionally, the most recent
determination letter from the IRS for each of the Midland Plans intended to
be qualified under Section 401 of the Code, and any outstanding
determination letter application for such plans has been furnished.
(iii) Except as otherwise set forth on Schedule 3.1(l)(iii),
(A) Each Midland Plan and Midland Benefit Program or Agreement has
been administered in compliance with its terms, the applicable
provisions of ERISA, the Code and all other applicable laws and the
terms of all applicable collective bargaining agreements;
(B) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of a member of the
Midland Group, threatened against, or with respect to, any of the
Midland Plans or Midland Benefit Programs or Agreements or their assets;
(C) As to any Midland Plan intended to be qualified under Section
401 of the Code, there has been no termination or partial termination of
the Midland Plan within the meaning of Section 411(d)(3) of the Code;
(D) No act, omission or transaction has occurred which would result
in imposition on a member of the Midland Group of (1) breach of
fiduciary duty liability damages under Section 409
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of ERISA, (2) a civil penalty assessed pursuant to subsections (c), (i)
or (l) of Section 502 of ERISA or (3) a tax imposed pursuant to Chapter
43 of Subtitle D of the Code;
(E) To the knowledge of a member of the Midland Group, there is no
matter pending (other than routine qualification determination filings)
with respect to any of the Midland Plans before the IRS, the Department
of Labor or the PBGC;
(F) No trust funding a Midland Plan is intended to be exempt from
federal income taxation pursuant to Section 501(c)(9) of the Code;
(iv) In connection with the consummation of the transaction
contemplated by this Agreement, no payments have or will be made under the
Midland Plans or Midland Benefit Programs or Agreements which, in the
aggregate, would result in imposition of the sanctions imposed under
Sections 280G and 4999 of the Code.
(v) Except as otherwise set forth in Schedule 3.1(l)(v), no Midland
Plan or Midland Benefit Program or Agreement provides retiree medical or
retiree life insurance benefits to any person and a member of the Midland
Group is not contractually or otherwise obligated (whether or not in
writing) to provide any person with life insurance or medical benefits upon
retirement or termination of employment, other than as required by the
provisions of Section 601 through 608 of ERISA and Section 4980B of the
Code. Additionally, each Midland Plan which is an "employee welfare benefit
plan," as such term is defined in Section 3(1) of ERISA, may be
unilaterally amended or terminated in its entirety without liability except
as to benefits accrued thereunder prior to such amendment or termination.
(vi) No Midland Plan is a multiemployer plan within the meaning of
Section 3(37) of ERISA.
(vii) Except for the Midland Stock Plans or as otherwise set forth in
Schedule 3.1(l)(vii), no Midland Plan or Midland Benefit Program or
Agreement provides that payments pursuant to such Midland Plan or Midland
Benefit Program or Agreement may be made in securities of a member of the
Midland Group or a Commonly Controlled Entity, nor does any trust
maintained pursuant to any Midland Plan or Midland Benefit Program or
Agreement hold any securities of a member of the Midland Group.
(m) LABOR MATTERS. Except as set forth on Schedule 3.1(m) of the
Midland Disclosure Schedule or in the Midland SEC Documents:
(i) neither Midland nor any of its Subsidiaries is a party to any
collective bargaining agreement or other current labor agreement with
any labor union or organization, and there is no current union
representation question involving employees of Midland or any of its
Subsidiaries, nor does Midland or any of its Subsidiaries know of any
activity or proceeding of any labor organization (or representative
thereof) or employee group (or representative thereof) to organize any
such employees;
(ii) as of the date hereof, there is no unfair labor practice
charge or grievance arising out of a collective bargaining agreement or
other grievance procedure against Midland or any of its Subsidiaries
pending, or, to the knowledge or Midland or any of its Subsidiaries,
threatened, that has, or is reasonably likely to have, a Material
Adverse Effect on Midland;
(iii) as of the date hereof, there is no complaint, lawsuit or
proceeding in any forum by or on behalf of any present or former
employee, any applicant for employment or any classes of the foregoing
alleging breach of any express or implied contract of employment, any
law or regulation governing employment or the termination thereof or
other discriminatory, wrongful or tortious conduct in connection with
the employment relationship against Midland or any of its Subsidiaries
pending, or, to the knowledge of Midland or any of its Subsidiaries,
threatened, that has, or is reasonably likely to have, a Material
Adverse Effect on Midland;
(iv) Midland and each of its Subsidiaries are in compliance with
all applicable laws respecting employment and employment practices,
terms and conditions of employment, wages, hours of work
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and occupational safety and health, except for non-compliance that does
not have, and is not reasonably likely to have, a Material Adverse
Effect on Midland; and
(v) as of the date hereof, there is no proceeding, claim, suit,
action or governmental investigation pending or, to the knowledge of
Midland or any of its Subsidiaries, threatened, in respect to which any
current or former director, officer, employee or agent of Midland or any
of its Subsidiaries is or may be entitled to claim indemnification from
Midland or any of its Subsidiaries pursuant to the Articles of
Incorporation or Bylaws of Midland or any provision of the comparable
charter or organizational documents of any of its Subsidiaries, as
provided in any indemnification agreement to which Midland or any
Subsidiary of Midland is a party or pursuant to applicable law that has,
or is reasonably likely to have, a Material Adverse Effect on Midland.
(n) INTANGIBLE PROPERTY. Midland and its Subsidiaries possess or have
adequate rights to use all material trademarks, trade names, patents,
service marks, brand marks, brand names, computer programs, databases,
industrial designs and copyrights necessary for the operation of the
businesses of each of Midland and its Subsidiaries (collectively, the
"Midland Intangible Property"), except where the failure to possess or have
adequate rights to use such properties would not reasonably be expected to
have a Material Adverse Effect on Midland. All of the Midland Intangible
Property is owned or licensed by Midland or its Subsidiaries free and clear
of any and all Liens, except those that are not reasonably likely to have a
Material Adverse Effect on Midland, and neither Midland nor any such
Subsidiary has forfeited or otherwise relinquished any Midland Intangible
Property which forfeiture would result in a Material Adverse Effect on
Midland. To the knowledge of Midland, the use of the Midland Intangible
Property by Midland or its Subsidiaries does not, in any material respect,
conflict with, infringe upon, violate or interfere with or constitute an
appropriation of any right, title, interest or goodwill, including, without
limitation, any intellectual property right, trademark, trade name, patent,
service mark, brand mark, brand name, computer program, database,
industrial design, copyright or any pending application therefor of any
other person and there have been no claims made and neither Midland nor any
of its Subsidiaries has received any notice of any claim or otherwise knows
that any of the Midland Intangible Property is invalid or conflicts with
the asserted rights of any other person or has not been used or enforced or
has failed to have been used or enforced in a manner that would result in
the abandonment, cancellation or unenforceability of any of the Midland
Intangible Property, except for any such conflict, infringement, violation,
interference, claim, invalidity, abandonment, cancellation or
unenforceability that would not reasonably be expected to have a Material
Adverse Effect on Midland.
(o) ENVIRONMENTAL MATTERS.
For purposes of this Agreement:
(i) "Environmental Laws" means all federal, state and local laws
(including common laws), rules, regulations, ordinances, orders,
decrees of any Governmental Entity, whether now in existence or
hereafter enacted and in effect at the time of Closing, relating to
pollution or the protection of human health, safety or the
environment of any jurisdiction in which the applicable party hereto
owns or operates assets or conducts business or owned or operated
assets or conducted business (whether or not through a predecessor
entity) (including, without limitation, ambient air, surface water,
groundwater, land surface, subsurface strata, natural resources or
wildlife), including, without limitation, laws and regulations
relating to Releases or threatened Releases of Hazardous Materials or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of solid waste or
Hazardous Materials, and any similar laws, rules, regulations,
ordinances, orders and decrees of any foreign jurisdiction in which
the applicable party hereto owns or operates assets or conducts
business;
(ii) "Hazardous Materials" means (A) any petroleum or petroleum
products, radioactive materials (including naturally occurring
radioactive materials), asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, polychlorinated biphenyls
or trans-
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formers or other equipment that contain dielectric fluid containing
polychlorinated biphenyls, (B) any chemicals, materials or substances
which are now defined as or included in the definition of "solid
wastes," "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous substances," "restricted hazardous
wastes," "toxic substances" or "toxic pollutants," or words of
similar import, under any Environmental Law and (C) any other
chemical, material, substance or waste, exposure to which is now
prohibited, limited or regulated under any Environmental Law in a
jurisdiction in which Midland or any of its Subsidiaries operates
(for purposes of Section 3.1(o)) or in which Vista or any of its
Subsidiaries operates (for purposes of Section 3.2(o)).
(iii) "Release" means any spill, effluent, emission, leaking,
pumping, pouring, emptying, escaping, dumping, injection, deposit,
disposal, discharge, dispersal, leaching or migration into the indoor
or outdoor environment, or into or out of any property owned,
operated or leased by the applicable party or its Subsidiaries; and
(iv) "Remedial Action" means all actions, including, without
limitation, any capital expenditures, required by a Governmental
Entity or required under any Environmental Law, or voluntarily
undertaken to (A) clean up, remove, treat, or in any other way
ameliorate or address any Hazardous Materials or other substance in
the indoor or outdoor environment; (B) prevent the Release or threat
of Release, or minimize the further Release of any Hazardous Material
so it does not endanger or threaten to endanger the public or
employee health or welfare of the indoor or outdoor environment; (C)
perform pre-remedial studies and investigations or post-remedial
monitoring and care pertaining or relating to a Release; or (D) bring
the applicable party into compliance with any Environmental Law.
Except as disclosed on Schedule 3.1(o) of the Midland Disclosure
Schedule:
(v) The operations of Midland and its Subsidiaries have been
conducted, are and, as of the Closing Date, will be, in
compliance with all Environmental Laws, except where the failure
to so comply would not reasonably be expected to have a Material
Adverse Effect on Midland;
(vi) Midland and its Subsidiaries have obtained and will
maintain all permits, licenses and registrations, or applications
relating thereto, and have made and will make all filings,
reports and notices required under applicable Environmental Laws
for the continued operations of their respective businesses,
except such matters the lack or failure of which would not
reasonably be expected to lead to a Material Adverse Effect on
Midland;
(vii) Midland and its Subsidiaries are not subject to any
outstanding written orders issued by, or contracts with, any
Governmental Entity or other person respecting (A) Environmental
Laws, (B) Remedial Action, (C) any Release or threatened Release
of a Hazardous Material or (D) an assumption of responsibility
for environmental liabilities of another person, except such
orders or contracts the compliance with which would not
reasonably be expected to have a Material Adverse Effect on
Midland;
(viii) Midland and its Subsidiaries have not received any
written communication alleging, with respect to any such party,
the violation of or liability under any Environmental Law, which
violation or liability would reasonably be expected to have a
Material Adverse Effect on Midland;
(ix) Neither Midland nor any of its Subsidiaries has any
contingent liability in connection with the Release of any
Hazardous Material into the indoor or outdoor environment
(whether on-site or off-site) or employee or third party exposure
to Hazardous Materials that would reasonably be expected to lead
to a Material Adverse Effect on Midland;
(x) The operations of Midland or its Subsidiaries involving
the generation, transportation, treatment, storage or disposal of
hazardous or solid waste, as defined and regulated
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under 40 C.F.R. Parts 260-270 (in effect as of the date of this
Agreement) or any applicable state equivalent, are in compliance
with applicable Environmental Laws, except where the failure to
so comply would not reasonably be expected to have a Material
Adverse Effect on Midland; and
(xi) To the knowledge of Midland, there is not now on or in
any property of Midland or its Subsidiaries or any property for
which Midland or its Subsidiaries is potentially liable any of
the following: (A) any underground storage tanks or surface
impoundments or (B) any on-site disposal of Hazardous Material,
any of which ((A) or (B) preceding) could reasonably be expected
to have a Material Adverse Effect on Midland.
(p) INSURANCE. Schedule 3.1(p) of the Midland Disclosure Schedule sets
forth an insurance schedule of Midland's and each of its Subsidiaries'
directors' and officers' liability insurance, primary and excess casualty
insurance policies, providing coverage for bodily injury and property
damage to third parties, including products liability and completed
operations coverage, and worker's compensation, in effect as of the date
hereof. Midland maintains, and through the Closing Date will maintain,
insurance in such amounts and covering such risks as are in accordance with
normal industry practice for companies engaged in businesses similar to
those of Midland and each of its Subsidiaries (taking into account the cost
and availability of such insurance). Each of Midland and its Subsidiaries
may terminate each of its insurance policies or binders at or after the
Closing Date and will incur no penalties or other material costs in doing
so. None of such policies or binders was obtained through the use of false
or misleading information or the failure to provide the insurer with all
information requested in order to evaluate the liabilities and risks
insured. There is no material default with respect to any provision
contained in any such policy or binder nor has Midland or any of its
Subsidiaries failed to give any notice or present any claim under any such
policy or binder in due and timely fashion. There are no billed but unpaid
premiums past due under any such policy or binder. Except as otherwise
disclosed on Schedule 3.1(p) of the Midland Disclosure Schedule, there are
no outstanding claims under any such policies or binders and, to the
knowledge of Midland, there has not occurred any event that might
reasonably form the basis of any claim against or relating to Midland or
any of its Subsidiaries is not covered by any of such policies or binders.
No notice of cancellation or non-renewal of any such policies or binders
has been received. Except as otherwise disclosed on Schedule 3.1(p) of the
Midland Disclosure Schedule, there are no performance bonds outstanding
with respect to Midland or any of its Subsidiaries.
(q) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on
Schedule 3.1(q) of the Midland Disclosure Schedule or as contemplated by
this Agreement, since December 31, 1997 none of Midland or any of its
Subsidiaries has done any of the following:
(i) Discharged or satisfied any Lien or paid any obligation or
liability, absolute or contingent, other than current liabilities
incurred and paid in the ordinary course of business and consistent with
past practices;
(ii) Paid or declared any dividends or distributions, purchased,
redeemed, acquired, or retired any indebtedness, stock, or other
securities from its shareholders or other securityholders, made any
loans or advances or guaranteed any loans or advances to any Person
(other than loans, advances, or guaranties made in the ordinary course
of business and consistent with past practices), or otherwise incurred
or suffered to exist any liabilities (other than current liabilities
incurred in the ordinary course of business and consistent with past
practices);
(iii) Except for Permitted Encumbrances suffered or permitted any
Lien to arise or be granted or created against or upon any of its
assets;
(iv) Cancelled, waived, or released any rights or claims against,
or indebtedness owed by, third parties;
(v) Amended its certificate or articles of incorporation or bylaws
or comparable organizational documents;
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(vi) Made or permitted any amendment, supplement, modification, or
termination of any Midland Material Agreement;
(vii) Paid or made any agreement to pay any severance or
termination payment to any employee or consultant;
(viii) Sold, transferred, assigned, or otherwise disposed of (A)
any Oil and Gas Interests of Midland that, individually or in the
aggregate, had a value at the time of such transfer, assignment, or
disposition of $50,000 or more or (B) any other assets (including any
undeveloped leasehold acreage) that, individually or in the aggregate,
had a value at the time of such transfer, assignment, or disposition of
$50,000 or more; provided, however, that this paragraph shall not apply
to Hydrocarbons sold in the ordinary course of business and consistent
with past practices;
(ix) Made any investment in or contribution, payment, or advance to
any Person (other than investments, contributions, payments, or
advances, or commitments with respect thereto, made in the ordinary
course of business and consistent with past practices).
(x) Granted present or future increases in the rates of
compensation or other benefits payable to any of its directors,
officers, or other executive personnel or any consultant or paid any
bonuses to such Persons;
(xi) Paid, loaned, or advanced (other than the payment, advance or
reimbursement of expenses in the ordinary course of business) any
amounts to, or sold, transferred, or leased any of its assets to, or
entered into any other transactions with, any of its Affiliates;
(xii) Waived any rights of material value;
(xiii) Suffered any material damage, destruction, or loss, whether
or not covered by insurance, affecting its assets or prospects;
(xiv) Made any change in any of the accounting principles followed
by it or the method of applying such principles;
(xv) Suffered any material labor trouble or any material
controversies with any of its employees or collective bargaining
association representing any of its employees;
(xvi) Entered into any other transactions (other than this
Agreement) except in the ordinary course of business and consistent with
past practices;
(xvii) Taken any of the actions referred to in Section 4.1 except
as would have been permitted or required thereby had such Section been
applicable at the time of such action;
(xviii) Agreed, whether in writing or otherwise, to do any of the
foregoing; or
(xix) Suffered any material adverse change or trend in its
financial position, results of operations, or business (other than
changes or trends, including changes or trends in commodity prices,
generally prevalent in or affecting the oil and gas industry).
(r) GOVERNMENTAL REGULATION. None of Midland or any of its
Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Interstate Commerce Act,
the Investment Company Act of 1940, or any state public utilities code.
(s) NO RESTRICTIONS. Except as otherwise disclosed on Schedule 3.1(s)
of the Midland Disclosure Schedule, none of Midland or any of its
Subsidiaries is a party to (i) any agreement, indenture, or other
instrument that contains restrictions with respect to the payment of
dividends or other distributions with respect to its capital, (ii) any
financial arrangement with respect to or creating any indebtedness to any
Person (other than indebtedness reflected in the Midland SEC Documents or
indebtedness incurred in the ordinary course of business), (iii) any
agreement, contract, or commitment relating to the making of any advance
to, or investment in, any Person (other than advances in the ordinary
course of business), (iv) any guaranty or other contingent liability with
respect to any indebtedness or obligation of any
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Person (other than guaranties undertaken in the ordinary course of business
and other than the endorsement of negotiable instruments for collection in
the ordinary course of business), (v) any management, service, consulting,
or other contract of a similar nature that cannot be terminated by Midland
or any of its Subsidiaries, as the case may be, upon written notice of 30
days or less and without penalty or other obligation, or (vi) any
agreement, contract, or commitment limiting in any respect its ability to
compete with any Person or otherwise conduct business of any line or
nature.
(t) AUDITS AND SETTLEMENTS. Except as otherwise disclosed on Schedule
3.1(t) of the Midland Disclosure Schedule, none of Midland or any of its
Subsidiaries is a party or subject to any unresolved or incomplete audit,
accounting, or other settlement.
(u) EMPLOYMENT CONTRACTS AND BENEFITS. Except as otherwise disclosed
on Schedule 3.1(u) of the Midland Disclosure Schedule or otherwise provided
for in any Midland Plan or Midland Benefit Program or Agreement, (i) none
of Midland or any of its Subsidiaries is subject to or obligated under any
consulting, employment, severance, termination, or similar arrangement, any
employee benefit, incentive, deferred compensation plan with respect to any
Person, or any bonus, profit sharing, pension, stock option, stock
purchase, or similar plan or other arrangement or other fringe benefit plan
entered into or maintained for the benefit of employees or any other Person
and (ii) no employee of Midland or any of its Subsidiaries, or any other
Person owns, or has any right granted by Midland or any of its Subsidiaries
to acquire, any interest in any of the assets or business of Midland or any
of its Subsidiaries.
(v) ACCOUNTS RECEIVABLE. Except as otherwise disclosed on Schedule
3.1(v) of the Midland Disclosure Schedule, all of the accounts, notes, and
loans receivable that have been recorded on the books of Midland or any of
its Subsidiaries are bona fide and represent accounts, notes, and loans
receivable validly due for goods sold or services rendered and are
reasonably expected to be collected in full within 90 days after the
applicable invoice or note maturity date (other than such accounts, notes,
and loans receivable that, individually or in the aggregate, do not have a
book value as of the date hereof in excess of $25,000). Except for
Permitted Encumbrances, all of such accounts, notes, and loans receivable
are free and clear of any and all Liens and other adverse claims and
charges, and none of such accounts, notes, or loans receivable is subject
to any offsets or claims of offset. None of the obligors on such accounts,
notes, or loans receivable has given notice to Midland or any of its
Subsidiaries that it will or may refuse to pay the full amount or any
portion thereof.
(w) TITLE TO ASSETS. Midland and its Subsidiaries (individually or
collectively) have Defensible Title to all Oil and Gas Interests of Midland
included or reflected in the Midland Engineering Report or the Midland
Financial Statements. Each Oil and Gas Interest included or reflected in
the Midland Engineering Report entitles Midland and its Subsidiaries
(individually or collectively) to receive not less than the undivided
interest set forth in (or derived from) the Midland Engineering Report of
all Hydrocarbons produced, saved, and sold from or attributable to such Oil
and Gas Interest, and the portion of the costs and expenses of operation
and development of such Oil and Gas Interest that is borne or to be borne
by Midland and its Subsidiaries (individually or collectively) is not
greater than the undivided interest set forth in (or derived from) the
Midland Engineering Report. Except for Permitted Encumbrances, each of
Midland and its Subsidiaries has good, marketable, and defensible title to
its assets (other than the Oil and Gas Interests of Midland). All leases
pursuant to which Midland or any of its Subsidiaries leases any assets are
in full force and effect, and neither Midland or any of its Subsidiaries
has received any notice of default under any such lease.
(x) MIDLAND ENGINEERING REPORT. All information supplied to Williamson
Petroleum Consultants, Inc. by or on behalf of Midland that was material to
such firm's evaluation of Midland's Oil and Gas Interests in connection
with the preparation of the Midland Engineering Report was (at the time
supplied or as modified or amended prior to the issuance of the Midland
Engineering Report) true and correct in all material respects. Except for
changes in classification or values of oil and gas reserve or property
interests that occurred in the ordinary course of business since December
31, 1997 and except for changes (including changes in commodity prices)
generally affecting the oil and gas industry, there has been no Material
Adverse Change with respect to the matters addressed in the Midland
Engineering Report.
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(y) OIL AND GAS OPERATIONS. Except as otherwise disclosed on Schedule
3.1(y):
(i) None of the wells included in the Oil and Gas Interests of
Midland has been overproduced such that it is subject or liable to being
shut-in or to any overproduction penalty, except where any such
overproduction could not reasonably be expected to have a Material
Adverse Effect on Midland;
(ii) There have been no changes proposed in the production
allowables for any wells included in the Oil and Gas Interests of
Midland that could reasonably be expected to have a Material Adverse
Effect on Midland;
(iii) All wells included in the Oil and Gas Interests of Midland
have been drilled and (if completed) completed, operated, and produced
in accordance with good oil and gas field practices and in compliance in
all material respects with applicable oil and gas leases and applicable
laws, rules, and regulations, except where any failure or violation
could not reasonably be expected to have a Material Adverse Effect on
Midland;
(iv) None of Midland or any of its Subsidiaries has agreed to or is
now obligated to abandon any well operated by any of them and included
in the Oil and Gas Interests of Midland that is or will not be abandoned
and reclaimed in accordance with applicable laws, rules, and regulations
and good oil and gas industry practices;
(v) Proceeds from the sale of Hydrocarbons produced from and
attributable to Midland's Oil and Gas Interests are being received by
Midland or its Subsidiaries in a timely manner and are not being held in
suspense for any reason (except for amounts, individually or in the
aggregate, not in excess of $25,000 and held in suspense in the ordinary
course of business); and
(vi) No Person has any call on, option to purchase, or similar
rights with respect to Midland's Oil and Gas Interests or to the
production attributable thereto, and upon consummation of the
transactions contemplated by this Agreement, Midland and its
Subsidiaries will have the right to market production from Midland's Oil
and Gas Interests on terms no less favorable than the terms upon which
such company is currently marketing such production.
(z) HYDROCARBON SALES AND PURCHASE AGREEMENTS. Except as otherwise
disclosed on Schedule 3.1(z) of the Midland Disclosure Schedule:
(i) None of the Hydrocarbon Sales Agreements of Midland or
Hydrocarbon Purchase Agreements of Midland has required since December
31, 1997, or will require as of or after the Closing Date, Midland or
any of its Subsidiaries (A) to have sold or delivered, or to sell or
deliver, Hydrocarbons for a price materially less than the market value
price that would have been, or would be, received pursuant to any
arm's-length contract for a term of one month with an unaffiliated
third-party purchaser or (B) to have purchased or received, or to
purchase or receive, Hydrocarbons for a price materially greater than
the market value price that would have been, or would be, paid pursuant
to an arm's-length contract for a term of one month with an unaffiliated
third-party seller;
(ii) Each of the Hydrocarbon Agreements of Midland is valid,
binding, and in full force and effect, and no party is in material
breach or default of any Hydrocarbon Agreement of Midland, and to the
knowledge of Midland, no event has occurred that with notice or lapse of
time (or both) would constitute a material breach or default or permit
termination, modification, or acceleration under any Hydrocarbon
Agreement of Midland;
(iii) There have been no claims from any third party for any price
reduction or increase or volume reduction or increase under any of the
Hydrocarbon Agreements of Midland, and none of Midland or any of its
Subsidiaries has made any claims for any price reduction or increase or
volume reduction or increase under any of the Hydrocarbon Agreements of
Midland;
(iv) Payments for Hydrocarbons sold pursuant to each Hydrocarbon
Sales Agreement of Midland have been made (subject to adjustment in
accordance with such Hydrocarbon Sales
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Agreements) materially in accordance with prices or price setting
mechanisms set forth in such Hydrocarbon Sales Agreements;
(v) No purchaser under any Hydrocarbon Sales Agreement of Midland
has notified Midland or any of its Subsidiaries (or, to the knowledge of
Midland, the operator of any property) of its intent to cancel,
terminate, or renegotiate any Hydrocarbon Sales Agreement of Midland or
otherwise to fail and refuse to take and pay for Hydrocarbons in the
quantities and at the price set out in any Hydrocarbon Sales Agreement,
whether such failure or refusal was pursuant to any force majeure,
market out, or similar provisions contained in such Hydrocarbon Sales
Agreement or otherwise;
(vi) None of Midland or any of its Subsidiaries is obligated in any
Hydrocarbon Sales Agreement by virtue of any prepayment arrangement, a
"take-or-pay" or similar provision, a production payment, or any other
arrangements to deliver Hydrocarbons produced from an Oil and Gas
Interest of Midland at some future time without then or thereafter
receiving payment therefor;
(vii) Midland and its Subsidiaries, collectively, are not
obligated, due to production and pipeline gas imbalances, to deliver gas
having a market value in excess of $50,000 without receiving payment
therefor; and
(viii) The Hydrocarbon Agreements of Midland are of the type
generally found in the oil and gas industry, do not (individually or in
the aggregate) contain unusual or unduly burdensome provisions that may
have a Material Adverse Effect on Midland, and are in form and substance
considered normal within the oil and gas industry.
(aa) FINANCIAL AND COMMODITY HEDGING. Schedule 3.1(aa) of the Midland
Disclosure Schedule accurately summarizes the outstanding Hydrocarbon and
financial hedging positions of Midland and its Subsidiaries (including
fixed price controls, collars, swaps, caps, hedges, and puts).
(bb) COMMITTED CAPITAL EXPENDITURES. Schedule 3.1(bb) of the Midland
Disclosure Schedule is a true, accurate, and complete list of all
commitments (including AFEs) pursuant to which Midland or any of its
Subsidiaries has paid or incurred since December 31, 1997, or is obligated
to pay or incur after the date hereof, drilling or capital expenditures in
excess of $25,000 with respect to any well, and except as otherwise
disclosed on Schedule 3.1(bb) of the Midland Disclosure Schedule, the
aggregate amount of drilling and capital expenditures with respect to oil
and gas wells that Midland and its Subsidiaries have paid or incurred since
December 31, 1997 or are obligated to pay or incur after the date hereof
does not exceed $500,000.
(cc) BUSINESS RELATIONS. To the knowledge of Midland, since December
31, 1997, there has been no termination, cancellation, or limitation of, or
any material modification or change in, the material business relationships
of Midland or any of its Subsidiaries with any material supplier or
customer or any partner or joint venture partner nor has there been any
material development relating to any such supplier, customer, partner, or
joint venture partner that could reasonably be expected to have a Material
Adverse Effect on Midland.
(dd) BOOKS AND RECORDS. All books, records, and files of Midland and
its Subsidiaries (including those pertaining to Midland's Oil and Gas
Interests, wells, and other assets, those pertaining to the production,
gathering, transportation, and sale of Hydrocarbons, and corporate,
accounting, financial, and employee records) (i) have been prepared,
assembled, and maintained in accordance with usual and customary policies
and procedures and (ii) fairly and accurately reflect the ownership, use,
enjoyment, and operation by Midland and its Subsidiaries of their
respective assets.
(ee) BROKERS. Except as disclosed in Schedule 3.1(ee), no broker,
finder, investment banker, or other Person is or will be, in connection
with the transactions contemplated by this Agreement, entitled to any
brokerage, finder's, or other fee or compensation based on any arrangement
or agreement made by or on behalf of Midland and for which Newco, Midland
or any Subsidiary of Midland.
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(ff) VOTE REQUIRED. The affirmative vote of the holders of at least
two-thirds of the outstanding shares of Midland Common Stock is the only
vote of the holders of any class or series of Midland capital stock or
other voting securities necessary to approve this Agreement, the Midland
Merger, and the transactions contemplated hereby.
(gg) DISCLOSURE AND INVESTIGATION. No representation or warranty of
Midland contained in this Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements contained herein not misleading. The Responsible Officers,
individually or collectively, of Midland and its Subsidiaries have
conducted, or have caused the respective officers, employees,
representatives, or agents of Midland and its Subsidiaries to conduct, such
investigations and inquiries that they reasonably believe most likely to
confirm the truth and accuracy of each of the representations and
warranties contained in this Section.
(hh) FAIRNESS OPINION. Midland has received an oral opinion from Dain
Rauscher Incorporated to the effect that the consideration to be received
in the Midland Merger by the holders of shares of Midland Common Stock is
fair to such holders from a financial point of view and such opinion has
not been withdrawn, revoked, or modified.
3.2 REPRESENTATIONS AND WARRANTIES OF VISTA. Vista hereby represents and
warrants to Midland as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of Vista, the General
Partner and Vista Sub is a partnership or corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation, has all requisite power and authority to own, lease, and
operate its properties and to carry on its business as now being conducted,
and is duly qualified and in good standing to do business in each
jurisdiction in which the business it is conducting, or the operation,
ownership, or leasing of its properties, makes such qualification
necessary, other than in such jurisdictions where the failure so to qualify
would not have a Material Adverse Effect on Vista. Vista has heretofore
delivered to Midland complete and correct copies of its Agreement of
Limited Partnership, as amended to date. The jurisdiction of incorporation
of the General Partner and Vista Sub is Texas. Vista has no Subsidiary
other than Vista Sub.
(b) CAPITAL STRUCTURE.
(i) All outstanding Partnership Interests are validly issued and
all capital contributions required to be made with respect to such
Partnership Interests have been made in full. The outstanding
Partnership Interests are subject to preemptive rights as set forth in
the Agreement of Limited Partnership. The outstanding Partnership
Interests have not been issued in violation of such preemptive rights.
Except as set forth in this Section 3.2(b), the Agreement of Limited
Partnership, or on Schedule 3.2(b) of the Vista Disclosure Schedule,
there are outstanding: (1) no Partnership Interests, Voting Debt or
other voting securities of Vista; (2) no securities of Vista or Vista
Sub convertible into or exchangeable for Partnership Interests, Voting
Debt or other voting securities of Vista or Vista Sub; and (3) no
options, warrants, calls, rights (including preemptive rights),
commitments, or agreements to which Vista or Vista Sub is a party or by
which it is bound in any case obligating Vista or Vista Sub to issue,
deliver, sell, purchase, redeem or acquire, or cause to be issued,
delivered, sold, purchased, redeemed or acquired, additional Partnership
Interests or any Voting Debt or other voting securities of Vista or of
Vista Sub, or obligating Vista or Vista Sub to grant, extend, or enter
into any such option, warrant, call, right, commitment, or agreement.
Except for the Agreement of Limited Partnership, there are not as of the
date hereof and there will not be at the Effective Time any voting
trusts or other agreements or understandings to which Vista is a party
or by which it is bound relating to the voting of any Partnership
Interests that will limit in any way the solicitation of consents by or
on behalf of Vista from, or the casting of votes by, the partners of
Vista with respect to the Vista Exchange. All outstanding shares of
capital stock of Vista Sub are owned by Vista, free and clear of all
Liens. There are no restrictions on Vista to vote the capital stock of
Vista Sub.
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(ii) As of the date hereof, the authorized capital stock of the
General Partner consists of 100,000 shares of GP Common Stock. At the
close of business on April 30, 1998, 79,254 shares of GP Common Stock
were issued and outstanding and no shares of GP Common Stock are held by
the General Partner in its treasury. No shares of GP Common Stock are
reserved for issuance for any other purpose. No Voting Debt on any
matters on which shareholders of the General Partner may vote are issued
and outstanding. All outstanding shares of GP Common Stock are validly
issued, fully paid, and nonassessable and are not subject to preemptive
rights. Except as described above, there are outstanding (A) no shares
of GP Common Stock, Voting Debt or other voting securities of the
General Partner; (B) no securities of the General Partner convertible
into or exchangeable for shares of GP Common Stock, Voting Debt or other
voting securities of the General Partner; and (C) no options, warrants,
calls, rights (including preemptive rights), commitments, or agreements
to which the General Partner is a party or by which it is bound in any
case obligating the General Partner to issue, deliver, sell, purchase,
redeem or acquire, or cause to be issued, delivered, sold, purchased,
redeemed or acquired, additional shares of GP Common Stock or any Voting
Debt or other voting securities of the General Partner, or obligating
the General Partner to grant, extend, or enter into any such option,
warrant, call, right, commitment, or agreement.
(c) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS.
(i) The General Partner has approved the Vista Exchange and this
Agreement, and declared the Vista Exchange and this Agreement to be in
the best interests of the shareholders of the General Partner and the
limited partners of Vista. Vista has all requisite partnership power and
authority to enter into this Agreement. The execution and delivery of
this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on
the part of the General Partner and all necessary partnership action on
the part of Vista. This Agreement has been duly executed and delivered
by Vista and, assuming this Agreement constitutes the valid and binding
obligation of Midland, Newco, and Merger Sub, constitutes a valid and
binding obligation of Vista enforceable in accordance with its terms,
subject, as to enforceability, to bankruptcy, insolvency,
reorganization, moratorium and other laws of general applicability
relating to or affecting creditors' rights and to general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(ii) Except as set forth on Schedule 3.2(c) of the Vista Disclosure
Schedule, the execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with
the provisions hereof will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation, or
acceleration of any material obligation or to the loss of a material
benefit under, or give rise to a right of purchase under, result in the
creation of any Lien upon any of the properties or assets of Vista, the
General Partner or Vista Sub under, or otherwise result in a material
detriment to Vista, the General Partner or Vista Sub under, any
provision of (A) the Agreement of Limited Partnership or any provision
of the Articles of Incorporation or Bylaws the General Partner or Vista
Sub, (B) any loan or credit agreement, note, bond, mortgage, indenture,
lease, or other agreement, instrument, permit, concession, franchise, or
license applicable to Vista, the General Partner or Vista Sub, (C) any
joint venture or other ownership arrangement, or (D) any judgment,
order, decree, statute, law, ordinance, rule, or regulation applicable
to Vista, the General Partner or Vista Sub or any of their respective
properties or assets, other than, in the case of clause (B) or (C) in
this subsection, any such conflicts, violations, defaults, rights, Liens
that, individually or in the aggregate, would not have a Material
Adverse Effect on Vista, materially impair the ability of Vista to
perform its obligations hereunder, or prevent the consummation of any of
the transactions contemplated hereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any
Governmental Entity, is required by or with respect to Vista, the
General Partner or Vista Sub in connection with the execution and
delivery of this Agreement by Vista or the consummation by Vista of the
transactions contemplated hereby, as to which the failure to obtain or
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make would have a Material Adverse Effect on Vista, except for (A) such
filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws, or environmental laws; (B) such
filings and approvals as may be required by any foreign premerger
notification, securities, corporate or other law, rule or regulation;
and (C) any such consent, approval, order, authorization, registration,
declaration, filing, or permit that the failure to obtain or make would
not, individually or in the aggregate, have a Material Adverse Effect on
Vista, materially impair the ability of Vista to perform its obligations
hereunder, or prevent the consummation of any of the transactions
contemplated hereby.
(d) FINANCIAL STATEMENTS AND MATERIAL AGREEMENTS. Vista has made
available to Midland a true and complete copy of (i) each of the Vista
Material Agreements and (ii) the audited consolidated balance sheets of
Vista and its sole Subsidiary as of December 31, 1997, together with the
audited consolidated statements of operations, partners' capital, and cash
flows of Vista and its sole Subsidiary for the year then ended, and the
notes thereto, accompanied by the reports thereon of Arthur Andersen LLP
(such audited consolidated financial statements of Vista collectively being
referred to as the "Financial Statements"). The Financial Statements were
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and
fairly present in accordance with applicable requirements of GAAP the
consolidated financial position of Vista and its consolidated sole
Subsidiary as of their respective dates and the consolidated results of
operations and the consolidated cash flows of Vista and its sole Subsidiary
for year then ended.
(e) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Vista for inclusion or incorporation by reference in the S-4 to
be filed with the SEC by Newco in connection with the issuance of shares of
Newco Common Stock in the Midland Merger will, at the time the S-4 becomes
effective under the Securities Act or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and none of the information supplied or to be supplied by
Vista and included or incorporated by reference in the Proxy Statement
will, at the date mailed to shareholders of Midland or at the time of the
meeting of such shareholders to be held in connection with the Midland
Merger or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event with respect to Vista, the General
Partner or Vista Sub, or with respect to other information supplied by
Vista for inclusion in the Proxy Statement or S-4, shall occur which is
required to be described in an amendment of, or a supplement to, the S-4 or
the Proxy Statement, such event shall be so described, and such amendment
or supplement shall be promptly filed with the SEC.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in, or
reflected in the Financial Statements, or except as contemplated by this
Agreement, since December 31, 1997, there has not been: (i) any
declaration, setting aside, or payment of any distribution (whether in
cash, stock or property) with respect to any of Vista's equity securities;
(ii) any amendment of any material term of any outstanding equity security
of Vista, the General Partner or Vista Sub; (iii) any repurchase,
redemption, or other acquisition by Vista, the General Partner or Vista Sub
of any outstanding shares of capital stock, Partnership Interests, or other
equity securities of, or other ownership interests in, Vista, the General
Partner or Vista Sub; (iv) any material change in any method of accounting
or accounting practice or any tax method, practice, or election by Vista,
the General Partner or Vista Sub; or (v) any other transaction, commitment,
dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) that is
reasonably likely to have a Material Adverse Effect on Vista, except for
general economic changes and changes that may affect the industries of
Vista, the General Partner or Vista Sub generally.
(g) NO UNDISCLOSED MATERIAL LIABILITIES. Except as disclosed in the
Financial Statements, as of the date hereof, there are no liabilities of
Vista, the General Partner or Vista Sub of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, that
are reasonably likely
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to have a Material Adverse Effect on Vista, other than: (i) liabilities
adequately provided for on the consolidated balance sheet of Vista and its
sole Subsidiary dated as of December 31, 1997 (including the notes
thereto), a copy of which has previously been provided to Midland; (ii)
liabilities incurred in the ordinary course of business subsequent to
December 31, 1997; and (iii) liabilities under this Agreement. The General
Partner has not engaged in any business, operations or activities other
than business, operations and activities undertaken in its capacity as
general partner of Vista.
(h) NO DEFAULT. Neither Vista, the General Partner nor Vista Sub is in
default or violation (and no event has occurred which, with notice or the
lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) the Agreement of Limited Partnership or
the Articles of Incorporation and Bylaws of the General Partner or Vista
Sub, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
lease, or other agreement, instrument, permit, concession, franchise, or
license to which Vista, the General Partner or Vista Sub is now a party or
by which Vista, the General Partner or Vista Sub or any of their respective
properties or assets is bound, or (iii) any order, writ, injunction,
decree, statute, rule or regulation applicable to Vista, the General
Partner or Vista Sub, except in the case of clauses (ii) and (iii) in this
subsection for defaults or violations which in the aggregate would not have
a Material Adverse Effect on Vista.
(i) COMPLIANCE WITH APPLICABLE LAWS. Vista, the General Partner and
Vista Sub hold all permits, licenses, variances, exemptions, orders,
franchises and approvals of all Governmental Entities necessary for the
lawful conduct of their respective businesses (the "Vista Permits"), except
where the failure so to hold would not have a Material Adverse Effect on
Vista. Vista, the General Partner and Vista Sub are in compliance with the
terms of the Vista Permits, except where the failure so to comply would not
have a Material Adverse Effect on Vista. The businesses of Vista, the
General Partner and Vista Sub are not being conducted in violation of any
law, ordinance, or regulation of any Governmental Entity, except for
possible violations which would not have a Material Adverse Effect on
Vista. As of the date of this Agreement, no investigation or review by any
Governmental Entity with respect to Vista, the General Partner and Vista
Sub is pending and of which Vista has knowledge or, to the knowledge of
Vista as of the date hereof, threatened, other than those the outcome of
which would not have a Material Adverse Effect on Vista.
(j) LITIGATION. Except as disclosed on Schedule 3.2(j) of the Vista
Disclosure Schedule, as of the date of this Agreement there is no suit,
action or proceeding pending, or, to the knowledge of Vista, threatened
against or affecting Vista, the General Partner or Vista Sub ("Vista
Litigation"), and Vista, the General Partner and Vista Sub have no
knowledge of any facts that are likely to give rise to any Vista
Litigation, that (in any case) is reasonably likely to have a Material
Adverse Effect on Vista, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against
Vista, the General Partner or Vista Sub ("Vista Order") that is reasonably
likely to have a Material Adverse Effect on Vista or its ability to
consummate the transactions contemplated by this Agreement. Schedule 3.2(j)
of the Vista Disclosure Schedule contains an accurate and complete list of
all suits, actions and proceedings pending or, to the knowledge of Vista,
threatened against or affecting Vista, the General Partner or Vista Sub as
of the date hereof.
(k) TAXES. Except as set forth on Schedule 3.2(k) of the Vista
Disclosure Schedule:
(i) Each of Vista, the General Partner and Vista Sub and any
affiliated, consolidated, combined, unitary or similar group of which
Vista, the General Partner and Vista Sub is or was a member has (A) duly
filed on a timely basis (taking into account any extensions) all U.S.
federal income Tax Returns, and all other material Tax Returns, required
to be filed or sent by or with respect to it, (B) duly paid or deposited
on a timely basis all Taxes that are shown to be due and payable on or
with respect to such Tax Returns, and all material Taxes that are
otherwise due and payable (except for audit adjustments not material in
the aggregate or to the extent that liability therefor is reserved for
in Vista's most recent audited financial statements) for which Vista,
the General Partner or Vista Sub may be liable, (C) established reserves
that are adequate for the payment of all material Taxes not yet due and
payable with respect to the results of operations of
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Vista, the General Partner and Vista Sub through the date hereof, and
(D) complied in all material respects with all applicable laws, rules
and regulations relating to the reporting, payment and withholding of
Taxes that are required to be withheld from payments to employees,
independent contractors, creditors, shareholders or any other third
party and has in all material respects timely withheld from employee
wages and paid over to the proper governmental authorities all amounts
required to be so withheld and paid over.
(ii) Schedule 3.2(k) of the Vista Disclosure Schedule sets forth
(A) the last taxable period through which the federal income Tax Returns
of Vista, the General Partner and Vista Sub have been audited by the IRS
or for which the statute of limitations for assessment has otherwise
closed and (B) any affiliated, consolidated, combined, unitary or
similar group or Tax Return in which Vista, the General Partner or Vista
Sub is or has been a member or joins or has joined in the filing. Except
to the extent being contested in good faith, all material deficiencies
asserted as a result of such examinations and any examination by any
applicable taxing authority have been paid, fully settled or adequately
provided for in Vista's most recent audited financial statements. Except
as disclosed in Schedule 3.2(k) of the Vista Disclosure Schedule, no
audits or other administrative proceedings or court proceedings are
presently pending, or to the knowledge of Vista, threatened, with regard
to any Taxes for which Vista, the General Partner or Vista Sub would be
liable, and no material deficiency for any Taxes has been proposed,
asserted or assessed (whether by examination report or prior to
completion of examination by means of notices of proposed adjustment or
other similar requests or notices) pursuant to such examination against
Vista, the General Partner or Vista Sub by any taxing authority with
respect to any period.
(iii) Neither Vista, the General Partner nor Vista Sub has executed
or entered into (or prior to the close of business on the Closing Date
will execute or enter into) with the IRS or any taxing authority (A) any
agreement or other document extending or having the effect of extending
the period for assessment or collection of any income or franchise Taxes
for which Vista, the General Partner or Vista Sub would be liable or (B)
a closing agreement pursuant to Section 7121 of the Code or any similar
provision of state, local, foreign or other income tax law, which will
require any increase in taxable income or alternative minimum taxable
income, or any reduction in tax credits, for Vista, the General Partner
or Vista Sub for any taxable period ending after the Closing Date.
(iv) Except as disclosed in Schedule 3.2(k) of the Vista Disclosure
Schedule, neither Vista, the General Partner nor Vista Sub is a party to
an agreement that provides for the payment of any amount that would
constitute a "parachute payment" within the meaning of Section 280G of
the Code or that would constitute compensation whose deductibility is
limited under Section 162(m) of the Code.
(v) Except as disclosed in Schedule 3.2(k) of the Vista Disclosure
Schedule, neither Vista, the General Partner nor Vista Sub is a party
to, is bound by or has any obligation under any tax sharing or
allocation agreement or similar agreement or arrangement.
(vi) There are no requests for rulings or outstanding subpoenas
from any taxing authority for information with respect to Taxes of
Vista, the General Partner or Vista Sub and, to the knowledge of Vista,
no material reassessments (for property or ad valorem Tax purposes) of
any assets or any property owned or leased by Vista, the General Partner
or Vista Sub have been proposed in written form.
(vii) Neither Vista, the General Partner nor Vista Sub has agreed
to make any adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of Vista or any of its Subsidiaries, and neither Vista, the General
Partner nor Vista Sub has any application pending with any taxing
authority requesting permission for any changes in any accounting method
of Vista, the General Partner or Vista Sub To the knowledge of Vista,
neither the IRS nor any other taxing authority has proposed in writing,
and neither Vista, the General Partner nor Vista Sub is otherwise
required to make, any such adjustment or change in accounting method.
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(viii) Vista has properly qualified to be treated as a partnership
for federal (and, where permissible, state) income Tax purposes and has
not, at any time, been required to be taxed as an association taxable as
a corporation for federal income Tax purposes under any provision of the
Code or elected to be taxable as a corporation for federal income Tax
purposes.
(l) EMPLOYEE BENEFIT MATTERS. (i) Schedule 3.2(l)(i) provides a
description of each of the following which is sponsored, maintained or
contributed to by Vista, the General Partner, or Vista Sub (the "Vista
Group") for the benefit of the employees of the Vista Group, former
employees of the Vista Group, directors of the Vista Group, former
directors of the Vista Group, or any agents, consultants, or similar
representatives providing services to or for the Vista Group, or has been
so sponsored, maintained or contributed to within six years prior to the
Closing Date for the benefit of such individuals:
(A) each "employee benefit plan," as such term is defined in
Section 3(3) of ERISA (including, but not limited to, employee benefit
plans, such as foreign plans, which are not subject to the provisions of
ERISA) ("Vista Plan");
(B) each personnel policy, stock option plan, stock purchase plan,
stock appreciation rights, phantom stock plan, collective bargaining
agreement, bonus plan or arrangement, incentive award plan or
arrangement, vacation policy, severance pay plan, policy or agreement,
deferred compensation agreement or arrangement, executive compensation
or supplemental income arrangement, consulting agreement, employment
agreement and each other employee benefit plan, agreement, arrangement,
program, practice or understanding which is not described in Section
3.2(l)(i)(A) ("Vista Benefit Program or Agreement").
(ii) True, correct and complete copies of each of the Vista Plans,
related trusts, insurance or group annuity contracts and each other funding
or financing arrangement relating to any Vista Plan, including all
amendments thereto, have been furnished to Midland. There has also been
furnished to Midland, with respect to each Vista Plan required to file such
report and description, the most recent report on Form 5500 and the summary
plan description. True, correct and complete copies or descriptions of all
Vista Benefit Programs or Agreements have also been furnished to Midland. A
schedule of employer expenses with respect to each Vista Plan or Vista
Benefit Program or Agreement for the current plan year and past plan year
has been furnished to Midland along with any administration agreement
associated with any Vista Plan. Additionally, the most recent determination
letter from the IRS for each of the Vista Plans intended to be qualified
under Section 401 of the Code, and any outstanding determination letter
application for such plans has been furnished.
(iii) Except as otherwise set forth on Schedule 3.2(l)(iii),
(A) Each Vista Plan or Vista Benefit Program or Agreement has been
administered in compliance with its terms, the applicable provisions of
ERISA, the Code and all other applicable laws and the terms of all
applicable collective bargaining agreements;
(B) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of a member of the
Vista Group, threatened against, or with respect to, any of the Vista
Plans or Vista Benefit Programs or Agreements or their assets;
(C) As to any Vista Plan intended to be qualified under Section 401
of the Code, there has been no termination or partial termination of the
Vista Plan within the meaning of Section 411(d)(3) of the Code;
(D) No act, omission or transaction has occurred which would result
in imposition on a member of the Vista Group of (1) breach of fiduciary
duty liability damages under Section 409 of ERISA, (2) a civil penalty
assessed pursuant to subsections (c), (i) or (l) of Section 502 of ERISA
or (3) a tax imposed pursuant to Chapter 43 of Subtitle D of the Code;
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(E) To the knowledge of a member of the Vista Group, there is no
matter pending (other than routine qualification determination filings)
with respect to any of the Vista Plans before the IRS, the Department of
Labor or the PBGC;
(F) No trust funding a Vista Plan is intended to be exempt from
federal income taxation pursuant to Section 501(c)(9) of the Code;
(iv) In connection with the consummation of the transaction
contemplated by this Agreement, no payments have or will be made under the
Vista Plans or Vista Benefit Programs or Agreements which, in the
aggregate, would result in imposition of the sanctions imposed under
Sections 280G and 4999 of the Code.
(v) Except as otherwise set forth in Schedule 3.2(l)(v), no Vista Plan
or Vista Benefit Program or Agreement provides retiree medical or retiree
life insurance benefits to any person and a member of the Vista Group is
not contractually or otherwise obligated (whether or not in writing) to
provide any person with life insurance or medical benefits upon retirement
or termination of employment, other than as required by the provisions of
Section 601 through 608 of ERISA and Section 4980B of the Code.
Additionally, each Vista Plan which is an "employee welfare benefit plan,"
as such term is defined in Section 3(1) of ERISA, may be unilaterally
amended or terminated in its entirety without liability except as to
benefits accrued thereunder prior to such amendment or termination.
(vi) No Vista Plan is a multiemployer plan within the meaning of
Section 3(37) of ERISA.
(vii) Except as otherwise set forth in Schedule 3.2(l)(vii), no Vista
Plan or Vista Benefit Program or Agreement provides that payments pursuant
to such Vista Plan or Vista Benefit Program or Agreement may be made in
securities of a member of the Vista Group or a Commonly Controlled Entity,
nor does any trust maintained pursuant to any Vista Plan or Vista Benefit
Program or Agreement hold any securities of a member of the Vista Group.
(m) LABOR MATTERS. Except as set forth on Schedule 3.2(m) of the Vista
Disclosure Schedule:
(i) neither Vista, the General Partner nor Vista Sub is a party to
any collective bargaining agreement or other current labor agreement
with any labor union or organization, and there is no current union
representation question involving employees of Vista, the General
Partner or Vista Sub, nor does Vista, the General Partner or Vista Sub
know of any activity or proceeding of any labor organization (or
representative thereof) or employee group (or representative thereof) to
organize any such employees;
(ii) as of the date hereof, there is no unfair labor practice
charge or grievance arising out of a collective bargaining agreement or
other grievance procedure against Vista, the General Partner or Vista
Sub pending, or, to the knowledge of Vista, the General Partner or Vista
Sub, threatened, that has, or is reasonably likely to have, a Material
Adverse Effect on Vista;
(iii) as of the date hereof, there is no complaint, lawsuit or
proceeding in any forum by or on behalf of any present or former
employee, any applicant for employment or any classes of the foregoing
alleging breach of any express or implied contract of employment, any
law or regulation governing employment or the termination thereof or
other discriminatory, wrongful or tortious conduct in connection with
the employment relationship against Vista, the General Partner or Vista
Sub pending, or, to the knowledge of Vista, the General Partner or Vista
Sub, threatened, that has, or is reasonably likely to have, a Material
Adverse Effect on Vista;
(iv) Vista, the General Partner and Vista Sub are in compliance
with all applicable laws respecting employment and employment practices,
terms and conditions of employment, wages, hours of work and
occupational safety and health, except for non-compliance that does not
have, and is not reasonably likely to have, a Material Adverse Effect on
Vista; and
(v) As of the date hereof, there is no proceeding, claim, suit,
action or governmental investigation pending or, to the knowledge of
Vista, the General Partner or Vista Sub, threatened, in
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respect to which any current or former director, officer, employee or
agent of Vista, the General Partner or Vista Sub is or may be entitled
to claim indemnification from Vista, the General Partner or Vista Sub
pursuant to the Agreement of Limited Partnership or any provision of the
Articles of Incorporation or Bylaws of the General Partner or Vista Sub,
as provided in any indemnification agreement to which Vista, the General
Partner or Vista Sub is a party or pursuant to applicable law that has,
or is reasonably likely to have, a Material Adverse Effect on Vista.
(n) INTANGIBLE PROPERTY. Vista, the General Partner and Vista Sub
possess or have adequate rights to use all material trademarks, trade
names, patents, service marks, brand marks, brand names, computer programs,
databases, industrial designs and copyrights necessary for the operation of
the businesses of each of Vista, the General Partner and Vista Sub
(collectively, the "Vista Intangible Property"), except where the failure
to possess or have adequate rights to use such properties would not
reasonably be expected to have a Material Adverse Effect on Vista. All of
the Vista Intangible Property is owned or licensed by Vista, the General
Partner or Vista Sub free and clear of any and all Liens, except those that
are not reasonably likely to have a Material Adverse Effect on Vista, and
neither Vista, the General Partner nor Vista Sub has forfeited or otherwise
relinquished any Vista Intangible Property which forfeiture would result in
a Material Adverse Effect on Vista. To the knowledge of Vista, the use of
the Vista Intangible Property by Vista, the General Partner or Vista Sub
does not, in any material respect, conflict with, infringe upon, violate or
interfere with or constitute an appropriation of any right, title, interest
or goodwill, including, without limitation, any intellectual property
right, trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person and there have been no claims made
and neither Vista, the General Partner nor Vista Sub has received any
notice of any claim or otherwise knows that any of the Vista Intangible
Property is invalid or conflicts with the asserted rights of any other
person or has not been used or enforced or has failed to have been used or
enforced in a manner that would result in the abandonment, cancellation or
unenforceability of any of the Vista Intangible Property, except for any
such conflict, infringement, violation, interference, claim, invalidity,
abandonment, cancellation or unenforceability that would not reasonably be
expected to have a Material Adverse Effect on Vista.
(o) ENVIRONMENTAL MATTERS. Except as disclosed on Schedule 3.2(o) of
the Vista Disclosure Schedule:
(i) The operations of Vista, the General Partner and Vista Sub have
been conducted, are and, as of the Closing Date, will be, in compliance
with all Environmental Laws, except where the failure to so comply would
not reasonably be expected to have a Material Adverse Effect on Vista;
(ii) Vista, the General Partner and Vista Sub have obtained and
will maintain all permits, licenses and registrations, or applications
relating thereto, and have made and will make all filings, reports and
notices required under applicable Environmental Laws for the continued
operations of their respective businesses, except such matters the lack
or failure of which would not reasonably be expected to lead to a
Material Adverse Effect on Vista;
(iii) Vista, the General Partner and Vista Sub are not subject to
any outstanding written orders issued by, or contracts with, any
Governmental Entity or other person respecting (A) Environmental Laws,
(B) Remedial Action, (C) any Release or threatened Release of a
Hazardous Material or (D) an assumption of responsibility for
environmental liabilities of another person, except such orders or
contracts the compliance with which would not reasonably be expected to
have a Material Adverse Effect on Vista;
(iv) Vista, the General Partner and Vista Sub have not received any
written communication alleging, with respect to any such party, the
violation of or liability under any Environmental Law, which violation
or liability would reasonably be expected to have a Material Adverse
Effect on Vista;
(v) Neither Vista, the General Partner nor Vista Sub has any
contingent liability in connection with the Release of any Hazardous
Material into the indoor or outdoor environment (whether on-
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site or off-site) or employee or third party exposure to Hazardous
Materials that would reasonably be expected to lead to a Material
Adverse Effect on Vista;
(vi) The operations of Vista, the General Partner or Vista Sub
involving the generation, transportation, treatment, storage or disposal
of hazardous or solid waste, as defined and regulated under 40 C.F.R.
Parts 260-270 (in effect as of the date of this Agreement) or any
applicable state equivalent, are in compliance with applicable
Environmental Laws, except where the failure to so comply would not
reasonably be expected to have a Material Adverse Effect on Vista; and
(vii) To the knowledge of Vista, there is not now on or in any
property of Vista, the General Partner or Vista Sub or any property for
which Vista, the General Partner or Vista Sub is potentially liable any
of the following: (A) any underground storage tanks or surface
impoundments or (B) any on-site disposal of Hazardous Material, any of
which ((A) or (B) preceding) could reasonably be expected to have a
Material Adverse Effect on Vista.
(p) INSURANCE. Schedule 3.2(p) of the Vista Disclosure Schedule sets
forth an insurance schedule of Vista's, the General Partner's and Vista
Sub's directors' and officers' liability insurance, primary and excess
casualty insurance policies, providing coverage for bodily injury and
property damage to third parties, including products liability and
completed operations coverage, and worker's compensation, in effect as of
the date hereof. Vista maintains, and through the Closing Date will
maintain, insurance in such amounts and covering such risks as are in
accordance with normal industry practice for companies engaged in
businesses similar to those of Vista, the General Partner and Vista Sub
(taking into account the cost and availability of such insurance). Each of
Vista, the General Partner and Vista Sub may terminate each of its
insurance policies or binders at or after the Closing Date and will incur
no penalties or other material costs in doing so. None of such policies or
binders was obtained through the use of false or misleading information or
the failure to provide the insurer with all information requested in order
to evaluate the liabilities and risks insured. There is no material default
with respect to any provision contained in any such policy or binder nor
has Vista, the General Partner or Vista Sub failed to give any notice or
present any claim under any such policy or binder in due and timely
fashion. There are no billed but unpaid premiums past due under any such
policy or binder. Except as otherwise disclosed on Schedule 3.2(p) of the
Vista Disclosure Schedule, there are no outstanding claims under any such
policies or binders and, to the knowledge of Vista, there has not occurred
any event that might reasonably form the basis of any claim against or
relating to Vista, the General Partner or Vista Sub that is not covered by
any of such policies or binders. No notice of cancellation or non-renewal
of any such policies or binders has been received. Except as otherwise
disclosed on Schedule 3.2(p) of the Vista Disclosure Schedule, there are no
performance bonds outstanding with respect to Vista, the General Partner or
Vista Sub.
(q) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as otherwise
disclosed on Schedule 3.2(q) of the Vista Disclosure Schedule or as
contemplated by this Agreement, since December 31, 1997, neither Vista, the
General Partner nor Vista Sub has done any of the following:
(i) Discharged or satisfied any Lien or paid any obligation or
liability, absolute or contingent, other than current liabilities
incurred and paid in the ordinary course of business and consistent with
past practices;
(ii) Paid or declared any dividends or distributions, purchased,
redeemed, acquired, or retired any indebtedness, stock, or other
securities from its partners, shareholders, or other securityholders,
made any loans or advances or guaranteed any loans or advances to any
Person (other than loans, advances, or guaranties made in the ordinary
course of business and consistent with past practices), or otherwise
incurred or suffered to exist any liabilities (other than current
liabilities incurred in the ordinary course of business and consistent
with past practices);
(iii) Except for Permitted Encumbrances, suffered or permitted any
Lien to arise or be granted or created against or upon any of its
assets;
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(iv) Cancelled, waived, or released any rights or claims against,
or indebtedness owed by, third parties;
(v) Amended the Agreement of Limited Partnership, in the case of
Vista, or its articles of incorporation or bylaws, in the case of the
General Partner and Vista Sub;
(vi) Made or permitted any amendment, supplement, modification, or
termination of any Vista Material Agreement;
(vii) Paid or made any agreement to pay any severance or
termination payment to any employee or consultant;
(viii) Sold, transferred, assigned, or otherwise disposed of (A)
any Oil and Gas Interests of Vista that, individually or in the
aggregate, had a value at the time of such transfer, assignment, or
disposition of $50,000 or more or (B) any other assets (including any
undeveloped leasehold acreage) that, individually or in the aggregate,
had a value at the time of such transfer, assignment, or disposition of
$50,000 or more provided, however, that this paragraph shall not apply
to Hydrocarbons sold in the ordinary course of business and consistent
with past practices;
(ix) Made any investment in or contribution, payment, or advance to
any Person (other than investments, contributions, payments, or
advances, or commitments with respect thereto, made in the ordinary
course of business and consistent with past practices).
(x) Granted present or future increases in the rates of
compensation or other benefits payable to any of its directors,
officers, or other executive personnel or any consultant or paid any
bonuses to such Persons;
(xi) Paid, loaned, or advanced (other than the payment, advance or
reimbursement of expenses in the ordinary course of business) any
amounts to, or sold, transferred, or leased any of its assets to, or
entered into any other transactions with, any of its Affiliates;
(xii) Waived any rights of material value;
(xiii) Suffered any material damage, destruction, or loss, whether
or not covered by insurance, affecting its assets or prospects;
(xiv) Made any change in any of the accounting principles followed
by it or the method of applying such principles;
(xv) Suffered any material labor trouble or any material
controversies with any of its employees or collective bargaining
association representing any of its employees;
(xvi) Entered into any other transactions (other than this
Agreement) except in the ordinary course of business and consistent with
past practices;
(xvii) Taken any of the actions referred to in Section 4.1 except
as would have been permitted or required thereby had such Section been
applicable at the time of such action;
(xviii) Agreed, whether in writing or otherwise, to do any of the
foregoing; or
(xix) Suffered any material adverse change or trend in its
financial position, results of operations, or business (other than
changes or trends, including changes or trends in commodity prices,
generally prevalent in or affecting the oil and gas industry).
(r) GOVERNMENTAL REGULATION. Neither Vista, the General Partner nor
Vista Sub is subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act, the Interstate Commerce Act, the
Investment Company Act of 1940, or any state public utilities code.
(s) NO RESTRICTIONS. Except for the Agreement of Limited Partnership
or as otherwise disclosed on Schedule 3.2(s) of the Vista Disclosure
Schedule, neither Vista, the General Partner nor Vista Sub is a party to
(i) any agreement, indenture, or other instrument that contains
restrictions with respect to the
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payment of dividends or other distributions with respect to its capital,
(ii) any financial arrangement with respect to or creating any indebtedness
to any Person (other than indebtedness reflected in the Financial
Statements or indebtedness incurred in the ordinary course of business),
(iii) any agreement, contract, or commitment relating to the making of any
advance to, or investment in, any Person (other than advances in the
ordinary course of business), (iv) any guaranty or other contingent
liability with respect to any indebtedness or obligation of any Person
(other than guaranties undertaken in the ordinary course of business and
other than the endorsement of negotiable instruments for collection in the
ordinary course of business), (v) any management, service, consulting, or
other contract of a similar nature that cannot be terminated by Vista, the
General Partner or Vista Sub, as the case may be, upon written notice of 30
days or less and without penalty or other obligation, or (vi) any
agreement, contract, or commitment limiting in any respect its ability to
compete with any Person or otherwise conduct business of any line or
nature.
(t) AUDITS AND SETTLEMENTS. Except as otherwise disclosed on Schedule
3.2(t) of the Vista Disclosure Schedule, neither Vista, the General Partner
nor Vista Sub is a party or subject to any unresolved or incomplete audit,
accounting, or other settlement.
(u) EMPLOYMENT CONTRACTS AND BENEFITS. Except as otherwise disclosed
on Schedule 3.2(u) of the Vista Disclosure Schedule or otherwise provided
for in any Vista Plan or Vista Benefit Program or Agreement, (i) neither
Vista, the General Partner nor Vista Sub is subject to or obligated under
any consulting, employment, severance, termination, or similar arrangement,
any employee benefit, incentive, or deferred compensation plan with respect
to any Person, or any bonus, profit sharing, pension, stock option, stock
purchase, or similar plan or other arrangement or other fringe benefit plan
entered into or maintained for the benefit of employees or any other Person
and (ii) no employee of Vista, the General Partner, Vista Sub, or any other
Person owns, or has any right granted by Vista, the General Partner or
Vista Sub to acquire, any interest in any of the assets or business of
Vista, the General Partner or Vista Sub.
(v) ACCOUNTS RECEIVABLE. Except as otherwise disclosed on Schedule
3.2(v) of the Vista Disclosure Schedule, all of the accounts, notes, and
loans receivable that have been recorded on the books of Vista, the General
Partner or Vista Sub are bona fide and represent accounts, notes, and loans
receivable validly due for goods sold or services rendered and are
reasonably expected to be collected in full within 90 days after the
applicable invoice or note maturity date (other than such accounts, notes,
and loans receivable that, individually or in the aggregate, do not have a
book value as of the date hereof in excess of $25,000). Except for
Permitted Encumbrances, all of such accounts, notes, and loans receivable
are free and clear of any and all Liens and other adverse claims and
charges, and none of such accounts, notes, or loans receivable is subject
to any offsets or claims of offset. None of the obligors on such accounts,
notes, or loans receivable has given notice to Vista, the General Partner
or Vista Sub that it will or may refuse to pay the full amount or any
portion thereof.
(w) TITLE TO ASSETS. Vista and Vista Sub (individually or
collectively) have Defensible Title to all Oil and Gas Interests of Vista
included or reflected in the Vista Engineering Report or the Financial
Statements. Each Oil and Gas Interest included or reflected in the Vista
Engineering Report entitles Vista and Vista Sub (individually or
collectively) to receive not less than the undivided interest set forth in
(or derived from) the Vista Engineering Report of all Hydrocarbons
produced, saved, and sold from or attributable to such Oil and Gas
Interest, and the portion of the costs and expenses of operation and
development of such Oil and Gas Interest that is borne or to be borne by
Vista and Vista Sub (individually or collectively) is not greater than the
undivided interest set forth in (or derived from) the Vista Engineering
Report. Except for Permitted Encumbrances, each of Vista and Vista Sub has
good, marketable, and defensible title to its assets (other than the Oil
and Gas Interests of Vista). All leases pursuant to which Vista or Vista
Sub lease any assets are in full force and effect, and neither Vista nor
Vista Sub has received any notice of default under any such lease.
(x) VISTA ENGINEERING REPORT. All information supplied to Williamson
Petroleum Consultants, Inc. by or on behalf of Vista that was material to
such firm's evaluation of Vista's Oil and Gas Interests in connection with
the preparation of the Vista Engineering Report was (at the time supplied
or as modified
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or amended prior to the issuance of the Vista Engineering Report) true and
correct in all material respects. Except for changes in classification or
values of oil and gas reserve or property interests that occurred in the
ordinary course of business since December 31, 1997 and except for changes
(including changes in commodity prices) generally affecting the oil and gas
industry, there has been no Material Adverse Change with respect to the
matters addressed in the Vista Engineering Report.
(y) OIL AND GAS OPERATIONS. Except as otherwise disclosed on Schedule
3.2(y):
(i) None of the wells included in the Oil and Gas Interests of
Vista has been overproduced such that it is subject or liable to being
shut-in or to any owe overproduction penalty, except where any such
overproduction could not reasonably be expected to have a Material
Adverse Effect on Vista;
(ii) There have been no changes proposed in the production
allowables for, any wells included in the Oil and Gas Interests of Vista
that could reasonably be expected to have a Material Adverse Effect on
Vista;
(iii) All wells included in the Oil and Gas Interests of Vista have
been drilled and (if completed) completed, operated, and produced in
accordance with good oil and gas field practices and in compliance in
all material respects with applicable oil and gas leases and applicable
laws, rules, and regulations, except where any failure or violation
could not reasonably be expected to have a Material Adverse Effect on
Vista;
(iv) Neither Vista nor Vista Sub has agreed to or is now obligated
to abandon any well operated by any of them and included in the Oil and
Gas Interests of Vista that is or will not be abandoned and reclaimed in
accordance with applicable laws, rules, and regulations and good oil and
gas industry practices;
(v) Proceeds from the sale of Hydrocarbons produced from and
attributable to Vista's Oil and Gas Interests are being received by
Vista or Vista Sub in a timely manner and are not being held in suspense
for any reason (except for amounts, individually or in the aggregate,
not in excess of $25,000 and held in suspense in the ordinary course of
business); and
(vi) No Person has any call on, option to purchase, or similar
rights with respect to Vista's Oil and Gas Interests or to the
production attributable thereto, and upon consummation of the
transactions contemplated by this Agreement, Vista or Vista Sub will
have the right to market production from Vista's Oil and Gas Interests
on terms no less favorable than the terms upon which such company is
currently marketing such production.
(z) HYDROCARBON SALES AND PURCHASE AGREEMENTS. Except as otherwise
disclosed on Schedule 3.2(z) of the Vista Disclosure Schedule:
(i) None of the Hydrocarbon Sales Agreements of Vista or
Hydrocarbon Purchase Agreements of Vista has required since December 31,
1997, or will require as of or after the Closing Date, Vista or Vista
Sub (A) to have sold or delivered, or to sell or deliver, Hydrocarbons
for a price materially less than the market value price that would have
been, or would be, received pursuant to any arm's-length contract for a
term of one month with an unaffiliated third-party purchaser or (B) to
have purchased or received, or to purchase or receive, Hydrocarbons for
a price materially greater than the market value price that would have
been, or would be, paid pursuant to an arm's-length contract for a term
of one month with an unaffiliated third-party seller;
(ii) Each of the Hydrocarbon Agreements of Vista is valid, binding,
and in full force and effect, and no party is in material breach or
default of any Hydrocarbon Agreement of Vista, and to the knowledge of
Vista, no event has occurred that with notice or lapse of time (or both)
would constitute a material breach or default or permit termination,
modification, or acceleration under any Hydrocarbon Agreement of Vista;
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(iii) There have been no claims from any third party for any price
reduction or increase or volume reduction or increase under any of the
Hydrocarbon Agreements of Vista, and neither Vista nor Vista Sub has
made any claims for any price reduction or increase or volume reduction
or increase under any of the Hydrocarbon Agreements of Vista;
(iv) Payments for Hydrocarbons sold pursuant to each Hydrocarbon
Sales Agreement of Vista have been made (subject to adjustment in
accordance with such Hydrocarbon Sales Agreements) materially in
accordance with prices or price setting mechanisms set forth in such
Hydrocarbon Sales Agreements;
(v) No purchaser under any Hydrocarbon Sales Agreement of Vista has
notified Vista or Vista Sub (or, to the knowledge of Vista, the operator
of any property) of its intent to cancel, terminate, or renegotiate any
Hydrocarbon Sales Agreement of Vista or otherwise to fail and refuse to
take and pay for Hydrocarbons in the quantities and at the price set out
in any Hydrocarbon Sales Agreement, whether such failure or refusal was
pursuant to any force majeure, market out, or similar provisions
contained in the Hydrocarbon Sales Agreement or otherwise;
(vi) Neither Vista nor Vista Sub is obligated in any Hydrocarbon
Sales Agreement of Vista by virtue of any prepayment arrangement, a
"take-or-pay" or similar provision, a production payment, or any other
arrangements to deliver Hydrocarbons produced from an Oil and Gas
Interest of Midland at some future time without then or thereafter
receiving payment therefor;
(vii) Vista and Vista Sub, collectively, are not obligated, due to
production and pipeline gas imbalances, to deliver gas having a market
value in excess of $50,000 without receiving payment therefor; and
(viii) The Hydrocarbon Agreements of Vista are of the type
generally found in the oil and gas industry, do not (individually or in
the aggregate) contain unusual or unduly burdensome provisions that may
have a Material Adverse Effect on Vista, and are in form and substance
considered normal within the oil and gas industry.
(aa) FINANCIAL AND COMMODITY HEDGING. Schedule 3.2(aa) of the Vista
Disclosure Schedule accurately summarizes the outstanding Hydrocarbon and
financial hedging positions of Vista and Vista Sub (including fixed price
controls, collars, swaps, caps, hedges, and puts).
(bb) COMMITTED CAPITAL EXPENDITURES. Schedule 3.2(bb) of the Vista
Disclosure Schedule is a true, accurate, and complete list of all
commitments (including AFEs) pursuant to which Vista or Vista Sub has paid
or incurred since December 31, 1997, or is obligated to pay or incur after
the date hereof, drilling or capital expenditures in excess of $25,000 with
respect to any well, and except as otherwise set forth disclosed on
Schedule 3.2(bb) of the Vista Disclosure Schedule, the aggregate amount of
drilling and capital expenditures with respect to oil and gas wells that
Vista and Vista Sub have paid or incurred since December 31, 1997 or are
obligated to pay or incur after the date hereof does not exceed $500,000.
(cc) BUSINESS RELATIONS. To the knowledge of Vista, since December 31,
1997, there has been no termination, cancellation, or limitation of, or any
material modification or change in, the material business relationships of
Vista, the General Partner or Vista Sub with any material supplier or
customer or any partner or joint venture partner nor has there been any
material development relating to any such supplier, customer, partner, or
joint venture partner that could reasonably be expected to have a Material
Adverse Effect on Vista.
(dd) BOOKS AND RECORDS. All books, records, and files of Vista, the
General Partner and Vista Sub (including those pertaining to Vista's Oil
and Gas Interests, wells, and other assets, those pertaining to the
production, gathering, transportation, and sale of Hydrocarbons, and
corporate, accounting, financial, and employee records) (i) have been
prepared, assembled, and maintained in accordance with usual and customary
policies and procedures and (ii) fairly and accurately reflect the
ownership, use, enjoyment, and operation by Vista, the General Partner and
Vista Sub of their respective assets.
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(ee) BROKERS. No broker, finder, investment banker, or other Person is
or will be, in connection with the transactions contemplated by this
Agreement, entitled to any brokerage, finder's, or other fee or
compensation based on any arrangement or agreement made by or on behalf of
Vista.
(ff) DISCLOSURE AND INVESTIGATION. No representation or warranty of
Vista contained in this Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements contained herein not misleading. The Responsible Officers,
individually or collectively, of Vista have conducted, or have caused the
respective officers, employees, representatives, or agents of Vista, the
General Partner and Vista Sub to conduct, such investigations and inquiries
that they reasonably believe most likely to confirm the truth and accuracy
of each of the representations and warranties contained in this Section.
3.3 REPRESENTATIONS AND WARRANTIES OF NEWCO AND MERGER SUB. Newco, Merger
Sub and Vista, jointly and severally, represent and warrant to Midland as
follows:
(a) ORGANIZATION, STANDING AND CORPORATE POWER. Each of Newco and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the its state of incorporation has all requisite
corporate power and authority to own, lease, and operate its properties and
to carry on its business as now being conducted and is duly qualified and
in good standing to do business in each jurisdiction in which the business
it is conducting, or the operation, ownership or leasing of its properties,
makes such qualification necessary, other than in such jurisdictions where
the failure so to qualify would not have a Material Adverse Effect on Newco
or Merger Sub, as applicable. Merger Sub has heretofore delivered to
Midland complete and correct copies of its Articles of Incorporation and
Bylaws. Complete and correct copies of Newco's Certificate of Incorporation
and Bylaws are attached as Exhibit 3.3(a) hereto.
(b) CAPITAL STRUCTURE.
(i) As of the date hereof, the authorized capital stock of Newco
consists of (x) 50,000,000 shares of common stock, $0.01 par value,
1,000 shares of which are issued and outstanding, all of which are owned
of record and beneficially by Vista and (y) 10,000,000 shares of
preferred stock, none of which is issued and outstanding. The
outstanding share of capital stock of Newco is duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive
rights. Upon consummation of the Merger and the Vista Exchange, the
shares of Newco Common Stock to be issued pursuant to the Merger and the
Vista Exchange will be duly authorized, and upon their issuance in
accordance with the terms of this Agreement, validly issued, fully paid
and nonassessable, and will not have been issued in violation of any
preemptive rights. Newco does not, and at the Effective Time, except as
expressly contemplated by this Agreement, Newco will not, have
outstanding any options, warrants, calls, rights (including preemptive
rights), commitments or agreements to which Newco or any Subsidiary of
Newco will be a party or by which it will be bound in any case
obligating Newco or any Subsidiary of Newco to issue, deliver, sell,
purchase, redeem, or acquire, or cause to be issued, delivered, sold,
purchased, redeemed, or acquired, additional shares of capital stock or
any Voting Debt or other voting securities of Newco or any Subsidiary of
Newco, or obligating Newco or any Subsidiary of Newco to grant, extend,
or enter into any such option, warrant, call, right, commitment, or
agreement.
(ii) The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, $0.01 par value, all of which are issued and
outstanding and owned of record and beneficially by Newco. The
outstanding share of capital stock of Merger Sub is duly authorized,
validly issued, fully paid and nonassessable and not subject to
preemptive rights. Merger Sub does not, and at the Effective Time,
except as contemplated by this Agreement, will not, have outstanding any
options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which Merger Sub will be a party or by
which it will be bound in any case obligating Merger Sub to issue,
deliver, sell, purchase, redeem or acquire, or cause to be issued,
delivered, sold, purchased, redeemed or acquired, additional shares of
capital stock or any Voting Debt or other voting securities of Merger
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Sub, or obligating Merger Sub to grant, extend, or enter into any such
option, warrant, call, right, commitment, or agreement.
(c) AUTHORITY; NO VIOLATIONS; CONSENTS AND APPROVALS. Each of Newco
and Merger Sub has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Newco and Merger
Sub, and the consummation by each of them of the transactions contemplated
by this Agreement, have been duly authorized by all necessary corporate
action on the part of each of them, including all necessary shareholder
approval. This Agreement has been duly executed and delivered by each of
Newco and Merger Sub, and, assuming this Agreement constitutes the valid
and binding obligation of Vista and Midland, constitutes a valid and
binding obligation of each of Newco and Merger Sub enforceable against each
of them in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors' rights and to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law). The execution and delivery
of this Agreement do not, and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will not,
conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any material obligation or to
the loss of a material benefit under, or give rise to a right of purchase
under, result in the creation of any Lien upon any of the properties or
assets of Newco or Merger Sub under, or otherwise result in a material
detriment to Newco or Merger Sub under, any provision of the Certificate of
Incorporation or Bylaws of Newco or Merger Sub. No consent, approval, order
or authorization of, or registration, declaration or filing with, or permit
from any Governmental Entity is required by or with respect to Newco or
Merger Sub in connection with the execution and delivery of this Agreement
by, or the consummation of the transactions contemplated in this Agreement
by, Newco or Merger Sub, except for: (i) the filing by Newco of the S-4
with the SEC with respect to the offer and sale of Newco Common Stock
pursuant to the Midland Merger; (ii) the filing by Newco of a Form D Notice
of Sale of Securities Pursuant to Regulation D with the SEC, with respect
to the offer and sale of Newco Common Stock pursuant to the Vista Exchange,
and such other compliance with the Securities Act and the rules and
regulations thereunder, as may be required in connection with this
Agreement and the transactions contemplated hereby; (iii) the filing by
Merger Sub of the Midland Articles of Merger with the Texas Secretary of
State; (iv) the filing by Newco of the Vista Certificate of Merger with the
Delaware Secretary of State and the Vista Articles of Merger with the Texas
Secretary of State; (v) filings with, and approval of, the AMEX or Nasdaq;
and (vi) such filings and approvals as may be required by any applicable
state securities, "blue sky" or takeover laws, or environmental laws.
(d) NO PRIOR ACTIVITIES. Except for this Agreement and the agreements
and transactions contemplated herein, neither Newco nor Merger (i) Sub has
entered into any agreements or arrangements with any person or (ii) is
subject to or bound by any obligation or undertaking. Except as
contemplated by this Agreement and the agreements and transactions
contemplated herein, neither Newco nor Merger Sub has engaged, directly or
indirectly, in any business activities of any type or kind.
ARTICLE 4
COVENANTS
4.1 CONDUCT OF BUSINESS BY VISTA AND MIDLAND PENDING CLOSING. Prior to the
Effective Time, (a) Midland agrees as to itself and its Subsidiaries that
(except as expressly contemplated or permitted by this Agreement, or to the
extent that Vista shall otherwise consent in writing) and (b)Vista agrees as to
itself and Vista Sub that (except as expressly contemplated or permitted by this
Agreement, or to the extent that Midland shall otherwise consent in writing)
(for purposes of this Section 4.1 Midland and Vista each being a "Party"):
(i) A Party and its Subsidiaries shall carry on its businesses in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted and shall use all commercially
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reasonable efforts to preserve intact its present business organizations,
keep available the services of its current officers and employees and
endeavor to preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect at the Effective
Time;
(ii) A Party shall not, and it shall not permit its Subsidiaries to,
engage in any line of business in which it is not engaged as of the date
hereof;
(iii) A Party shall not, and it shall not permit its Subsidiaries to,
(A) amend its certificate or articles of incorporation or by-laws or other
organizational documents, (B)'split, combine, or reclassify any of its
outstanding capital stock, partnership interests, or other securities,
(C)'declare, set aside, or pay any dividends or other distributions
(whether payable in cash, property, or securities) with respect to its
capital stock, (D) issue, sell, or agree to issue or sell any securities,
including its capital stock or other equity securities, any rights,
options, or warrants to acquire its equity securities, or securities
convertible into or exchangeable or exercisable for its equity securities
(other than shares of Midland Common Stock issued pursuant to the exercise
of any Midland Stock Option or any Midland Stock Warrant outstanding as of
the date hereof), (E) purchase, cancel, retire, redeem, or otherwise
acquire any of its outstanding equity securities or other securities, (F)
merge or consolidate with, or transfer all or substantially all of its
assets to, another corporation or other business entity, (G) liquidate,
wind-up, or dissolve (or suffer any liquidation or dissolution), or (H)
enter into any contract, agreement, commitment, or arrangement with respect
to any of the foregoing;
(iv) A Party shall not, and it shall not permit its Subsidiaries to,
(A) acquire any corporation, partnership, or other business entity or any
interest therein (other than interests in joint ventures, joint operation
or ownership arrangements, or tax partnerships acquired in the ordinary
course of business), (B) sell, lease or sublease, transfer, or otherwise
dispose of or mortgage, pledge, or otherwise encumber any Oil and Gas
Interests that, individually or in the aggregate, had a value at the time
of such sale, lease, sublease, transfer, or disposition of $50,000 or more
or any other assets that, individually or in the aggregate, have a value at
the time of such sale, lease, sublease, transfer, or disposition of $50,000
or more (except that this clause shall not apply to the sale of
Hydrocarbons in the ordinary course of business) (C) farm-out any Oil and
Gas Interest of Midland or Vista, as applicable, or interest therein, (D)
sell, transfer, or otherwise dispose of or mortgage, pledge, or otherwise
encumber any securities of any other Person, (E) make any material loans,
advances, or capital contributions to, or investments in, any Person (other
than loans or advances in the ordinary course of business and consistent
with past practices, (F) enter into any material agreement not terminable
by such Party upon notice of 30 days or less and without penalty or other
obligation (other than Hydrocarbon Agreements entered into in the ordinary
course of business and consistent with past practices), (G) enter into any
material transaction not in the ordinary course of business and not
contemplated by this Agreement, (H) agree with any Person to limit or
otherwise restrict in any manner the ability of such Party or any of its
Subsidiaries to compete or otherwise conduct its business, or (I) enter
into any contract, agreement, commitment, or arrangement with respect to
any of the foregoing;
(v) A Party shall not, and it shall not permit its Subsidiaries to,
(A) incur any indebtedness for borrowed money or any other obligation or
liability (other than current liabilities incurred in the ordinary course
of business and consistent with past practices) in excess of its then
current borrowing capacity under its existing senior bank facilities, (B)
assume, endorse (other than endorsements of negotiable instruments in the
ordinary course of business), guarantee, or otherwise become liable or
responsible (whether directly, contingently, or otherwise) for the
liabilities or obligations of any Person, or (C) enter into any contract,
agreement, commitment, or arrangement with respect to any of the foregoing;
(vi) A Party shall, and shall cause its Subsidiaries to, operate,
maintain, and otherwise deal with the Oil and Gas Interests of such Party
in accordance with good and prudent oil and gas field practices (including
the making of all appropriate repairs, renewals, and replacements thereof)
and in accordance with all applicable oil and gas leases and other
contracts or agreements and all applicable laws, rules, and regulations;
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(vii) A Party shall not, and it shall not permit its Subsidiaries to,
pay, agree to pay, or incur drilling or other capital expenditures with
respect to oil and gas wells in excess of ten percent (10%) of its current
drilling and capital expenditure budget as respectively set forth on
Schedules 3.1(bb) and 3.2(bb) in the aggregate (in either case, other than
expenditures necessary for the preservation or protection of the public
safety or health under emergency circumstances);
(viii) A Party shall not, and it shall not permit its Subsidiaries to,
resign, or transfer or otherwise voluntarily relinquish any right it has as
of the date of this Agreement, as operator of any Oil and Gas Interest;
(ix) A Party shall not, and it shall not permit its Subsidiaries
to,(A) enter into, or otherwise become liable or obligated under or
pursuant to, (x) any employee benefit, pension, or other plan (whether or
nor subject to ERISA), (y) any other stock option, stock purchase,
incentive, or deferred compensation plans or arrangements or other fringe
benefit plan, or (z) any consulting, employment, severance, termination, or
similar agreement with any Person, or amend or extend any such plan,
arrangement, or agreement, (B) hire any key employee, except for payments
made pursuant to any plan, agreement, or arrangement disclosed on Schedule
3.1(l) of the Midland Disclosure Schedule or Schedule 3.2(l) of the Vista
Disclosure Schedule, as applicable, grant, or otherwise become liable for
or obligated to pay, any severance or termination payments, bonuses, or
increases in compensation or benefits (other than payments, bonuses, or
increases that are mandated by the terms of written agreements existing as
of the date hereof or that are paid in the ordinary course of business,
consistent with past practices, and not individually or in the aggregate
material in amount) to, or forgive any indebtedness of, any employee or
consultant, or (C) enter into any contract, agreement, commitment, or
arrangement to do any of the foregoing;
(x) A Party shall, and shall cause its Subsidiaries to, keep and
maintain accurate books, records, and accounts in accordance with GAAP;
(xi) A Party shall not, and it shall not permit its Subsidiaries to,
create, incur, assume, or permit to exist any Lien on any of its assets,
except for Permitted Encumbrances;
(xii) A Party shall, and it shall permit its Subsidiaries to, (A) pay
all Taxes, assessments, and other governmental charges imposed upon any of
its assets or with respect to its franchises, business, income, or assets
before any penalty or interest accrues thereon, (B) pay all claims
(including claims for labor, services, materials, and supplies) that have
become due and payable and which by law have or may become a Lien upon any
of its assets prior to the time when any penalty or fine shall be incurred
with respect thereto or any such Lien shall be imposed thereon, and (C)
comply in all material respects with the requirements of all applicable
laws, rules, regulations, and orders of any Governmental Entity, obtain or
take all Governmental Actions necessary in the operation of its business,
and comply with and enforce the provisions of all Midland Material
Agreements or Vista Material Agreements, as applicable, including paying
when due all rentals, royalties, expenses, and other liabilities relating
to its business or assets (provided, however, that such Party or any of its
Subsidiaries may contest the imposition of any such Taxes, assessments, and
other governmental charges, any such claim, or the requirements of any
applicable law, rule, regulation, or order or any Midland Material
Agreement or Vista Material Agreement, as applicable, if done so in good
faith by appropriate proceedings, if adequate reserves are established in
accordance with GAAP or as may be determined as sufficient by Midland's
board of directors or the General Partner of Vista, as applicable, and if
such contest does not involve a risk of a Material Adverse Effect on
Midland or Vista, as applicable);
(xiii) A Party shall, and it shall permit its Subsidiaries to,
maintain in full force and effect the policies or binders of insurance
described in Section 3.1(p) or Section'3.2(p), as applicable, and
applicable to it;
(xiv) A Party shall not, and it shall not permit its Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction
(including the purchase, sale, lease, or exchange of any assets, unless
otherwise permitted hereby, or the rendering of any service) with any
Affiliate of such Party (other than
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any of its Subsidiaries) on terms that are less favorable to such Party or
any of its Subsidiaries, as the case may be, than those that could be
obtained at the time from unaffiliated third parties;
(xv) A Party shall not, and it shall not permit its Subsidiaries to,
enter into, or otherwise be a party to, any, shareholder agreement, voting
trust, or other agreement or understanding relating to the voting of any
shares of the capital stock or other securities of such Party or any of its
Subsidiaries (other than the Midland Voting Agreement); and
(xvi) A Party shall, and it shall permit its Subsidiaries to, at all
times preserve and keep in full force and effect its corporate existence
and rights and franchises material to its performance under this Agreement.
4.2 ACCESS TO ASSETS, PERSONNEL, AND INFORMATION. From the date hereof
until the Effective Time, Midland agrees as to itself and its Subsidiaries that,
and Vista agrees as to itself and its Subsidiaries that (for purposes of this
Section 4.2, Midland and Vista each being a "Requesting Party" or the "Providing
Party," as applicable):
(a) A Providing Party shall afford to the Requesting Party and the
Requesting Party's Representatives, at the Requesting Party's sole risk and
expense, reasonable access to any of the assets, books and records
(including files, Tax Returns, and accountants' workpapers), contracts,
employees, representatives, and agents (including attorneys, accountants,
and independent engineers) and facilities (including office facilities) of
such Providing Party and its Subsidiaries, and shall upon request furnish
promptly to the Requesting Party (at the Requesting Party's expense) a copy
of any file, book or record, contract, or other written information
concerning such Providing Party and its Subsidiaries (or any of their
respective assets) that is within the possession or control of the
Providing Party; provided, however, that a Providing Party shall not be
obligated to provide access to or to furnish to a Requesting Party any
information that the Providing Party is contractually obligated not to so
disclose under a written confidentiality agreement; provided, further, that
the Providing Party notifies the Requesting Party of such confidentiality
agreement. If requested by the Requesting Party, however, the Providing
Party shall use reasonable efforts to obtain the required consent to
provide such information. During such period, the Providing Party will make
available to a reasonable number of the Requesting Party's Representatives
adequate office space and facilities at the principal office facility of
such Providing Party and will permit a reasonable number of the Requesting
Party's Representatives to observe, but not participate in, staff meetings
at those facilities and other facilities of the Providing Party and its
Subsidiaries.
(b) As soon as practicable following a Requesting Party's request
therefor, the Providing Party shall provide the Requesting Party with
descriptions of all material assets (including such Providing Party's Oil
and Gas Interests) sufficient to permit such Requesting Party to properly
identify and evaluate such assets. Such descriptions shall include, with
respect to the Providing Party's Oil and Gas Interests, an electronic (A)
listing of all properties by name, well, and internal accounting and land
number designation and (B) division of interest for all wells and
properties by field or location and by well by field or location,
identifiable by reference to the listing described in clause (i) above.
(c) A Requesting Party and the Requesting Party's Representatives
shall have the right to make an environmental and physical assessment of
the assets of the Providing Party and its Subsidiaries and, in connection
therewith, shall have the right to enter and inspect such assets and all
buildings and improvements thereon, conduct soil and water tests and
borings, and generally conduct such tests, examinations, investigations,
and studies as such Requesting Party deems necessary, desirable, or
appropriate for the preparation of engineering or other reports relating to
such assets, their condition, and the presence of Hazardous Materials. The
Providing Party shall be provided 24 hours' prior notice of the activities,
and the Providing Party's Representatives shall have the right to witness
all such tests and investigations. The Requesting Party shall (and shall
cause the Requesting Party's Representatives to) keep any data or
information acquired by any such examinations and the results of any
analyses of such data and information strictly confidential and will not
(and will cause the Requesting Party's Representative not to) disclose any
of such data, information, or results to any Person unless otherwise
required by
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law or regulation and then only after written notice to the Providing Party
of the determination of the need for disclosure. The Requesting Party
hereby indemnifies and holds the Providing Party and its Subsidiaries, and
the Providing Party's Representatives harmless from and against any and all
claims arising out of or as a result of the activities of the Requesting
Party and the Requesting Party's Representatives on the assets of the
Providing Party and its Subsidiaries in connection with conducting such
environmental and physical assessment, except to the extent of and limited
by the gross negligence or willful misconduct of the Providing Party and
its Subsidiaries, or any of the Providing Party's Representatives or any
failure of any of them to warn the Requesting Party and the Requesting
Party's Representatives of known hazardous or dangerous conditions.
(d) A Providing Party will fully and accurately disclose, and will
cause each of its Subsidiaries to fully and accurately disclose, to the
Requesting Party and the Requesting Party's Representatives all information
that is (A) requested by the Requesting Party or any of the Requesting
Party's Representatives, (B) known (now or hereafter) to the Providing
Party or any of its Subsidiaries, and (C) relevant in any manner or degree
to the value, ownership, use, operation, development, or transferability of
the assets of the Providing Party or any of its Subsidiaries.
(e) A Providing Party shall furnish to the Requesting Party, promptly
upon receipt or filing (as the case may be), a copy of each communication
between the Providing Party and the SEC after the date hereof and each
report, schedule, registration statement, or other document filed by such
party with the SEC after the date hereof.
(f) A Providing Party will (and will cause its Subsidiaries and
Representatives to) fully cooperate in all respects with the Requesting
Party and the Requesting Party's Representatives in connection with the
Requesting Party's examinations, evaluations, and investigations described
in this Section, and the Providing Party will (and will cause the Providing
Party's Representatives to) fully cooperate in all respects with the
Requesting Party and the Requesting Party's Representatives in connection
with the Requesting Party's examinations, evaluations, and investigations
described in this Section.
(g) A Requesting Party agrees that it will not (and will cause the
Requesting Party's Representatives not to) use any information obtained
pursuant to this Section for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement.
(h)(i) A Requesting Party shall not, and shall not permit its
Affiliates, officers, employees, directors, shareholders or representatives
to, disclose to any third party (other than such parties' respective legal
counsel, accountants and other advisors, all of whom shall be required to
observe the provisions of this Section 4.2(h)) any information received
from the Providing Party in the course of investigating, negotiating, and
performing the transactions contemplated by this Agreement; provided,
however, that this provision shall not be applicable to information which:
(1) becomes generally available to the public other than as a result of a
disclosure by the Requesting Party or such Requesting Party's Affiliates,
officers, directors, employees, shareholders or representatives, (2) was
available to the Requesting Party on a non-confidential basis prior to its
disclosure to the Requesting Party by the Providing Party or its
Affiliates, officers, directors, employees, shareholders or
representatives, (3) becomes available to the Requesting Party on a
non-confidential basis from a source other than the Providing Party or its
Affiliates, officers, directors, employees, shareholders or representatives
when such source is entitled, to the best of the Requesting Party's
knowledge, to make the disclosure, or (4) was independently developed by
the Requesting Party without reference to the information received from the
Providing Party. If either party or any of their respective Affiliates,
officers, directors, employees, shareholders or representatives is
requested or required to disclose any information received by it or to
disclose any such information which is required to be kept confidential by
this Section 4.2(h), such party agrees to provide the Providing Party with
prompt notice of each such request, to the extent practicable, so that the
Providing Party may seek an appropriate protective order or waive
compliance by the Requesting Party with the provisions of this Section
4.2(h) or both. If, absent the entry of a protective order or the receipt
of a waiver under this Agreement, the Requesting Party, its Affiliates,
officers, directors, employees, shareholders or representatives are, in the
opinion of its counsel, legally compelled
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to disclose such information, the Requesting Party may disclose such
information to the persons and to the extent required without liability
under this Agreement, and such party agrees to exercise its reasonable
commercial efforts to obtain reasonable assurances that confidential
treatment will be accorded any such information so furnished.
(ii) Midland and its Subsidiaries have taken, and after the date
hereof Midland will, and Midland will cause its Subsidiaries to, take all
steps reasonably necessary to safeguard and maintain the secrecy and
confidentiality of any of Midland's assets that constitute confidential or
proprietary information of Midland or its Subsidiaries. From and after the
date hereof, Midland shall not, and Midland shall cause its Subsidiaries to
not, disclose to any Person (other than Vista and such authorized
representatives of Vista as Vista shall identify to Midland in writing) any
confidential or proprietary information with respect to the business of
Midland except (i) as otherwise required by law, or (ii) prior to the
Closing Date, in the ordinary course and consistent with the past business
practices of Midland and its Subsidiaries;
provided, however, that the provisions of this Section 4.2(h) shall not
prohibit Midland or Vista from including such confidential or proprietary
information in the S-4 or any private placement memorandum distributed in
connection with the Exchange Agreements.
(i) Notwithstanding anything in this Section to the contrary, (A)
Midland shall not be obligated under the terms of this Section to disclose
to Vista or Vista's Representatives, or grant Vista or the Vista's
Representatives access to, information that is within Midland's possession
or control but subject to a valid and binding confidentiality agreement
with a third party without first obtaining the consent of such third party,
and Midland, to the extent reasonably requested by Vista, will use its
reasonable best efforts to obtain any such consent; and (B) Vista shall not
be obligated under the terms of this Section to disclose to Midland or
Midland's Representatives, or grant Midland or Midland's Representatives
access to, information that is within Vista's possession or control but
subject to a valid and binding confidentiality agreement with a third party
without first obtaining the consent of such third party, and Vista, to the
extent reasonably requested by Midland, will use its reasonable best
efforts to obtain any such consent.
4.3 NO SOLICITATION BY MIDLAND.
(a) From and after the date hereof, Midland will not, and will not
authorize or permit any of its Representatives to, directly or indirectly,
solicit or encourage (including by way of providing information) any
prospective acquiror or the invitation or submission of any inquiries,
proposals or offers or any other efforts or attempts that constitute, or
may reasonably be expected to lead to, any Midland Acquisition Proposal (as
hereinafter defined) from any person or engage in any discussions or
negotiations with respect thereto or otherwise cooperate with or assist or
participate in, or facilitate any such proposal; provided, however, that,
notwithstanding any other provision of this Agreement, Midland's Board of
Directors may take and disclose to the shareholders of Midland a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act. Midland
shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by Midland or any of its
Representatives with respect to any Midland Acquisition Proposal existing
on the date hereof. Midland will promptly notify in writing Vista of any
receipt by Midland or any of its Subsidiaries of a request from a third
party for information concerning Midland (or any of its Subsidiaries) and
its business, properties and assets or the receipt of any Midland
Acquisition Proposal, including the identity of the person or group
requesting such information or making such Midland Acquisition Proposal,
and the material terms and conditions of any Midland Acquisition Proposal.
(b) As used in this Agreement, "Midland Acquisition Proposal" means
any proposal or offer, other than a proposal or offer by Vista or any of
its Affiliates, for, or that could be reasonably expected to lead to, a
tender or exchange offer, a merger, consolidation or other business
combination involving Midland or any of its Subsidiaries or any proposal to
acquire in any manner a substantial equity interest in, or any substantial
portion of the assets of, Midland or any of its Subsidiaries.
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4.4 NO SOLICITATION BY VISTA.
(a) From and after the date hereof, Vista will not, and will not
authorize or permit any of its Representatives to, directly or indirectly,
solicit or encourage (including by way of providing information) any
prospective acquiror or the invitation or submission of any inquiries,
proposals or offers or any other efforts or attempts that constitute, or
may reasonably be expected to lead to, any Vista Acquisition Proposal (as
hereinafter defined) from any person or engage in any discussions or
negotiations with respect thereto or otherwise cooperate with or assist or
participate in, or facilitate any such proposal; provided, however, that,
notwithstanding any other provision of this Agreement, the General Partner
may take and disclose to the limited partners of Vista a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act. Vista
shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by Vista or any of its
Representatives with respect to any Vista Acquisition Proposal existing on
the date hereof. Vista will promptly notify in writing Midland of any
receipt by Vista or Vista Sub of a request from a third party for
information concerning Vista or Vista Sub and its business, properties and
assets or the receipt of any Vista Acquisition Proposal, including the
identity of the person or group requesting such information or making such
Vista Acquisition Proposal, and the material terms and conditions of any
Vista Acquisition Proposal.
(b) As used in this Agreement, "Vista Acquisition Proposal" means any
proposal or offer, other than a proposal or offer by Midland or any of its
Affiliates, for, or that could be reasonably expected to lead to, a tender
or exchange offer, a merger, consolidation or other business combination
involving Vista or Vista Sub or any proposal to acquire in any manner a
substantial equity interest in, or any substantial portion of the assets
of, Vista or Vista Sub
4.5 MIDLAND SHAREHOLDERS MEETING.
(a) Midland shall call a meeting of its shareholders to be held as
promptly as practicable after the date hereof for the purpose of voting
upon this Agreement and the Midland Merger. Subject to the fiduciary duties
of the Board of Directors of Midland, Midland will (through its Board of
Directors) recommend to its shareholders approval of such matters and not
rescind such recommendation and shall use its reasonable best efforts to
obtain approval and adoption of this Agreement and the Midland Merger by
its shareholders. Midland shall use all commercially reasonable efforts to
hold such meeting as soon as practicable after the date upon which the S-4
becomes effective.
(b) Notwithstanding clause (a) above, however, the following shall be
conditions (which shall be for the benefit of both Midland and Vista) to
the recommendation of the Board of Directors of Midland to the Midland
shareholders, the holding of the Midland Meeting and the mailing of the
Proxy Statement:
(i) The fairness opinion described in Section 3.1(hh) shall have
been confirmed in writing and shall not have been withdrawn, revoked, or
modified;
(ii) Midland shall have received an opinion (reasonably acceptable
to Midland and Vista) from Arthur Andersen LLP (or such other firm as is
reasonably acceptable to Midland and Vista) to the effect that (A) the
Midland Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, (B)
each of Newco, Midland, and Merger Sub will be a party to such
reorganization within the meaning of Section 368(b) of the Code, (C) no
gain or loss will be recognized by Newco, Midland, or Merger Sub as a
result of the Midland Merger, and (D) no gain or loss will be recognized
by a shareholder of Midland as a result of the Midland Merger with
respect to the shares of Midland Common Stock converted solely into
shares of Newco Common Stock, and such opinion shall not have been
withdrawn, revoked, or modified;
(iii) Vista shall have received from Grant Thornton LLP, Midland's
independent auditors, a letter, dated a date within two business days
before the date on which the Proxy Statement is first
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mailed to the shareholders of Midland, with respect to the financial
statements of Midland and other financial information about Midland
included (or incorporated by reference) in the Proxy Statement, such
letter to be in substantially the form described in Section 5.2(c); and
(iv) Midland shall have received from Arthur Andersen LLP, Vista's
independent certified public accountants, a letter dated a date within
two business days before the date on which the Proxy Statement is first
mailed to the shareholders of Midland, with respect to the Financial
Statements of Vista and other financial information about Vista included
in the Proxy Statement, such letter to be in substantially the form
described in Section 5.3(d).
4.6 S-4 AND PROXY STATEMENT.
(a) Vista, Newco, and Midland shall cooperate and promptly prepare the
S-4, and Vista shall cause Newco to file the S-4 with the SEC as soon as
practicable after the date hereof. Vista and Newco shall use their
reasonable best efforts, and Midland shall cooperate fully with Vista and
Newco (including furnishing all information concerning Midland and the
holders of Midland Common Stock as may be reasonably requested by Vista and
Newco), to have the S-4 declared effective under the Securities Act as
promptly as practicable after such filing. Newco shall use its reasonable
best efforts, and Midland shall cooperate fully with Newco, to obtain all
necessary state securities laws or "blue sky" permits, approvals, and
registrations in connection with the issuance of Newco Common Stock
pursuant to the Midland Merger.
(b) Vista, Newco, and Midland will cause the S-4 (including the Proxy
Statement), at the time it becomes effective under the Securities Act, to
comply as to form in all material respects with the applicable provisions
of the Securities Act, the Exchange Act, and the rules and regulations of
the SEC thereunder.
(c) Midland hereby covenants and agrees with Vista and Newco that (i)
the S-4 (at the time it becomes effective under the Securities Act and at
the Effective Time) will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading (provided, however, that this
clause shall apply only to information contained in the S-4 that was
supplied by Midland specifically for inclusion therein) and (ii) the Proxy
Statement (at the time it is first mailed to shareholders of Midland, at
the time of the Midland Meeting, and at the Effective Time) will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading provided, however, that this clause shall not apply to
any information contained in the Proxy Statement that was supplied by Vista
or Newco specifically for inclusion therein). If, at any time prior to the
Effective Time, any event with respect to Midland, or with respect to other
information supplied by Midland specifically for inclusion in the S-4,
occurs and such event is required to be described in an amendment to the
S-4, Midland shall promptly notify Vista and Newco of such occurrence and
shall cooperate with Newco in the preparation and filing of such amendment.
If, at any time prior to the Effective Time, any event with respect to
Midland, or with respect to other information included in the Proxy
Statement, occurs and such event is required to be described in a
supplement to the Proxy Statement, such event shall be so described and
such supplement shall be promptly prepared, filed, and disseminated.
(d) Vista and Newco hereby covenant and agree with Midland that (i)
the S-4 (at the time it becomes effective under the Securities Act and at
the Effective Time) will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading (provided, however, that this
clause shall not apply to any information contained in the S-4 that was
supplied by Midland specifically for inclusion therein) and (ii) the Proxy
Statement (at the time it is first mailed to shareholders of Midland, at
the time of the Midland Meeting, and at the Effective Time) will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading (provided, however, that this clause shall apply only
to information contained in the Proxy Statement that was supplied by Vista
or
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Newco specifically for inclusion therein). If, at any time prior to the
Effective Time, any event with respect to Vista or Newco, or with respect
to other information included in the S-4, occurs and such event is required
to be described in an amendment to the S-4, such event shall be so
described and such amendment shall be promptly prepared and filed. If at
any time prior to the Effective Time, any event with respect to Vista or
Newco, or with respect to other information supplied by Vista or Newco
specifically for inclusion in the Proxy Statement, occurs and such event is
required to be described in a supplement to the Proxy Statement, Vista or
Newco shall promptly notify Midland of such occurrence and shall cooperate
with Midland in the preparation, filing, and dissemination of such
supplement.
(e) No amendment or supplement to the S-4 or the Proxy Statement will
be filed or disseminated to the shareholders of Midland without the
approval of Vista, Newco, and Midland. Newco shall advise Vista and
Midland, promptly after it receives notice thereof, of the time when the
S-4 has become effective under the Securities Act, the issuance of any stop
order with respect to the S-4, the suspension of the qualification of the
Newco Common Stock issuable in connection with the Merger and the Vista
Exchange, for offering or sale in any jurisdiction, or any comments or
requests for additional information by the SEC.
4.7 STOCK EXCHANGE LISTING. Newco shall use its reasonable best efforts to
cause the shares of Newco Common Stock to be issued in the Midland Merger and
the Vista Exchange and upon exercise of the Midland Stock Options, Midland
Warrants or Midland Common Stock Warrants to be approved for listing on the AMEX
or Nasdaq, subject to official notice of issuance prior to the Closing Date.
4.8 ADDITIONAL ARRANGEMENTS. Subject to the terms and conditions herein
provided, each of Midland, Vista and Newco will take, or cause to be taken, all
action and will do, or cause to be done, all things necessary, appropriate, or
desirable under applicable laws and regulations or under applicable governing
agreements to consummate and make effective the transactions contemplated by
this Agreement, including using its reasonable best efforts to obtain all
necessary waivers, consents, and approvals and effecting all necessary
registrations and filings. Each of Midland, Vista, and Newco will take, or cause
to be taken, all action or will do, or cause to be done, all things necessary,
appropriate, or desirable to cause the covenants and conditions applicable to
the transactions contemplated hereby to be performed or satisfied as soon as
practicable. In addition, if any Governmental Entity shall have issued any
order, decree, ruling, or injunction or taken any other action that would have
the effect of restraining, enjoining, or otherwise prohibiting or preventing the
consummation of the transactions contemplated hereby, each of Midland, Vista,
and Newco will use its reasonable best efforts to have such order, decree,
ruling, or injunction or other action declared ineffective as soon as
practicable.
4.9 AGREEMENTS OF RULE 145 AFFILIATES. At least 30 days prior to the
Effective Time, Vista shall cause to be prepared and delivered to Midland, and
Midland shall cause to be prepared and delivered to Vista, a list identifying
all persons who, at the time of the Midland Meeting or the Vista Exchange, as
applicable, may be deemed to be "affiliates" of Midland or Vista, as that term
is used in paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Rule 145 Affiliates"). Vista shall use its reasonable best efforts to cause
each person who is identified as a Rule 145 Affiliate in such Vista list to
deliver to Vista and Newco, at or prior to the Effective Time, a written
agreement, in the form attached as Exhibit 4.9 hereto (the "Affiliate
Agreement"). Vista and the Rule 145 Affiliates shall be relieved of this
obligation under the foregoing provisions of this Section 4.9 and such written
agreements if, and to the extent, such Rule 145 is amended not to require such
written agreements or any of the covenants contained therein. Midland shall use
its reasonable best efforts to cause each person who is identified as a Rule 145
Affiliate in such Midland list to deliver to Midland and Newco, at or prior to
the Effective Time, an Affiliate Agreement. Midland and the Rule 145 Affiliates
shall be relieved of this obligation under the foregoing provisions of this
Section 4.9 and such written agreements if, and to the extent, such Rule 145 is
amended not to require such written agreements or any of the covenants contained
therein.
4.10 PUBLIC ANNOUNCEMENTS. Prior to the Closing, the parties hereto will
consult with each other before issuing any press release or otherwise making any
public statements with respect to the transactions contemplated by this
Agreement and shall not issue any press release or make any such public
statement prior
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to obtaining the approval of the other parties hereto; provided, however, that
such consent shall not be required where such release or announcement is
required by applicable law or stock exchange rule; and provided further,
however, that any of the parties hereto may respond to inquiries by the press or
others regarding the transactions contemplated by this Agreement, so long as
such responses are consistent with such party's previously issued press
releases.
4.11 NOTIFICATION OF CERTAIN MATTERS. Midland shall give prompt notice to
Vista of (a) any representation or warranty contained in Section 3.1 being
untrue or inaccurate when made, (b) the occurrence of any event or development
that would cause (or could reasonably be expected to cause) any representation
or warranty contained in Section 3.1 to be untrue or inaccurate on the Closing
Date, or (c) any failure of Midland to comply with or satisfy any covenant,
condition, or agreement to be complied with or satisfied by it hereunder. Vista
shall give prompt notice to Midland of (i) any representation or warranty
contained in Section 3.2 or 3.3 being untrue or inaccurate when made, (ii) the
occurrence of any event or development that would cause (or could reasonably be
expected to cause) any representation or warranty contained in Section 3.2 or to
be untrue or inaccurate on the Closing Date, or (iii) any failure of Vista,
Newco, or Merger Sub to comply with or satisfy any covenant, condition, or
agreement to be complied with or satisfied by it hereunder.
4.12 PAYMENT OF EXPENSES. Each party hereto shall pay its own fees and
expenses (including fees and expenses of such parties' attorneys and
accountants) incident to preparing for, entering into, and carrying out this
Agreement and the consummation of the transactions contemplated hereby, whether
or not the Merger and the Vista Exchange shall be consummated, except that (a)
the fees and expenses (including fees and expenses of such parties' attorneys
and accountants) incurred by a party terminating this Agreement as provided
below in connection with this Agreement and the transactions contemplated herein
(including fees and expenses incurred in connection with the preparation and
filing of the S-4 with the SEC and the fees and expenses incurred in connection
with the printing, mailing and distribution of the Proxy Statement) shall be
reimbursed, borne and paid (i) if this Agreement is terminated by Midland
pursuant to Section 6.1(d), by Vista up to $300,000, and (ii) if this Agreement
is terminated by Vista pursuant to Section 6.1(c), by Midland up to $300,000 and
(b) if the Merger and the Vista Exchange are consummated all fees and expenses
(including fees and expenses of such parties' attorneys and accountants)
incident to preparing for, entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby shall be borne and paid by
Newco. The provisions for reimbursement of fees and expenses in this Section
shall be in addition to and not a limitation upon the liabilities or obligations
of a party as a result of a termination pursuant to Section 6.1(c) or 6.1(d).
4.13 INDEMNIFICATION.
(a) From and after the Effective Time, the MM Surviving Corporation
shall indemnify and hold harmless each person and shall advance expenses
incurred by each person who is, has been at any time prior to the date
hereof, or becomes prior to the Effective Time an officer or director of
Midland or any of its Subsidiaries (collectively, the "Midland Indemnified
Parties") against all losses, claims, damages, liabilities, costs or
expenses (including attorney's fees), judgments, and amounts paid in
settlement in connection with any claim, action, suit, proceeding, or
investigation arising out of or pertaining to acts or omissions, or alleged
acts or omissions, by him in his capacity as an officer or director of
Midland or any of its Subsidiaries, which acts or omissions occurred prior
to the Effective Time, to the full extent permitted by applicable law and
by the Bylaws of Midland in effect prior to the Effective Time, which
Bylaws make mandatory the indemnification of and advancement of expenses to
all Midland Indemnified Parties to the full extent permitted by Article
2.02-1 of the TBCA. The procedures associated with such indemnification
shall be the same as those associated with the Midland Indemnified Parties'
indemnification from Midland or any of its respective Subsidiaries, as the
case may be, immediately prior to the Effective Time (provided, however,
that the determination that such indemnification is permissible under
Section B of Article 2.02-1 of the TBCA shall be made by special legal
counsel selected by the Board of Directors as set forth in Section F(3) of
Article 2.02-1, such selection to be subject to the consent of a majority
of the Midland Indemnified Parties in such instance, which consent may not
be unreasonably withheld; and, further provided, however, that the MM
Surviving Corporation shall be under no
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obligation to deposit trust funds pursuant to any "change-in-control" or
similar provisions). Midland hereby agrees that, from and after the date
hereof until the Effective Time, it will not (and it will cause each of its
Subsidiaries not to) amend, modify, or otherwise alter any contractual
provision under which any Midland Indemnified Party is entitled to
indemnification from Midland or any of its Subsidiaries, as the case may
be, at the time of the execution of this Agreement. The provisions of this
Section are intended to be for the benefit of, and shall be enforceable by,
the parties hereto and each Midland Indemnified Party and their respective
heirs and representatives.
(b) From and after the Effective Time, Vista shall indemnify and hold
harmless each person or entity, and shall advance expenses incurred by each
person or entity who is, has been at any time prior to the date hereof, or
becomes prior to the Effective Time an officer, director or partner of the
General Partner, Vista or any of its Subsidiaries (collectively, the "Vista
Indemnified Parties") against all losses, claims, damages, liabilities,
costs or expenses (including attorney's fees), judgments, and amounts paid
in settlement in connection with any claim, action, suit, proceeding, or
investigation arising out of or pertaining to acts or omissions, or alleged
acts or omissions, by such Vista Indemnified Party in his or its capacity
as an officer, director, or partner of the General Partner, Vista or any of
its Subsidiaries, which acts or omissions occurred prior to the Effective
Time to the full extent permitted by applicable law. The procedures
associated with such indemnification shall be the same as those associated
with the Vista Indemnified Parties' indemnification from Vista or any of
its Subsidiaries, as the case may be, immediately prior to the Effective
Time (provided, however, that Vista shall be under no obligation to deposit
trust funds pursuant to any "change-in-control" or similar provisions).
Vista hereby agrees that, from and after the date hereof until the
Effective Time, it will not (and it will cause each of its Subsidiaries not
to) amend, modify, or otherwise alter any contractual provision under which
any Vista Indemnified Party is entitled to indemnification from Vista or
any of its Subsidiaries at the time of the execution of this Agreement. The
provisions of this Section are intended to be for the benefit of, and shall
be enforceable by, the parties hereto and each Vista Indemnified Party and
their respective heirs and representatives.
4.14 INDEMNIFICATION AGREEMENTS. Contemporaneously with the Closing, Newco
shall enter into indemnification agreements, substantially in the form attached
hereto as Exhibit 4.14(a)(each an "Indemnification Agreement"), with each of its
officers and directors and with each of the officers and directors listed on
Schedule 4.14 of the Midland Disclosure Schedule, substantially in the form
attached hereto as Exhibit 4.14(b). The provisions of this Section are intended
to be for the benefit of, and shall be enforceable by, the parties hereto and
each of the Persons named in this Section and their respective heirs and
representatives.
4.15 REGISTRATION OF SHARES TO BE ISSUED PURSUANT TO STOCK
OPTIONS. Promptly after the Effective Time, Newco shall file with the SEC a
registration statement on Form S-8, effective as of the Effective Time, with
respect to the shares of Newco Common Stock to be issued upon exercise of the
Midland Stock Options. Newco shall use all reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status of
the related prospectus) for so long as any Midland Stock Options remain
outstanding. The provisions of this Section are intended to be for the benefit
of, and shall be enforceable by, the parties hereto and each holder of a Midland
Stock Option and their respective heirs and representatives.
4.16 REGISTRATION RIGHTS AGREEMENT. (a) Contemporaneously with the Closing,
Newco shall enter into a Registration Rights Agreement, substantially in the
form attached hereto as Exhibit 4.16(a) (the "Vista Registration Rights
Agreement"), with each of the shareholders of the General Partner and each of
the limited partners of Vista immediately prior to the Vista Exchange.
(b) Contemporaneously with the Closing, Newco shall enter into a
Registration Rights Agreement, substantially in the form attached hereto as
Exhibit 4.16(b) (the "Midland Registration Rights Agreement") with each holder
of a Midland Exchange Stock Option.
(c) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, the parties hereto and each of the Persons named or
described in this Section and their respective heirs and representatives.
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4.17 RESIGNATIONS OF OFFICERS AND DIRECTORS OF MIDLAND. Contemporaneously
with the execution and delivery of this Agreement, Midland shall obtain written
resignations from each of its officers and directors under which such persons
have resigned as an officer and/or director of Midland effective as of the
Effective Time. Contemporaneously with the execution and delivery of this
Agreement, Midland shall enter into a Termination Agreements, substantially in
the forms attached hereto as Exhibits 4.17(a) and 4.17(b) (each a "Termination
Agreement"), with Howard E. Ehler and Marilyn D. Wade, respectively.
4.18 NEWCO LONG-TERM INCENTIVE PLAN. Prior to the Effective Time, but to
become effective immediately after the Effective Time, Newco shall approve and
adopt the Vista Energy Resources, Inc. 1998 Key Employee Stock Option Plan,
substantially in the form attached hereto as Exhibit 4.18 (the "Newco Long-Term
Incentive Plan").
4.19 MIDLAND OPTION EXERCISE AGREEMENTS. Within 30 days from the date
hereof, Midland shall use its reasonable best efforts to cause each of the
holders of issued and outstanding Midland Stock Options (other than Midland
Exchange Stock Options) to execute an Option Exercise Agreement.
4.20 TRANSACTIONS WITH AFFILIATES. For a period of one year following the
Effective Time, except for the grant of options pursuant to the terms of the
Newco Long-Term Incentive Plan and the issuance of shares of Newco Common Stock
underlying such options or the Newco Warrants, Newco shall not issue shares of
Newco Common Stock or securities exchangeable or exercisable for or convertible
into shares of Newco Common Stock to any person or entity that is an affiliate
of Newco for consideration that is less than fair market value of the securities
issued. For a transaction or series of related transactions involving value of
less than $1,000,000, the fair market value of the Newco Common Stock or other
security to be issued will be determined by the Board of Directors of Newco
after taking into consideration the historical trading price of Newco Common
Stock. For a transaction or series of related transactions involving value of
more than $1,000,000, the fair market value of the Newco Common Stock or other
security to be issued will be determined by the Board of Directors of Newco
after (i) taking into consideration the historical trading price of Newco Common
Stock and (ii) receipt of an opinion from a nationally recognized investment
banking firm that such transaction is fair, from a financial point of view, to
Newco.
ARTICLE 5
CONDITIONS
5.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER AND THE
VISTA EXCHANGE. The respective obligations of each party to effect the Merger
and the Vista Exchange shall be subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:
(a) SHAREHOLDER APPROVAL. The Midland Merger and this Agreement shall
have been duly and validly approved and adopted by the shareholders of
Midland;
(b) FAIRNESS OPINION. The fairness opinion described in Section
3.1(hh) shall have been confirmed in writing and shall not have been
withdrawn, revoked, or modified;
(c) TAX OPINION. The tax opinion described in Section 4.5(b)(ii) shall
not have been withdrawn, revoked, or modified;
(d) EXCHANGE LISTING. The shares of Newco Common Stock issuable
pursuant to the Midland Merger and the Vista Exchange and the shares of
Newco Common Stock to be issued upon exercise of the Midland Stock Options
and the Midland Warrants shall have been authorized for listing on the AMEX
or Nasdaq, subject to official notice of issuance;
(e) OTHER APPROVALS. All consents, approvals, permits, and
authorizations required to be obtained prior to the Effective Time from,
any Governmental Entity in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
by Midland, Vista, Newco, and Merger Sub shall have been made or obtained
(as the case may be), except where the failure to obtain such consents,
approvals, permits, and authorizations would not be reasonably likely to
result in
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a Material Adverse Effect on Newco (assuming the Midland Merger and the
Vista Exchange have taken place) or to materially adversely affect the
consummation of the Midland Merger and the Vista Exchange;
(f) SECURITIES LAW MATTERS. The S-4 shall have become effective under
the Securities Act and shall be effective at the Effective Time, and no
stop order suspending such effectiveness shall have been issued, no action,
suit, proceeding, or investigation by the SEC to suspend such effectiveness
shall have been initiated and be continuing, and all necessary approvals
under state securities laws relating to the issuance or trading of the
Newco Common Stock to be issued in the Midland Merger and the Vista
Exchange shall have been received; and
(g) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction, or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Midland Merger and the Vista Exchange shall be in
effect; provided, however, that prior to invoking this condition, each
party shall have complied fully with its obligations under Section 4.8 and,
in addition, shall use all reasonable efforts to have any such decree,
ruling, injunction, or order vacated, except as otherwise contemplated by
this Agreement.
5.2 CONDITIONS OF OBLIGATIONS OF VISTA, NEWCO, AND MERGER SUB. The
obligations of Vista and Newco to effect the Vista Exchange are subject to the
satisfaction of the following conditions, any or all of which may be waived in
whole or in part by Vista.
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Midland set forth in Section 3.1 shall be true and correct in
all material respects (provided that any representation or warranty of
Midland contained herein that is qualified by a materiality standard or a
Material Adverse Effect qualification shall not be further qualified
hereby) as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, and Vista shall
have received a certificate signed on behalf of Midland by the chief
executive officer and the chief financial officer of Midland to such
effect;
(b) PERFORMANCE OF COVENANTS AND AGREEMENTS. Midland shall have
performed in all material respects all covenants and agreements required to
be performed by it under this Agreement at or prior to the Closing Date,
and Vista shall have received a certificate signed on behalf of Midland by
the chief executive officer and the chief financial officer of Midland to
such effect;
(c) COMFORT LETTER. Vista shall have received a letter from Grant
Thornton LLP, Midland's independent auditors, of the kind contemplated by
the Statement of Auditing Standards with respect to Letters to Underwriters
promulgated by the American Institute of Certified Public Accountants,
dated as of a date within two business days prior to the Closing Date, in
form and substance reasonably satisfactory to Vista, in connection with the
procedures undertaken by them with respect to the financial statements of
Midland and its consolidated Subsidiaries included (or incorporated by
reference) in the S-4 and the other matters contemplated by such Statement
of Auditing Standards and customarily included in similar letters relating
to transactions similar to the Midland Merger;
(d) DISSENTERS' RIGHTS. The aggregate number of shares of capital
stock of Midland, which are entitled to vote at the Midland Meeting and are
held of record by a Person or Persons who exercise their right, if any,
under the TBCA to dissent from the proposed Midland Merger, shall not
exceed five percent (5%) of the total number of issued and outstanding
shares of capital stock of Midland held of record as of the record date for
the Midland Meeting and entitled to vote on the proposed Midland Merger at
such meeting.
(e) LEGAL OPINION. At the Closing, Vista shall have received from Law
Snakard & Gambill, Midland's legal counsel, an opinion dated the Closing
Date in substantially the form set forth as Exhibit 5.2(e) hereto.
(f) NO ADVERSE CHANGE. From the date of this Agreement through the
Closing, there shall not have occurred any change in the condition
(financial or otherwise), operations, or business of Midland
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and its Subsidiaries, taken as a whole, that would have or would be
reasonably likely to have a Material Adverse Effect on Midland (other than
changes, including changes in commodity prices, generally prevalent
affecting the oil and gas industry).
(g) MIDLAND OPTION EXERCISE AGREEMENTS. Midland shall have received an
Option Exercise Agreement executed by each of the holders of issued and
outstanding Midland Stock Options who is an executive officer or director
of Midland.
5.3 CONDITIONS OF OBLIGATIONS OF MIDLAND. The obligation of Midland to
effect the Midland Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Midland:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Vista, Newco, and Merger Sub set forth in Sections 3.2 and
3.3 shall be true and correct in all material respects (provided that any
representation or warranty of Vista, Newco, or Merger Sub contained herein
that is qualified by a materiality standard or a Material Adverse Effect
qualification shall not be further qualified hereby) as of the date of this
Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and
as of the Closing Date, and Midland shall have received a certificate
signed on behalf of Vista by the General Partner to such effect;
(b) PERFORMANCE OF COVENANTS AND AGREEMENTS. Vista, Newco, and Merger
Sub shall have performed in all material respects all covenants and
agreements required to be performed by them under this Agreement at or
prior to the Closing Date, and Midland shall have received a certificate
signed on behalf of Vista by the General Partner to such effect;
(c) LEGAL OPINION. At the Closing, Midland shall have received from
Vinson & Elkins L.L.P., Vista's legal counsel, an opinion dated the Closing
Date in substantially the form set forth as Exhibit 5.3(c) hereto.
(d) COMFORT LETTER. Midland shall have received a letter from Arthur
Andersen LLP, Vista's independent certified public accountants, of the kind
contemplated by the Statement of Auditing Standards with respect to Letters
to Underwriters promulgated by the American Institute of Certified Public
Accountants, dated as of a date within two business days prior to the
Closing Date, in form and substance reasonably satisfactory to Midland, in
connection with the procedures undertaken by them with respect to the
financial statements of Vista and its consolidated Subsidiaries included in
the S-4 and the other matters contemplated by such Statement of Auditing
Standards and customarily included in similar letters relating to
transactions similar to the Midland Merger; and
(e) NO ADVERSE CHANGE. From the date of this Agreement through the
Closing, there shall not have occurred any change in the condition
(financial or otherwise), operations, or business of Vista and its
Subsidiaries, taken as a whole, that would have or would be reasonably
likely to have a Material Adverse Effect on Vista (other than changes,
including changes in commodity prices, generally prevalent affecting the
oil and gas industry).
(f) EXCHANGE AGREEMENTS. Newco shall have received an Exchange
Agreement from each holder of GP Common Stock and each holder of a
Partnership Interest.
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ARTICLE 6
TERMINATION
6.1 TERMINATION RIGHTS. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, whether before or after
approval of the Merger and this Agreement by the shareholders of Midland and the
partners of Vista:
(a) By mutual written consent of Vista and Midland;
(b) By either Midland or Vista if (i) the Merger have not been
consummated by October 30, 1998 (provided, however, that the right to
terminate this Agreement pursuant to this clause (i) shall not be available
to any party whose breach of any representation or warranty or failure to
perform any covenant or agreement under this Agreement has been the cause
of or resulted in the failure of the Merger to occur on or before such
date), (ii) any Governmental Entity shall have issued an order, decree, or
ruling or taken any other action permanently restraining, enjoining, or
otherwise prohibiting the Merger and such order, decree, ruling, or other
action shall have become final and nonappealable (provided, however, that
the right to terminate this Agreement pursuant to this clause (ii) shall
not be available to any party until such party has used all reasonable
efforts to remove such injunction, order, or decree), or (iii) any required
approval of the shareholders or partners of a party, as applicable, shall
not have been obtained by reason of the failure to obtain the required vote
upon a vote held at a duly held meeting of shareholders of Midland, or at
any adjournment thereof (provided, however, that Midland shall not have the
right to terminate this Agreement pursuant to this clause (iii) if Vista
then has the right to terminate this Agreement pursuant to subsection (e)
of this Section);
(c) By Vista if (i) there has been a breach of the representations and
warranties made by Midland in Section 3.1 of this Agreement or (ii) Midland
has failed to comply in any material respect with any of its covenants or
agreements contained in this Agreement and such failure has not been, or
cannot be, cured within a reasonable time after notice and demand for cure
thereof which period in no event shall extend beyond October 30, 1998.
(d) By Midland if (i) there has been a breach of the representations
and warranties made by Vista, Newco, or Merger Sub in Sections 3.2 and 3.3
of this Agreement, (ii) Vista, Newco, or Merger Sub has failed to comply in
any material respect with any of its covenants or agreements contained in
this Agreement, and, in either such case, such breach or failure has not
been, or cannot be, cured within a reasonable time after notice and a
demand for cure thereof which period in no event shall extend beyond
October 30, 1998;
(e) By Vista if (i) the Board of Directors of Midland shall have
failed to recommend adoption of the Midland Merger and this Agreement at
the time the Proxy Statement is first mailed to shareholders of Midland or
shall have amended or withdrawn any such recommendation and such
recommendation is not reinstated in its prior form within five business
days after such amendment or withdrawal or (ii) (x) the shareholders of
Midland fail to duly and validly adopt the Midland Merger and this
Agreement at the Midland Meeting or any adjournment thereof or (y) the
Midland Meeting does not occur for any reason (other than as a result of a
breach of this Agreement by Vista) prior to October 29, 1998 (and if this
Agreement is terminated pursuant to this subsection, Vista shall have the
right to receive from Midland, and Midland agrees to pay to Vista, an
amount of cash equal to $400,000, which amount shall be inclusive of
expenses as set forth in Section 4.12);
(f) By Vista after June 22, 1998, if on such date Midland shall not
have received an Option Exercise Agreement executed by each of the holders
of issued and outstanding Midland Stock Options who is an executive officer
of director of Midland;
(g) By Midland after June 22, 1998, if on such date Vista shall not
have received an Exchange Agreement from each holder of GP Common Stock and
each holder of a Partnership Interest.
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6.2 EFFECT OF TERMINATION. If this Agreement is terminated by either
Midland or Vista pursuant to the provisions of Section 6.1, this Agreement shall
forthwith become void except for, and there shall be no further obligation on
the part of any party hereto or its respective Affiliates, directors, officers,
partners, or shareholders except pursuant to, the provisions of Sections 4.12
and 6.1(e), and Article 7; provided, however, that a termination of this
Agreement shall not relieve any party hereto from any liability for damages
(excluding punitive damages which each party hereby waives the right to recover
hereunder) incurred as a result of a breach by such party of its
representations, warranties, covenants, agreements, or other obligations
hereunder occurring prior to such termination.
ARTICLE 7
MISCELLANEOUS
7.1 AMENDMENT. This Agreement may be amended by the parties hereto at any
time before or after approval of the Midland Merger and this Agreement by the
shareholders of Midland and the Vista Exchange by the partners of Vista;
provided, however, that after any such approval, no amendment shall be made that
by law requires further approval by such shareholders or partners without such
further approval. This Agreement may not be amended except by a written
instrument signed on behalf of each of the parties hereto.
7.2 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive performance
of any of the covenants or agreements, or satisfaction of any of the conditions,
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party.
7.3 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AND
AGREEMENTS. All representations, warranties, covenants, and agreements contained
in this Agreement or in any instrument delivered pursuant to this Agreement
shall be deemed to the extent expressly provided herein to be conditions to the
Midland Merger, and none of such representations, warranties, covenants, and
agreements shall survive the consummation of the Merger (except for the
agreements contained in Article 2, in Sections 4.12, 4.13, 4.14, 4.15, 4.16,
4.17, 4.18 and 4.20, and in this Article.
7.4 NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and either delivered personally, by facsimile
transmission, or by registered or certified mail (postage prepaid and return
receipt requested) and shall be deemed given when received (or, if mailed, five
business days after the date of mailing) at the following addresses or facsimile
transmission numbers (or at such other address or facsimile transmission number
for a party as shall be specified by like notice):
(a) If to Vista, Newco, or Merger Sub:
Vista Energy Resources, Inc.
4550 West Texas Avenue, Suite 700
Midland, Texas 79701
Attention: C. Randall Hill
Facsimile No.: (915) 688-0589
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201-2975
Attention: A. Winston Oxley
Facsimile No.: (214) 220-7716
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(b) If to Midland:
616 FM 1960 West
Suite 600
Houston, Texas 77090-3027
Attention: Wayne M. Whitaker
Facsimile No.: (281) 587-9052
with a copy to:
Law, Snakard & Gambill
500 Throckmorton, Suite 3200
Fort Worth, Texas 76102
Attention: Vernon E. Rew, Jr.
Facsimile No.: (817) 332-7473
7.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
7.6 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
7.7 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(together with the documents and instruments delivered by the parties in
connection with this Agreement) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and (b) except as
provided in Section 4.13, is solely for the benefit of the parties hereto and
their respective successors, legal representatives, and assigns and does not
confer on any other person any rights or remedies hereunder.
7.8 APPLICABLE LAW. This Agreement shall be governed in all respects,
including validity, interpretation, and effect, by the laws of the State of
Texas regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
7.9 NO REMEDY IN CERTAIN CIRCUMSTANCES. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void, or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality, and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby, unless the foregoing inconsistent action or the failure to
take an action constitutes a material breach of this Agreement or makes this
Agreement impossible to perform, in which case this Agreement shall terminate
pursuant to Article 6. Except as otherwise contemplated by this Agreement, to
the extent that a party hereto took an action inconsistent herewith or failed to
take action consistent herewith or required hereby pursuant to an order or
judgment of a court or other competent Governmental Entity, such party shall not
incur any liability or obligation unless such party breached its obligations
hereunder or did not in good faith seek to resist or object to the imposition or
entering of such order or judgment.
7.10 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with the terms hereof or was otherwise
breached. Accordingly, the parties hereto hereby agree that each party hereto
shall be entitled to an injunction to prevent a breach of this Agreement and
shall be entitled to specific performance of the terms and provisions hereof in
addition to any other remedy at law or in equity.
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7.11 ASSIGNMENT. Nether this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties, except that Merger Sub may assign, in its sole discretion, any or all
of its rights, interests, and obligations hereunder to any newly-formed direct
or indirect wholly-owned corporate subsidiary of Newco. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by the parties and their respective successors and assigns.
7.12 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including any investigation by or on behalf of any
party, shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants, or agreements
contained in this Agreement. The waiver by any party hereto of a breach of any
provision hereof shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provisions hereof.
7.13 CERTAIN PROVISIONS INAPPLICABLE. The parties hereby acknowledge and
represent that the Board of Directors of each corporate party hereto has
approved the terms of this Agreement and the consummation of the transactions
contemplated herein and that such approval is sufficient to render the
provisions of Section 203 of the DGCL and Section 13.03 of the TBCA inapplicable
to the transactions contemplated herein.
7.14 TERMINATION OF LETTER OF INTENT AND CONFIDENTIALITY AGREEMENT. The
parties hereby acknowledge and agree that the Letter of Intent dated January 12,
1998 between Vista and Midland and the Confidentiality Agreement dated November
18, 1997 between Vista and Midland are hereby terminated and are of no further
force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF. The parties have caused this Agreement to be executed
by their duly authorized representatives, effective as of the date first written
above.
VISTA RESOURCES PARTNERS, L.P.
By: Vista Resources I, Inc., its
General Partner
By:
----------------------------------
Name: C. Randall Hill
Title: Chairman of the Board and
Chief Executive Officer
MIDLAND RESOURCES, INC.
By:
----------------------------------
Name:
------------------------------------
Title:
------------------------------------
VISTA ENERGY RESOURCES, INC.
By:
----------------------------------
Name:
------------------------------------
Title:
------------------------------------
MIDLAND ACQUISITION CO.
By:
----------------------------------
Name:
------------------------------------
Title:
------------------------------------
[SIGNATURE PAGE TO MERGER AGREEMENT]
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APPENDIX B
VISTA EXCHANGE AGREEMENT
THIS VISTA EXCHANGE AGREEMENT (this "Agreement") dated as of June 15, 1998
is entered into by and among Vista Energy Resources, Inc., a Delaware
corporation (including its successors, the "Company"), and the security holders
(the "Holders") listed on the signature page hereof, who hold (a) shares of
common stock, $.01 par value per share (the "GP Common Stock") of Vista
Resources I, Inc. (the "General Partner"), (b) limited partner interests in
Vista Resources Partners, L.P. ("Vista") (each 1% limited partner interest in
Vista calculated based on the sharing ratio thereof, is referred to herein as a
"Partnership Interest") or (c) shares of GP Common Stock and Partnership
Interest, in each case as shown on Schedule I hereto.
RECITALS
A. Vista, and Midland Resources, Inc., a Texas corporation ("Midland"),
have determined to engage in a strategic business combination. Capitalized terms
used but not defined herein shall have the meanings given such terms in the
Merger Agreement.
B. In furtherance thereof, the General Partner has approved the Agreement
and Plan of Merger (the "Merger Agreement") among Vista, Midland, the Company
and Midland Merger Co., a Texas corporation and a direct wholly-owned subsidiary
of the Company ("Merger Sub").
C. In furtherance thereof, the General Partner has approved the exchange
(the "Vista GP Exchange") of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), and warrants that are exercisable for shares of
Common Stock ("Newco Warrants") for all of the outstanding shares of GP Common
Stock and the exchange (the "Vista LP Exchange" and, together with the Vista GP
Exchange, the "Vista Exchange") of shares of Common Stock and Newco Warrants for
all of the outstanding Partnership Interest.
D. In furtherance thereof, the respective Boards of Directors of Merger Sub
and Midland have approved Merger Agreement and the merger of Merger Sub with and
into Midland, with Midland being the surviving corporation (the "Midland
Merger").
E. The undersigned desires, concurrently with the Effective Time, to
exchange its or his shares of GP Common Stock, Partnership Interest or both
shares of GP Common Stock and Partnership Interest, as the case may be, for
shares of Common Stock and Newco Warrants as provided herein.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth in this Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
ARTICLE 1
THE EXCHANGES
1.1 EXCHANGE AGREEMENTS. At the Effective Time, without any action on the
part of any party hereto, each issued and outstanding share of GP Common Stock
held by a Holder shall be exchanged for a number of shares of Common Stock equal
to 1.60089817 (the "Vista GP Conversion Stock Number") and a Newco Warrant that
is exercisable for a number of shares of Common Stock equal to 1.16511028 (the
"Vista GP Conversion Warrant Number") and each issued and outstanding
Partnership Interest that is held by a Holder shall be exchanged for a number of
shares of Common Stock equal to 117,674.06 (the "Vista LP Conversion Stock
Number") and a Newco Warrant that is exercisable for a number of shares of
Common Stock equal to 85,641.46 (the "Vista LP Conversion Warrant Number"). Any
fractional Partnership Interest shall be likewise exchanged on a pro rata basis.
As provided in the Merger Agreement, each of the Vista GP Conversion Stock
Number, the Vista LP Conversion Stock Number, the Vista GP Conversion Warrant
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Number and the Vista LP Conversion Warrant Number shall be increased or
decreased, as necessary, immediately prior to the Effective Time such that (i)
the aggregate percentage of shares of Common Stock that the Holders of GP Common
Stock and the Holders of Partnership Interests shall be entitled to receive at
the Effective Time shall equal 72.5% of the shares of Common Stock that will be
outstanding calculated on a Fully Diluted Basis immediately after the Effective
Time and (ii) the aggregate percentage of shares of Newco Common Stock issuable
upon exercise of the Newco Warrants that the Holders of GP Common Stock and the
Holders of Partnership Interests shall be entitled to receive shall equal 72.5%
of the shares of Common Stock that is issuable upon the exercise of (x) all of
the Midland Warrants outstanding immediately after the Effective Time, (y) all
Newco Warrants issued pursuant to the Midland Exchange and (z) all Newco
Warrants issuable pursuant to the Vista Exchange. Subject to Section 1.3, any
such adjustments to the Vista GP Conversion Stock Number, the Vista LP
Conversion Stock Number, the Vista GP Conversion Warrant Number or the Vista LP
Conversion Warrant Number shall be made not later than two business days prior
to the Closing and shall be determined by Newco's independent auditors Arthur
Andersen LLP.
1.2 EXCHANGE OF GP COMMON STOCK CERTIFICATES.
(a) EXCHANGE FUND. Immediately after the Effective Time, the Company
shall deposit with the Exchange Agent, for the benefit of the Holders of GP
Common Stock and Partnership Interest and for exchange in accordance with
this Agreement, (i) certificates representing the shares of Common Stock
and (ii) certificates representing the Newco Warrants, in each case to be
issued in exchange for shares of GP Common Stock and Partnership Interest
pursuant to Section 1.1. Such shares of Common Stock and Newco Warrants,
together with any dividends or distributions with respect thereto (as
provided in subsection (c) of this Section 1.2), are referred to herein as
the "Exchange Fund." The Exchange Agent, pursuant to irrevocable
instructions consistent with the terms of this Agreement, shall deliver the
Common Stock and Newco Warrants to be issued pursuant to Section 1.1 out of
the Exchange Fund, and the Exchange Fund shall not be used for any other
purpose. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the Common Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or
other distributions paid or distributed with respect thereto for the
account of any Person thereto.
(b) EXCHANGE PROCEDURES FOR GP COMMON STOCK.
(i) As soon as reasonably practicable after the Effective Time, the
Company shall cause the Exchange Agent to mail to each holder of record
of a certificate representing shares of GP Common Stock (a "GP
Certificate") that, immediately prior to the Effective Time, represented
shares of GP Common Stock converted into Common Stock and Newco Warrants
pursuant to Section 1.1 a letter of transmittal to be used to effect the
exchange of such GP Certificate for a certificate representing shares of
Common Stock (a "Company Certificate") and a certificate representing a
Newco Warrant (a "Warrant Certificate"), along with instructions for
using such letter of transmittal to effect such exchange. The letter of
transmittal (or the instructions thereto) shall specify that delivery of
any GP Certificate shall be effected, and risk of loss and title thereto
shall pass, only upon delivery of such GP Certificate to the Exchange
Agent and shall be in such form and have such other provisions as the
Company may reasonably specify.
(ii) Upon delivery to the Exchange Agent of, together with the
surrender of a GP Certificate, if applicable, a duly completed and
executed letter of transmittal and any other required documents, (A) the
Holder of such GP Certificate shall be entitled to receive in exchange
therefor (x) a Company Certificate representing the number of shares of
Common Stock that such Holder has the right to receive pursuant to
Section 1.1 and any unpaid dividends and distributions that such Holder
has the right to receive pursuant to subsection (d) of this Section
(after giving effect to any required withholding of taxes) and (y) a
Warrant Certificate exercisable for a number of shares of Common Stock
that such Holder has the right to receive pursuant to Section 1.1, and
(B) the GP Certificate, if any, so surrendered shall forthwith be
cancelled. No interest shall be paid or accrued on unpaid dividends and
distributions, if any, payable to Holders of GP Certificates.
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(iii) In the event of a transfer of ownership of GP Common Stock
that is not registered in the transfer records of the General Partner, a
Company Certificate and Warrant Certificate representing the appropriate
number of shares of Common Stock may be issued to a transferee if the GP
Certificate representing such shares of GP Common Stock is presented to
the Exchange Agent accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer
taxes have been paid.
(iv) Until surrendered as contemplated by this subsection, each GP
Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender a Company
Certificate and Warrant Certificate as provided in this Agreement.
(c) EXCHANGE PROCEDURES FOR PARTNERSHIP INTEREST.
(i) The parties hereby acknowledge and agree that the Partnership
Interest are uncertificated and that the ownership of the Partnership
Interest is evidenced by the records of Vista and that such ownership is
reflected on Exhibit A hereto. As soon as reasonably practicable after
the Effective Time, the Company shall deliver to the Exchange Agent a
letter of instruction, directing the Exchange Agent to issue to each
Holder, who has executed and delivered a counterpart of this Agreement,
(x) a Company Certificate representing the number of shares of Common
Stock that such Holder has the right to receive pursuant to Section 1.1
and any unpaid dividends and distributions that such Holder has the
right to receive pursuant to subsection (d) of this Section (after
giving effect to any required withholding of taxes) and (y) a Warrant
Certificate exercisable for a number of shares of Common Stock that such
Holder has the right to receive pursuant to Section 1.1.
(ii) From and after the Effective Time, each Partnership Interest
shall be deemed to represent only the right to receive a Company
Certificate and Warrant Certificate as provided in this Agreement.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to Common Stock declared or made after the
Effective Time with a record date after the Effective Time shall be paid to
the Holder of any unsurrendered GP Certificate or Partnership Interest
prior to delivery of the exchange instructions by the Company. Subject to
the effect of applicable laws, (i) at the time of the surrender of a GP
Certificate for exchange in accordance with the provisions of this Section
or the delivery of the applicable exchange instructions in the case of the
Partnership Interest, there shall be paid to the Holder thereof, without
interest, the amount of dividends or other distributions (having a record
date after the Effective Time but on or prior to surrender and a payment
date on or prior to surrender) theretofore paid with respect to the number
of shares of Common Stock that such Holder is entitled to receive (less the
amount of any withholding taxes that may be required with respect thereto)
and (ii) at the appropriate payment date, there shall be paid to the
Holder, without interest, the amount of dividends or other distributions
(having a record date after the Effective Time but on or prior to surrender
and a payment date subsequent to surrender) payable with respect to the
number of shares of Common Stock that such Holder receives (less the amount
of any withholding taxes that may be required with respect thereto).
(e) NO FURTHER OWNERSHIP RIGHTS. The shares of Common Stock and Newco
Warrants issued in exchange of shares of GP Common Stock and Partnership
Interest in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights of the Holders pertaining to such
shares of GP Common Stock and Partnership Interest.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
held by the Exchange Agent in accordance with the terms of this Section
that remains unclaimed by a Holder for a period of one year following the
Effective Time shall be delivered to the Company, upon demand. Thereafter,
a Holder who has not theretofore complied with the provisions of this
Section shall look only to the
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Company for their claim for Common Stock and any dividends or distributions
with respect to Common Stock (all without interest and Newco Warrants).
(g) NO LIABILITY. None of the Company, the General Partner, the
Exchange Agent, or any other Person shall be liable to any Holder for any
amount properly delivered to any public official pursuant to any applicable
abandoned property, escheat, or similar law. Any amounts remaining
unclaimed by Holders for a period of two years following the Effective Time
(or such earlier date immediately prior to the time at which such amounts
would otherwise escheat to or become property of any governmental entity)
shall, to the extent permitted by applicable law, become the property of
the Company free and clear of any claims or interest of any such Holders or
their successors, assigns, or personal representative previously entitled
thereto.
(h) LOST, STOLEN, OR DESTROYED GP CERTIFICATES. If any GP Certificate
shall have been lost, stolen, or destroyed, upon the making of an affidavit
of that fact by the Person claiming such GP Certificate to be lost, stolen,
or destroyed and, if required by the Company, the posting by such Holder of
a bond in such reasonable amount as the Company may direct as an indemnity
against any claim that may be made against it with respect to such GP
Certificate, the Exchange Agent shall issue in exchange for such lost,
stolen, or destroyed GP Certificate the shares of Common Stock (along with
any unpaid dividends and distributions pursuant to subsection (c) of this
Section) deliverable with respect thereto pursuant to this Agreement.
1.3 POST-EFFECTIVE TIME ADJUSTMENT. Effective as of the last day of the
fourth calendar month immediately following the calendar month in which the
Closing Date occurred, Newco shall cause its independent auditors Arthur
Andersen LLP to redetermine the Vista GP Conversion Stock Number and the Vista
LP Conversion Stock Number by redetermining, as of such date, Fully Diluted
Basis to the extent necessary so as to reflect the number of shares of Newco
Common Stock, if any, issued after the Effective Time as of the result of the
exercise of any Midland Stock Options. In the event any such adjustment to the
Vista GP Conversion Stock Number and the Vista LP Conversion Stock Number is
determined appropriate, then Newco shall promptly issue to each Holder such
Holder's pro rata share of a number of shares of Newco Common Stock equal to an
amount equal to (i) the quotient realized by dividing (x) the number of shares
of Newco Common Stock issued after the Effective Time as a result of the
exercise of any Midland Stock Options by (y) .275 minus (ii) the number of
shares of Newco Common Stock described in clause (x) above.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Each of the undersigned Holders, severally and not jointly, hereby
represents and warrants to the Company as follows:
(a) AUTHORITY. Such Holder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by such Holder and the
consummation by such Holder of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of such Holder.
This Agreement has been, or upon execution and delivery will be, duly
executed and delivered and constitutes, or upon execution and delivery will
constitute, the valid and binding obligations of such Holder enforceable
against such Holder in accordance with their terms, subject as to
enforceability to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in equity).
(b) NO CONFLICT; REQUIRED CONSENTS. The execution and delivery of this
Agreement by such Holder does not and the performance by such Holder of the
transactions contemplated hereby will not, (i) conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to such Holder,
(ii) violate, conflict with, result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become
a default) under, or give to others any rights of termination,
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amendment, acceleration or cancellation of, any note, indenture, agreement,
lease, license, permit or other instrument or obligation to which such
Holder is a party or by which such Holder is bound, or (iii) require any
consent, approval, authorization or permit from any governmental regulatory
body, except in each case where such conflict, violation, breach or default
or failure to obtain such consents, approvals, authorizations or permits or
to make such filings would not prevent or delay the performance by such
Holder of its or his obligations under this Agreement.
(c) NO LIENS OR ENCUMBRANCES. Exhibit A hereto accurately set forth
the ownership of such Holder's GP Common Stock and Partnership Interest. At
the Effective Time, all of the shares of GP Common Stock or Partnership
Interest, as the case may be, to be exchanged by such Holder in accordance
with the terms of this Agreement will be exchanged free and clear of all
liens, pledges, claims, security interests, restrictions, options or
encumbrances of any kind.
(d) INVESTMENT REPRESENTATIONS.
(i) Such Holder is acquiring the Common Stock and Newco Warrants
for his own account for investment, and not with a view to distribution
or resale thereof; and such Holder has no present plans to enter into
any contract (other than the Registration Rights Agreement to be entered
into between the Company and the holders of GP Common Stock and
Partnership Interests), undertaking, agreement, or arrangement for the
distribution or resale of any of the Common Stock or Newco Warrants.
(ii) (1) Such Holder can bear the economic risk of losing its or
his entire investment; (2) such Holder's overall commitment to
investments which are not readily marketable is not disproportionate to
such Holder's net worth, and such Holder's investment in the Common
Stock and Newco Warrants will not cause such overall commitment to
become excessive; (3) such Holder has adequate means of providing for
such Holder's current needs and personal contingencies and has no need
for liquidity in such Holder's investment in the Common Stock and Newco
Warrants; (4) such Holder has such knowledge and experience in financial
and business matters that such Holder is capable of evaluating the risks
and merits of this investment, or has retained advisors who have such
knowledge and experience; (5) such Holder is familiar with the business
and financial condition, properties, operations and prospects of the
Company and the terms of the Midland Merger and the Vista Exchange; and
(6) such Holder has been provided with a copy of a private placement
memorandum (the "Information") in the form of Exhibit B hereto.
(iii) Such Holder and/or his attorney and/or his accountant have
received a copy of the Information, have thoroughly read the Information
and understand the nature of the risks involved in the proposed
investment. Such Holder and/or his attorney and/or his accountant have
had an opportunity to ask questions of and receive answers from the
Company, or a person or persons acting on its behalf, concerning the
terms and conditions of this investment and the Company and the business
and prospects of the Company, including the effects of the Midland
Merger and the Vista Exchange and answers have been provided to its or
his satisfaction to all of his questions related thereto.
(iv) Such Holder recognizes that an investment in the Company
involves certain risks, and such Holder has taken full cognizance of and
understands all of the risks related to the acquisition of the Common
Stock and Newco Warrants.
(v) Such Holder is an "Accredited Investor" (as defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933 (the
"Securities Act")).
(vi) The address set forth below such Holder's name on the
signature page hereto is its or his true and correct residence.
(vii) Such Holder understands, agrees and acknowledges that (1) it
has been disclosed to it or him that the Common Stock and Newco Warrants
have not been registered under the Securities Act, or applicable state
securities laws and that the economic risk of the investment must be
borne
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indefinitely by such Holder, and neither the Common Stock nor the Newco
Warrants (nor the Common Stock issuable upon exercise of the Newco
Warrants) can be sold, pledged, hypothecated or otherwise transferred
unless subsequently registered under the Securities Act and such laws,
or an exemption from such registration is available, (2) except as
provided in the Registration Rights Agreement the Company is not
obligated to file a notification under Regulation A of the Securities
Act or a registration statement under the Securities Act or any state
securities laws, (3) the benefits of Rule 144 under the Securities Act
governing the possible disposition of the Common Stock and Newco
Warrants (and the Common Stock issuable upon exercise of the Newco
Warrants) are not currently available, and the Company has not
covenanted to take any action necessary to make such Rule 144 available
for a limited resale of the Common Stock and Newco Warrants (and the
Common Stock issuable upon exercise of the Newco Warrants), and (4) it
is not anticipated that there will be any market for resale of the
Common Stock and Newco Warrants (and the Common Stock issuable upon
exercise of the Newco Warrants).
(viii) Holder understands, agrees and acknowledges that the
following restrictions and limitations are applicable to Holder's
purchase and resales, pledges, hypothecations or other transfers of the
Common Stock and Newco Warrants (and the Common Stock issuable upon
exercise of the Newco Warrants), and, therefore, that Holder must bear
the economic risk of investment in the Common Stock and Newco Warrants
(and the Common Stock issuable upon exercise of the Newco Warrants) for
an indefinite period of time as described in Section 2.1(d)(vii):
(1) A legend will be placed on the certificates representing the
Common Stock and Newco Warrants (and the Common Stock issuable upon
exercise of the Newco Warrants) in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL
THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER
(WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION
OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE,
PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE
FEDERAL OR STATE SECURITIES LAWS.
(2) Stop transfer instructions have been or will be placed with
respect to the Common Stock and Newco Warrants (and the Common Stock
issuable upon exercise of the Newco Warrants) so as to restrict the
resale, pledge, hypothecation or other transfer thereof in accordance
with the above legend.
(3) The legend and stop transfer instructions described in
Sections 2.1(d)(viii)(1) and (2) above will be placed with respect to
any new certificate issued upon presentment by Holder of a
certificate for transfer.
(4) Any applicable blue sky or state securities laws legends
shall also be placed on the certificates representing the Common
Stock.
(ix) The foregoing representations and warranties are true and
accurate as of the date hereof and shall be true and accurate as of the
Effective Time. If in any respect such representations and warranties
shall not be true and accurate prior thereto, such Holder will give
written notice of such fact to the Company specifying which
representations and warranties are not true and accurate and the reasons
therefor.
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ARTICLE 3
MISCELLANEOUS
3.1 REGISTRATION RIGHTS AGREEMENT. Concurrently with the execution of this
Agreement, the Company and each Holder shall execute and deliver a counterpart
of the Registration Rights Agreement in the form and substance of Exhibit C
hereto.
3.2 WARRANTS. Attached as Exhibit D hereto is the form of Newco Warrant to
be issued pursuant to the terms of this Agreement.
3.3 AMENDMENT. This Agreement may be amended by the parties hereto at any
time; provided, however, that this Agreement may not be amended by the parties
hereto in any way that would be adverse to the interests of Midland or its
shareholders without the consent of Midland. This Agreement may not be amended
except by a written instrument signed on behalf of each of the parties hereto.
3.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive performance
of any of the covenants or agreements, or satisfaction of any of the conditions,
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party.
3.5 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AND
AGREEMENTS. All representations, warranties, covenants, and agreements contained
in this Agreement or in any instrument delivered pursuant to this Agreement
shall be deemed to the extent expressly provided in the Merger Agreement, to be
conditions to the Midland Merger, and none of such representations, warranties,
covenants, and agreements shall survive the consummation of the Merger (except
for the agreements contained in Articles 1 and 3).
3.6 NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and either delivered personally, by facsimile
transmission, or by registered or certified mail (postage prepaid and return
receipt requested) and shall be deemed given when received (or, if mailed, five
business days after the date of mailing) at the following addresses or facsimile
transmission numbers (or at such other address or facsimile transmission number
for a party as shall be specified by like notice):
(a) If to the Company:
Vista Energy Resources, Inc.
550 West Texas Avenue, Suite 700
Midland, Texas 79701
Attention: C. Randall Hill
Facsimile No.: (915) 688-0589
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201-2975
Attention: A. Winston Oxley
Facsimile No.: (214) 220-7716
(b) If to a Holder:
At the address specified for such
Holder on the signature pages hereto.
3.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been
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signed by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
3.8 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
3.9 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(together with the documents and instruments delivered by the parties in
connection with this Agreement) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and (b) is solely
for the benefit of the parties hereto and their respective successors, legal
representatives, and assigns and does not confer on any other person any rights
or remedies hereunder; provided that Midland shall be deemed a third party
beneficiary of the provisions contained in Section 3.3.
3.10 APPLICABLE LAW. This Agreement shall be governed in all respects,
including validity, interpretation, and effect, by the laws of the State of
Texas regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
3.11 NO REMEDY IN CERTAIN CIRCUMSTANCES. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void, or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality, and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby, unless the foregoing inconsistent action or the failure to
take an action constitutes a material breach of this Agreement or makes this
Agreement impossible to perform, in which case this Agreement shall terminate.
Except as otherwise contemplated by this Agreement, to the extent that a party
hereto took an action inconsistent herewith or failed to take action consistent
herewith or required hereby pursuant to an order or judgment of a court or other
competent court, governmental, regulatory or administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign, such
party shall not incur any liability or obligation unless such party breached its
obligations under this Agreement or did not in good faith seek to resist or
object to the imposition or entering of such order or judgment.
3.12 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with the terms hereof or was otherwise
breached. Accordingly, the parties hereto hereby agree that each party hereto
shall be entitled to an injunction to prevent a breach of this Agreement and
shall be entitled to specific performance of the terms and provisions hereof in
addition to any other remedy at law or in equity.
3.13 ASSIGNMENT. Nether this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by the parties and their respective
successors and assigns.
3.14 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including any investigation by or on behalf of any
party, shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants, or agreements
contained in this Agreement. The waiver by any party hereto of a breach of any
provision hereof shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provisions hereof.
3.15 TERMINATION. Upon any termination of the Merger Agreement, this
Agreement shall terminate without any further action on the part of any party
hereto.
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IN WITNESS WHEREOF. The parties have caused this Agreement to be executed
by their duly authorized representatives, effective as of the date first written
above.
VISTA ENERGY RESOURCES INC.
By:
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Name: C. Randall Hill
Title: Chairman of the Board and
Chief Executive Officer
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[SIGNATURE PAGE TO VISTA EXCHANGE AGREEMENT]
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[SIGNATURE PAGE TO VISTA EXCHANGE AGREEMENT]
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APPENDIX C
MIDLAND EXCHANGE AGREEMENT
THIS MIDLAND EXCHANGE AGREEMENT (this "Agreement") dated as of May 22, 1998
is entered into by and among Vista Energy Resources, Inc., a Delaware
corporation (including its successors, the "Company"), and the security holders
(the "Holders") listed on the signature page hereof, who hold options as shown
on Exhibit A hereto ("Midland Exchange Stock Options") to acquire shares of
common stock, par value $.001 per share, of Midland Resources, Inc., a Texas
corporation ("Midland").
RECITALS
A. Vista Resources Partners, L.P. ("Vista"), and Midland have determined to
engage in a strategic business combination. Capitalized terms used but not
defined herein shall have the meanings given such terms in the Merger Agreement.
B. In furtherance thereof, Vista Resources I, Inc. (the "General Partner")
has approved the Agreement and Plan of Merger (the "Merger Agreement") among
Vista, Midland, the Company and Midland Merger Co., a Texas corporation and a
direct wholly-owned subsidiary of the Company ("Merger Sub").
C. In furtherance thereof, the Holders have approved the exchange (the
"Midland Exchange") of warrants ("Newco Warrants") that are exercisable for
shares of the Company's common stock, par value $.01 per share (the "Common
Stock") for all of the outstanding Midland Exchange Stock Options.
D. In furtherance thereof, the respective Boards of Directors of Merger Sub
and Midland have approved Merger Agreement and the merger of Merger Sub with and
into Midland, with Midland being the surviving corporation (the "Midland
Merger").
E. The undersigned desires, concurrently with the Effective Time, to
exchange its or his Midland Exchange Stock Options for Newco Warrants as
provided herein.
F. Whereas, Marilyn D. Wade joins as a Holder herein as a part of the
transactions contemplated by the Release and Hold Harmless Agreement of even
date herewith entered into between Marilyn D. Wade, Deas H. Warley III and
Midland Resources, Inc.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth in this Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
ARTICLE 1
THE EXCHANGES
1.1 EXCHANGE AGREEMENTS. At the Effective Time, without any action on the
part of any party hereto, each Midland Exchange Stock Option shall be exchanged
for a Newco Warrant that is exercisable for that whole number of shares of
Common Stock (to the nearest whole share) equal to the product of (x) .725 times
(y) the number of shares of Newco Common Stock into which the shares of Midland
Common Stock subject to such Midland Exchange Stock Option would be converted
pursuant to the terms of the Merger Agreement. No payment shall be made for
fractional interests.
1.2 EXCHANGE OF MIDLAND EXCHANGE STOCK OPTIONS.
(a) EXCHANGE FUND. Immediately after the Effective Time, the Company
shall deposit with the Exchange Agent, for the benefit of the Holders and
for exchange in accordance with this Agreement, certificates representing
the Newco Warrants to be issued in exchange for Midland Exchange Stock
Options pursuant to Section 1.1. Such Newco Warrants, together with any
dividends or distributions with respect thereto (as provided in subsection
(c) of this Section 1.2), are referred to herein as the
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"Exchange Fund." The Exchange Agent, pursuant to irrevocable instructions
consistent with the terms of this Agreement, shall deliver the Newco
Warrants to be issued pursuant to Section 1.1 out of the Exchange Fund, and
the Exchange Fund shall not be used for any other purpose.
(b) EXCHANGE PROCEDURES FOR MIDLAND EXCHANGE STOCK OPTIONS.
(i) As soon as reasonably practicable after the Effective Time, the
Company shall cause the Exchange Agent to mail to each Holder a letter
of transmittal to be used to effect the exchange of such Holder's
Midland Exchange Stock Options for a certificate representing a Newco
Warrant (a "Warrant Certificate"), along with instructions for using
such letter of transmittal to effect such exchange. The letter of
transmittal (or the instructions thereto) shall specify that delivery of
such Holder's Midland Exchange Stock Options shall be effected, and risk
of loss and title thereto shall pass, only upon delivery of such
Holder's Midland Exchange Stock Options to the Exchange Agent and shall
be in such form and have such other provisions as the Company may
reasonably specify.
(ii) Upon delivery to the Exchange Agent of, together with the
surrender of a Holder's Midland Exchange Stock Options, if applicable, a
duly completed and executed letter of transmittal and any other required
documents, the Holder of such Exchange Stock Options shall be entitled
to receive in exchange therefor a Warrant Certificate exercisable for a
number of shares of Common Stock that such Holder has the right to
receive pursuant to Section 1.1.
(iii) From and after the Effective Time, each Midland Exchange
Stock Option shall be deemed to represent only the right to receive a
Warrant Certificate as provided in this Agreement.
(c) NO FURTHER OWNERSHIP RIGHTS. The Newco Warrants issued in exchange
of Midland Exchange Stock Options in accordance with the terms hereof shall
be deemed to have been issued in full satisfaction of all rights of the
Holders pertaining to such Midland Exchange Stock Options. Each Midland
Exchange Stock Option shall be terminated immediately following their
exchange for a Newco Warrant.
(d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
held by the Exchange Agent in accordance with the terms of this Section
that remains unclaimed by a Holder for a period of one year following the
Effective Time shall be delivered to the Company, upon demand. Thereafter,
a Holder who has not theretofore complied with the provisions of this
Section shall look only to the Company for their claim for Newco Warrants.
(e) NO LIABILITY. None of the Company, the General Partner, the
Exchange Agent, or any other Person shall be liable to any Holder for any
amount properly delivered to any public official pursuant to any applicable
abandoned property, escheat, or similar law. Any amounts remaining
unclaimed by Holders for a period of two years following the Effective Time
(or such earlier date immediately prior to the time at which such amounts
would otherwise escheat to or become property of any governmental entity)
shall, to the extent permitted by applicable law, become the property of
the Company free and clear of any claims or interest of any such Holders or
their successors, assigns, or personal representative previously entitled
thereto.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Each of the undersigned Holders, severally and not jointly, hereby
represents and warrants to the Company as follows:
(a) AUTHORITY. Such Holder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by such Holder and the
consummation by such Holder of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of such Holder.
This Agreement has been, or upon execution and delivery will be, duly
executed and delivered and constitutes, or upon execution and
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delivery will constitute, the valid and binding obligations of such Holder
enforceable against such Holder in accordance with their terms, subject as
to enforceability to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law
or in equity).
(b) NO CONFLICT; REQUIRED CONSENTS. The execution and delivery of this
Agreement by such Holder does not and the performance by such Holder of the
transactions contemplated hereby will not, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to such Holder,
violate, conflict with, result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration
or cancellation of, any note, indenture, agreement, lease, license, permit
or other instrument or obligation to which such Holder is a party or by
which such Holder is bound, or require any consent, approval, authorization
or permit from any governmental regulatory body, except in each case where
such conflict, violation, breach or default or failure to obtain such
consents, approvals, authorizations or permits or to make such filings
would not prevent or delay the performance by such Holder of its or his
obligations under this Agreement.
(c) NO LIENS OR ENCUMBRANCES. Exhibit A hereto accurately set forth
the ownership of such Holder's Midland Exchange Stock Options. At the
Effective Time, all of the Midland Exchange Stock Options to be exchanged
by such Holder in accordance with the terms of this Agreement will be
exchanged free and clear of all liens, pledges, claims, security interests,
restrictions, options or encumbrances of any kind.
(d) INVESTMENT REPRESENTATIONS.
(i) Such Holder is acquiring the Newco Warrants (and the Common
Stock issuable thereunder) for his own account for investment, and not
with a view to distribution or resale thereof; and such Holder has no
present plans to enter into any contract (other than the Registration
Rights Agreement to be entered into between the Company and the holders
of Midland Exchange Stock Options), undertaking, agreement, or
arrangement for the distribution or resale of any of the Newco Warrants
(or the Common Stock issuable thereunder).
(ii) (1) Such Holder can bear the economic risk of losing its or
his entire investment; (2) such Holder's overall commitment to
investments which are not readily marketable is not disproportionate to
such Holder's net worth, and such Holder's investment in the Newco
Warrants (or the Common Stock issuable thereunder) will not cause such
overall commitment to become excessive; (3) such Holder has adequate
means of providing for such Holder's current needs and personal
contingencies and has no need for liquidity in such Holder's investment
in the Newco Warrants (or the Common Stock issuable thereunder); (4)
such Holder has such knowledge and experience in financial and business
matters that such Holder is capable of evaluating the risks and merits
of this investment, or has retained advisors who have such knowledge and
experience; and (5) such Holder is familiar with the business and
financial condition, properties, operations and prospects of the Company
and the terms of the Midland Merger and the Vista Exchange.
(iii) Such Holder and/or his attorney and/or his accountant have
thoroughly understand the nature of the risks involved in the proposed
investment. Such Holder and/or his attorney and/or his accountant have
had an opportunity to ask questions of and receive answers from the
Company, or a person or persons acting on its behalf, concerning the
terms and conditions of this investment and the Company and the business
and prospects of the Company, including the effects of the Midland
Merger and the Vista Exchange and answers have been provided to its or
his satisfaction to all of his questions related thereto.
(iv) Such Holder recognizes that an investment in the Company
involves certain risks, and such Holder has taken full cognizance of and
understands all of the risks related to the acquisition of the Newco
Warrants and the Common Stock issuable thereunder.
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(v) Such Holder is an "Accredited Investor" (as defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933 (the
"Securities Act")).
(vi) The address set forth below such Holder's name on the
signature page hereto is its or his true and correct residence.
(vii) Such Holder understands, agrees and acknowledges that (1) it
has been disclosed to it or him that the Common Stock underlying the
Newco Warrants have not been registered under the Securities Act, or
applicable state securities laws and that the economic risk of the
investment must be borne indefinitely by such Holder, and the Newco
Warrants (and the Common Stock issuable upon exercise of the Newco
Warrants) cannot be sold, pledged, hypothecated or otherwise transferred
unless subsequently registered under the Securities Act and such laws,
or an exemption from such registration is available, (2) except as
provided in the Registration Rights Agreement the Company is not
obligated to file a notification under Regulation A of the Securities
Act or a registration statement under the Securities Act or any state
securities laws, (3) the benefits of Rule 144 under the Securities Act
governing the possible disposition of the Newco Warrants (and the Common
Stock issuable upon exercise of the Newco Warrants) are not currently
available, and the Company has not covenanted to take any action
necessary to make such Rule 144 available for a limited resale of the
Newco Warrants (and the Common Stock issuable upon exercise of the Newco
Warrants), and (4) it is not anticipated that there will be any market
for resale of the Newco Warrants (and the Common Stock issuable upon
exercise of the Newco Warrants).
(viii) Holder understands, agrees and acknowledges that the
following restrictions and limitations are applicable to Holder's
purchase and resales, pledges, hypothecations or other transfers of the
Newco Warrants (and the Common Stock issuable upon exercise of the Newco
Warrants), and, therefore, that Holder must bear the economic risk of
investment in the Newco Warrants (and the Common Stock issuable upon
exercise of the Newco Warrants) for an indefinite period of time as
described in Section 2.1(d)(vii):
(1) A legend will be placed on the certificates representing the
Newco Warrants (and the Common Stock issuable upon exercise of the
Newco Warrants) in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL
THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER
(WHICH, IN THE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION
OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE,
PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE
FEDERAL OR STATE SECURITIES LAWS.
(2) Stop transfer instructions have been or will be placed with
respect to the Newco Warrants (and the Common Stock issuable upon
exercise of the Newco Warrants) so as to restrict the resale, pledge,
hypothecation or other transfer thereof in accordance with the above
legend.
(3) The legend and stop transfer instructions described in
Sections 2.1(d)(viii)(1) and (2) above will be placed with respect to
any new certificate issued upon presentment by Holder of a
certificate for transfer.
(4) Any applicable blue sky or state securities laws legends
shall also be placed on the certificates representing the Newco
Warrant (and the Common Stock issuable thereunder).
(ix) The foregoing representations and warranties are true and
accurate as of the date hereof and shall be true and accurate as of the
Effective Time. If in any respect such representations and
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warranties shall not be true and accurate prior thereto, such Holder
will give written notice of such fact to the Company specifying which
representations and warranties are not true and accurate and the reasons
therefor.
ARTICLE 3
MISCELLANEOUS
3.1 REGISTRATION RIGHTS AGREEMENT. Concurrently with the execution of this
Agreement, the Company and each Holder shall execute and deliver a counterpart
of the Registration Rights Agreement in the form and substance of Exhibit B
hereto.
3.2 WARRANTS. Attached as Exhibit C hereto is the form of Newco Warrant to
be issued pursuant to the terms of this Agreement.
3.3 AMENDMENT. This Agreement may be amended by the parties hereto at any
time; provided, however, that this Agreement may not be amended by the parties
hereto in any way that would be adverse to the interests of Midland or its
shareholders without the consent of Midland. This Agreement may not be amended
except by a written instrument signed on behalf of each of the parties hereto.
3.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive performance
of any of the covenants or agreements, or satisfaction of any of the conditions,
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party.
3.5 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AND
AGREEMENTS. All representations, warranties, covenants, and agreements contained
in this Agreement or in any instrument delivered pursuant to this Agreement
shall be deemed to the extent expressly provided in the Merger Agreement, to be
conditions to the Midland Merger, and none of such representations, warranties,
covenants, and agreements shall survive the consummation of the Merger (except
for the agreements contained in Articles 1 and 3).
3.6 NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and either delivered personally, by facsimile
transmission, or by registered or certified mail (postage prepaid and return
receipt requested) and shall be deemed given when received (or, if mailed, five
business days after the date of mailing) at the following addresses or facsimile
transmission numbers (or at such other address or facsimile transmission number
for a party as shall be specified by like notice):
(a) If to the Company:
Vista Energy Resources, Inc.
550 West Texas Avenue, Suite 700
Midland, Texas 79701
Attention: C. Randall Hill
Facsimile No.: (915) 688-0589
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201-2975
Attention: A. Winston Oxley
Facsimile No.: (214) 220-7716
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(b) If to a Holder:
At the address specified for such
Holder on the signature pages hereto.
3.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
3.8 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
3.9 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(together with the documents and instruments delivered by the parties in
connection with this Agreement) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and (b) is solely
for the benefit of the parties hereto and their respective successors, legal
representatives, and assigns and does not confer on any other person any rights
or remedies hereunder; provided that Midland shall be deemed a third party
beneficiary of the provisions contained in Section 3.3.
3.10 APPLICABLE LAW. This Agreement shall be governed in all respects,
including validity, interpretation, and effect, by the laws of the State of
Texas regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
3.11 NO REMEDY IN CERTAIN CIRCUMSTANCES. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void, or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality, and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby, unless the foregoing inconsistent action or the failure to
take an action constitutes a material breach of this Agreement or makes this
Agreement impossible to perform, in which case this Agreement shall terminate.
Except as otherwise contemplated by this Agreement, to the extent that a party
hereto took an action inconsistent herewith or failed to take action consistent
herewith or required hereby pursuant to an order or judgment of a court or other
competent court, governmental, regulatory or administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign, such
party shall not incur any liability or obligation unless such party breached its
obligations under this Agreement or did not in good faith seek to resist or
object to the imposition or entering of such order or judgment.
3.12 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with the terms hereof or was otherwise
breached. Accordingly, the parties hereto hereby agree that each party hereto
shall be entitled to an injunction to prevent a breach of this Agreement and
shall be entitled to specific performance of the terms and provisions hereof in
addition to any other remedy at law or in equity.
3.13 ASSIGNMENT. Nether this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by the parties and their respective
successors and assigns.
3.14 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including any investigation by or on behalf of any
party, shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants, or agreements
contained in
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this Agreement. The waiver by any party hereto of a breach of any provision
hereof shall not operate or be construed as a waiver of any prior or subsequent
breach of the same or any other provisions hereof.
3.15 TERMINATION. Upon any termination of the Merger Agreement, this
Agreement shall terminate without any further action on the part of any party
hereto.
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IN WITNESS WHEREOF. The parties have caused this Agreement to be executed
by their duly authorized representatives, effective as of the date first written
above.
VISTA ENERGY RESOURCES, INC.
By:
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Name: C. Randall Hill
Title: Chairman of the Board and
Chief Executive Officer
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[SIGNATURE PAGE TO MIDLAND EXCHANGE AGREEMENT]
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[SIGNATURE PAGE TO MIDLAND EXCHANGE AGREEMENT]
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APPENDIX D-1
[DAIN RAUSCHER WESSELS LETTERHEAD]
June 30, 1998
Board of Directors
Midland Resources, Inc.
616 F.M. 1960 West
Suite 600
Houston, TX 77090-3027
Gentlemen:
You have requested our opinion, as of the date hereof, as to the fairness,
from a financial point of view, to the common stockholders of Midland Resources,
Inc., a Texas corporation ("Midland"), of the proposed merger (the "Merger") of
Midland with Vista Resources Partners, L.P., a Texas limited partnership
("Vista"). The terms of the Merger are set forth in the Agreement and Plan of
Merger dated May 22, 1998 (the "Agreement"). Following the Merger, Midland
stockholders will control 27.5% and the owners of Vista will control 72.5% of
the common stock of the combined company.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. We have acted as financial
advisor to the Board of Directors of Midland in connection with the Merger, and
will receive a fee for our services. In the ordinary course of business, Dain
Rauscher Wessels and its affiliates at any time may hold long or short
positions, and may trade or otherwise effect transactions as principal or for
the accounts of customers, in debt or equity securities or options on securities
of Midland.
In connection with our review of the Merger, and in arriving at our opinion
described below, we have reviewed business and financial information relating to
Midland and Vista. We have, among other things: (i) reviewed the Agreement and
related documents; (ii) reviewed the Annual Reports on Form 10-KSB for the years
ended December 31, 1995, 1996 and 1997 and the Quarterly Reports on Form 10-QSB
and related unaudited financial information for certain interim periods,
including the three months ended March 31, 1998, of Midland; (iii) reviewed the
Proxy Statement filed on Schedule 14A dated May 29, 1997 of Midland; (iv)
reviewed the audited financial statements for the years ended December 31, 1995,
1996 and 1997, prepared by Arthur Andersen LLP, independent public accountants,
and the unaudited financial statements for the three months ended March 31, 1998
of Vista; (v) reviewed Midland's proved oil and gas reserves and the
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves as of January 1, 1998, estimated by Williamson Petroleum
Consultants, Inc., independent petroleum engineers; (vi) reviewed Vista's proved
oil and gas reserves and the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves as of January 1, 1998, estimated
by Williamson Petroleum Consultants, Inc., independent petroleum engineers;
(vii) met with certain members of Midland's and Vista's senior management to
discuss their respective operations, historical financial statements and future
prospects and their views of the business, operational and strategic benefits,
potential synergies and other implications of the Merger; (viii) reviewed
certain operating and financial information of Midland and Vista, including
projections and projected cost savings and operating synergies, provided to us
by Midland's and Vista's management relating to their respective businesses and
prospects; (ix) reviewed the projected consolidated pro forma financial
statements for the combined companies for the years ending December 31, 1998 and
1999 as prepared by Midland's and Vista's management; (x) reviewed historical
market prices and trading volumes for Midland Common Stock; (xi) reviewed
publicly available financial data and stock market performance data of publicly
held companies that we deemed generally comparable to Midland and Vista; and
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(xii) reviewed the financial terms of certain business combinations of
comparable exploration and production companies. In addition, we have considered
such other information and have conducted such other analyses and investigations
as we deemed appropriate under the circumstances.
In connection with our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information publicly available or
furnished to us by Midland and Vista or their representatives. We have not
independently verified the accuracy or completeness of such information and we
have further relied upon assurances of the management of Midland and Vista that
they are unaware of any facts that would make the information provided to us
incomplete or misleading. We have not made or obtained any independent
evaluations or appraisals of any of the properties, assets or facilities of
Midland or Vista. With respect to the financial projections of Midland and
Vista, we have assumed that they have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of management as
to the future financial performance of Midland and Vista, and we express no
opinion with respect to such forecasts or the assumptions on which they are
based.
Our opinion is based solely upon the information set forth herein as
reviewed by us and circumstances, including economic, market and financial
conditions, existing as of the date hereof. Events occurring after the date
hereof could materially affect the assumptions used both in preparing this
opinion and in the documents reviewed by us. We have not undertaken to reaffirm
or revise this opinion or otherwise comment upon any events occurring after the
date hereof.
It is understood that this letter is for the information of the Board of
Directors of Midland only and, without our prior written consent, other than as
required by law or judicial process, is not to be quoted or referred to, in
whole or in part, in any registration statement, prospectus or proxy statement,
or in any other written document used in connection with the offering or sale of
securities, nor shall this letter be used for any other purposes.
Subject to the foregoing and based upon our experience as investment
bankers, the matters described above and other factors we deemed relevant, we
are of the opinion that as of the date hereof, the Merger is fair from a
financial point of view to the holders of the currently outstanding Midland
Common Stock.
Very truly yours,
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
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APPENDIX D-2
[DAIN RAUSCHER WESSELS LETTERHEAD]
June 30, 1998
Board of Directors
Midland Resources, Inc.
616 F.M. 1960 West
Suite 600
Houston, TX 77090-3027
Gentlemen:
We understand that Midland Resources, Inc., a Texas corporation
("Midland"), intends to restructure the options issued under the Midland
Resources, Inc. 1997 Board of Directors Stock Incentive Plan (the "Director
Options") in connection with its proposed merger (the "Merger") with Vista
Resources Partners, L.P., a Texas limited partnership ("Vista"). The Director
Options are being restructured (the "Restructuring") into a restricted version
of the current issue of Class B Warrants of Midland (the "Director Warrants").
You have requested that we render our opinion as to whether the Restructuring is
fair from a financial point of view to the holders of the currently outstanding
Midland Common Stock.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities private placements and
valuations for corporate and other purposes. We have acted as financial advisor
to the Board of Directors of Midland in connection with the Merger, and will
receive a fee for our services. In the ordinary course of business, Dain
Rauscher Wessels and its affiliates at any time may hold long or short
positions, and may trade or otherwise effect transactions as principal or for
the accounts of customers, in debt or equity securities or options on securities
of Midland.
In connection with our review of the Restructuring, and in arriving at our
opinion described below, we have reviewed business and financial information
relating to Midland. We have, among other things: (i) reviewed the Stock Option
Agreement; (ii) reviewed the 1997 Board of Directors Stock Incentive Plan; (iii)
reviewed the Warrant Agreement; (iv) reviewed the Registration Rights Agreement
for Midland Holders; and (v) reviewed publicly available financial data and
stock market performance data of Midland Common Stock as well as the publicly
traded Class B Warrants. In addition, we have considered such other information
and have conducted such other analyses and investigations as we deemed
appropriate under the circumstances.
In connection with our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information publicly available or
furnished to us by Midland or their representatives. We have not independently
verified the accuracy or completeness of such information and we have further
relied upon assurances of the management of Midland that they are unaware of any
facts that would make the information provided to us incomplete or misleading.
Our opinion is based solely upon the information set forth herein as
reviewed by us and circumstances, including economic, market and financial
conditions, existing as of the date hereof. Events occurring after the date
hereof could materially affect the assumptions used both in preparing this
opinion and in the documents reviewed by us. We have not undertaken to reaffirm
or revise this opinion or otherwise comment upon any events occurring after the
date hereof.
It is understood that this letter is for the information of the Board of
Directors of Midland only and, without our prior written consent, other than as
required by law or judicial process, is not to be quoted or
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referred to, in whole or in part, in any registration statement, prospectus or
proxy statement, or in any other written document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes.
Based on the current price levels of Midland Common Stock, application of
the Black-Scholes option pricing model, the restrictions on the new Director
Warrants and an overall business judgment, an exchange ratio of 0.725 new
Director Warrants for one Director Option is fair as of the date hereof from a
financial point of view to the holders of the currently outstanding Midland
Common Stock.
Very truly yours,
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
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APPENDIX E
VISTA ENERGY RESOURCES, INC.
1998 KEY EMPLOYEE STOCK OPTION PLAN
1. PURPOSE.
Vista Energy Resources, Inc., a Delaware corporation (herein, together
with its successors, referred to as the "Company"), by means of this 1998
Stock Option Plan (the "Plan"), desires to afford certain individuals and
key employees of the Company and any parent corporation or subsidiary
corporation thereof now existing or hereafter formed or acquired (such
parent and subsidiary corporations sometimes referred to herein as "Related
Entities") who are responsible for the continued growth of the Company an
opportunity to acquire a proprietary interest in the Company, and thus to
create in such persons an increased interest in and a greater concern for
the welfare of the Company and any Related Entities. As used in the Plan,
the terms "parent corporation" and "subsidiary corporation" shall mean,
respectively, a corporation within the definition of such terms contained
in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code
of 1986, as amended (the "Code").
The stock options described in Sections 6 and 7 (the "Options"), and
the shares of Common Stock (as hereinafter defined) acquired pursuant to
the exercise of such Options are a matter of separate inducement and are
not in lieu of any salary or other compensation for services.
2. ADMINISTRATION.
(a) COMMITTEE. The Board of Directors of the Company (the "Board of
Directors" shall administer the Plan with respect to all Key Employees (as
hereinafter defined) or Eligible Non-Employees (as hereinafter defined) or
may delegate all or part of its duties under this Plan to any committee
appointed by the Board of Directors (the "Committee") or to any officer or
committee of officers of the Company, subject in each case to such
conditions and limitations as the Board of Directors may establish and
subject to the following sentence. Unless a majority of the members of the
Board of Directors determines otherwise: (a) the Committee shall be
constituted in a manner that satisfies the requirements of Rule 16b-3,
which Committee shall administer the Plan with respect to all Key Employees
or Eligible Non-Employees who are subject to Section 16 of the Exchange Act
in a manner that satisfies the requirements of Rule 16b-3; and (b) the
Committee shall be constituted in a manner that satisfies the requirements
of Section 162(m), which Committee shall administer the Plan with respect
to "performance-based compensation" for all Key Employees or Eligible
Non-Employees who are reasonably expected to be "covered employees" as
those terms are defined in Section 162(m). The number of persons that shall
constitute the Committee shall be determined from time to time by a
majority of all the members of the Board of Directors. Except for
references in Sections 2(a), 2(b), and 2(c) and unless the context
otherwise requires, references herein to the Committee shall also refer to
the Board of Directors as administrator of the Plan for Key Employees or
Eligible Non-Employees or to the appropriate delegate of the Committee or
the Board of Directors.
(b) DURATION, REMOVAL, ETC. The members of the Committee shall serve
at the pleasure of the Board of Directors, which shall have the power, at
any time and from time to time, to remove members from or add members to
the Committee. Removal from the Committee may be with or without cause. Any
individual serving as a member of the Committee shall have the right to
resign from membership in the Committee by written notice to the Board of
Directors. The Board of Directors, and not the remaining members of the
Committee, shall have the power and authority to fill vacancies on the
Committee, however caused.
(c) MEETINGS AND ACTIONS OF COMMITTEE. The Board of Directors shall
designate which of the Committee members shall be the chairman of the
Committee. If the Board of Directors fails to designate a Committee
chairman, the members of the Committee shall elect one of the Committee
members as chairman, who shall act as chairman until he ceases to be a
member of the Committee or until the Board
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of Directors elects a new chairman. The Committee shall hold its meetings
at those times and places as the chairman of the Committee may determine.
At all meetings of the Committee, a quorum for the transaction of business
shall be required, and a quorum shall be deemed present if at least a
majority of the members of the Committee are present. At any meeting of the
Committee, each member shall have one vote. All decisions and
determinations of the Committee shall be made by the majority vote or
majority decision of all of its members present at a meeting at which a
quorum is present; provided, however, that any decision or determination
reduced to writing and signed by all of the members of the Committee shall
be as fully effective as if it had been made at a meeting that was duly
called and held. The Committee may make any rules and regulations as it may
deem advisable for the conduct of its business that are not inconsistent
with the provisions of the Plan, the certificate of incorporation of the
Company, the by-laws of the Company, Rule 16b-3 so long as it is
applicable, and Section 162(m) so long as it is applicable.
3. SHARES AVAILABLE.
Subject to the adjustments provided in Section 10, the maximum
aggregate number of shares of Common Stock, $.01 par value, of the Company
("Common Stock") in respect of which Options may be granted for all
purposes under the Plan shall be 900,000 shares. If, for any reason, any
shares as to which Options have been granted cease to be subject to
purchase thereunder, including the expiration of such Option, the
termination of such Option prior to exercise, or the forfeiture of such
Option, such shares shall thereafter be available for grants under the
Plan. Options granted under the Plan may be fulfilled in accordance with
the terms of the Plan with (i) authorized and unissued shares of the Common
Stock, (ii) issued shares of such Common Stock held in the Company's
treasury, or (iii) issued shares of Common Stock reacquired by the Company
in each situation as the Board of Directors or the Committee may determine
from time to time.
4. ELIGIBILITY AND BASES OF PARTICIPATION.
Grants of Incentive Options (as hereinafter defined) and Non-Qualified
Options (as hereinafter defined) may be made under the Plan, subject to and
in accordance with Section 6, to Key Employees. As used herein, the term
"Key Employee" shall mean any employee of the Company or any Related
Entity, including officers and directors of the Company or any Related
Entity who are also employees of the Company or any Related Entity, who is
regularly employed on a salaried basis and who is so employed on the date
of such grant, whom the Committee identifies as having a direct and
significant effect on the performance of the Company or any Related Entity.
Grants of Non-Qualified Options may be made, subject to and in
accordance with Section 7, to any Eligible Non-Employee. As used herein,
the term "Eligible Non-Employee" shall mean any person or entity of any
nature whatsoever, specifically including an individual, a firm, a company,
a corporation, a partnership, a trust, or other entity (collectively, a
"Person"), that the Committee designates as eligible for a grant of Options
pursuant to this Plan because such Person performs bona fide consulting,
advisory, or other services for the Company or any Related Entity (other
than services in connection with the offer or sale of securities in a
capital-raising transaction) and the Board of Directors or the Committee
determines that the Person has a direct and significant effect on the
financial development of the Company or any Related Entity.
The adoption of this Plan shall not be deemed to give any Person a
right to be granted any Options.
Notwithstanding any other provision of this Plan to the contrary, with
respect to the grant of any Options to any Key Employee or Eligible
Non-Employee, the Committee shall first determine the number of shares in
respect of which Options are to be granted to such Key Employee or Eligible
Non-Employee and shall then cause to be granted to such Key Employee or
Eligible Non-Employee an Option exercisable for such shares. The exercise
price per share of Common Stock under each Option shall be fixed by the
Committee at the time of grant of the Option and shall equal at least 100%
of the Fair Market Value of a share of Common Stock on the date of grant.
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5. AUTHORITY OF COMMITTEE.
Subject to the express provisions of the Plan and any applicable law
with which the Company intends the Plan to comply, the Committee shall have
the authority, in its sole and absolute discretion, (a) to adopt, amend,
and rescind administrative and interpretive rules and regulations relating
to the Plan, including without limitation to adopt and observe such
procedures concerning the counting of Options against the Plan and
individual maximums as it may deem appropriate from time to time; (b) to
determine the Key Employees or Eligible Non-Employees to whom, and the time
or times at which, Options shall be granted; (c) to determine the amount of
cash and the number of shares of Common Stock, that shall be the subject of
each Option; (d) to determine the terms and provisions of each award
evidencing Options granted hereunder (which need not be identical),
including provisions defining or otherwise relating to (i) the term and the
period or periods and extent of exercisability of the Options, (ii) the
extent to which the transferability of shares of Common Stock issued or
transferred pursuant to any Option is restricted, (iii) the effect of
termination of employment on the Option, and (iv) the effect of approved
leaves of absence (consistent with any applicable regulations of the
Internal Revenue Service); (e) to accelerate, pursuant to Section 8, the
time of exercisability of any Option that has been granted; (f) to construe
the respective awards evidencing Options granted hereunder and the Plan;
(g) to make determinations of the Fair Market Value of the Common Stock
pursuant to the Plan; (h) to delegate its duties under the Plan to such
agents as it may appoint from time to time, subject to the second sentence
of Section 2(a); and (i) to make all other determinations, perform all
other acts, and exercise all other powers and authority necessary or
advisable for administering the Plan, including the delegation of those
ministerial acts and responsibilities as the Committee deems appropriate.
The Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan, in any Option, or in any awards evidencing
Options granted hereunder in the manner and to the extent it deems
necessary or desirable to carry the Plan into effect, and the Committee
shall be the sole and final judge of that necessity or desirability. The
determinations of the Committee on the matters referred to in this Section
5 shall be final and conclusive. The Committee shall not have the power to
appoint members of the Committee or to terminate, modify, or amend the
Plan. Those powers are vested in the Board of Directors.
From time to time, the Board of Directors and appropriate officers of
the Company shall be and are authorized to take whatever actions are
necessary to file required documents with governmental authorities, stock
exchanges, and other appropriate Persons to make shares of Common Stock
available for issuance pursuant to awards evidencing Options granted
hereunder.
6. INCENTIVE OPTIONS.
Subject to the express provisions of this Plan, the Committee shall
have the authority to grant incentive stock options pursuant to Section 422
of the Code ("Incentive Options"), to grant non-qualified stock options
(options which do not qualify under Section 422 of the Code)
("Non-Qualified Options"), and to grant both types of Options to Key
Employees. No Incentive Option shall be granted pursuant to this Plan after
the earlier of ten years from the date of adoption of the Plan or ten years
from the date of approval of the Plan by the stockholders of the Company.
Notwithstanding anything in this Plan to the contrary, Incentive Options
may be granted only to Key Employees. The terms and conditions of Incentive
Options granted under this Section 6 shall be determined from time to time
by the Committee; provided, however, that Incentive Options granted under
this Section 6 shall be subject to all terms and provisions of the Plan
(other than Section 7), including the following:
(a) OPTION EXERCISE PRICE. Subject to Section 4, the Committee
shall establish Incentive Option exercise price at the time any
Incentive Option is granted at such amount as the Committee shall
determine; provided, that such price shall not be less than the Fair
Market Value per share of Common Stock at the date Incentive Option is
granted; and provided, further, that in the case of an Incentive Option
granted to a person who, at the time such Incentive Option is granted,
owns shares of the Company or any Related Entity which possess more than
10% of the total combined voting power of all classes of shares of the
Company or of any Related Entity, the option exercise price shall
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not be less than 110% of the Fair Market Value per share of Common Stock
at the Incentive Option is granted. The Incentive Option exercise price
shall be subject to adjustment in accordance with the provisions of
Section 9 of the Plan.
(b) PAYMENT. The price per share of Common Stock with respect to
Incentive Option exercise shall be payable at the time of such exercise.
Such price shall be payable in cash or by any other means acceptable to
the Committee, including delivery to the Company of shares of Common
Stock owned by the optionee or by the delivery or withholding of shares
pursuant to a procedure created pursuant to Section 5.d. of the Plan.
Shares delivered to or withheld by the Company in payment of Incentive
Option exercise price shall be valued at the Fair Market Value of the
Common Stock on the day preceding the date of the exercise of Incentive
Option.
(c) CONTINUATION OF EMPLOYMENT. Each Incentive Option shall require
the optionee to remain in the continuous employ of the Company or any
Related Entity from the date of grant of the Incentive Option until no
more than three months prior to the date of exercise of the Incentive
Option.
(d) EXERCISABILITY OF STOCK OPTION. Subject to Section 8, each
Incentive Option shall be exercisable in one or more installments as the
Committee may determine at the time of the grant. No Incentive Option by
its terms shall be exercisable after the expiration of ten years from
the date of grant of the Incentive Option; provided, however, that no
Incentive Option granted to a person who, at the time such Incentive
Option is granted, owns stock of the Company, or any Related Entity,
possessing more than 10% of the total combined voting power of all
classes of stock of the Company, or any Related Entity, shall be
exercisable after the expiration of five years from the date such
Incentive Option is granted.
(e) DEATH. If any optionee's employment with the Company or a
Related Entity terminates due to the death of such optionee, the estate
of such optionee, or a Person who acquired the right to exercise such
Incentive Option by bequest or inheritance or by reason of the death of
the optionee, shall have the right to exercise such Incentive Option in
accordance with its terms at any time and from time to time within 180
days after the date of death unless a longer or shorter period is
expressly provided in such Incentive Option or established by the
Committee pursuant to Section 8 (but in no event after the expiration
date of such Incentive Option).
(f) DISABILITY. If the employment of any optionee terminates
because of his Disability (as defined in Section 18), such optionee or
his legal representative shall have the right to exercise the Incentive
Option in accordance with its terms at any time and from time to time
within 180 days after the date of such termination unless a longer or
shorter period is expressly provided in such Incentive Option or
established by the Committee pursuant to Section 8 (but not after the
expiration date of the Incentive Option); provided, however, that in the
case of an Incentive Option, the optionee or his legal representative
shall in any event be required to exercise the Incentive Option within
one year after termination of the optionee's employment due to his
Disability.
(g) TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. Unless an
optionee's Incentive Option expressly provides otherwise, such optionee
shall immediately forfeit all rights under his Incentive Option, except
as to the shares of stock already purchased thereunder, if the
employment of such optionee with the Company or a Related Entity is
terminated by the Company or any Related Entity for Good Cause (as
defined below) or if such optionee voluntarily terminates employment
without the consent of the Company or any Related Entity. The
determination that there exists Good Cause for termination shall be made
by the Committee (unless otherwise agreed to in writing by the Company
and the optionee).
(h) OTHER TERMINATION OF EMPLOYMENT. If the employment of an
optionee with the Company or a Related Entity terminates for any reason
other than those specified in subsections 6(e), (f) or (g) above, such
optionee shall have the right to exercise his Incentive Option in
accordance with its terms, within 30 days after the date of such
termination, unless a longer or shorter period is expressly
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provided in such Incentive Option or established by the Committee
pursuant to Section 8 (but not after the expiration date of the
Incentive Option); provided, that no Incentive Option shall be
exercisable more than three months after such termination.
(i) MAXIMUM EXERCISE. The aggregate Fair Market Value of stock
(determined at the time of the grant of the Incentive Option) with
respect to which Incentive Options are exercisable for the first time by
an optionee during any calendar year under all plans of the Company and
any Related Entity shall not exceed $100,000.
7. NON-QUALIFIED OPTIONS.
(a) Subject to the express provisions of this Plan, the Committee
shall have the authority to grant Non-Qualified Options to Key Employees
and Eligible Non-Employees. The terms and conditions of the Non-Qualified
Options granted under this Section 7 shall be determined from time to time
by the Committee; provided, however, that the Non-Qualified Options granted
under this Section 7 shall be subject to all terms and provisions of the
Plan (other than Section 6), including the following:
(i) OPTION EXERCISE PRICE. Subject to Section 4, the Committee
shall establish the Non-Qualified Option exercise price at the time any
Non-Qualified Option is granted at such amount as the Committee shall
determine. The Non-Qualified Option exercise price shall be subject to
adjustment in accordance with the provisions of Section 9 of the Plan.
(ii) PAYMENT. The price per share of Common Stock with respect to
each Non-Qualified Option exercise shall be payable at the time of such
exercise. Such price shall be payable in cash or by any other means
acceptable to the Committee, including delivery to the Company of shares
of Common Stock owned by the optionee or by the delivery or withholding
of shares pursuant to a procedure created pursuant to Section 5.d. of
the Plan. Shares delivered to or withheld by the Company in payment of
the Non-Qualified Option exercise price shall be valued at the Fair
Market Value of the Common Stock on the day preceding the date of the
exercise of the Non-Qualified Option.
(iii) EXERCISABILITY OF STOCK OPTION. Subject to Section 8, each
Non-Qualified Option shall be exercisable in one or more installments as
the Committee may determine at the time of the grant. No Non-Qualified
Option shall be exercisable after the expiration of five years from the
date of grant of the Non-Qualified Option, unless otherwise expressly
provided in such Non-Qualified Option.
(iv) DEATH. If the retention by the Company or any Related Entity
of the services of any Eligible Non-Employee terminates because of his
death, the estate of such optionee, or a Person who acquired the right
to exercise such Non-Qualified Option by bequest or inheritance or by
reason of the death of the optionee, shall have the right to exercise
such Non-Qualified Option in accordance with its terms, at any time and
from time to time within 180 days after the date of death unless a
longer or shorter period is expressly provided in such Non-Qualified
Option or established by the Committee pursuant to Section 8 (but in no
event after the expiration date of such Non-Qualified Option).
(v) DISABILITY. If the retention by the Company or any Related
Entity of the services of any Eligible Non-Employee terminates because
of his Disability, such optionee or his legal representative shall have
the right to exercise the Non-Qualified Option in accordance with its
terms at any time and from time to time within 180 days after the date
of the optionee's termination unless a longer or shorter period is
expressly provided in such Non-Qualified Option or established by the
Committee pursuant to Section 8 (but not after the expiration of the
Non-Qualified Option).
(vi) TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. If the retention
by the Company or any Related Entity of the services of any Eligible
Non-Employee is terminated (i) for Good Cause, (ii) as a result of
removal of the optionee from office as a director of the Company or of
any Related Entity for cause by action of the stockholders of the
Company or such Related Entity in accordance with the by-laws of the
Company or such Related Entity, as applicable, and the corporate law of
the
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Jurisdiction of incorporation of the Company or such Related Entity, or
(iii) as a result of the voluntarily termination by optionee of
optionee's service without the consent of the Company or any Related
Entity, then such optionee shall immediately forfeit his rights under
his Non-Qualified Option except as to the shares of stock already
purchased. The determination that there exists Good Cause for
termination shall be made by the Option Committee (unless otherwise
agreed to in writing by the Company and the optionee).
(vii) OTHER TERMINATION OF RELATIONSHIP. If the retention by the
Company or any Related Entity of the services of any Eligible
Non-Employee terminates for any reason other than those specified in
subsections 7(d), (e) or (f) above, such optionee shall have the right
to exercise his or its Non-Qualified Option in accordance with its terms
within 30 days after the date of such termination, unless a longer or
shorter period is expressly provided in such Non-Qualified Option or
established by the Committee pursuant to Section 8 (but not after the
expiration date of the Non-Qualified Option).
(viii) INELIGIBILITY FOR OTHER GRANTS. Any Eligible Non-Employee
who receives a Non-Qualified Option pursuant to this Section 7 shall be
ineligible to receive any Options under any other Section of the Plan.
8. CHANGE OF CONTROL.
If (i) a Change of Control shall occur or (ii) the Company shall enter
into an agreement providing for a Change of Control, then the Committee may
declare any or all Options outstanding under the Plan to be exercisable in
full at such time or times as the Committee shall determine,
notwithstanding the express provisions of such Options. Each Option
accelerated by the Committee pursuant to the preceding sentence shall
terminate, notwithstanding any express provision thereof or any other
provision of the Plan, on such date (not later than the stated exercise
date) as the Committee shall determine.
9. ADJUSTMENT OF SHARES.
Unless otherwise expressly provided in a particular Option, in the
event that, by reason of any merger, consolidation, combination,
liquidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares or
other like change in capital structure of the Company (collectively, a
"Reorganization"), the Common Stock is substituted, combined, or changed
into any cash, property, or other securities, or the shares of Common Stock
are changed into a greater or lesser number of shares of Common Stock, the
number and/or kind of shares and/or interests subject to an Option and the
per share price or value thereof shall be appropriately adjusted by the
Committee to give appropriate effect to such Reorganization. Any fractional
shares or interests resulting from such adjustment shall be eliminated.
Notwithstanding the foregoing, (i) each such adjustment with respect to an
Incentive Option shall comply with the rules of Section 424(a) of the Code,
and (ii) in no event shall any adjustment be made which would render any
Incentive Option granted hereunder other than an "incentive stock option"
for purposes of Section 422 of the Code. The maximum aggregate number of
shares of Common Stock in respect of which Options may be granted under
this Plan as provided for in Section 3 shall be subject to adjustment as
contemplated above.
In the event the Company is not the surviving entity of a
Reorganization (not involving a Change of Control) and, following such
Reorganization, any optionee will hold Options issued pursuant to this Plan
which have not been exercised, canceled, or terminated in connection
therewith, the Company shall cause such Options to be assumed (or canceled
and replacement Options issued) by the surviving entity or a Related
Entity. A Reorganization involving a Change of Control in which the Company
is not the surviving entity shall be governed by Section 8.
10. ASSIGNMENT OR TRANSFER.
(a) Except as otherwise expressly provided in any Non-Qualified
Option, no Option granted under the Plan or any rights or interests therein
shall be assignable or transferable by an optionee except by will or the
laws of descent and distribution, and during the lifetime of an optionee,
Options granted to him or
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her hereunder shall be exercisable only by the optionee or, in the event
that a legal representative has been appointed in connection with the
Disability of an optionee, such legal representative.
(b) Notwithstanding any limitation on a Key Employee's or Eligible
Non-Employee's right to transfer an Option, the Committee may (in its sole
discretion) permit a Key Employee or Eligible Non-Employee to transfer an
Option, or may cause the Company to grant an Option that otherwise would be
granted to a Key Employee or Eligible Non-Employee, in any of the following
circumstances: (a) pursuant to a qualified domestic relations order, (b) to
a trust established for the benefit of the Key Employee or Eligible
Non-Employee or one or more of the children, grandchildren, or spouse of
the Key Employee or Eligible Non-Employee, as applicable; (c) to a limited
partnership in which all the interests are held by the Key Employee or
Eligible Non-Employee and that Person's children, grandchildren or spouse;
or (d) to another Person in circumstances that the Committee believes will
result in the Option continuing to provide an incentive for the Key
Employee or Eligible Non-Employee to remain in the service of the Company
or its Subsidiaries and apply his or her best efforts for the benefit of
the Company or its Subsidiaries. If the Committee determines to allow such
transfers or issuances of Option, any Key Employee or Eligible Non-Employee
desiring such transfers or issuances shall make application therefor in the
manner and time that the Committee specifies and shall comply with such
other requirements as the Committee may require to assure compliance with
all applicable laws, including securities laws, and to assure fulfillment
of the purposes of this Plan. The Committee shall not authorize any such
transfer or issuance if it may not be made in compliance with all
applicable federal, state and foreign securities laws. The granting of
permission for such an issuance or transfer shall not obligate the Company
to register the shares of Common Stock to be issued under the applicable
Option.
11. COMPLIANCE WITH SECURITIES LAWS.
The Company shall not in any event be obligated hereunder to file any
registration statement under the Securities Act or any applicable state
securities law to permit exercise of any option or to issue any Common
Stock in violation of the Securities Act or any applicable state securities
law. Each optionee (or, in the event of his death or, in the event a legal
representative has been appointed in connection with his Disability, the
Person exercising the Option) shall, as a condition to his right to
exercise any Option, deliver to the Company an agreement or certificate
containing such representations, warranties and covenants as the Company
may deem necessary or appropriate to ensure that the issuance of shares of
Common Stock pursuant to such exercise is not required hereunder to be
registered under the Securities Act or any applicable state securities law.
Certificates for shares of Common Stock, when issued, may have
substantially the following legend, or statements of other applicable
restrictions, endorsed thereon, and may not be immediately transferable:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES
LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, TRANSFERRED
OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE
SATISFACTORY TO THE ISSUER (WHICH, IN THE DISCRETION OF THE ISSUER, MAY
INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH
OFFER, SALE, PLEDGE, TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE
APPLICABLE FEDERAL OR STATE LAWS.
This legend shall not be required for shares of Common Stock issued
pursuant to an effective registration statement under the Securities Act
and in accordance with applicable state securities laws.
12. WITHHOLDING TAXES.
By acceptance of the Option, the optionee will be deemed to (i) agree
to reimburse the Company or Related Entity by which the optionee is
employed for any federal, state, or local taxes required by any government
to be withheld or otherwise deducted by such corporation in respect of the
optionee's exercise of all or a portion of the Option; (ii) authorize the
Company or any Related Entity by which the optionee
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is employed to withhold from any cash compensation paid to the optionee or
in the optionee's behalf, an amount sufficient to discharge any federal,
state, and local taxes imposed on the Company, or the Related Entity by
which the optionee is employed, and which otherwise has not been reimbursed
by the optionee, in respect of the optionee's exercise of all or a portion
of the Option; and (iii) agree that the Company may, in its discretion,
hold the stock certificate to which the optionee is entitled upon exercise
of the Option as security for the payment of the aforementioned withholding
tax liability, until cash sufficient to pay that liability has been
accumulated, and may, in its discretion, effect such withholding by
retaining shares issuable upon the exercise of the Option having a Fair
Market Value on the date of exercise which is equal to the amount to be
withheld.
13. COSTS AND EXPENSES.
The costs and expenses of administering the Plan shall be borne by the
Company and shall not be charged against any Option nor to any employee
receiving an Option.
14. FUNDING OF PLAN.
The Plan shall be unfunded. The Company shall not be required to make
any segregation of assets to assure the payment of any Option under the
Plan.
15. OTHER INCENTIVE PLANS.
The adoption of the Plan does not preclude the adoption by appropriate
means of any other incentive plan for employees.
16. EFFECT ON EMPLOYMENT.
Nothing contained in the Plan or any agreement related hereto or
referred to herein shall affect, or be construed as affecting, the terms of
employment of any Key Employee except to the extent specifically provided
herein or therein. Nothing contained in the Plan or any agreement related
hereto or referred to herein shall impose, or be construed as imposing, an
obligation on (i) the Company or any Related Entity to continue the
employment of any Key Employee, and (ii) any Key Employee to remain in the
employ of the Company or any Related Entity.
17. DEFINITIONS.
In addition to the terms specifically defined elsewhere in the Plan,
as used in the Plan, the following terms shall have the respective meanings
indicated:
(a) "Affiliate" shall mean, as to any Person, a Person that
directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, such Person.
(b) "Board of Directors" shall have the meaning set forth in
Section 2 hereof.
(c) "Change of Control" shall mean the first to occur of the
following events: (i) any sale, lease, exchange, or other transfer (in
one transaction or series of related transactions) of all or
substantially all of the assets of the Company to any Person or group of
related Persons for purposes of Section 13(d) of the Exchange Act, (ii)
a majority of the Board of Directors of the Company shall consist of
Persons who are not Continuing Directors; or (iii) the acquisition by
any Person or Group (other than Natural Gas Partners II, L.P., Natural
Gas Partners III, L.P. or any Affiliate thereof) of the power, directly
or indirectly, to vote or direct the voting of securities having more
than 50% of the ordinary voting power for the election of directors of
the Company.
(d) "Code" shall have the meaning set forth in Section 1 hereof.
(e) "Committee" shall have the meaning set forth in Section 2
hereof.
(f) "Common Stock" shall have the meaning set forth in Section 3
hereof.
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(g) "Company" shall have the meaning set forth in Section 1 hereof.
(h) "Continuing Director" shall mean, as of the date of
determination, any Person who (i) was a member of the Board of Directors
of the Company immediately after the Effective Time or (ii) was
nominated for election or elected to the Board of Directors of the
Company with the affirmative vote of a majority of the Continuing
Directors who were members of such Board of Directors at the time of
such nomination or election.
(i) "Disability" shall mean permanent disability as defined under
the appropriate provisions of the long-term disability plan maintained
for the benefit of employees of the Company or any Related Entity who
are regularly employed on a salaried basis unless another meaning shall
be agreed to in writing by the Committee and the optionee; provided,
however, that in the case of an Incentive Option "disability" shall have
the meaning specified in Section 22(e)(3) of the Code.
(j) "Effective Time" shall mean the time that the proposed merger
of Midland Merger Co. and Midland Resources, Inc. is effective as such
merger is contemplated by that certain Agreement and Plan of Merger,
dated as of May 22, 1998, among Vista Resources Partners, L.P., Midland
Resources, Inc., Vista Energy Resources, Inc. and Midland Merger Co.
(k) "Eligible Non-Employee" shall have the meaning set forth in
Section 4 hereof.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(m) "Fair Market Value" shall, as it relates to the Common Stock,
mean the average of the high and low prices of such Common Stock as
reported on the principal national securities exchange on which the
shares of Common Stock are then listed on the date specified herein, or
if there were no sales on such date, on the next preceding day on which
there were sales, or if such Common Stock is not listed on a national
securities exchange, the last reported bid price in the over-the-
counter market, or if such shares are not traded in the over-the-counter
market, the per share cash price for which all of the outstanding Common
Stock could be sold to a willing purchaser in an arms length transaction
(without regard to minority discount, absence of liquidity, or transfer
restrictions imposed by any applicable law or agreement) at the date of
the event giving rise to a need for a determination. Except as may be
otherwise expressly provided in a particular Option, Fair Market Value
shall be determined in good faith by the Committee.
(n) "Good Cause", with respect to any Key Employee, shall mean
(unless another definition is agreed to in writing by the Company and
the optionee) termination by action of the Board of Directors because
of: (A) the optionee's conviction of, or plea of nolo contendere to, a
felony or a crime involving moral turpitude; (B) the optionee's personal
dishonesty, incompetence, willful misconduct, willful violation of any
law, rule, or regulation (other than minor traffic violations or similar
offenses) or breach of fiduciary duty which involves personal profit;
(C) the optionee's commission of material mismanagement in the conduct
of his duties as assigned to him by the Board of Directors or the
optionee's supervising officer or officers of the Company or any Related
Entity; (D) the optionee's willful failure to execute or comply with the
policies of the Company or any Related Entity or his stated duties as
established by the Board of Directors or the optionee's supervising
officer or officers of the Company or any Related Entity, or the
optionee's intentional failure to perform the optionee's stated duties;
(E) substance abuse or addiction on the part of the optionee. "Good
Cause", with respect to any Eligible Non-Employee, shall mean (unless
another definition is agreed to in writing by the Company and the
optionee) termination by action of the Board of Directors because of:
(A) the optionee's conviction of, or plea of nolo contendere to, a
felony or a crime involving moral turpitude; (B) the optionee's personal
dishonesty, incompetence, willful misconduct, willful violation of any
law, rule, or regulation (other than minor traffic violations or similar
offenses) or breach of fiduciary duty which involves personal profit;
(C) the optionee's commission of material mismanagement in providing
services to the Company or any Related Entity; (D) the optionee's
willful failure to comply with the policies of the Company in providing
services to the Company or any Related Entity, or the optionee's
intentional failure to perform the
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services for which the optionee has been engaged; (E) the optionee's use
of an unlawful substance on the Company's premises or while performing
the optionee's duties or responsibilities; or (F) the optionee's
willfully making any material misrepresentation or willfully omitting to
disclose any material fact to the board of directors of the Company or
any Related Entity with respect to the business of the Company or any
Related Entity. Notwithstanding the foregoing, in the case of any
optionee who has an employment agreement with the Company or any Related
Entity that contains a definition of "Good Cause" (or any similar
definition), then during the term of such employment agreement the
definition contained in such employment agreement shall be the
applicable definition of "Good Cause" under the Plan as to such
optionee.
(o) "Incentive Options" shall have the meaning set forth in Section
6 hereof.
(p) The term "included" when used herein shall mean "including, but
not limited to".
(q) "Key Employee" shall have the meaning set forth in Section 4
hereof.
(r) "Non-Qualified Options" shall have the meaning set forth in
Section 6 hereof.
(s) "Options" shall have the meaning set forth in Section 1 hereof.
(t) "Person" shall have the meaning set forth in Section 4 hereof,
(u) "Plan" shall have the meaning set forth in Section 1 hereof.
(v) "Related Entities" shall have the meaning set forth in Section
1 hereof.
(w) "Reorganization" shall have the meaning set forth in Section 9
hereof.
(x) "Rule 16b-3" shall mean Rule 16b-3, as amended, or other
applicable rules under Section 16(b) of the Exchange Act.
(y) "Section 162(m)" means Section 162(m) of the Code and the rules
and regulations adopted from time to time thereunder, or any successor
law or rule as it may be amended from time to time.
(z) "Securities Act" shall mean the Securities Act of 1933.
(aa) "Subsidiary" shall mean, with respect to any Person, any other
Person of which such first Person owns or has the power to vote,
directly or indirectly, securities representing a majority of the votes
ordinarily entitled to be cast for the election of directors or other
governing Persons.
18. AMENDMENT OF PLAN.
The Board of Directors shall have the right to amend, modify, suspend
or terminate the Plan at any time; provided, that no amendment shall be
made which shall increase the total number of shares of the Common Stock
which may be issued and sold pursuant to Options granted under the Plan
unless such amendment is made by or with the approval of the stockholders.
The Board of Directors shall have the right to amend the Plan and the
Options outstanding thereunder, without the consent or joinder of any
optionee or other Person, in such manner as may be determined necessary or
appropriate by the Board of Directors in order to cause the Plan and the
Options outstanding thereunder (i) to qualify as "incentive stock options"
within the meaning of Section 422 of the Code, (ii) to comply with Rule
16b-3 (or any successor rule) under the Exchange Act (or any successor law)
and the regulations (including any temporary regulations) promulgated
thereunder, or (iii) to comply with Section 162(m) of the Code (or any
successor section) and the regulations (including any temporary
regulations) promulgated thereunder. Except as provided above, no
amendment, modification, suspension or termination of the Plan shall alter
or impair any Options previously granted under the Plan, without the
consent of the holder thereof.
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19. INDIVIDUAL LIMITATIONS ON AWARDS.
No Person may be granted during any one year period, Options with
respect to more than 250,000 shares of Common Stock. If an Option is
canceled, the canceled Option shall continue to be counted against the
maximum number of shares of Common Stock for which Options may be granted
to such Person under the Plan. If, after grant, the exercise price of an
Option is reduced, the transaction shall be treated as a cancellation of
the Option and the grant of a new Option. In such case, both the Option
that is deemed to be canceled and the Option that is deemed to be granted
reduce the maximum number of shares for which Options may be granted to
such Person under the Plan.
20. EFFECTIVE DATE.
The Plan shall become effective at the Effective Time.
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MIDLAND RESOURCES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF STOCKHOLDERS ON OCTOBER 28, 1998.
The undersigned hereby appoints Wayne M. Whitaker and Darrell M. Dillard,
or any one of them, with full power of substitution, attorneys and proxies of
the undersigned to vote all shares of common stock of Midland Resources, Inc.
(the "Company") which the undersigned is entitled to vote at the special meeting
of stockholders of the Company to be held on October 28, 1998, at Midland, Texas
at 10:00 a.m. Texas time:
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF STOCKHOLDERS
MIDLAND RESOURCES, INC.
OCTOBER 28, 1998
o Please Detach and Mail in the Envelope Provided o
A [X] PLEASE MARK YOUR -
VOTES AS IN THIS -
EXAMPLE ----
FOR AGAINST ABSTAIN
1. Proposal to approve and adopt the [ ] [ ] [ ]
Agreement and Plan of Merger among
the Company, Vista Resources Partners,
L.P., Vista Energy Resources, Inc.
and Midland Merger Co.
All as described in the Notice of Meeting of Stockholders
and Proxy Statement, receipt of which is hereby acknowledged.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS
MADE HEREIN. IF NO CONTRARY SPECIFICATION IS MADE, IT WILL BE
VOTED "FOR" THE PROPOSAL SET FORTH.
PLEASE DATE, SIGN AND MAIL YOUR PROXY PROMPTLY.
Signature(s) of stockholder(s) _____________________ ________________________ Dated this ___ day of ______, 1998
Note: Please sign exactly as your name appears on your stock certificate. When signing as an executor,
administrator, trustee or other representative, please sign your full title. All joint owners should sign.