<PAGE> 1
================================================================================
PROXY STATEMENT
PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [X] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
PIONEER NATURAL RESOURCES COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
<TABLE>
<CAPTION>
====================================================================================================================
AGGREGATE MAXIMUM
NUMBER OF PER UNIT AGGREGATE TOTAL FEE
TITLE OF EACH CLASS OF SECURITIES SECURITIES PRICE(1) VALUE PAID
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares.................... 51,332,432(2) $21.26 $1,091,327,504 $218,266
==================================================================================================================
</TABLE>
(1) Represents C$29.43 (the average of the high and low sales price of Chauvco
Common Shares on The Toronto Stock Exchange on September 25, 1997),
converted to U.S. dollars by applying the Noon Spot Rate on September 25,
1995 of .7224 Canadian dollar for each U.S. dollar.
(2) Assumes exercise of all outstanding options.
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
================================================================================
<PAGE> 2
PRELIMINARY COPIES
PIONEER NATURAL RESOURCES COMPANY
AND
CHAUVCO RESOURCES LTD.
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS OF PIONEER NATURAL RESOURCES COMPANY
AND
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS OF CHAUVCO RESOURCES LTD.
TO BE HELD DECEMBER , 1997
AND
NOTICE OF PETITION
AND
JOINT MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT
WITH RESPECT TO AN ARRANGEMENT INVOLVING
PIONEER NATURAL RESOURCES COMPANY
AND
CHAUVCO RESOURCES LTD.
NOVEMBER , 1997
<PAGE> 3
PIONEER NATURAL RESOURCES COMPANY
1400 Williams Square West
5205 N. O'Connor Blvd.
Irving, Texas 75039
November , 1997
Dear Pioneer Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"Special Meeting") of Pioneer Natural Resources Company, a Delaware corporation
("Pioneer"), to be held on , 1997 at , at .
The Special Meeting relates to the acquisition by Pioneer of the Canadian and
Argentine oil and gas businesses of Chauvco Resources Ltd., an Alberta
corporation ("Chauvco"), and the spinoff to Chauvco shareholders and
optionholders of Chauvco's Gabonese oil and gas operations and other
international interests.
These transactions will be accomplished pursuant to the terms of a
Combination Agreement (the "Combination Agreement") dated September 3, 1997
between Pioneer and Chauvco. The Combination Agreement provides for a plan of
arrangement (the "Plan of Arrangement"), whereby, without limitation, Pioneer
will issue common stock, par value $0.01 per share, of Pioneer ("Pioneer Common
Stock") and from time to time thereafter upon the exchange of exchangeable
shares ("Exchangeable Shares") of Pioneer Natural Resources (Canada) Ltd.
("Pioneer Canada"), a newly-formed, indirectly owned subsidiary of Pioneer in
consideration for all of the issued and outstanding shares and options of
Chauvco (the transactions contemplated by the Combination Agreement and the Plan
of Arrangement being referred to herein collectively as the "Transaction"). At
the Special Meeting, you will be asked to approve the Combination Agreement and
the Transaction. Details of the Transaction are contained in the Joint
Management Information Circular and Proxy Statement (the "Joint Proxy
Statement") being delivered with this letter.
If the proposals contained in the Joint Proxy Statement are approved by
Pioneer's stockholders and Chauvco's shareholders, Chauvco will become a
wholly-owned subsidiary of Pioneer Canada, and each existing holder of common
shares of Chauvco ("Chauvco Common Shares") will automatically transfer each
Chauvco Common Share such holder holds to Pioneer Canada in consideration for
(i) a fraction (varying between 0.493827 and 0.451467 as detailed in the Joint
Proxy Statement) of a share of Pioneer Common Stock or Exchangeable Shares, or a
combination of both, in each case determined in accordance with the Exchange
Ratio (as defined in the Joint Proxy Statement) and as otherwise set forth in
the Joint Proxy Statement, and, in certain cases, based upon such holder's
election, and (ii) one share of the common shares of Chauvco Resources
International Ltd. ("CRI Share"), which will have its principal properties,
operations and oil reserves located in Gabon, central west Africa. In certain
circumstances, Pioneer has the right to cause Pioneer Canada to deliver fewer
shares of Pioneer Common Stock and Exchangeable Shares and pay cash to the
holders of Chauvco Common Shares, as detailed in the Joint Proxy Statement. In
addition, each existing holder of options to purchase Chauvco Common Shares
("Chauvco Options") will automatically transfer each Chauvco Option such holder
holds to Pioneer Canada in consideration for (i) one CRI Share and (ii) a number
of shares of Pioneer Common Stock determined in accordance with the Exchange
Ratio and in accordance with the holder's election of whether or not to pay the
exercise price in cash. Each Exchangeable Share will entitle its holder to
dividend and other rights economically equivalent to those of the Pioneer Common
Stock and, through a voting trust, the right to vote at meetings of the
stockholders of Pioneer.
THE PIONEER BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE COMBINATION
AGREEMENT AND THE TRANSACTION ARE FAIR TO AND IN THE BEST INTERESTS OF PIONEER
AND ITS STOCKHOLDERS, HAS APPROVED THE COMBINATION AGREEMENT AND THE TRANSACTION
AND RECOMMENDS THAT PIONEER'S STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE
COMBINATION AGREEMENT AND THE TRANSACTION.
In view of the importance of the actions to be taken at the Special
Meeting, you are urged to read the Joint Proxy Statement carefully and,
regardless of the number of shares that you own, we request that you
<PAGE> 4
complete, sign, date and return the enclosed proxy card promptly. If you attend
the Special Meeting, you may vote in person, even though you have previously
returned your proxy.
Sincerely,
I. Jon Brumley
Chairman of the Board
<PAGE> 5
PIONEER NATURAL RESOURCES COMPANY
1400 Williams Square West
5205 N. O'Connor Blvd.
Irving, Texas 75039
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held November , 1997
Notice is hereby given that a special meeting (the "Special Meeting") of
the stockholders of Pioneer Natural Resources Company, a Delaware corporation
("Pioneer"), will be held at , on December , 1997 at for the
following purposes:
1. To consider and vote upon a proposal to approve the Combination
Agreement dated September 3, 1997 (the "Combination Agreement") between
Pioneer and Chauvco Resources Ltd., an Alberta corporation ("Chauvco"), and
the transactions contemplated thereby and by a plan of arrangement attached
as an exhibit to the Combination Agreement (the "Plan of Arrangement"),
which transactions include, without limitation, the issuance of shares of
common stock, par value $0.01 per share, upon consummation of the
arrangement set forth in the Plan of Arrangement (the "Arrangement") and
from time to time thereafter upon the exchange of exchangeable shares of
Pioneer Natural Resources (Canada) Ltd., a newly-formed, indirectly owned
subsidiary of Pioneer, being issued pursuant to the Arrangement, as more
fully described in the accompanying Joint Management Information Circular
and Proxy Statement; and
2. To transact such other business as may properly be presented to the
Special Meeting.
A record of stockholders has been taken as of the close of business on
November , 1997, and only those stockholders of record on that date will be
entitled to notice of and to vote at the Special Meeting. A stockholders list
will be available commencing December , 1997 and may be inspected during
normal business hours prior to the Special Meeting at the offices of Pioneer,
1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039.
If you do not expect to be present at the Special Meeting, please sign and
date the enclosed proxy and return it promptly in the enclosed stamped envelope
that has been provided for your convenience. The prompt return of proxies will
help ensure a quorum and save Pioneer the expense of further solicitation.
By Order of the Board of Directors,
Mark L. Withrow
Secretary
November , 1997
<PAGE> 6
CHAUVCO RESOURCES LTD.
2900, 255 -- 5th Avenue S.W.
Calgary, Alberta, Canada T2P 3G6
November , 1997
Dear Chauvco shareholder:
We are pleased to invite you to attend an important meeting of shareholders
(the "Meeting"), to be held on , December , 1997 at a.m. (Calgary time) at
, Calgary, Alberta, Canada. Because of the importance of the business of
the Meeting, we would like as many of you as possible either to attend in
person, or to be represented by sending in your proxies.
The business of the Meeting relates to the acquisition by Pioneer Natural
Resources Company ("Pioneer") of the Canadian and Argentine oil and gas
businesses of Chauvco Resources Ltd. ("Chauvco") and the spinoff to Chauvco
shareholders and optionholders of Chauvco's Gabonese oil and gas operations and
other international interests. Approval of these transactions requires
consideration of and voting on an arrangement (the "Arrangement") which, if
approved, will facilitate the business combination of Chauvco and Pioneer.
The details of the proposed transaction are included in the attached Joint
Management Information Circular and Proxy Statement (the "Joint Proxy
Statement"). Also included is the form of proxy and Letter of Transmittal and
Election Form. Please review the Joint Proxy Statement carefully as it has been
prepared to help you make an informed decision.
If the proposals contained in the Joint Proxy Statement are approved by
Pioneer's stockholders and Chauvco's shareholders, Chauvco will become a
wholly-owned subsidiary of Pioneer Natural Resources (Canada) Ltd. ("Pioneer
Canada"), and each existing holder of common shares of Chauvco ("Chauvco Common
Shares") will automatically transfer each Chauvco Common Share such holder holds
to Pioneer Canada in consideration for:
(i) a fraction (varying between 0.493827 and 0.451467 as detailed in the
Joint Proxy Statement) of Pioneer common stock, ("Pioneer Common Stock"), or
exchangeable shares ("Exchangeable Shares") of Pioneer Canada, in each case
determined in accordance with the Exchange Ratio (as defined in the Joint Proxy
Statement) and as otherwise set forth in the Joint Proxy Statement, and
(ii) one share of the common stock of Chauvco Resources International Ltd.
("CRI Share"), which will have its principal properties, operations and oil
reserves located in Gabon, central west Africa.
Only holders resident in Canada may elect to receive Exchangeable Shares,
and such holders may also elect to have their Chauvco Common Shares transferred
for a combination of Pioneer Common Stock and Exchangeable Shares. In certain
circumstances, Pioneer has the right to issue fewer shares of Pioneer Common
Stock and Exchangeable Shares and pay cash to the holders of Chauvco Common
Shares, as detailed in the Joint Proxy Statement. In addition, each existing
holder of options to purchase Chauvco Common Shares ("Chauvco Options") will
automatically transfer each Chauvco Option such holder holds to Pioneer Canada
in consideration for (i) one CRI Share and (ii) a number of shares of Pioneer
Common Stock determined in accordance with the Exchange Ratio and in accordance
with the holder's election of whether or not to pay the exercise price in cash.
Each Exchangeable Share will entitle its holder to dividend and other rights
economically equivalent to those of the Pioneer Common Stock and, through a
voting trust, the right to vote at meetings of the stockholders of Pioneer.
The Combination Agreement provides that, before the Arrangement becomes
effective, Chauvco will enter into a transaction causing its 20% interest in the
Alliance Pipeline Project (as defined in the Joint Proxy Statement) to be
distributed to or through an entity for a cash payment to Chauvco of C$13.5
million plus any additional amounts funded for regular capital needs and
commitments after September 3, 1997.
After considering many different factors (which are reviewed in detail in
the Joint Proxy Statement) including, among other things, the opinions of
Salomon Brothers Inc and RBC Dominion Securities Inc., financial advisors
engaged by Chauvco, that the consideration to be received by the Chauvco
shareholders in the transaction is fair from a financial point of view, your
Board of Directors has unanimously recommended that you vote in favor of the
resolution concerning the Arrangement and the combination of Pioneer and
Chauvco.
We urge you to complete the enclosed form of proxy and return it, not later
than the time specified in the Notice of Special Meeting of Shareholders, in the
postage-paid envelope provided. Regardless of the number of shares you own, your
vote is important.
Yours very truly,
Guy J. Turcotte
Chairman and
Chief Executive Officer
<PAGE> 7
CHAUVCO RESOURCES LTD.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
---------------------
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the
"Meeting") of Chauvco Resources Ltd. ("Chauvco") will be held at a.m.
(Calgary time) on , December , 1997 at , Calgary, Alberta,
Canada for the following purposes:
1. to consider, pursuant to an order (the "Interim Order") of the
Court of Queen's Bench of Alberta dated November , 1997 and, if deemed
advisable, to pass, with or without variation, a special resolution (the
"Arrangement Resolution") to approve an arrangement (the "Arrangement")
under section 186 of the Business Corporations Act (Alberta) (the "ABCA"),
all as more particularly described in the accompanying Joint Management
Information Circular and Proxy Statement (the "Joint Proxy Statement"); and
2. to transact such further or other business as may properly come
before the Meeting or any adjournment or adjournments thereof.
Specific details of the matters to be put before the Meeting are set out in
the Joint Proxy Statement, which forms part of this Notice. The full text of the
Arrangement Resolution is attached as Annex B to the Joint Proxy Statement.
Pursuant to the Interim Order, a copy of which is attached as Annex D to
the Joint Proxy Statement, holders of Chauvco common shares have been granted
the right to dissent in respect of the Arrangement. If the Arrangement becomes
effective, a dissenting shareholder will be entitled to be paid the fair value
of the Chauvco common shares held by such shareholder if the Secretary of
Chauvco or the Chairman of the Meeting shall have received from such dissenting
shareholder at or before the Meeting a written objection to the Arrangement
Resolution and the dissenting holder shall have otherwise complied with the
provisions of section 184 of the ABCA. The dissent right is described in the
accompanying Joint Proxy Statement and the full text of section 184 of the ABCA
is attached as Annex M to the Joint Proxy Statement. ONLY REGISTERED
SHAREHOLDERS MAY DISSENT. FAILURE TO STRICTLY COMPLY WITH THE REQUIREMENTS SET
OUT IN SECTION 184 OF THE ABCA MAY RESULT IN THE LOSS OF ANY RIGHT OF DISSENT.
Each person who is a holder of record of Chauvco common shares at the close
of business on , 1997 (the "Chauvco Record Date"), is entitled to
notice of, and to attend and vote at, the Meeting and any adjournment or
postponement thereof, provided that to the extent a person has transferred any
Chauvco common shares after the Chauvco Record Date and the transferee of such
shares establishes that such transferee owns such shares and demands not later
than 10 days before the Meeting to be included in the list of shareholders
eligible to vote at the Meeting, such transferee will be entitled to vote such
shares at the Meeting.
DATED at Calgary, Alberta, November , 1997.
By Order of the Chauvco Board of
Directors
Martin A. Lambert
Secretary
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. SHAREHOLDERS ARE
URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE
ENVELOPE PROVIDED. TO BE EFFECTIVE, PROXIES MUST BE RECEIVED BY CORPORATE
SHAREHOLDER SERVICES INC., SUITE 1485, 550 SIXTH AVENUE S.W., CALGARY, ALBERTA
T2P OS2 PRIOR TO THE MEETING OR, IF THE MEETING IS ADJOURNED OR POSTPONED,
BEFORE THE TIME OF THE ADJOURNED OR POSTPONED MEETING.
<PAGE> 8
ACTION NO.
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF SECTION 186 OF THE BUSINESS CORPORATIONS ACT,
S.A. 1981, c.B-15, AS AMENDED
AND IN THE MATTER OF AN ARRANGEMENT PROPOSED BY
CHAUVCO RESOURCES LTD. INVOLVING
CHAUVCO RESOURCES LTD., ITS SECURITYHOLDERS,
PIONEER NATURAL RESOURCES COMPANY AND
PIONEER NATURAL RESOURCES (CANADA) LTD.
NOTICE OF PETITION
NOTICE IS HEREBY GIVEN that a petition (the "Petition") has been filed with
the Court of Queen's Bench of Alberta, Judicial District of Calgary (the
"Court"), by Chauvco Resources Ltd. ("Chauvco") with respect to a proposed
arrangement (the "Arrangement") under Section 186 of the Business Corporations
Act, S.A. 1981, c.B-15, as amended (the "ABCA"), involving Chauvco, its
securityholders, Pioneer Natural Resources Company ("Pioneer") and Pioneer
Natural Resources (Canada) Ltd., which Arrangement is described in greater
detail in the Joint Management Information Circular and Proxy Statement of
Pioneer and Chauvco dated November , 1997 accompanying this Notice of
Petition.
AND NOTICE IS FURTHER GIVEN that the said Petition will be heard before the
presiding Chambers Justice at the Court House, 611 -- 4th Street S.W., Calgary,
Alberta, Canada, on the day of December, 1997 at a.m. (Calgary time)
or as soon thereafter as counsel may be heard.
At the hearing of the Petition, Chauvco intends to seek the following:
(i) a declaration that the terms and conditions of the Arrangement are
fair to the persons affected;
(ii) an order approving the Arrangement pursuant to the provisions of
Section 186 of the ABCA;
(iii) a declaration that the Arrangement will, upon the filing of
Articles of Arrangement under the ABCA and the issuance of the
Certificate of Amendment under the ABCA, be effective under the
ABCA in accordance with its terms; and
(iv) such other further orders, declarations and directions as the
Court may deem just.
ANY SHAREHOLDER OF CHAUVCO (A "SHAREHOLDER") OR OTHER INTERESTED PARTY
DESIRING TO SUPPORT OR OPPOSE THE PETITION OR MAKE SUBMISSIONS MAY APPEAR AT THE
TIME OF HEARING IN PERSON OR BY COUNSEL FOR THAT PURPOSE, PROVIDED SUCH
SHAREHOLDER OR OTHER INTERESTED PARTY FILES WITH THE COURT AND SERVES UPON
CHAUVCO, ON OR BEFORE DECEMBER , 1997, A NOTICE OF INTENTION TO APPEAR,
TOGETHER WITH ANY EVIDENCE OR MATERIALS WHICH ARE TO BE PRESENTED TO THE COURT,
SETTING OUT SUCH SHAREHOLDER'S OR INTERESTED PARTY'S ADDRESS FOR SERVICE BY
ORDINARY MAIL AND INDICATING WHETHER SUCH SHAREHOLDER OR INTERESTED PARTY
INTENDS TO SUPPORT OR OPPOSE THE PETITION OR MAKE SUBMISSIONS. Service on
Chauvco is to be effected by delivery to the solicitors for Chauvco at the
address set forth below.
AND NOTICE IS FURTHER GIVEN that, at the hearing and subject to the
foregoing, Shareholders and any other interested party will be entitled to make
representations as to, and the Court will be requested to consider, the fairness
of the Arrangement. If you do not attend, either in person or by counsel, at
that time, the Court may approve or refuse to approve the Arrangement as
presented, or may approve it subject to such terms and conditions as the Court
shall deem fit, without any further notice.
AND NOTICE IS FURTHER GIVEN that the Court, by an Interim Order dated
November , 1997 has given directions as to the calling and holding of the
Special Meeting of the Shareholders of Chauvco for the purpose of such
Shareholders voting upon the special resolution to approve the Arrangement and,
in
<PAGE> 9
particular, has directed that such Shareholders shall have the right to dissent
under the provisions of Section 184 of the ABCA upon compliance with the terms
of the Interim Order.
AND NOTICE IS FURTHER GIVEN that a copy of the said Petition and other
documents in the proceedings will be furnished to any Shareholder of Chauvco or
other interested party requesting the same by the undermentioned solicitors for
Chauvco upon written request delivered to such solicitors as follows:
Bennett Jones Verchere
4500 Bankers Hall East
855 -- Second Street S.W.
Calgary, Alberta
T2P 4K7
Attention: Martin A. Lambert
DATED at the City of Calgary, in the Province of Alberta, this day of
November, 1997.
CHAUVCO RESOURCES LTD.
Guy J. Turcotte
Chairman and
Chief Executive Officer
<PAGE> 10
PIONEER NATURAL RESOURCES COMPANY CHAUVCO RESOURCES LTD.
JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT
This Joint Management Information Circular and Proxy Statement (the "Joint
Proxy Statement") is being furnished to holders of common shares of Chauvco
Resources Ltd., an Alberta, Canada corporation ("Chauvco"), in connection with
the solicitation of proxies by management of Chauvco for use at the Chauvco
Meeting to be held at (Calgary time) on December , 1997, at
and any adjournment or postponement thereof.
This Joint Proxy Statement is also being furnished to holders of common
stock, par value $0.01 per share, of Pioneer Natural Resources Company, a
Delaware corporation ("Pioneer"), in connection with the solicitation of proxies
by the board of directors of Pioneer for use at the Pioneer Meeting to be held
at (Dallas time) on December , 1997 at and any
adjournment or postponement thereof.
This Joint Proxy Statement and the accompanying forms of proxy are first
being mailed to shareholders of Chauvco and stockholders of Pioneer on or about
November , 1997.
All information in this Joint Proxy Statement relating to Chauvco and
Chauvco Resources International Ltd., which will have its properties, operations
and oil reserves located in Gabon, central west Africa and other international
locations, has been supplied by Chauvco and all information relating to Pioneer,
including its predecessors, has been supplied by Pioneer. Certain capitalized
terms used in this Joint Proxy Statement without definition have the meanings
ascribed thereto in the Glossary of Terms beginning on page 195.
SEE "RISK FACTORS" BEGINNING ON PAGE 22 AND ON PAGE A-6 OF ANNEX A FOR
CERTAIN CONSIDERATIONS RELEVANT TO APPROVAL OF THE PROPOSALS AND AN INVESTMENT
IN THE SECURITIES REFERRED TO HEREIN.
---------------------
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy Statement and, if given or
made, such information or representation should not be relied upon as having
been authorized. This Joint Proxy Statement 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 Joint Proxy Statement nor any
distribution of the securities referred to in this Joint Proxy Statement shall,
under any circumstances, create an implication that there has been no change in
the information set forth therein since the date of this Joint Proxy Statement.
---------------------
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY..................................................... 5
RISK FACTORS................................................ 22
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES.............. 28
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS.................. 28
COMPARATIVE MARKET PRICE DATA............................... 29
COMPARATIVE PER SHARE DATA.................................. 30
THE MEETINGS................................................ 31
Pioneer................................................... 31
Chauvco................................................... 32
THE TRANSACTION............................................. 33
General................................................... 33
Transaction Mechanics and Description of Exchangeable
Shares and Other Features.............................. 34
The Combination Agreement................................. 39
Other Agreements.......................................... 43
Court Approval of the Arrangement and Completion of the
Transaction............................................ 43
Background of the Transaction............................. 43
Recommendation of Pioneer's Board of Directors; Reasons
for the Transaction.................................... 46
Recommendation of Chauvco's Board of Directors; Reasons
for the Transaction.................................... 47
Opinions of Financial Advisors............................ 48
Interests of Certain Persons in the Transaction........... 59
Accounting Treatment...................................... 59
Procedures for Exchange by Chauvco Shareholders and
Chauvco Optionholders.................................. 59
Stock Exchange Listing.................................... 60
Eligibility for Investment in Canada...................... 61
Regulatory Matters........................................ 61
Resale of Exchangeable Shares, Pioneer Common Stock and
CRI Shares Received in the Transaction................. 61
Continuance of Pioneer Canada Under the ABCA.............. 63
Business Combination Costs................................ 63
Dissenters' Rights........................................ 63
INCOME TAX CONSIDERATIONS TO CHAUVCO SHAREHOLDERS AND
CHAUVCO OPTIONHOLDERS..................................... 63
Canadian Federal Income Tax Considerations................ 63
United States Federal Income Tax Considerations........... 69
BUSINESS OF PIONEER......................................... 73
General................................................... 73
Overview of the Pioneer Enterprise........................ 73
Management of Pioneer..................................... 75
Compensation of Executive Officers........................ 80
Compensation Committee Interlocks and Insider
Participation.......................................... 87
Description of Pioneer Long-Term Incentive Plan........... 88
Description of Pioneer Employee Stock Purchase Plan....... 91
Related Party Transactions................................ 93
Capitalization Table...................................... 95
Selected Historical Consolidated Financial Data of
Pioneer................................................ 94
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Pioneer......... 97
</TABLE>
2
<PAGE> 12
<TABLE>
<CAPTION>
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<S> <C>
Selected Historical Consolidated Financial Data of Mesa... 113
Management's Discussion and Analysis of Financial
Condition and Results of Operations
of Mesa................................................ 115
Business Description...................................... 126
Governmental Regulation................................... 142
Environmental and Health Controls......................... 142
Employees................................................. 145
Litigation................................................ 145
BUSINESS OF CHAUVCO......................................... 147
General................................................... 147
Management of Chauvco..................................... 148
Executive Compensation.................................... 150
Employee Stock Option Plan................................ 151
Long Term Incentive Plans................................. 151
Composition of the Compensation Committee................. 152
Report on Executive Compensation.......................... 152
Directors' Compensation................................... 153
Capitalization............................................ 153
Principal Holders......................................... 153
Selected Historical Consolidated Financial Data of
Chauvco................................................ 154
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Chauvco......... 155
Petroleum and Natural Gas Operations...................... 162
Governmental and Environmental Regulations................ 173
Employees................................................. 176
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 177
COMPARISON OF STOCKHOLDER RIGHTS............................ 178
Vote Required for Extraordinary Transactions.............. 178
Amendment to Governing Documents.......................... 179
Dissenter's Rights........................................ 179
Oppression Remedy......................................... 180
Derivative Action......................................... 180
Shareholder Consent in Lieu of Meeting.................... 181
Director Qualifications................................... 181
Fiduciary Duties of Directors............................. 181
Indemnification of Officers and Directors................. 181
Director Liability........................................ 182
Anti-Takeover Provisions and Interested Stockholder
Transactions........................................... 182
DESCRIPTION OF CAPITAL STOCK................................ 184
Pioneer Capital Stock..................................... 184
Chauvco Share Capital..................................... 186
Pioneer Canada Share Capital.............................. 186
Support Agreement......................................... 188
Voting and Exchange Trust Agreement....................... 189
Delivery of Pioneer Common Stock.......................... 190
Call Rights............................................... 190
DISSENTING SHAREHOLDERS' RIGHTS............................. 191
LEGAL MATTERS............................................... 193
EXPERTS..................................................... 193
</TABLE>
3
<PAGE> 13
<TABLE>
<CAPTION>
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<S> <C>
AVAILABLE INFORMATION FOR PIONEER........................... 194
STOCKHOLDER PROPOSALS....................................... 194
APPROVAL OF PROXY STATEMENT BY CHAUVCO BOARD OF DIRECTORS... 194
GLOSSARY OF TERMS........................................... 195
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
ANNEX A -- Chauvco Resources International Ltd.
Information............................................... A-1
ANNEX B -- Form of Arrangement Resolution.................. B-1
ANNEX C -- Combination Agreement............................ C-1
ANNEX D -- Interim Order.................................... D-1
ANNEX E -- Plan of Arrangement............................. E-1
ANNEX F -- Exchangeable Share Provisions................... F-1
ANNEX G -- Special Preferred Voting Stock Provisions........ G-1
ANNEX H -- Form of Support Agreement........................ H-1
ANNEX I -- Form of Voting and Exchange Trust Agreement..... I-1
ANNEX J -- Goldman Sachs Fairness Opinion.................. J-1
ANNEX K -- Salomon Brothers Fairness Opinion................ K-1
ANNEX L -- RBC DS Fairness Opinion......................... L-1
ANNEX M -- Section 184 of the ABCA.......................... M-1
</TABLE>
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<PAGE> 14
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement. Reference is made to, and this summary is qualified
in its entirety by, the more detailed information contained in this Joint Proxy
Statement. Stockholders are urged to carefully read this Joint Proxy Statement
in its entirety. Parker & Parsley Petroleum Company ("Parker & Parsley") and
MESA Inc. ("Mesa") merged in August 1997 (the "Parker/Mesa Merger"), which
transaction resulted in the creation of Pioneer Natural Resources Company
("Pioneer"). Unless otherwise required by the context, references to historical
financial, reserve and other statistical information regarding Pioneer are to
historical information relating to Parker & Parsley and its subsidiaries taken
as a whole, not including either Mesa and its subsidiaries or the pro forma
effect of the transactions described in this Joint Proxy Statement. Unless
otherwise required by the context, references to historical financial, reserve
and other statistical information regarding Mesa are to historical information
relating to Mesa and its subsidiaries taken as a whole. The presentation of
combined information regarding Parker & Parsley and Mesa, as well as the
presentation of pro forma information regarding the combination of Pioneer and
Chauvco Resources Ltd. ("Chauvco"), is specifically identified as such in this
Joint Proxy Statement. Unless otherwise indicated, all reserve information is as
of December 31, 1996. Certain terms relating specifically to the transactions
described in this Joint Proxy Statement and relating to the oil and gas business
and used herein are defined in the "Glossary of Terms" included elsewhere in
this Joint Proxy Statement. In this Joint Proxy Statement, unless otherwise
indicated, all dollar amounts are expressed in U.S. dollars.
OVERVIEW
This Joint Proxy Statement relates to the acquisition by Pioneer of the
Canadian and Argentine oil and gas businesses of Chauvco and the spinoff to the
holders of Chauvco common shares (the "Chauvco Shareholders") and the holders of
options to purchase Chauvco Common Shares (the "Chauvco Optionholders") of
Chauvco's Gabonese oil and gas operations and other international interests.
These transactions will be accomplished pursuant to the terms of a Combination
Agreement (the "Combination Agreement") dated as of September 3, 1997 between
Pioneer and Chauvco and the terms of a plan of arrangement (the "Plan of
Arrangement") attached as an exhibit to the Combination Agreement which include,
without limitation, the issuance of shares of common stock, par value $0.01 per
share, of Pioneer ("Pioneer Common Stock") upon consummation of the arrangement
contemplated therein (the "Arrangement") and from time to time thereafter upon
the exchange of exchangeable shares ("Exchangeable Shares") of Pioneer Natural
Resources (Canada) Ltd. ("Pioneer Canada"), a newly-formed indirectly owned
subsidiary of Pioneer, being issued pursuant to the Arrangement (the
transactions contemplated by the Combination Agreement and the Plan of
Arrangement being referred to herein collectively as the "Transaction"),
whereby, among other things, Pioneer Canada will acquire all of the outstanding
common shares of Chauvco ("Chauvco Common Shares") and all of the options to
acquire Chauvco Common Shares (the "Chauvco Options").
If the requisite approvals are obtained, including from both the holders of
common stock of Pioneer (the "Pioneer Stockholders") and the Chauvco
Shareholders, each existing holder of Chauvco Common Shares will automatically
transfer each Chauvco Common Share such holder holds to Pioneer Canada in
consideration for (i) a fraction (varying between 0.493827 and 0.451467 as
detailed herein) of a share of Pioneer Common Stock or an equivalent fraction of
an Exchangeable Share, in each case determined in accordance with the Exchange
Ratio (as defined herein), and (ii) one common share ("CRI Share") of Chauvco
Resources International Ltd. ("CRI"), which will have its principal properties,
operations and oil reserves located in Gabon, central west Africa. Only holders
resident in Canada may elect to receive Exchangeable Shares, and such holders
may elect to have their Chauvco Common Shares transferred for a combination of
Pioneer Common Stock and Exchangeable Shares. In certain circumstances, Pioneer
has the right to cause Pioneer Canada to deliver fewer shares of Pioneer Common
Stock and Exchangeable Shares and to pay cash to the Chauvco Shareholders and
the Chauvco Optionholders. In addition, each existing holder of options to
purchase Chauvco Common Shares ("Chauvco Options") will automatically transfer
each Chauvco Option such holder holds to Pioneer Canada in consideration for (i)
one CRI Share and (ii) a number of shares of
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<PAGE> 15
Pioneer Common Stock determined in accordance with the Exchange Ratio and in
accordance with the holder's election of whether or not to pay the exercise
price of such Chauvco Options in cash. As a result of the Arrangement, Pioneer
Canada will become the holder of all Chauvco Common Shares and CRI will be
transferred to Chauvco Shareholders and Chauvco Optionholders.
Consummation of the Transaction will result in the issuance of up to an
aggregate of 25,349,341 shares of Pioneer Common Stock and Exchangeable Shares.
The Exchangeable Shares entitle the holders to dividend and other rights
economically equivalent to those of shares of Pioneer Common Stock and, through
a voting trust, the right to vote at meetings of Pioneer Stockholders.
PIONEER
THE INFORMATION INCLUDED UNDER THIS HEADING "PIONEER" IS AS OF DECEMBER 31,
1996 AND GIVES EFFECT TO THE COMBINATION OF PARKER & PARSLEY AND MESA (INCLUDING
GIVING EFFECT TO THE GREENHILL ACQUISITION (SEE "BUSINESS OF PIONEER -- BUSINESS
DESCRIPTION -- RECENT DEVELOPMENTS -- GREENHILL ACQUISITION)), AND IS ON A PRO
FORMA BASIS GIVING EFFECT TO THE TRANSACTION AS IF IT HAD OCCURRED ON DECEMBER
31, 1996.
The Transaction will strengthen Pioneer's status as a preeminent
independent oil and gas company by combining Pioneer's long-lived, low cost oil
and gas reserves and gas processing facilities with Chauvco's high quality
reserves, significant growth potential and international assets and prospects.
After the Transaction, Pioneer will be the second largest independent oil and
gas exploration and production company in the United States, based on total
proved reserves, with a balanced oil and gas reserve base and significant
production and reserve growth potential. Led by a proven management team,
Pioneer will continue to have the financial strength and flexibility to pursue
an aggressive growth strategy through a coordinated balance of exploitation,
exploration and acquisition activities.
Pioneer's principal strengths and strategies are the following:
Reserves and Operating Areas
- Pioneer has 703 MMBOE of reserves, comprised of 2.3 Tcf of natural gas
and 315 MMBbls of crude oil and liquids, 85% of which are in the United
States, principally the MidContinent region and Texas. Outside the United
States, Pioneer has core operating areas in western Canada and Argentina
which account for 6% and 9% of proved reserves, respectively.
- Pioneer's reserve base is long-lived, with an aggregate reserve to
production ratio of approximately 12 years, and well-balanced, with 55%
natural gas and 45% crude oil and liquids.
- Pioneer operates wells representing approximately 80% of its total proved
reserves and is a dominant operator in the United States in the Hugoton,
West Panhandle and Spraberry fields. Pioneer also operates in western
Canada and Argentina.
Drilling and Growth Opportunities
- Pioneer has approximately 4,700 drilling locations, of which
approximately 3,000 are in the United States, primarily in west Texas and
along the Texas and Louisiana coasts, and approximately 1,700 are in
western Canada and Argentina.
- Pioneer has approximately 2.2 million net undeveloped acres, of which
approximately 700,000 are located in the United States and approximately
1.5 million are located in western Canada and Argentina.
- Pioneer expects to invest 25% of its 1998 capital expenditure budget in
exploration activities, with the balance to be invested in development
drilling and exploitation activities.
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<PAGE> 16
Management
- Pioneer's management team is led by Jon Brumley and Scott Sheffield. Mr.
Brumley is the Chairman of the Board and Mr. Sheffield is the President
and Chief Executive Officer. Both Mr. Brumley and Mr. Sheffield are
proven leaders in the industry, with well established records of
successfully building oil and gas companies.
- The Pioneer board of directors (the "Pioneer Board") will be enhanced and
expanded to 16 members by the addition of Guy Turcotte, Chauvco's Chief
Executive Officer (subject to Pioneer Stockholder approval), and James
Baroffio, a member of the Chauvco board of directors (the "Chauvco
Board"), both of whom are experienced leaders in the exploration and
production industry.
- With inside ownership of 14%, the Pioneer Board's and management team's
interests in creating value are aligned with those of its stockholders.
Objectives and Growth Strategy
- Increasing stockholder value. Pioneer's five-year growth goal is to
increase stockholder value by doubling operating cash flow through
increases in production. Although Pioneer's management team believes it
can reach this goal, there can be no assurances that cash flow from
operations will double or increase at all. See "Risk Factors" for a
discussion of certain risks associated with Pioneer's intent to pursue an
aggressive growth strategy.
- Development and production enhancement activities. Pioneer seeks to
increase reserves and production through exploitation activities,
including development drilling and recompletions in its core operating
areas.
- Exploration. Pioneer's exploration activities use the latest in seismic,
drilling and completion technology to identify and drill sites with high
reserve potential, such as those in the southern Louisiana transition
zone, the Gulf of Mexico, east Texas, western Canada and Argentina.
- Acquisitions. Pioneer pursues acquisitions to enhance existing core
areas or to establish new core areas. Pioneer's acquisition efforts focus
on opportunities to increase reserves and production through both
exploitation and exploration activities, with a high degree of
operational control.
- Increasing natural gas processing capacity in core areas. Pioneer
intends to expand the processing capabilities of its gas processing
facilities and will strive to obtain additional dedications of third
party gas to these plants. By owning and operating these processing
facilities, Pioneer retains the processing margin on the gas it produces,
as well as on gas produced by third parties.
- Maintaining financial strength and flexibility. Pioneer intends to
maintain financial strength, flexibility and an investment grade rating
for its senior debt by seeking to: (i) maintain its credit ratios
consistent with guidelines established by the major credit rating
agencies for investment grade companies; (ii) fund its development and
exploration activities primarily with internally generated cash flow;
(iii) continue a portfolio management approach to its assets so as to
direct future investments toward projects that enhance growth; (iv) use
hedging strategies to reduce price risk in supporting its capital
expenditure budget and its acquisition activities; and (v) reduce per
unit operating and general and administrative expenditures.
- Aligning the interests of its directors, officers, senior management, key
technical personnel and stockholders. Pioneer believes that it is
essential to align the interests of management and employees with those
of its stockholders through equity-based compensation plans and ownership
of Pioneer Common Stock by directors, officers and employees. To attract,
retain and motivate quality personnel, Pioneer utilizes the Pioneer
Long-Term Incentive Plan (as defined herein) and the Pioneer Employee
Stock Purchase Plan (as defined herein).
See "Risk Factors -- Cautionary Statement Regarding Forward-Looking
Information" and "Business of Pioneer."
7
<PAGE> 17
CHAUVCO AND CRI
Chauvco, founded in 1981, is an oil and gas company concentrating on the
acquisition, exploration, development and production of oil and natural gas
resources in Canada in the provinces of Alberta and British Columbia and in
Argentina in the provinces of Tierra del Fuego and Neuquen. In addition, in 1996
Chauvco began development operations in Gabon, central west Africa. For
information regarding CRI, the shares of which will be distributed to Chauvco
Shareholders and Chauvco Optionholders, see Annex A.
DATE, TIME AND PLACE OF THE MEETINGS
Pioneer. The Pioneer Meeting will be held on December , 1997, at
at (Dallas time).
Chauvco. The Chauvco Meeting will be held on December , 1997, at
at
(Calgary time).
PURPOSES OF THE MEETINGS
Pioneer. The purpose of the Pioneer Meeting is to consider and act upon a
proposal to approve the Combination Agreement and the Transaction and such other
business as may be properly presented to the meeting.
Chauvco. The purpose of the Chauvco Meeting is to consider and act upon a
proposal to approve the Arrangement and such other business as may be properly
presented to the meeting.
RECORD DATES; HOLDERS ENTITLED TO VOTE
Pioneer. Only holders of record of shares of Pioneer Common Stock at the
close of business on November , 1997, are entitled to notice of and to vote at
the Pioneer Meeting. On such date, there were shares of Pioneer Common
Stock outstanding, each of which will be entitled to one vote on each matter to
be acted upon at the Pioneer Meeting.
Chauvco. Only holders of record of Chauvco Common Shares at the close of
business on November , 1997 are entitled to notice of and to vote at the
Chauvco Meeting, provided that to the extent a person has transferred any
Chauvco Common Shares after such record date and the transferee of such shares
establishes that such transferee owns such shares and demands not later than 10
days before the Chauvco Meeting to be included in the list of shareholders
eligible to vote at the Chauvco Meeting, such transferee will be entitled to
vote such shares at the Chauvco Meeting. On such date, there were Chauvco
Common Shares outstanding, each of which will be entitled to one vote on each
matter to be acted upon at the Chauvco meeting.
QUORUM; VOTE REQUIRED
Pioneer. The presence, in person or by proxy, at the Pioneer Meeting of
the holders of a majority of the shares of Pioneer Common Stock outstanding and
entitled to vote at the Pioneer Meeting is necessary to constitute a quorum at
the meeting. The affirmative vote of the holders of a majority of the
outstanding shares of Pioneer Common Stock present and entitled to vote thereon
at the Pioneer Meeting is required to approve the Combination Agreement and the
Transaction.
Chauvco. The presence, in person or by proxy, at the Chauvco Meeting of
not less than two Chauvco Shareholders representing not less than 5% of the
Chauvco Common Shares outstanding and entitled to vote at the Chauvco Meeting is
necessary to constitute a quorum at the meeting, and the affirmative vote of the
holders of not less than two-thirds of the votes cast by the holders of Chauvco
Common Shares present is required to approve the Arrangement.
8
<PAGE> 18
SUMMARY OF THE TRANSACTION
- General. Pursuant to the terms of the Combination Agreement and the
Arrangement, if approval is obtained from Pioneer Stockholders of the
Combination Agreement and the Transaction and from the Chauvco
Shareholders of the Arrangement, Pioneer Canada will acquire all of the
outstanding Chauvco Common Shares and Chauvco Options, and CRI will be
spun off to Chauvco Shareholders and Chauvco Optionholders.
- Court Approval. In addition to approval by Chauvco Shareholders, the
Arrangement requires approval by the Court of Queen's Bench of Alberta
(the "Court"). Prior to the mailing of this Joint Proxy Statement,
Chauvco obtained an interim order of the Court (the "Interim Order")
providing for the calling and holding of the Chauvco Meeting and other
procedural matters. Subject to approval of the Arrangement by the Chauvco
Shareholders at the Chauvco Meeting, the hearing in respect of the final
order of the Court (the "Final Order") is scheduled to take place on
, 1997 at (Calgary time) in the Court. All Chauvco
Shareholders and Chauvco Optionholders who wish to participate or be
represented or to present evidence or arguments at that hearing must
serve and file a notice of appearance as set out in the Notice of
Petition for the Final Order and satisfy any other requirements. At the
hearing of the application in respect of the Final Order, the Court will
consider, among other things, the fairness and reasonableness of the
Arrangement. The Court may approve the Arrangement as proposed or as
amended in any manner the Court may direct, subject to compliance with
such terms and conditions, if any, as the Court deems fit.
- Transfer of Chauvco Common Shares and Related Matters. Under the terms
of the Arrangement, each Chauvco Common Share will be transferred to
Pioneer Canada in consideration for one CRI Share and (i) a number of
shares of Pioneer Common Stock determined in accordance with the Exchange
Ratio (as defined herein) or (ii) a number of Exchangeable Shares
determined in accordance with the Exchange Ratio. Chauvco Shareholders
who are residents of Canada for the purposes of the Canadian Tax Act (as
defined herein) will have the option to elect to have their holdings of
Chauvco Common Shares transferred for a combination of shares of Pioneer
Common Stock and Exchangeable Shares. All non-Canadian residents and
those Canadian residents who fail to make an election will automatically
receive shares of Pioneer Common Stock. In any case, each holder of
Chauvco Common Shares will receive only a whole number of shares of
Pioneer Common Stock, Exchangeable Shares or a combination thereof. In
lieu of fractional shares, Pioneer Canada will pay to the holders of
Chauvco Common Shares an amount equal to their fractional entitlement
determined in accordance with the Arrangement. Holders of Chauvco Common
Shares will be entitled to exchange their Chauvco Common Share
certificates for Pioneer certificates, Exchangeable Share certificates or
a combination thereof and CRI Share certificates upon completing and
returning a Letter of Transmittal and Election Form. Holders of the
Exchangeable Shares will be entitled at any time following the date on
which the Arrangement becomes effective (the "Effective Date") to require
Pioneer Canada to exchange such Exchangeable Shares by delivering an
equivalent number of shares of Pioneer Common Stock. However, Pioneer
Canada must deliver all such requests to Pioneer, whereupon Pioneer has
the right to deliver (instead of Pioneer Canada) an equivalent number of
shares of Pioneer Common Stock. After the third anniversary of the
Effective Date, if certain conditions are met, Pioneer has the right to
exchange, and on the fifth anniversary of the Effective Date, there shall
be an automatic exchange of, all the outstanding Exchangeable Shares for
an equivalent number of shares of Pioneer Common Stock. Upon exchange of
all of the Exchangeable Shares, the former holders of Chauvco Common
Shares will own approximately 23% of Pioneer's outstanding common stock
as of the Effective Date. Pioneer and Pioneer Canada will enter into
certain ancillary agreements to ensure that holders of Exchangeable
Shares will have voting, dividend and liquidation rights equivalent to
those of holders of Pioneer Common Stock.
At the Effective Time (as defined herein), each Chauvco Option will vest,
if not already vested, and be transferred to Pioneer Canada in
consideration for one CRI Share and a number of shares of Pioneer Common
Stock determined in accordance with the Exchange Ratio in which event, in
addition to transferring the Chauvco Options to Pioneer Canada, the
Chauvco Optionholder will be required to
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<PAGE> 19
pay Pioneer Canada an amount equal to the aggregate exercise price which
the Chauvco Optionholder would otherwise be required to pay on the
exercise of such options (the "Option Payment"). Alternatively, any
Chauvco Optionholder may elect to forego making the Option Payment and
thereby reduce the number of shares of Pioneer Common Stock to be
received by the number obtained by dividing the Option Payment by the
average closing sales price per share of Pioneer Common Stock on the New
York Stock Exchange ("NYSE") over the 10 consecutive trading days ending
on the third trading day before the date of the Chauvco Meeting (the
"Pioneer Stock Price"). See "The Transaction -- Transaction Mechanics and
Description of Exchangeable Shares and Other Features" and "-- Procedures
For Exchange by Chauvco Shareholders and Chauvco Optionholders."
A minimum and maximum of 23,174,899 and 25,349,341 shares of Pioneer
Common Stock or Exchangeable Shares, or a combination of both, will be
issued upon consummation of the Transaction, based on the minimum and
maximum Exchange Ratio and assuming Chauvco Optionholders elect to make
the Option Payment. As of the date of this Joint Proxy Statement, there
are 74,409,380 shares of Pioneer Common Stock issued and outstanding. The
Pioneer Common Stock trades on the NYSE. As a condition precedent to the
Arrangement, upon consummation of the Transaction, the Exchangeable
Shares and CRI Shares will trade on The Toronto Stock Exchange (the
"TSE").
- Exchange Ratio. The Combination Agreement provides that the Exchange
Ratio ranges from a maximum of .493827 (if the price of Pioneer Common
Stock averages below $33.50) to a minimum of .451467 (if the average
price of Pioneer Common Stock is equal to or greater than $39.01), and is
based on the average trading price of shares of Pioneer Common Stock
during the period of 10 consecutive trading days ending on the third day
prior to the Chauvco Meeting. If the Exchange Ratio is above .465116,
Pioneer may elect to cause Pioneer Canada to deliver to the Chauvco
Shareholders and the Chauvco Optionholders a number of shares of Pioneer
Common Stock, Exchangeable Shares or combination thereof based on an
Exchange Ratio equal to .465116 and an amount of cash (in Canadian
dollars) per Chauvco Common Share or Chauvco Option that would compensate
such holders for the balance of the Exchange Ratio. See "The
Transaction -- Transaction Mechanics and Description of Exchangeable
Shares and Other Features -- The Arrangement."
- Appointments to Pioneer Board. The Combination Agreement provides for
the appointment or nomination of two Chauvco representatives to the
Pioneer Board. See "The Transaction -- Interests of Certain Persons in
the Transaction."
- Certain Related Agreements. Chauvco and Pioneer have entered into
agreements with certain holders of Chauvco Common Shares (Trimac
Corporation, Gendis Inc. and Guy J. Turcotte) and Pioneer Common Stock
(Richard E. Rainwater, Scott D. Sheffield and I. Jon Brumley) pursuant to
which such holders have agreed, at the Chauvco Meeting and the Pioneer
Meeting, respectively, to vote their securities in favor of the
applicable proposals. Such holders have also agreed to vote against any
proposal that might materially adversely affect the Transaction. In
addition, Pioneer and Chauvco have entered into agreements with each
affiliate (as such term is defined pursuant to Rule 145 under the
Securities Act of 1933 (the "Securities Act") of Chauvco (the "Chauvco
Affiliates") pursuant to which such persons have agreed that they will
not sell, pledge or otherwise dispose of Exchangeable Shares or Pioneer
Common Stock unless such transaction is permitted by Rule 145 of the
Securities Act, such transaction is registered under the Securities Act
or such transaction is exempt from registration under the Securities Act.
See "The Transaction -- Other Agreements -- Affiliates Agreements."
- Effective Time of the Transaction. It is anticipated that the
Transaction will become effective after the requisite shareholder, Court
and regulatory approvals have been obtained and are final and all other
conditions to the Transaction have been satisfied or waived. It is
presently anticipated that the Transaction will become effective on or
about December , 1997.
- Conditions to the Transaction. The obligations of Pioneer and Chauvco to
consummate the Transaction are subject to the satisfaction of certain
conditions, including obtaining requisite shareholder, Court and
regulatory approvals. See "The Transaction -- The Combination Agreement."
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<PAGE> 20
DISPOSITION BY CHAUVCO OF THE ALLIANCE PIPELINE PROJECT
The Combination Agreement provides that, on or prior to the Effective Time,
Chauvco shall enter into a transaction causing all of its rights and assets
relating to the Alliance Pipeline Project to be distributed to or through an
entity for a cash payment to Chauvco of C$13.5 million (plus any additional
amounts funded by Chauvco after September 3, 1997 for regular capital needs and
commitments). Chauvco currently anticipates that it will convey its approximate
20% interest in the Alliance Pipeline Project prior to the Effective Time to
various entities owned directly or indirectly by a limited partnership formed
under the laws of the Province of Alberta. For a description of the Alliance
Pipeline Project, see "The Transaction -- The Combination
Agreement -- Disposition of Chauvco's Interest in Alliance Pipeline Project."
RECOMMENDATION OF PIONEER'S BOARD OF DIRECTORS; PIONEER'S REASONS FOR THE
TRANSACTION
The Pioneer Board believes that the terms of the Combination Agreement and
the Transaction are fair to and in the best interest of Pioneer and its
stockholders, has approved the Combination Agreement and the Transaction and
recommends that the Pioneer Stockholders approve the Combination Agreement and
the Transaction.
In reaching its conclusion, the Pioneer Board considered a number of
strategic, financial and other factors, including:
- Establishment of New Core Areas. The Pioneer Board considered the
opportunities presented by the establishment of two new core areas in
western Canada and Argentina, the benefits of owning Canadian oil and gas
reserves in terms of the long-term supply and demand dynamics of the
North American energy markets, the attractive operating climate in
Argentina and the similarity of the reservoir characteristics in
Argentina to Pioneer's domestic properties.
- Production Growth. The Pioneer Board considered that the expected oil
and gas production volumes from the Chauvco properties, reinvestment
projects and the recent growth in production from the Chauvco properties,
will accelerate Pioneer's expansion and growth strategies.
- Reserve Growth Potential. The Pioneer Board considered the projected
reserves of the Chauvco properties based on an evaluation by its
engineering staff and believes that the complementary nature of the two
companies will provide a strong foundation for growth that will benefit
the Pioneer Stockholders.
- Accretion to Cash Flow. The Pioneer Board considered that the projected
future results of the Transaction will be accretive to discretionary cash
flow by approximately 7% in 1998 and 15% in 1999.
- Improved Balance Sheet. The Pioneer Board considered that upon
consummation of the Transaction, Pioneer's debt to book capitalization
ratio will decrease from 47% to 40%, which had been set as a target
ratio, and that other credit ratios will approach their targets as well.
- Management. The Pioneer Board also considered the depth and breadth of
management experience of Mr. Turcotte and Mr. Baroffio, who have each
agreed to serve on the Pioneer Board. Both of these individuals have
extensive experience and successful track records as builders of oil and
gas companies and operations in foreign lands.
- Combination Agreement. The Pioneer Board considered the terms and
conditions of the Combination Agreement, including the consideration to
be paid to Chauvco Shareholders and Chauvco Optionholders in the
Transaction. The Pioneer Board considered that the Exchange Ratio
fluctuates if the average price of Pioneer Common Stock is between $33.50
and $39.01 per share and that, as the average price increases up to
$39.01, the Exchange Ratio will decrease. The Pioneer Board also
considered the provisions of the Combination Agreement which prohibit
Chauvco and its officers, directors, employees, agents, affiliates and
other representatives, and those of Chauvco's subsidiaries, from
soliciting or encouraging any Acquisition Transaction (as defined herein)
or, subject to the fiduciary duties of the Chauvco Board, from engaging
in any discussions or negotiations with any third parties with respect to
an Acquisition Transaction. The Pioneer Board further considered the
provisions
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<PAGE> 21
of the Combination Agreement which require Chauvco to pay to Pioneer a fee of
C$25 million or C$40 million under certain circumstances.
- Shareholders Agreements. The Pioneer Board considered that Chauvco and
Pioneer have entered into agreements with certain holders of Chauvco
Common Shares and Pioneer Common Stock pursuant to which such holders
have agreed, at the Chauvco Meeting and the Pioneer Meeting,
respectively, to vote their securities in favor of the proposals to be
brought before such meetings. In addition, such holders have agreed to
vote against any proposal that might materially adversely affect the
Transaction. Such Chauvco Shareholders collectively own approximately 48%
of the outstanding Chauvco Common Shares and such Pioneer Stockholders
collectively own approximately 16% of the outstanding Pioneer Common
Stock.
- Fairness Opinion. The Pioneer Board received a presentation from
Goldman, Sachs & Co., its financial advisor ("Goldman Sachs") at the
meeting of the Pioneer Board held on September 3, 1997, and considered
the written opinion of Goldman Sachs, rendered on September 3, 1997,
that, as of such date and based upon and subject to the factors and
assumptions set forth therein, the consideration to be paid by Pioneer
pursuant to the Combination Agreement was fair to Pioneer. A copy of
Goldman Sachs' written opinion to the Pioneer Board dated as of September
3, 1997 is attached as Annex J to this Joint Proxy Statement.
RECOMMENDATION OF CHAUVCO'S BOARD OF DIRECTORS; CHAUVCO'S REASONS FOR THE
TRANSACTION
The Chauvco Board believes that the Arrangement is fair and in the best
interests of Chauvco and the Chauvco Shareholders, has voted unanimously to
approve the Arrangement and recommends that the Chauvco's Shareholders approve
the Arrangement.
In reaching its conclusion, the Chauvco Board reviewed presentations from
and discussed the terms and conditions of the Arrangement with:
- Chauvco senior management;
- representatives of its legal counsel; and
- representatives of Salomon Brothers Inc. ("Salomon Brothers") and RBC
Dominion Securities Inc. ("RBC DS"), its financial advisors.
The Chauvco Board considered a number of factors, including:
- Opinions of Experienced Financial Advisors. Each of Salomon Brothers and
RBC DS rendered an opinion to the Chauvco Board to the effect that the
consideration to be received by the Chauvco Shareholders in the
Transaction is fair to the Chauvco Shareholders from a financial point of
view. As part of its review of the consideration, RBC DS considered the
opportunity to participate in CRI and the Alliance Pipeline Project and
concluded that the combined consideration of the one CRI Share and the
opportunity to participate in the Alliance Pipeline Project to be
received for each Chauvco Common Share would be in the region of C$3.00
to C$4.50. Copies of Salomon Brothers' and RBC DS's written opinions to
the Chauvco Board dated as of September 3, 1997 are attached as Annex K
and Annex L to this Joint Proxy Statement.
- Evaluations of Interested Parties. Beginning in early May 1997, Chauvco,
through its financial advisors, conducted an extensive process to seek
industry participants to initiate a transaction to enhance shareholder
value. As a result, a large number of interested parties evaluated
Chauvco, and the Transaction compared favorably to all other proposals.
- Premium to Trading Price. The Transaction provides the Chauvco
Shareholders with a significant premium to the trading price of the
Chauvco Common Shares immediately preceding the announcement of the
Transaction.
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<PAGE> 22
- Increased Liquidity. The Pioneer Common Stock should provide Chauvco
Shareholders with increased liquidity.
- Retention of Gabon. Chauvco Shareholders retain the upside of Chauvco in
Gabon and other international opportunities by the spinoff of CRI to
Chauvco Shareholders through the distribution of the CRI Shares.
- Retention of Alliance. Chauvco Shareholders may retain the upside of
Chauvco in the Alliance Pipeline Project by the distribution to Chauvco
Shareholders of rights to acquire Chauvco's 20% interest in the Alliance
Pipeline Project.
- Pioneer Management. Pioneer's senior management, led by Jon Brumley and
Scott Sheffield, has a proven track record.
- Interest in Larger Entity. Chauvco Shareholders will acquire an interest
in Pioneer, which with Chauvco's Canadian and Argentine operations will be
one of the largest U.S. based independent oil and gas producers. The
strategic and operational fit between the two companies is exceptional.
- Retain Two Chauvco Directors. Chauvco Shareholders will retain the
benefit of two of Chauvco's directors by the addition of Messrs. Baroffio
and Turcotte to the Pioneer Board.
INTERESTS OF CERTAIN PERSONS
Pursuant to the Combination Agreement, one Chauvco representative will be
appointed to the Pioneer Board immediately upon consummation of the Transaction
and a second Chauvco representative will be nominated as a director of Pioneer
for election at Pioneer's 1998 annual stockholders meeting. In addition, Pioneer
has agreed to maintain all rights to indemnification existing at the time of
execution of the Combination Agreement in favor of the directors and officers of
Chauvco and its subsidiaries in accordance with the charter documents and bylaws
of each entity and to the fullest extent permitted under the ABCA. See "The
Transaction -- Interests of Certain Persons in the Transaction."
Chauvco has entered into executive involuntary termination and severance
agreements with each of the officers of Chauvco which provide for a payment in
the event that an officer's employment is terminated by Chauvco at any time
other than for just cause. In such event, Chauvco is required to pay to such an
officer an amount equal to two times such officer's monthly salary and benefits
for each year the officer has been employed by Chauvco, subject to a minimum
payment equal to the officer's salary and benefits for one year.
Chauvco has also created a staff severance plan which provides that an
employee will receive between three and six weeks wages per year employed in the
event of a change of control of Chauvco and the subsequent termination of the
employee.
Chauvco has previously adopted an employee retention plan which provides
that Chauvco will pay a retention bonus to each employee (including officers) of
Chauvco on the date which is 180 days after there has been a change of control,
provided that the employee is still employed by Chauvco on that date. The amount
of the retention bonus for each employee varies between two and six months'
salary and benefits based on their category of employment. If the employee's
employment is terminated by Chauvco during such 180-day period, other than for
just cause, the employee shall be entitled to a pro rated share of the retention
bonus based on the number of days of employment following the change of control,
subject to a minimum payment of one-half of the retention bonus.
ACCOUNTING TREATMENT
The Transaction will be accounted for as a purchase of Chauvco by Pioneer
under U.S. generally accepted accounting principles ("U.S. GAAP"). See "The
Transaction -- Accounting Treatment."
13
<PAGE> 23
BUSINESS COMBINATION COSTS
Pioneer and Chauvco expect to incur non-recurring business combination
costs in connection with the Transaction estimated to be between $20 million and
$30 million.
CERTAIN TAX CONSEQUENCES
The Transaction has been structured to provide for a deferral from Canadian
tax for Chauvco Shareholders who are residents of Canada for the purposes of the
Income Tax Act (Canada) (the "Canadian Tax Act"). However, such Chauvco
Shareholders will only be entitled to a tax deferral if they elect to receive
Exchangeable Shares and they file an election under subsection 85(1) of the
Canadian Tax Act. In such circumstances, Chauvco Shareholders who would
otherwise incur a gain on the transfer of their Chauvco Common Shares to Pioneer
Canada will be able to elect to restrict the proceeds of disposition of their
Chauvco Common Shares to the aggregate fair market value of the CRI Shares, cash
and shares of Pioneer Common Stock which they receive, and thereby defer the
recognition of any gain to the extent of the fair market value of any
Exchangeable Shares received. Such Chauvco Shareholders will generally only be
able to obtain a tax deferral for as long as they continue to hold the
Exchangeable Shares, and will recognize a gain or loss when their Exchangeable
Shares are exchanged for shares of Pioneer Common Stock or sold in the open
market.
HOLDERS OF CHAUVCO COMMON SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE TAX CONSEQUENCES TO THEM OF THE RECOGNITION OF A CAPITAL GAIN AS A
RESULT OF THE TRANSFER OF THEIR CHAUVCO COMMON SHARES TO PIONEER CANADA. UNLESS
A HOLDER ELECTS TO RECEIVE EXCHANGEABLE SHARES AND MAKES AN ELECTION UNDER
SUBSECTION 85(1) OF THE CANADIAN TAX ACT, A DEFERRAL FROM CANADIAN TAX WILL NOT
BE AVAILABLE. SEE "INCOME TAX CONSIDERATIONS TO CHAUVCO SHAREHOLDERS AND CHAUVCO
OPTIONHOLDERS."
DISSENTER'S RIGHTS
Under Delaware law, Pioneer Stockholders will not have appraisal or
dissenter's rights relating to the Transaction. Under Canadian law, Chauvco
Shareholders will have certain appraisal or dissenter's rights. See "Dissenting
Shareholders' Rights" and Annex M of this Joint Proxy Statement.
REGULATORY REQUIREMENTS
The Transaction is subject to the premerger filing requirements of the HSR
Act, and on , 1997, Pioneer, Chauvco and Guy Turcotte made premerger
filings under the United States Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), with the Federal Trade Commission (the "FTC")
and the Antitrust Division of the Department of Justice. On , 1997,
the FTC notified Pioneer, Chauvco and Guy Turcotte that their respective
requests for early termination of the waiting period under the HSR Act had been
granted and that the waiting period had been terminated.
The Transaction is also subject to the expiration of the applicable waiting
period under the Competition Act, Canada, and the receipt of necessary approvals
under the Investment Canada Act. On , 1997, Pioneer filed a short form
notification filing and an application for an advance ruling certificate under
the Competition Act and on , 1997, Pioneer made a review application
under the Investment Canada Act. Pioneer and Chauvco have applied for and expect
to receive rulings or orders of certain provincial securities regulatory
authorities in Canada to permit the issuance to Chauvco Shareholders of the CRI
Shares, Exchangeable Shares and Pioneer Common Stock and to permit resale of the
CRI Shares, Exchangeable Shares and Pioneer Common Stock in such provinces
without restriction by a shareholder other than a "control person." All other
required regulatory filings either have been or will be made prior to the
consummation of the Transaction. See "The Transaction -- Regulatory Matters" and
"-- Resale of Exchangeable Shares, Pioneer Common Stock and CRI Shares Received
in the Transaction."
14
<PAGE> 24
RISK FACTORS
In evaluating the Transaction the following risk factors relating to the
Transaction, Pioneer and its business, and Chauvco and its business should be
taken into account, which risk factors are discussed at greater length under the
caption "Risk Factors."
- forward-looking statements are contained in this Joint Proxy Statement
and, although Pioneer and Chauvco believe they are based on reasonable
assumptions, no assurances can be given that actual results may not
differ from such forward-looking statements;
- the number of Shares of Pioneer Common Stock or Exchangeable Shares to be
received by Chauvco Shareholders and Chauvco Optionholders will fluctuate
between a certain price range, but will become fixed if the Pioneer Stock
Price (as defined herein) is below the floor or above the ceiling
determined in the Combination Agreement;
- prices for oil, natural gas and NGL production and the costs of
acquiring, finding, developing and producing such products are volatile;
- Pioneer will continue to have substantial indebtedness upon consummation
of the Transaction;
- Pioneer's and Chauvco's reserve information is based upon estimates of
proved reserves and, in the case of Chauvco, proved and probable
reserves, and future net cash flows, which may not prove to be accurate;
- Pioneer's and Chauvco's success will depend upon replacement of reserves
and successful drilling of its large inventory of exploration projects;
- Pioneer's success will depend upon key personnel;
- oil and natural gas operations involve risks that may not be fully
insured;
- international operations are subject to political, economic and other
uncertainties;
- exposure to foreign exchange risks;
- governments regulate the oil and natural gas industry extensively;
- oil and natural gas production, development and exploration activities
are competitive;
- certain provisions of Pioneer's charter and bylaws may discourage a
change in control;
- restrictions may exist on the payment of dividends;
- the price of Pioneer Common Stock may be volatile; and
- possible preferential purchase rights relating to core Argentine
properties.
15
<PAGE> 25
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined statements of operations data and other
financial data of Pioneer for the six months ended June 30, 1997 and for the
year ended December 31, 1996 give effect to the Parker/Mesa Merger and the
acquisition of Chauvco as if such merger and such acquisition had occurred on
January 1, 1996. The unaudited pro forma combined balance sheet data of Pioneer
as of June 30, 1997 and December 31, 1996 give effect to the Parker/Mesa Merger
and the acquisition of Chauvco as if such merger and such acquisition had
occurred on June 30, 1997 and December 31, 1996, respectively. This Summary Pro
Forma Combined Financial Information is qualified in its entirety by, and should
be read in conjunction with, the Unaudited Pro Forma Combined Financial
Statements of Pioneer included elsewhere in this Joint Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
------------------ --------------
(IN MILLIONS, EXCEPT RATIOS AND PER
SHARE DATA)
<S> <C> <C>
Statements of Operations Data:
Revenues:
Oil and gas............................................ $ 457,504 $ 881,639
Natural gas processing................................. 11,819 23,184
Interest and other..................................... 5,556 42,419
Gain on disposition of assets, net..................... 2,655 11,966
---------- ----------
477,534 959,208
---------- ----------
Costs and expenses:
Oil and gas production................................. 125,682 230,159
Natural gas processing................................. 6,098 11,949
Depletion, depreciation and amortization............... 195,089 378,848
Impairment of oil and gas properties and natural gas
processing facilities................................. 2,907 --
Exploration and abandonments........................... 34,968 37,555
General and administrative............................. 47,747 83,955
Interest............................................... 70,353 137,958
Other.................................................. 3,301 4,791
---------- ----------
486,145 885,215
---------- ----------
Income (loss) before income taxes........................... (8,611) 73,993
Income tax benefit (provision).............................. 3,400 (27,000)
---------- ----------
Income (loss) from continuing operations.................... $ (5,211) $ 46,993
========== ==========
Income (loss) from continuing operations per share........ $ (.05) $ .49
========== ==========
Weighted average shares outstanding......................... 96,468 96,769
Other Financial Data:
EBITDAEX(a)............................................... $ 294,706 $ 628,354
Ratio of earnings to fixed charges(b)..................... (b) 1.53
Balance Sheet Data (end of period):
Working capital........................................... $ 8,500 $ 23,635
Property, plant and equipment, net........................ 4,998,028 4,705,337
Total assets.............................................. 5,303,906 5,060,930
Long-term obligations..................................... 1,891,171 1,701,818
Total stockholders' equity................................ 2,667,209 2,642,485
</TABLE>
- ---------------
(a) EBITDAEX is presented because of its wide acceptance as a financial
indicator of a company's ability to service or incur debt. EBITDAEX (as used
herein) is calculated by adding interest, income taxes, depletion,
depreciation and amortization, impairment of oil and gas properties and
natural gas processing facilities, and exploration and abandonment costs to
income (loss) from continuing operations. Interest
16
<PAGE> 26
includes accrued interest expense and amortization of deferred financing
costs. EBITDAEX should not be considered as an alternative to earnings
(loss) or operating earnings (loss), as defined by generally accepted
accounting principles, as an indicator of Pioneer's financial performance,
as an alternative to cash flow, as a measure of liquidity or as being
comparable to other similarly titled measures of other companies.
(b) For purposes of computing the pro forma ratio of earnings to fixed charges,
earnings consists of income (loss) from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense,
interest capitalized and the portion of rental expense attributable to
interest. Earnings for Unaudited Pro Forma Combined Pioneer were inadequate
to cover its fixed charges during the six months ended June 30, 1997 by $8.6
million.
17
<PAGE> 27
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Pioneer
The following table sets forth selected consolidated financial information
of Pioneer for the six months ended June 30, 1997 and 1996 and for each of the
five fiscal years in the period ended December 31, 1996. This data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations of Pioneer and the Consolidated Financial
Statements of Pioneer and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ---------------------------------------------------
1997 1996 1996 1995 1994(A) 1993(B) 1992
-------- -------- -------- -------- -------- -------- -------
(UNAUDITED)
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Oil and gas...................................... $ 198.6 $ 192.0 $ 396.9 $ 375.7 $ 337.6 $ 207.2 $ 135.1
Natural gas processing........................... 11.8 11.1 23.8 33.2 39.2 77.5 54.6
Gas marketing.................................... -- -- -- 76.8 103.0 43.8 12.1
Interest and other............................... 2.8 2.4 17.5 11.4 6.9 4.4 4.2
Gain on disposition of assets, net(c)............ 2.7 95.3 97.1 16.6 9.5 23.2 4.2
-------- -------- -------- -------- -------- -------- -------
215.9 300.8 535.3 513.7 496.2 356.1 210.2
-------- -------- -------- -------- -------- -------- -------
Costs and expenses:
Oil and gas production........................... 55.4 57.4 110.3 130.9 127.1 78.3 51.8
Natural gas processing........................... 6.1 6.0 12.5 25.9 33.6 51.6 38.6
Gas marketing.................................... -- -- -- 75.7 101.5 42.8 11.0
Depletion, depreciation and amortization......... 59.5 59.6 112.1 159.1 145.4 80.4 45.6
Impairment of oil and gas properties and natural
gas processing facilities...................... -- -- -- 130.5 -- -- --
Exploration and abandonments..................... 18.4 10.8 23.0 27.5 25.2 3.6 4.5
General and administrative....................... 15.0 13.0 28.4 37.4 29.0 23.8 11.6
Interest......................................... 20.2 26.1 46.2 65.4 50.6 23.3 14.7
Other............................................ .8 1.3 2.5 11.3 4.3 3.9 2.3
-------- -------- -------- -------- -------- -------- -------
175.4 174.2 335.0 663.7 516.7 307.7 180.1
-------- -------- -------- -------- -------- -------- -------
Income (loss) before income taxes, extraordinary
item and cumulative effect of accounting
change........................................... 40.5 126.6 200.3 (150.0) (20.5) 48.4 30.1
Income tax benefit (provision)..................... (14.5) (31.7) (60.1) 45.9 6.5 (17.0) (3.0)
-------- -------- -------- -------- -------- -------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change........... 26.0 94.9 140.2 (104.1) (14.0) 31.4 27.1
Extraordinary item................................. -- -- -- 4.3 (.6) -- --
Cumulative effect of accounting change............. -- -- -- -- -- 17.1 --
-------- -------- -------- -------- -------- -------- -------
Net income (loss).................................... $ 26.0 $ 94.9 $ 140.2 $ (99.8) $ (14.6) $ 48.5 $ 27.1
======== ======== ======== ======== ======== ======== =======
Income (loss) before extraordinary item and
cumulative effect of accounting change per share:
Primary.......................................... $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05
======== ======== ======== ======== ======== ======== =======
Fully diluted.................................... $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05
======== ======== ======== ======== ======== ======== =======
Net income (loss) per share:
Primary.......................................... $ .74 $ 2.66 $ 3.92 $ (2.83) $ (.49) $ 1.74 $ 1.05
======== ======== ======== ======== ======== ======== =======
Fully diluted.................................... $ .71 $ 2.32 $ 3.47 $ (2.83) $ (.49) $ 1.74 $ 1.05
======== ======== ======== ======== ======== ======== =======
Dividends per share................................ $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10
======== ======== ======== ======== ======== ======== =======
Weighted average shares outstanding................ 35.4 35.7 35.7 35.3 30.1 27.9 25.8
Other Financial Data:
EBITDAEX(d)........................................ $ 138.6 $ 223.0 $ 381.7 $ 232.5 $ 200.7 $ 155.7 $ 95.0
Cash flows from operating activities............... 124.6 120.6 230.1 157.3 129.8 112.2 77.2
Cash flows from investing activities............... (158.0) 147.7 13.7 (53.3) (446.0) (398.2) (111.8)
Cash flows from financing activities............... 24.5 (228.4) (245.4) (107.9) 331.4 278.9 33.8
Capital expenditures............................... 170.3 76.9 227.8 228.4 554.9 583.5 129.7
Ratio of earnings to fixed charges(e).............. 3.0 5.8 5.3 (e) (e) 3.0 2.9
</TABLE>
18
<PAGE> 28
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ---------------------------------------------------
1997 1996 1996 1995 1994(A) 1993(B) 1992
-------- -------- -------- -------- -------- -------- -------
(UNAUDITED)
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Working capital.................................... $ 10.2 $ 57.1 $ 26.1 $ 31.5 $ 43.7 $ 39.5 $ 8.0
Property, plant and equipment, net................. 1,139.4 955.4 1,040.4 1,121.7 1,349.9 802.0 499.1
Total assets....................................... 1,283.5 1,138.6 1,199.9 1,319.2 1,604.9 1,016.9 576.7
Long-term obligations.............................. 376.8 328.0 329.0 603.2 727.2 544.3 225.9
Preferred stock of subsidiary...................... 188.8 188.8 188.8 188.8 188.8 -- --
Total stockholders' equity......................... 554.9 504.4 530.3 411.0 509.6 348.8 295.0
</TABLE>
- ---------------
(a) Includes amounts relating to the acquisition of Bridge Oil Limited in July
1994 and the acquisition of properties from PG&E Resources Company in August
1994.
(b) Includes amounts relating to the acquisition of certain Prudential-Bache
Energy limited partnerships in July 1993. Also includes results of
operations related to Pioneer's interest in the Carthage gas processing
plant that had been deferred in 1992 and 1993 and the gain of $7.3 million
recognized on the sale of that interest on June 30, 1993.
(c) Includes a gain of $83.3 million in 1996 related to the disposition of
certain wholly-owned subsidiaries.
(d) EBITDAEX is presented because of its wide acceptance as a financial
indicator of a company's ability to service or incur debt. EBITDAEX (as used
herein) is calculated by adding interest, income taxes, depletion,
depreciation and amortization, impairment of oil and gas properties and
natural gas processing facilities and exploration and abandonment costs to
income (loss) before extraordinary item and cumulative effect of accounting
change. Interest includes accrued interest expense and amortization of
deferred financing costs. EBITDAEX should not be considered as an
alternative to earnings (loss) or operating earnings (loss), as defined by
generally accepted accounting principles, as an indicator of Pioneer's
financial performance, as an alternative to cash flow, as a measure of
liquidity or as being comparable to other similarly titled measures of other
companies.
(e) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes, extraordinary item and
cumulative effect of accounting change plus fixed charges net of interest
capitalized. Fixed charges consist of interest expense, interest capitalized
and the portion of rental expense attributable to interest. Pioneer's 1995
and 1994 earnings were inadequate to cover its fixed charges. The amount of
the deficiencies were $150.0 million in 1995 and $20.5 million in 1994.
19
<PAGE> 29
Mesa
The following table sets forth selected financial information of Mesa for
each of the six months ended June 30, 1997 and 1996 and for the five fiscal
years in the period ended December 31, 1996. This data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations of Mesa and the Consolidated Financial Statements of Mesa
and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- -------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total operating revenue.................... $ 172.1 $ 152.0 $ 311.4 $ 235.0 $ 228.7 $ 222.2 $ 237.1
Total operating expenses................... 124.1 105.6 214.7 187.0 200.0 200.2 210.9
------- -------- ------- ------- ------- ------- -------
Operating income........................... 48.0 46.4 96.7 48.0 28.7 22.0 26.2
------- -------- ------- ------- ------- ------- -------
Net interest expense(a).................... (47.5) (66.9) (113.4) (132.7) (131.3) (131.3) (129.9)
Other income(b)............................ (2.5) 26.1 25.0 27.1 19.2 6.9 14.5
------- -------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations(c)............................ $ (2.0) $ 5.6 $ 8.3 $ (57.6) $ (83.4) $(102.4) $ (89.2)
-------- ------- ------- ------- -------
Dividends on preferred stock............... (11.1) (9.5)
------- -------
Income (loss) from continuing operations
applicable to common stock(c)............ $ (13.1) $ (1.2)
======= =======
Income (loss) from continuing operations
per common share......................... $ (0.20) $ 0.09 $ (0.02) $ (0.90) $ (1.42) $ (2.61) $ (2.31)
======= ======== ======= ======= ======= ======= =======
Weighted average common shares and common
share equivalents outstanding............ 64.3 64.1 64.2 64.1 58.9 39.3 38.6
Other Financial Data:
EBITDAEX(d)................................ $ 102.7 $ 135.2 $ 228.6 $ 183.4 $ 160.3 $ 142.4 $ 178.1
Cash flows from operating activities....... 87.8 78.6 101.3 69.2 48.6 32.5 (28.4)
Cash flows from investing activities....... (371.7) (19.8) (45.0) (41.4) (40.3) 37.5 (17.0)
Cash flows from financing activities....... 288.0 (33.6) (188.7) (22.1) (3.6) (88.5) (29.5)
Capital expenditures....................... 372.0 19.7 50.2 42.3 32.6 29.6 69.2
Ratio of earnings to fixed charges(e)...... (e) 1.1 (e) (e) (e) (e) (e)
Balance Sheet Data (end of period):
Working capital.............................. $ 11.9 $ 18.4 $ 14.8 $ 43.8 $ 115.7 $ 76.2 $ 102.9
Property, plant and equipment, net........... 1,351.7 1,048.7 1,046.4 1,104.8 1,130.4 1,191.8 1,280.3
Total assets................................. 1,505.5 1,413.5 1,213.9 1,486.8 1,484.0 1,533.4 1,676.5
Long-term debt, including current
maturities................................. 1,108.3 1,201.7 808.1 1,236.7 1,223.3 1,241.3 1,286.2
Stockholders' equity......................... 263.5 73.7 265.5 67.0 124.6 112.1 184.4
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Business of Pioneer -- Management's Discussion and Analysis of
Financial Condition and Results of Operations of Mesa -- Results of
Operations -- Other Income (Expense)" for additional detail.
(c) Loss from continuing operations excludes a $59.4 million ($.92 per common
share) extraordinary loss on debt extinguishment for 1996. Net loss
attributable to common stock was $60.6 million ($.94 per common share) for
the year ended December 31, 1996. Net loss and net loss per share for the
years ended December 31, 1995, 1994, 1993 and 1992 and the three months
ended March 31, 1997 and 1996 are the same as loss from continuing
operations and loss from continuing operations per common share shown above.
(d) EBITDAEX is presented because of its wide acceptance as a financial
indicator of a company's ability to service or incur debt. EBITDAEX (as used
herein) is calculated by adding interest, income taxes, depletion,
depreciation and amortization, impairment of oil and gas properties and
exploration costs to loss from continuing operations applicable to common
stock. Interest includes accrued interest expense and amortization of
deferred financing costs. EBITDAEX should not be considered as an
alternative to earnings (loss) or operating earnings (loss), as defined by
generally accepted accounting principles, as an indicator of Mesa's
financial performance, as an alternative to cash flow, as a measure of
liquidity or as being comparable to other similarly titled measures of other
companies.
(e) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as loss from continuing operations applicable to common stock
plus fixed charges. Fixed charges consist of interest expense, capitalized
interest and preferred stock dividends. Earning were inadequate to cover
fixed charges for the years ended December 31, 1996 through 1992 by $1.3
million, $58.5 million, $83.5 million, $105.3 million and $91.6 million,
respectively, and for the six months ended June 30, 1997 by $24.2 million.
20
<PAGE> 30
Chauvco.
The following table sets forth selected financial information of Chauvco
for the six months ended June 30, 1997 and 1996 and for the five fiscal years in
the period ended December 31, 1996. This data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Chauvco and the Consolidated Financial Statements of Chauvco and
the related notes thereto included elsewhere herein. See Note 11 to the
Consolidated Financial Statements for a reconciliation of Canadian generally
accepted accounting principles ("GAAP") in Canadian dollars to U.S. GAAP in
Canadian Dollars.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Canadian GAAP
Revenue............................... C$102,526 C$ 86,739 C$178,543 C$170,314 C$164,381 C$136,794 C$121,906
Net income............................ 19,178 16,979 34,131 25,425 29,052 28,220 22,726
Net income per share.................. 0.40 0.35 0.71 0.54 0.65 0.64 0.53
U.S. GAAP
Revenue............................... C$102,526 C$ 86,739 C$178,543 C$170,314 C$164,381 (a) (a)
Net income............................ 21,280 19,259 41,276 33,337 24,562 (a) (a)
Net income per share.................. 0.44 0.40 0.85 0.71 0.55 (a) (a)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ---------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Canadian GAAP
Working capital (deficiency)..................... C$ (3,912) C$ (7,441) C$ 7,477 C$ (749) C$(11,872) C$ 631
Total assets..................................... 830,493 637,436 590,490 564,652 384,603 332,052
Long-term debt................................... 285,926 127,207 139,087 180,715 51,405 50,303
Shareholders' equity............................. 417,906 397,751 362,892 281,442 250,277 219,958
U.S. GAAP
Working capital.................................. C$ (3,912) C$ (7,441) C$ 7,477 (a) (a) (a)
Total assets..................................... 782,264 585,453 526,601 (a) (a) (a)
Long-term debt................................... 285,926 127,207 139,087 (a) (a) (a)
Shareholders' equity............................. 391,375 369,118 327,114 (a) (a) (a)
</TABLE>
- ---------------
(a) U.S. GAAP information for these periods is not available.
21
<PAGE> 31
RISK FACTORS
Shareholders should carefully review the following factors together with
the other information contained in this Joint Proxy Statement prior to voting on
the proposals herein.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Joint Proxy Statement includes forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
of 1934 (the "Exchange Act"). All statements other than statements of historical
fact included in this Joint Proxy Statement including, without limitation, the
statements under "Summary -- Pioneer," "Business of Pioneer -- Overview of the
Pioneer Enterprise," "-- Management's Discussion and Analysis of Financial
Condition and Results of Operations of Pioneer," "-- Management's Discussion and
Analysis of Financial Condition and Results of Operations of Mesa" and "Business
of Chauvco -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of Chauvco" are forward-looking statements. Although
Pioneer and Chauvco 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 Pioneer and Chauvco 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 Pioneer to achieve the goals described in "The Transaction --
Recommendation of Pioneer's Board of Directors; Reasons for the Transaction" and
"-- Recommendation of Chauvco's Board of Directors; Reasons for the
Transaction," as well as other factors discussed in this Joint Proxy Statement.
EXCHANGE RATIO DETERMINATION
Stockholders of Pioneer and Chauvco should consider that the number of
shares of Pioneer Common Stock or Exchangeable Shares to be received by Chauvco
Shareholders and Chauvco Optionholders will be established by the Exchange Ratio
that will depend upon the average per share market price of Pioneer Common Stock
over a specified period prior to the Chauvco Meeting. As the average price
increases between $33.50 and $39.01, the Exchange Ratio will decrease from
0.493827 to 0.451467. Alternatively, as the average price decreases between
$39.01 and $33.50, the Exchange Ratio will increase from 0.451467 to 0.493827.
However, if the average price falls below $33.50, the Exchange Ratio will cease
to increase and Chauvco Shareholders and Chauvco Optionholders will not receive
any additional consideration for their Chauvco Common Shares and Chauvco
Options. If the average price rises above $39.01, the Exchange Ratio will cease
to decrease and Chauvco Shareholders and Chauvco Optionholders will receive the
benefit of such increase in price. See "The Transaction -- Transaction Mechanics
and Description of Exchangeable Shares and Other Features -- The Arrangement."
EFFECT OF VOLATILE PRODUCT PRICES AND MARKETS
The future financial condition and results of operations of Pioneer and
Chauvco will depend upon the prices received for oil and natural gas production
and NGLs and the costs of acquiring, finding, developing and producing reserves.
Prices for oil, natural gas and NGLs 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 Pioneer and Chauvco. 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, gas or NGL
prices would have a material adverse effect on Pioneer's or Chauvco'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 Pioneer and Chauvco depends upon a
number of factors beyond their control, including market demand, as well as the
availability and capacity of transportation and processing facilities. A
substantial portion of Pioneer's and Chauvco's oil and a significant portion of
their
22
<PAGE> 32
natural gas is transported through gathering systems and pipelines which are not
owned by Pioneer or Chauvco. 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. Neither Pioneer nor Chauvco has experienced any material inability
to market its proved reserves of oil or natural gas as a result of limited
access to transportation space. If transportation space is materially restricted
or is unavailable in the future, Pioneer's or Chauvco's ability to market its
oil or natural gas could be impaired and cash flow from the affected properties
could be reduced, which could have a material adverse effect on Pioneer's or
Chauvco's financial condition or results of operations. See "Business of
Pioneer -- Governmental Regulation" and "Business of Chauvco -- Governmental and
Environmental Regulation."
Oil, natural gas and NGL 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 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 1, 1997 to September 25, 1997, the prices of crude oil have ranged from
a high of $26.62 per Bbl to a low of $18.53 per Bbl and gas prices have ranged
from a high of $3.64 per Mcf to a low of $1.78 per Mcf, in each case as the
reported NYMEX Daily Prompt Month Closing Price.
Both Pioneer and Chauvco engage in hedging activities with respect to
portions of their respective projected oil and gas production through a variety
of financial arrangements designed to protect against price declines, including
swaps, collars and futures agreements, and Pioneer and Chauvco expect to
continue to do so. To the extent that Pioneer or Chauvco engage in such
activities, they may be prevented from realizing the benefits of price increases
above the levels reflected in such hedges.
SUBSTANTIAL INDEBTEDNESS
Upon consummation of the Transaction, Pioneer will have long-term
indebtedness (including current maturities) of approximately $1.8 billion,
consisting of an estimated $819 million in borrowings under an unsecured
revolving bank credit facility (the "Pioneer Credit Facility"), $358 million
attributable to senior notes and $577 million attributable to senior
subordinated notes. Pioneer's level of indebtedness will have several important
effects on its future operations, including that (i) a portion of Pioneer's cash
flow from operations will be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) the covenants
contained in the Pioneer Credit Facility and in the indentures governing the
senior subordinated notes will require Pioneer to meet certain financial tests
and other restrictions, limit its ability to borrow additional funds, to grant
liens, to dispose of assets, and to pay dividends, and will affect Pioneer's
flexibility in planning for and reacting to changes in its business, including
possible acquisition activities, and (iii) Pioneer's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired.
Pioneer's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon Pioneer's future performance, which
will depend in part on oil and gas prices received, Pioneer's level of
production and general economic conditions and financial, business and other
factors affecting the operations of Pioneer, many of which are beyond its
control. There can be no assurance that Pioneer's future performance will not be
adversely affected by such changes in oil and gas prices and production, and by
such economic conditions and financial, business and other factors.
Consummation of the Transaction will result in a decrease in Pioneer's
total indebtedness to book capitalization ratio although, in the future, it is
anticipated that such indebtedness ratio will fluctuate. Pioneer may take
several courses of action designed to reduce its total indebtedness in the
future, including the sale of assets and other actions that Pioneer may deem
appropriate. There can be no assurance that Pioneer will take these actions,
that market conditions and other factors will permit Pioneer to take such
actions, or that any of these actions will be successful if taken. See "Business
of Pioneer -- Overview of the Pioneer Enterprise" and "-- Business
Description -- Financial Management."
23
<PAGE> 33
RELIANCE ON ESTIMATES OF RESERVES AND FUTURE NET CASH FLOWS
Information relating to Pioneer's and Chauvco's oil and gas reserves set
forth in this Joint Proxy Statement is based upon engineering estimates. Reserve
engineering is a subjective process of estimating the recovery from underground
accumulations of oil and natural 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
natural gas that are ultimately recovered, production and operation costs, the
amount and timing of future development expenditures, and future oil and natural
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 oil and gas reserves
attributable to Pioneer's or Chauvco's properties. In accordance with applicable
requirements of the SEC, 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 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 SEC 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 Pioneer's or Chauvco's business or the oil and gas
industry in general.
REPLACEMENT OF RESERVES AND UNPROVED PROPERTIES
Pioneer's and Chauvco's future success will depend on their ability to
find, develop or acquire additional oil and gas reserves that are economically
recoverable. The reserves of Pioneer and Chauvco will generally decline as
reserves are depleted, except to the extent that Pioneer and Chauvco conduct
successful exploration or development activities or acquire properties
containing reserves, or both. There can be no assurance that Pioneer's or
Chauvco's planned development and exploration projects and acquisition
activities will result in significant additional reserves or that Pioneer and
Chauvco will have success drilling productive wells at low finding and
development costs. Furthermore, while Pioneer's and Chauvco's revenues may
increase if prevailing oil and gas prices increase significantly, Pioneer's and
Chauvco's finding costs for additional reserves could also increase.
Upon consummation of the Transaction, Pioneer will have unproved property
costs of over $900 million. U.S. GAAP requires periodic evaluation of these
costs on a project-by-project basis in comparison to their estimated value.
These evaluations will be affected by results of exploration activities, future
sales or expiration of all or a portion of such projects. If the quantity of
proved reserves determined by such evaluations are not sufficient to fully
recover the cost invested in each project, Pioneer may be required to recognize
significant non-cash charges in the earnings of future periods. There can be no
assurance that economic reserves will be determined to exist for such projects.
DEPENDENCE ON KEY PERSONNEL
Pioneer is dependent upon the efforts of Mr. Brumley and Mr. Sheffield, its
Chairman of the Board and Chief Executive Officer, respectively. The loss of the
services of either of such individuals or of one or more of
24
<PAGE> 34
the other members of Pioneer's senior management team could impede Pioneer's
ability to achieve its goals. Pioneer currently maintains key-man insurance on
Mr. Brumley and Mr. Sheffield.
OPERATING HAZARDS; LIMITED INSURANCE COVERAGE
Pioneer's and Chauvco's operations are subject to hazards and risks
inherent in drilling for and production and transportation of natural gas and
oil, such as fires, natural disasters, explosions, encountering formations with
abnormal pressures, blowouts, cratering, pipeline ruptures and spills, any of
which can result in loss of hydrocarbons, environmental pollution, personal
injury claims and other damage to the properties of Pioneer or Chauvco and
others. These risks could result in substantial losses to Pioneer and Chauvco
due to injury and loss of life, severe damage to and destruction of property and
equipment, pollution and other environmental damage and suspension of
operations. Moreover, Pioneer's Gulf of Mexico offshore operations will be
subject to a variety of operating risks peculiar to the marine environment, such
as hurricanes or other adverse weather conditions, to more extensive
governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to interruption
or termination of operations by governmental authorities based on environmental
or other considerations.
As protection against operating hazards, Pioneer and Chauvco have
maintained insurance coverage against some, but not all, potential losses.
Pioneer's and Chauvco's coverages include, but are not limited to, operator's
extra expense, physical damage on certain assets, employer's liability,
comprehensive general liability, automobile, workers' compensation and limited
coverage for sudden environmental damages, but Pioneer and Chauvco do not
believe that insurance coverage for environmental damages that occur over time
is available at a reasonable cost. Moreover, Pioneer and Chauvco do not believe
that insurance coverage for the full potential liability that could be caused by
sudden environmental damages is available at a reasonable cost. Accordingly,
each of Pioneer and Chauvco may be subject to liability or may lose substantial
portions of its properties in the event of environmental damages. The occurrence
of an event that is not fully covered by insurance could have an adverse effect
on Pioneer's and Chauvco's financial condition and results of operations.
INTERNATIONAL OPERATIONS
At present, Pioneer and Chauvco have operations currently being conducted
in Argentina, Guatemala and Gabon. Pioneer may also commence operations in other
countries. International operations are subject to political, economic and other
uncertainties, including, among other things, risk of war, revolution, border
disputes, expropriation, renegotiation or modification of existing contracts,
import, export and transportation regulations and tariffs, taxation policies,
including royalty and tax increases and retroactive tax claims, exchange
controls, limits on allowable levels of production, currency fluctuations, labor
disputes, and other uncertainties arising out of foreign government sovereignty
over Pioneer's international operations. Certain regions of the world have a
history of political and economic instability. Such instability could result in
new governments or the adoption of new policies that might display a
substantially more hostile attitude toward foreign investment. Furthermore, in
the event of a dispute arising from international operations, Pioneer may be
subject to the exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdiction of courts in the United
States.
EXCHANGE RATE FLUCTUATIONS
Chauvco is exposed to foreign exchange risks since a portion of its
expenditures are in Central African Francs ("CFA Francs"). The exchange rate
between CFA Francs and U.S. dollars has varied substantially in the last five
years. The CFA Franc was fixed to the French franc at CFA Franc 50; French franc
1 from 1948 until its devaluation by 50% on January 12, 1994. Parity is
currently fixed at CFA Franc 100; French franc 1. In addition, Pioneer is
exposed to foreign exchange risks since a portion of its expenditures are in
Guatemala, and Pioneer will be exposed to foreign exchange risks in Argentina,
Canada and any other foreign country in which it operates.
25
<PAGE> 35
GOVERNMENTAL REGULATION
General. Pioneer's and Chauvco's operations are affected from time to time
in varying degrees by political developments and federal, provincial and state
laws and regulations. In particular, oil and natural gas production, operations
and economics are or have been affected by price controls, production controls,
taxes, royalties and export and import regulations and other laws relating to
the oil and natural gas industry, by changes in such laws and by changes in
administrative regulations. Pioneer and Chauvco cannot predict how existing laws
and regulations may be interpreted by enforcement agencies or court rulings,
whether additional laws, regulations and other controls will be adopted, or the
effect such changes may have on its business or financial condition.
Environmental. Pioneer's and Chauvco's operations are subject to numerous
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences or before the
construction of pipelines, plants and other facilities, restrict the types and
locations of wells and facilities, quantities and concentration of various
substances that can be released into the environment in connection with drilling
and production activities, limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands and other protected areas, and impose
substantial liabilities for pollution which might result from Pioneer's and
Chauvco's operations and may require environmental assessment and public
hearings before exploration or development projects may be initiated or
significant changes may be made to existing facilities . Moreover, the recent
trend toward stricter standards in environmental legislation and regulation is
likely to continue. For instance, legislation has been proposed in the U.S.
Congress from time to time that would reclassify certain crude oil and natural
gas exploration and production wastes as "hazardous wastes" which would make the
reclassified wastes subject to much more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted it could have a
significant impact on the operating costs of Pioneer, as well as the oil and gas
industry in general. Initiatives to further regulate the disposal of crude oil
and natural gas wastes pending in certain states or other jurisdictions could
have a similar impact and Pioneer and Chauvco could incur substantial costs to
comply with environmental laws and regulations. In addition to compliance costs
and increased reporting requirements, government entities and other third
parties may assert substantial liabilities, fines, or penalties against owners
and operators of oil and gas properties for oil spills, discharge of hazardous
materials, remediation, improper abandonment and clean-up costs and other
environmental damages, including damages caused by previous property owners or
cause the suspension or revocation of necessary licenses and authorizations. The
imposition of any such liabilities, fines or penalties on Pioneer or Chauvco or
such suspension or revocation could have a material adverse effect on Pioneer's
or Chauvco's financial condition and results of operations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse effect on Pioneer. See "Business of
Pioneer -- Environmental and Health Controls."
COMPETITION
Pioneer and Chauvco operate in the highly competitive areas of natural gas
and oil production, development and exploration. Pioneer and Chauvco also
compete with companies for the acquisition of desirable natural gas and oil
properties, as well as for the equipment and labor required to develop and
operate such properties. Factors affecting Pioneer's and Chauvco's ability to
compete in the marketplace include the availability of funds and information
relating to a property, the standards established by Pioneer and Chauvco for the
minimum projected return on investment, the availability of alternate fuel
sources and the transportation of gas. Pioneer's and Chauvco's competitors
include major integrated oil companies and a substantial number of independent
energy companies, many of which may have substantially larger financial
resources, staffs and facilities than Pioneer or Chauvco.
26
<PAGE> 36
ANTI-TAKEOVER PROVISIONS
Pioneer's Certificate of Incorporation, as amended and restated (the
"Pioneer Restated Certificate"), (i) provides for staggered terms of office for
directors; (ii) contains a "fair price" provision; (iii) prohibits stockholders
from acting by written consent; (iv) prohibits stockholders from calling special
meetings of stockholders; (v) requires certain procedures to be followed and
time periods to be met for any stockholder to propose matters to be considered
at annual meetings of stockholders, including nominating directors for election
at those meetings; (vi) limits the ability of stockholders to interfere with the
power of the Pioneer Board in other specified ways; (vii) requires supermajority
votes to amend any of the preceding provisions; and (viii) authorizes the
Pioneer Board to issue up to 100,000,000 shares of preferred stock without
stockholder approval and to set the rights, preferences, and other designations,
including voting rights, of those shares as the Pioneer Board may determine. See
"Description of Capital Stock -- Pioneer Capital Stock -- Certain Provisions of
the Certificate of Incorporation and Bylaws." These provisions, alone or in
combination with each other, may discourage transactions involving actual or
potential changes of control of Pioneer, including transactions that otherwise
could involve payment of a premium over prevailing market prices to holders of
Pioneer Common Stock. Pioneer is also subject to provisions of the DGCL that may
make some business combinations more difficult. See "Description of Capital
Stock -- Pioneer Capital Stock -- Delaware Anti-Takeover Statute."
RESTRICTIONS ON DIVIDENDS
Dividends will be paid on Pioneer Common Stock only if, as and when
declared by the Pioneer Board. Pioneer's ability to pay dividends may be limited
by the terms of its credit facilities, debt indentures, and preferred stock.
Pioneer intends to pay a $0.05 dividend semi-annually. No assurance can be given
about the amount or timing of dividends, if any, that Pioneer may pay, about
whether Pioneer will be permitted to pay dividends following the Transaction, or
about the ability of Pioneer to obtain waivers or amendments of covenants
limiting or prohibiting dividend payments. There is no current intention on the
part of the Chauvco Board to pay any dividends on the Chauvco Common Shares.
POSSIBLE VOLATILITY OF STOCK PRICE
Following the Transaction, the market price for Pioneer Common Stock may be
highly volatile depending on various factors, including the general economy,
stock market conditions, announcements by Pioneer, its competitors and
fluctuations in Pioneer's overall operating results. In addition, the stock
market historically has experienced volatility which 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 Pioneer
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.
POSSIBLE PREFERENTIAL PURCHASE RIGHT
In September 1997, Chauvco received a written notice from YPF S.A. ("YPF")
that, in its view, consummation of the Transaction would permit YPF to exercise
its preferential right under its agreements with Chauvco to purchase the Tierra
del Fuego production concession located in Argentina. See "Business of
Chauvco -- Petroleum and Natural Gas Operations -- Description of
Properties -- Tierra del Fuego." Based upon legal advice, Chauvco and Pioneer do
not believe that YPF's preferential purchase right will be triggered upon
consummation of the Transaction, and Chauvco's legal counsel has so informed
YPF. There can be no assurance, however, that YPF's position would not prevail
in arbitration or litigation. YPF has not asserted its view of the value of the
Tierra del Fuego production concession. If YPF were to prevail in arbitration or
litigation, there is a high degree of risk that YPF will dispute Pioneer's
allocation of purchase price to the Tierra del Fuego production concession.
Pioneer's preliminary allocation of purchase price for the Tierra del Fuego
production concession is $ million.
27
<PAGE> 37
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The consolidated financial statements of, and the summaries of historical
consolidated financial information concerning, Chauvco contained in this Joint
Proxy Statement are reported in Canadian dollars and have been prepared in
accordance with Canadian GAAP, which differs in certain material respects from
U.S. GAAP. See Note 11 of Notes to Chauvco's Consolidated Financial Statements,
which presents a reconciliation of such consolidated financial statements from
Canadian GAAP to U.S. GAAP. The pro forma financial statements contained in this
Joint Proxy Statement for Chauvco have been converted to U.S. dollars using the
period end exchange rate for each balance sheet and the period end average
exchange rate for each statement of operations. The historical exchange rates in
effect for each period are displayed in the table below. In addition, certain
adjustments to the pro forma financial statements of Chauvco have been made to
conform such pro forma financial statements to U.S. GAAP.
The consolidated financial statements and the pro forma financial
statements of and the summaries of historical consolidated financial information
concerning Pioneer and Mesa contained in this Joint Proxy Statement are reported
in U.S. dollars and have been prepared in accordance with U.S. GAAP.
IN THIS JOINT PROXY STATEMENT, UNLESS OTHERWISE INDICATED, ALL DOLLAR
AMOUNTS ARE EXPRESSED IN U.S. DOLLARS.
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS
The following table sets forth, for each period indicated, the average rate
for one Canadian dollar expressed in U.S. dollars on the last day of each month
during such period and the exchange rate at the end of such period, based upon
the noon buying rate in New York City for cable transfers in Canadian dollars,
as certified for customer purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"):
<TABLE>
<CAPTION>
SIX MONTH
PERIOD
ENDED JUNE 30, TWELVE MONTH PERIOD ENDED DECEMBER 31,
--------------- ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
High.................................. .7487 .7391 .7513 .7527 .7632 .8046 .8757
Low................................... .7146 .7235 .7235 .7023 .7103 .7439 .7761
Average............................... .7269 .7310 .7330 .7307 .7302 .7733 .8242
Period end............................ .7241 .7322 .7301 .7323 .7128 .7544 .7865
</TABLE>
On September 25, 1997, the exchange rate for one Canadian dollar expressed
in U.S. dollars based on the Noon Buying Rate was .7224.
The following table sets forth, for each period indicated, the average
exchange rate for one U.S. dollar expressed in Canadian dollars on the last date
of each month during such period and the exchange rate at the end of such
period, based upon the noon spot rate of the Bank of Canada (the "Noon Spot
Rate"):
<TABLE>
<CAPTION>
SIX MONTH PERIOD
ENDED JUNE 30, TWELVE MONTH PERIOD ENDED DECEMBER 31,
----------------- ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
High........................... 1.3995 1.3860 1.3860 1.4235 1.4074 1.3399 1.2887
Low............................ 1.3353 1.3525 1.3306 1.3282 1.3102 1.2423 1.1416
Average........................ 1.3762 1.3677 1.3643 1.3686 1.3698 1.2936 1.2140
Period end..................... 1.3811 1.3651 1.3696 1.3652 1.4028 1.3240 1.2711
</TABLE>
On September 25, 1997, the Noon Spot Rate was one U.S. dollar equals 1.3840
Canadian dollars.
28
<PAGE> 38
COMPARATIVE MARKET PRICE DATA
The following table sets forth the high and low sales prices and trading
volumes of the Pioneer Common Stock, traded under the symbol "PXD" on the NYSE,
and of the Chauvco Common Shares, traded under the symbol "CHA" on the TSE, for
the periods indicated. The quotations are as reported in published financial
sources.
<TABLE>
<CAPTION>
PIONEER CHAUVCO
---------------------------------- ----------------------------------
HIGH LOW HIGH LOW
NYSE NYSE VOLUME TSE TSE VOLUME
---- ---- ---------- ---- --- ----------
<S> <C> <C> <C> <C> <C> <C>
1995
Quarter ended March 31 .............. $22 7/8 $16 5/16 13,771,900 C$18 7/8 C$15 3/8 1,288,863
Quarter ended June 30................ 22 3/4 18 5/8 6,016,700 18 15 1/4 2,659,433
Quarter ended September 30........... 23 1/4 17 3/8 8,065,200 15 5/8 11 1/8 3,458,631
Quarter ended December 31............ 22 17 1/2 6,089,600 12 1/2 11 1,356,169
1996
Quarter ended March 31 .............. $23 3/4 $19 3/8 8,257,800 C$13 1/2 C$11 5/8 2,439,175
Quarter ended June 30................ 27 7/8 22 3/4 9,044,200 12 3/4 10 1/2 8,222,241
Quarter ended September 30........... 27 3/4 22 1/4 5,899,200 12 9 3/4 2,899,044
Quarter ended December 31............ 37 1/4 26 1/8 12,193,600 15 1/10 11 1/20 5,022,018
1997
Quarter ended March 31............... $37 5/8 $28 7/8 9,076,700 C$17 C$13 1/2 8,443,599
Quarter ended June 30................ 36 3/16 28 1/2 24,597,500 21 1/2 15 17/20 4,658,082
Quarter ended September 30 (through
September 26)...................... 44 3/8 34 3/4 22,826,800 32 1/10 19 1/2 17,801,486
</TABLE>
On September 2, 1997, the last full trading day prior to the joint public
announcement by Pioneer and Chauvco of the proposed Transaction, the last
reported sales price on the NYSE of the Pioneer Common Stock was $41 3/4 and the
high and low sales prices were $42 and $39 3/4, respectively. The last reported
sales price of the Chauvco Common Shares on the TSE on the same day was C$21.50,
and the high and low sales prices were C$21.50 and C$21.00, respectively. On
November , 1997, the last reported sales price per share of the Pioneer Common
Stock was $ , and the last reported sales price of the Chauvco Common
Shares was C$ .
On November , 1997, there were shares of Pioneer Common Stock
outstanding held of record by stockholders and Chauvco Common Shares
outstanding held of record by shareholders.
DIVIDEND POLICIES
Pioneer intends to pay dividends of $0.05 per share of common stock
semi-annually. Chauvco has not paid dividends on its capital stock.
29
<PAGE> 39
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of Pioneer
and Chauvco and per share data of an unaudited pro forma basis after giving
effect to the Transaction. This data should be read in conjunction with the
"Business of Pioneer -- Selected Historical Consolidated Financial Data of
Pioneer," "Unaudited Pro Forma Combined Financial Statements" and the separate
Consolidated Financial Statements of Pioneer and Chauvco and the notes thereto.
The unaudited pro forma financial data are not necessarily indicative of the
operating results that would have been achieved had the Transaction been in
effect as of the beginning of the periods presented and should not be construed
as representative of future operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PIONEER
Book value per common share............. $ 15.83 $ 14.17 $ 15.12 $ 11.62 $ 14.58 $ 12.49 $ 10.84
Cash dividends per common share......... $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10
Income (loss) per common share before
extraordinary item and cumulative
effect of accounting change:
Primary............................... $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05
Fully-Diluted......................... $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05
CHAUVCO
CANADIAN GAAP
Book value per common share........... C$ 8.63 C$ 7.87 C$ 8.23 C$ 7.51 C$ 6.32 C$ 5.66 C$ 5.03
Cash dividends per common share....... -- -- -- -- --
Basic income per common share......... C$ .40 C$ .35 C$ .71 C$ .54 C$ .65 C$ .64 C$ .53
U.S. GAAP
Book value per common share........... C$ 8.03 C$ 7.17 C$ 7.59 C$ 6.78 C$ 5.34 (a) (a)
Cash dividends per common share....... -- -- -- --
Income (loss) per common share........ C$ .44 C$ .40 C$ .85 C$ .71 C$ .55 (a) (a)
PIONEER UNAUDITED PRO FORMA
Book value per common share............. $ 27.52 N/A $ 27.26 N/A N/A N/A N/A
Cash dividends per common share......... .05 N/A .10 N/A N/A N/A N/A
Income (loss) from continuing operations
per common share...................... $ (.05) $ N/A $ .49 $ N/A $ N/A $ N/A $ N/A
UNAUDITED PRO FORMA
EQUIVALENT -- CHAUVCO
Book value per common share............. C$17.16 N/A C$16.86 N/A N/A N/A N/A
Cash dividends per common share......... -- N/A -- N/A N/A N/A N/A
Income (loss) per common share.......... C$ (.03) N/A C$ .30 N/A N/A N/A N/A
</TABLE>
- ---------------
(a) U.S. GAAP information for these periods is not available.
30
<PAGE> 40
THE MEETINGS
PIONEER
Solicitation and Voting of Proxies. The accompanying proxy is solicited on
behalf of the Pioneer Board for use at the Pioneer Meeting, to be held at
on December , 1997 at (Dallas time). Only
holders of record of Pioneer Common Stock at the close of business on the
Pioneer Record Date will be entitled to vote at the Pioneer Meeting. At the
close of business on the Pioneer Record Date, there were shares of
Pioneer Common Stock outstanding and entitled to vote. A majority of those
shares, present in person or by proxy, will constitute a quorum for the
transaction of business. Abstentions and broker non-votes will be considered to
be represented for purposes of a quorum. This Joint Proxy Statement and the
accompanying form of proxy were first mailed to Pioneer Stockholders on or about
November , 1997.
Revocation of Proxies. A Pioneer Stockholder who has given a proxy may
revoke it at any time before it is exercised at the Pioneer Meeting by (i)
delivering to the secretary of Pioneer (by any means, including facsimile) a
written notice stating that the proxy is revoked, (ii) signing and so delivering
a proxy bearing a later date or (iii) attending the Pioneer Meeting and voting
in person (although attendance at the Pioneer Meeting will not, by itself,
revoke a proxy).
Expenses of Proxy Solicitation. The expenses of soliciting proxies to be
voted at the Pioneer Meeting will be paid by Pioneer. Following the original
mailing of the proxies and other soliciting materials, Pioneer and/or its agents
also may solicit proxies by mail, telephone, facsimile or in person. Following
the original mailing of the proxies and other soliciting materials, Pioneer will
request brokers, custodians, nominees and other record holders of Pioneer Common
Stock to forward copies of the proxy and other soliciting materials to persons
for whom they hold shares of Pioneer Common Stock and to request authority for
the exercise of proxies. In such cases, Pioneer, upon the request of the record
holders, will reimburse such holders for their reasonable expenses. In addition,
Pioneer has engaged D.F. King & Associates, Inc. to assist in the solicitation
of proxies. Pioneer anticipates that it will incur total fees of approximately
$ , plus reimbursement of certain out-of-pocket expenses for this
service.
Voting of Proxies. Shares represented by all properly executed proxies
received in time for the Pioneer Meeting will be voted at such meeting in the
manner specified by the holders thereof. If no instructions are indicated, such
proxies will be voted FOR approval of the Combination Agreement and the
Transaction. A properly executed proxy marked "ABSTAIN," although counted for
purposes of determining whether there is a quorum and for purposes of
determining the aggregate voting power and number of shares represented and
entitled to vote at the Pioneer Meeting, will not be voted. Accordingly,
abstentions will have the same effect as a vote against the proposal. Shares
represented by "broker non-votes" (i.e., shares held by brokers or nominees
which are represented at a meeting but with respect to which the broker or
nominee is not empowered to vote on a particular proposal) will be counted for
purposes of determining whether there is a quorum at the Pioneer Meeting, but
will not be included for purposes of determining the aggregate voting power and
number of shares represented at the Pioneer Meeting. Accordingly, "broker
non-votes" will have no effect on the proposal to approve the Combination
Agreement and the Transaction. It is not expected that any matter other than
that referred to herein will be brought before the Pioneer Meeting. If, however,
other matters are properly presented at any such meeting, the persons named as
proxies will vote in accordance with their judgment with respect to such
matters.
If a quorum is not present at the Pioneer Meeting, the stockholders
entitled to vote who are present or represented by proxy at such meeting have
the power to adjourn the Pioneer Meeting from time to time without notice until
a quorum is present. At any such adjourned meeting at which a quorum is present,
any business may be transacted that may have been transacted at the Pioneer
Meeting had a quorum originally been present; provided, that if the adjournment
is for more than 30 days or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting. Proxies
solicited by this Joint Proxy Statement may be used to vote in favor of any
motion to adjourn the Pioneer Meeting. The persons named on the proxies intend
to vote in favor of any motion to adjourn the Pioneer Meeting to a subsequent
day if, prior to the
31
<PAGE> 41
Pioneer Meeting, such person have not received sufficient proxies to approve the
proposals described in this Joint Proxy Statement. If such a motion is approved
but sufficient proxies are not received by the time set for the resumption of
the Pioneer Meeting, this process will be repeated until sufficient proxies to
vote in favor of the proposals to be presented to the stockholders at the
Pioneer Meeting have been received or it appears that sufficient proxies will
not be received.
Voting Rights. Holders of Pioneer Common Stock are entitled to one vote
for each share held as of the Pioneer Record Date. Approval by the Pioneer
Stockholders of the Combination Agreement and the Transaction is required by the
rules of the NYSE. Such approval under Pioneer's bylaws requires the affirmative
vote of a majority of the outstanding shares of Pioneer Common Stock present and
entitled to vote thereon at the Pioneer Meeting.
Auditors. KPMG Peat Marwick LLP, certified public accountants, serve as
the independent auditors of Pioneer. Representatives of KPMG Peat Marwick LLP
plan to attend the Pioneer Meeting and will be available to answer questions.
Its representatives will also have an opportunity to make a statement at the
meeting if they so desire, although it is not expected that any statement will
be made.
CHAUVCO
Solicitation and Voting of Proxies. The accompanying proxy is solicited on
behalf of the management of Chauvco for use at the Chauvco Meeting to be held at
on December , 1997 at (Calgary time). Only
holders of record of Chauvco Common Shares at the close of business on the
Chauvco Record Date will be entitled to vote at the Chauvco Meeting, subject to
the provisions of the ABCA regarding transfers of Chauvco Common Shares after
the Chauvco Record Date. See the Chauvco Notice of Special Meeting of
Shareholders accompanying this Joint Proxy Statement. At the close of business
on the Chauvco Record Date, there were Chauvco Common Shares outstanding
and entitled to vote. A quorum of Chauvco Shareholders for the transaction of
business at the Chauvco Meeting is not less than two shareholders present,
either in person or by duly appointed proxy, holding or representing not less
than 5% of the Chauvco Common Shares entitled to be voted at the Chauvco
Meeting.
To be effective, proxies must be received by Corporate Shareholder Services
Inc. prior to the Chauvco Meeting or, if the Chauvco Meeting is adjourned or
postponed before the time of the adjourned or postponed Meeting.
Revocation of Proxies. Proxies given by Chauvco Shareholders for use at
the Chauvco Meeting may be revoked at any time prior to their use. A Chauvco
Shareholder giving a proxy may revoke the proxy (i) by instrument in writing
executed by the Chauvco Shareholder or by his or her attorney authorized in
writing, or, if the Chauvco Shareholder is a corporation, under its corporate
seal by an officer or attorney thereof duly authorized indicating the capacity
under which such officer or attorney is signing, and deposited either at the
registered office of Chauvco (as set forth in this Joint Proxy Statement) at any
time up to and including 4:00 p.m. (Calgary time) on the last business day
preceding the day of the Chauvco Meeting, or any adjournment or postponement
thereof, or with the chairman of the Chauvco Meeting on the day of such Chauvco
Meeting or adjournment or postponement thereof, (ii) by a duly executed proxy
bearing a later date or time than the date or time of the proxy being revoked,
(iii) by voting in person at the Chauvco Meeting (although attendance at the
Chauvco Meeting will not in and of itself constitute a revocation of a proxy) or
(iv) in any other manner permitted by law.
Expenses of Proxy Solicitation. The expenses of soliciting proxies to be
voted at the Chauvco Meeting will be paid by Chauvco. Following the original
mailing of the proxies and other soliciting materials, Chauvco and/or its agents
also may solicit proxies by mail, telephone, facsimile or in person. Following
the original mailing of the proxies and other soliciting materials, Chauvco will
request brokers, custodians, nominees and other record holders of Chauvco Common
Shares to forward copies of the proxy and other soliciting materials to persons
for whom they hold Chauvco Common Shares and to request authority for the
exercise of proxies. In such cases, Chauvco, upon the request of the record
holders, will reimburse such holders for their reasonable expenses. In addition,
Chauvco has engaged Corporate Shareholder Services Inc. to assist in the
32
<PAGE> 42
solicitation of proxies. Chauvco anticipates that it will incur total fees of
approximately $ , plus reimbursement of certain out-of-pocket expenses
for this service.
Appointment of Proxy and Discretionary Authority. A CHAUVCO SHAREHOLDER
HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A SHAREHOLDER OF CHAUVCO)
OTHER THAN PERSONS DESIGNATED IN THE FORM OF PROXY ACCOMPANYING THIS JOINT PROXY
STATEMENT, AS NOMINEE TO ATTEND AND ACT FOR AND ON BEHALF OF SUCH CHAUVCO
SHAREHOLDER AT THE CHAUVCO MEETING AND MAY EXERCISE SUCH RIGHT BY INSERTING THE
NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED ON THE FORM OF PROXY.
The form of proxy accompanying this Joint Proxy Statement confers
discretionary authority upon the proxy nominees with respect to amendments or
variations to the matters identified in the accompanying notice of the Chauvco
Meeting and other matters which may properly come before the Chauvco Meeting.
The shares represented by proxies at the Chauvco Meeting will be voted in
accordance with the instructions of the Chauvco Shareholder on any ballot that
may be called for and, where the person whose proxy is solicited specifies a
choice with respect to any matter to be voted upon, his or her shares shall be
voted in accordance with the specifications so made.
If a Chauvco Shareholder appoints a person designated by the management of
Chauvco in the form of proxy as nominee and does not direct the management
nominee to vote either for or against the matter or matters with respect to
which an opportunity to specify how the Chauvco Common Shares registered in the
name of such Chauvco Shareholder shall be voted, the proxy shall be voted FOR
such matter or matters proposed in this Joint Proxy Statement.
The management of Chauvco knows of no matters to come before the Chauvco
Meeting other than the matters referred to in the accompanying notice of the
Chauvco Meeting. However, if any other matters which are not now known to the
management of Chauvco should properly come before the Chauvco Meeting, the
shares represented by proxies in favor of management nominees will be voted on
such matters in accordance with the best judgment of the proxy nominee.
Voting Rights. Holders of Chauvco Common Shares are entitled to one vote
for each share held. The Arrangement Resolution must be approved by the
affirmative vote of not less than 66 2/3% of the votes cast by the holders of
Chauvco Common Shares present (in person or by proxy) and entitled to vote at
the Chauvco Meeting.
Auditors. Price Waterhouse, chartered accountants, serve as the
independent auditors of Chauvco. Representatives of Price Waterhouse plan to
attend the Chauvco Meeting and will be available to answer questions. Its
representatives will also have an opportunity to make a statement at the meeting
if they so desire, although it is not expected that any statement will be made.
THE TRANSACTION
GENERAL
Pioneer and Chauvco have entered into the Combination Agreement which
relates to the acquisition by Pioneer of the Canadian and Argentine oil and gas
businesses of Chauvco and the spinoff to Chauvco Shareholders and Chauvco
Optionholders of Chauvco's Gabonese oil and gas operations and other
international interests. Prior to consummation of the Transaction, Chauvco will
distribute its 20% interest in the Alliance Pipeline Project. The Combination
Agreement provides that, subject to the satisfaction of the conditions thereof,
the Transaction will be effected. Pioneer has caused Pioneer Canada to be
incorporated as an indirect wholly-owned subsidiary of Pioneer under the Company
Act (British Columbia) (the "BCCA"). THE DESCRIPTIONS OF THE COMBINATION
AGREEMENT AND THE ARRANGEMENT CONTAINED IN THIS JOINT PROXY STATEMENT ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE COMBINATION AGREEMENT AND THE
PLAN OF ARRANGEMENT, COPIES OF WHICH ARE INCLUDED AS ANNEX C AND ANNEX E,
RESPECTIVELY, TO THIS JOINT PROXY STATEMENT.
33
<PAGE> 43
TRANSACTION MECHANICS AND DESCRIPTION OF EXCHANGEABLE SHARES AND OTHER FEATURES
The Arrangement. Pursuant to the terms of the Plan of Arrangement, at the
Effective Time, the following shall occur, in the following order:
(a) Chauvco shall subscribe for that number of CRI Shares as is equal to
(i) the number of Chauvco Common Shares which are issued and outstanding three
trading days prior to the Effective Date (the "Record Date"), (ii) plus that
number of Chauvco Common Shares which all Chauvco Optionholders would otherwise
be entitled to acquire on the exercise of their Chauvco Options on a fully
vested basis on the Record Date, (iii) less that number of CRI Shares then held
by Chauvco, and (iv) less that number of Chauvco Common Shares held by
shareholders who have exercised their rights of dissent in accordance with the
Plan of Arrangement and who are ultimately entitled to be paid the fair value
for such shares. The subscription price for the CRI Shares shall be paid for in
cash in the aggregate amount equal to $5,000,000 plus the fair market value on
the Effective Date (as determined and adjusted in accordance with the Plan of
Arrangement) of the Gabon Securities as defined in paragraph (b) below;
(b) CRI shall purchase from CR International Limited, a wholly-owned
subsidiary of Chauvco ("CR"), for cash in an aggregate amount equal to the fair
market value thereof on the Effective Date (as determined and adjusted in
accordance with the Plan of Arrangement), (i) all of the issued and outstanding
securities of the Gabon Subsidiaries (as defined in the Plan of Arrangement),
(ii) 75% of the issued and outstanding securities of Westoil, and (iii) all of
its rights under a loan in the amount of U.S. $909,421.60 made by CR to Olympic
Marine Services International, Inc. (which owns the remaining 25% of the issued
and outstanding securities of Westoil), any and all advances made by CR to
Westoil, and any and all advances made by Chauvco (all of which shall have first
been assigned by Chauvco to CR) to the Gabon Subsidiaries and Westoil (such
securities in (b)(i), (ii) and (iii) collectively, the "Gabon Securities");
(c) Chauvco shall transfer, assign and convey to CRI, in consideration for
$1.00, all of Chauvco's right, title, benefit and interest in and to any and all
trademarks (including registrations and applications therefor), trade names and
the internet domain name "chauvco.com" owned by Chauvco as at the Effective
Time, and certain other assets and property;
(d) Pioneer Canada shall purchase from Chauvco all of the issued and
outstanding CRI Shares in consideration of the payment by way of promissory note
of Pioneer Canada to Chauvco in an amount equal to the subscription price paid
for such CRI Shares by Chauvco under paragraph (a) above;
(e) each of the outstanding Chauvco Options which has not been exercised
prior to the Record Date will vest, if not already vested, and be transferred to
Pioneer Canada in consideration for one (1) CRI Share and, in accordance with
the election of each Chauvco Optionholder and the remainder of this paragraph
(e) and paragraph (f), a number of shares of Pioneer Common Stock determined in
accordance with the Exchange Ratio in which event, in addition to transferring
the Chauvco Options to Pioneer Canada, the Chauvco Optionholder will be required
to make the Option Payment. As an alternative to making the Option Payment,
Chauvco Optionholders will be entitled to elect to reduce the number of shares
of Pioneer Common Stock to be received by the number obtained by dividing the
Option Payment by the Pioneer Stock Price (converted into Canadian dollars using
the Currency Exchange Rate). Each Chauvco Optionholder will receive only a whole
number of shares of Pioneer Common Stock resulting from the transfer of his
Chauvco Options. In lieu of fractional shares of Pioneer Common Stock, each
Chauvco Optionholder who would otherwise be entitled to receive such fractional
shares shall be paid by Pioneer Canada an amount determined in accordance with
the Plan of Arrangement in full satisfaction of such fractional entitlement;
(f) a Chauvco Optionholder electing to make the Option Payment and receive
the applicable number of shares of Pioneer Common Stock under paragraph (e)
above must have given effect to the election by depositing with Montreal Trust
Company of Canada (the "Depositary"), prior to the Election Deadline (as defined
below), a duly completed Option Letter of Transmittal and Election Form
indicating such holder's election and by agreeing to pay the Option Payment to
the Depositary as agent for Pioneer Canada. Coincident with the receipt of the
CRI Shares and shares of Pioneer Common Stock, such Chauvco Optionholder shall
pay the Option Payment to the Depositary as agent for Pioneer Canada less any
amounts receivable by such Chauvco Optionholder in connection with fractional
entitlements under the Plan of
34
<PAGE> 44
Arrangement. In the event that a Chauvco Optionholder who has elected to make
the Option Payment fails to make the Option Payment on or before the delivery of
the securities to the Chauvco Optionholder, the Depositary shall be entitled to
sell all or any portion of the shares of Pioneer Common Stock held on behalf of
such Chauvco Optionholder to satisfy the Option Payment and remit the same to
Pioneer Canada. In the event that a Chauvco Optionholder has failed to validly
make an election in the Option Letter of Transmittal and Election Form pursuant
to this paragraph, such Chauvco Optionholder shall be deemed to have elected the
option to receive the reduced number of shares of Pioneer Common Stock by not
making the Option Payment;
(g) each of the outstanding Chauvco Common Shares will be transferred to
Pioneer Canada in consideration for one (1) CRI Share and, at the election of
the holders of the Chauvco Common Shares:
(i) a number of shares of Pioneer Common Stock determined in
accordance with the Exchange Ratio. Each such holder of Chauvco Common
Shares will receive only a whole number of shares of Pioneer Common Stock
resulting from the transfer of such holder's Chauvco Common Shares to
Pioneer Canada. In lieu of fractional shares of Pioneer Common Stock, each
holder of a Chauvco Common Share who otherwise would be entitled to receive
such fractional share shall be paid by Pioneer Canada an amount determined
in accordance with the Plan of Arrangement in full satisfaction of such
fractional entitlement; or
(ii) a number of shares of Exchangeable Shares determined in
accordance with the Exchange Ratio. Each such holder of Chauvco Common
Shares will receive only a whole number of Exchangeable Shares resulting
from the transfer of such holder's Chauvco Common Shares to Pioneer Canada.
In lieu of fractional Exchangeable Shares, each holder of a Chauvco Common
Share who otherwise would be entitled to receive such fractional share
shall be paid by Pioneer Canada an amount determined in accordance with the
Plan of Arrangement in full satisfaction of such fractional entitlement;
provided that, such holders shall be entitled to elect to receive a combination
of shares of Pioneer Common Stock and Exchangeable Shares on the transfer of
their Chauvco Common Shares;
(h) a holder of Chauvco Common Shares must have given effect to the
election in paragraph (g) above by depositing with the Depositary, prior to the
date that is two days prior to the Chauvco Meeting (the "Election Deadline"), a
duly completed Letter of Transmittal and Election Form. In the event that a
holder of Chauvco Common Shares has failed to validly make an election under
paragraph (g) in the Letter of Transmittal and Election Form pursuant to this
paragraph, such holder shall be deemed to have elected the option under
paragraph (g)(i). Notwithstanding any provision to the contrary, holders of
Chauvco Common Shares who are not residents of Canada for the purposes of the
Canadian Tax Act will not be entitled to receive Exchangeable Shares under
paragraph (g)(ii). Each holder of Chauvco Common Shares who, prior to the
Election Deadline, returns to Chauvco a duly completed Letter of Transmittal and
Election Form (containing a declaration of residency status) shall be treated as
a resident shareholder or non-resident shareholder, as applicable, in accordance
with his declaration. Any holder of Chauvco Common Shares who does not complete
such declaration by the Election Deadline and who has an address on the register
of holders of Chauvco Common Shares which is outside of Canada shall be deemed
to be a non-resident shareholder;
(i) upon the transfer of shares referred to in paragraph (g) above: (i)
each holder of a Chauvco Common Share shall cease to be such a holder, shall
have his name removed from the register of holders of Chauvco Common Shares and
shall become a holder of the number of fully paid CRI Shares and Exchangeable
Shares and/or shares of Pioneer Common Stock to which he is entitled as a result
of the transfer of shares referred to in paragraph (g) and such holder's name
shall be added to the register of holders of such securities accordingly; and
(ii) Pioneer Canada shall become the legal and beneficial owner of all of the
Chauvco Common Shares so transferred;
(j) holders of Chauvco Common Shares who are residents of Canada for the
purposes of the Canadian Tax Act and who have elected to receive Exchangeable
Shares under paragraph (g)(ii) shall be entitled to make an income tax election
pursuant to subsection 85(1) of the Canadian Tax Act with respect to the
transfer of their Chauvco Common Shares to Pioneer Canada by providing two
signed copies of the necessary election forms to Pioneer Canada within 90 days
following the Effective Date, duly completed with the details of the number of
shares transferred and the applicable agreed amounts for the purposes of such
election.
35
<PAGE> 45
Thereafter, subject to the election forms complying with the provisions of the
Canadian Tax Act, the forms will be signed by Pioneer Canada and returned to
such holders of Chauvco Common Shares for filing with Revenue Canada, Customs,
Excise and Taxation; and
(k) Pioneer Canada shall be continued as a corporation under the ABCA.
Pursuant to the Arrangement, the Exchange Ratio means in respect of
Exchangeable Shares or Pioneer Common Stock to be delivered upon the transfer of
Chauvco Common Shares or Chauvco Options to Pioneer Canada, a ratio of the
number of Exchangeable Shares or shares of Pioneer Common Stock per Chauvco
Common Share or Chauvco Option equal to:
(a) if the Pioneer Stock Price is less than $33.50, .493827;
(b) if the Pioneer Stock Price is at least $33.50 but less than $39.01,
.493827 - ((Pioneer Stock Price - 33.50) X .042360)
5.51
and
(c) if the Pioneer Stock Price is equal to or greater than $39.01, .451467.
The Exchange Ratio as so determined in each case shall be rounded to six
decimal places. The Pioneer Stock Price shall mean the average closing sales
price, regular way, per share of the Pioneer Common Stock on the NYSE as
reported in the Wall Street Journal over the 10 consecutive trading days ending
on the third day next preceding the date of the Chauvco Meeting. Notwithstanding
the foregoing, if the Exchange Ratio is above .465116, Pioneer may elect to
cause Pioneer Canada to deliver, in lieu of Exchangeable Shares and shares of
Pioneer Common Stock, a number of Exchangeable Shares or shares of Pioneer
Common Stock for each Chauvco Common Share or Chauvco Option based on the
Exchange Ratio as set forth above equal to .465116 and an amount in cash (in
Canadian dollars) per Chauvco Common Share or Chauvco Option equal to the
product of (x) the Pioneer Stock Price multiplied by the noon spot rate of
exchange of U.S. dollars to Canadian dollars announced by the Bank of Canada on
the day preceding the date of calculation (the "Currency Exchange Rate") and (y)
Exchange Ratio -- .465116 (the "Cash Payment").
Chauvco determined that the fair market value of the Gabon Securities to
Chauvco on September 3, 1997 was approximately $47.9 million relying on (i) the
bidding process in connection with the sale of Chauvco, (ii) the reserve and
evaluation reports prepared by Chauvco's independent engineers, (iii) the review
and recommendation of Chauvco's senior management which established a range of
values at various discount factors and an assessment of the exploration and
development potential of the applicable properties, and (iv) an independent
appraisal obtained to confirm and support the allocation to the CRI Shares of a
portion of the consideration received by the Chauvco Shareholders. The fair
market value of the Gabon Securities to Chauvco on the Effective Date shall be
revalued and determined by Chauvco using consistent principles. Notwithstanding
the determination of the fair market value of the Gabon Securities to Chauvco on
the Effective Date pursuant to the foregoing, unless Chauvco and Pioneer
otherwise agree, the Combination Agreement provides that the amount which will
be payable by CRI for the Gabon Securities may not exceed $100 million.
As a result, immediately following the Effective Time, Chauvco will be
wholly-owned by Pioneer Canada and former holders of Chauvco Common Shares and
Chauvco Options will hold shares of Pioneer Common Stock and Exchangeable
Shares, or a combination thereof, and CRI Shares.
As noted above, at the Effective Time, each Chauvco Common Share and
Chauvco Option will automatically be transferred to Pioneer Canada for the
applicable consideration. Enclosed with copies of this Joint Proxy Statement
delivered to the registered holders of Chauvco Common Shares and to the Chauvco
Optionholders are the Letter of Transmittal and Election Form or Option Letter
of Transmittal and Election Form, which when duly completed and returned
together with all required share certificates and payments will enable the
holder to receive the consideration to which such holder is entitled. See
"-- Procedures for Exchange by Chauvco Shareholders and Chauvco Optionholders."
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The Exchangeable Shares are subject to adjustment or modification in the
event of a stock split or other changes to the capital structure of Pioneer so
as to maintain the initial one-to-one ratio between the Exchangeable Shares and
Pioneer Common Stock.
Exchange and Call Right. Holders of the Exchangeable Shares will be
entitled at any time following the Effective Time to retract (i.e., require
Pioneer Canada to redeem) any or all such Exchangeable Shares owned by them and
to receive an equivalent number of shares of Pioneer Common Stock plus an
additional amount equivalent to all declared and unpaid dividends on such
Exchangeable Shares. Holders of the Exchangeable Shares may effect such
retraction by presenting a certificate or certificates to Pioneer Canada or its
transfer agent representing the number of Exchangeable Shares the holder desires
to retract together with a duly executed statement in the form of Exhibit A to
the Exchangeable Share Provisions or in such other form as may be acceptable to
Pioneer Canada (the "Retraction Request") specifying the number of Exchangeable
Shares the holder wishes to retract and the date upon which the holder desires
to receive the Pioneer Common Stock, which must be between three and 10 business
days after the request is received by Pioneer Canada (the "Retraction Date"),
and such other documents as may be required to effect the retraction of the
Exchangeable Shares.
Upon receipt of the Exchangeable Shares, the Retraction Request and other
required documentation from the holder thereof, Pioneer Canada must immediately
notify Pioneer of such Retraction Request. Pioneer will thereafter have two
business days in which to exercise a call right (the "Retraction Call Right") to
purchase all of the Exchangeable Shares submitted by the holder thereof by the
delivery of an equivalent number of shares of Pioneer Common Stock plus an
additional amount equivalent to the full amount of all declared and unpaid
dividends on the Exchangeable Shares to the transfer agent for delivery to such
holder on the Retraction Date. In the event Pioneer determines not to exercise
its Retraction Call Right and provided that the Retraction Request is not
revoked in accordance with the Exchangeable Share Provisions, Pioneer Canada is
obligated to deliver to the holder the number of shares of Pioneer Common Stock
equal to the number of Exchangeable Shares submitted by the holder for
retraction and payment of an additional amount equivalent to the full amount of
all declared and unpaid dividends on such Exchangeable Shares by the Retraction
Date.
Subject to applicable law and the Redemption Call Rights of Pioneer
described below, on the Automatic Redemption Date (which will be on the fifth
anniversary date of the first issuance of Exchangeable Shares or, in certain
cases at the option of Pioneer, after the third anniversary of such issuance),
Pioneer Canada must redeem all but not less than all of the then outstanding
Exchangeable Shares in exchange for an equal number of shares of Pioneer Common
Stock, plus an additional amount equivalent to the full amount of all declared
and unpaid dividends on such Exchangeable Shares. Notwithstanding any proposed
redemption of the Exchangeable Shares of Pioneer Canada, Pioneer will have the
overriding right to purchase on the Automatic Redemption Date all but not less
than all of the then outstanding Exchangeable Shares in exchange for one share
of Pioneer Common Stock for each such Exchangeable Share, plus an additional
amount equivalent to the full amount of all declared and unpaid dividends on
such Exchangeable Share. Pioneer Canada shall, at least 120 days before the
Automatic Redemption Date, provide the registered holders of Exchangeable Shares
with written notice of the proposed redemption or purchase of the Exchangeable
Shares by Pioneer Canada or Pioneer, as the case may be. For a more detailed
description of the Exchange Rights and the Call Rights (each as defined herein)
in connection with the Exchangeable Shares, see "Description of Capital Stock
- -- Pioneer Canada Share Capital -- Exchangeable Shares of Pioneer Canada,"
"-- Voting and Exchange Trust Agreement -- Exchange Rights" and "-- Call
Rights."
Effect of Call Right Exercise. If Pioneer exercises one or more of its
Call Rights, it will directly issue shares of Pioneer Common Stock to holders of
Exchangeable Shares and will become the holder of such Exchangeable Shares.
Pioneer will not be entitled to exercise any voting rights attached to the
Exchangeable Shares it so acquires. If Pioneer declines to exercise its Call
Rights when applicable, it will be required, pursuant to the Support Agreement,
to issue Pioneer Common Stock to Pioneer Canada which will, in turn, transfer
such stock to the holders of Exchangeable Shares in consideration for the return
and cancellation of such Exchangeable Shares. The tax consequences resulting
from Pioneer's exercise of one or more of the Call Rights are discussed in
"Income Tax Considerations to Chauvco Shareholders and Chauvco Optionholders --
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<PAGE> 47
Canadian Federal Income Tax Considerations," which includes a discussion on
deemed dividends and Part VI.1 tax.
Voting, Dividend and Liquidation Rights of Holders of Exchangeable
Shares. On the Effective Date, Pioneer, Pioneer Canada and Montreal Trust
Company of Canada (the "Trustee") will enter into the Voting and Exchange Trust
Agreement in the form attached hereto as Annex I. Pursuant to the terms of the
Voting and Exchange Trust Agreement, Pioneer will on the Effective Date deposit
with the Trustee the one share of Pioneer Special Voting Stock, par value $0.01
per share, to be issued by Pioneer and deposited with the Trustee pursuant to
the Voting and Exchange Trust Agreement (the "Voting Share"), which will entitle
the Trustee to a number of votes equal to the number of Exchangeable Shares
outstanding from time to time that are not held by Pioneer or entities
controlled by Pioneer. With respect to any matter as to which holders of shares
of Pioneer Common Stock are entitled to vote, each holder of an Exchangeable
Share will have the right to instruct the Trustee as to the manner of voting for
one of the votes comprising the Voting Share for each Exchangeable Share owned
by such holder (the "Voting Rights"). See "Description of Capital Stock --
Voting and Exchange Trust Agreement -- Voting Rights."
Upon the occurrence of a Pioneer Canada Insolvency Event (as defined
herein), holders of the Exchangeable Shares will have preferential rights to
receive from Pioneer one share of Pioneer Common Stock for each Exchangeable
Share they hold, plus an additional amount equivalent to the full amount of any
declared and unpaid dividends on each such Exchangeable Share. In the event of a
proposed Pioneer Canada Insolvency Event, Pioneer will have the right to
purchase all of the outstanding Exchangeable Shares from the holders thereof at
the effective time of any such liquidation, dissolution, or winding up in
exchange for one share of Pioneer Common Stock for each such Exchangeable Share,
plus an additional amount equivalent to the full amount of all declared and
unpaid dividends on such Exchangeable Share.
Upon the occurrence of a Pioneer Liquidation Event (as defined herein), in
order for the holders of the Exchangeable Shares to participate on a pro rata
basis with the holders of Pioneer Common Stock, each holder of Exchangeable
Shares will automatically receive in exchange therefor an equivalent number of
shares of Pioneer Common Stock, plus an additional amount equivalent to the full
amount of any declared and unpaid dividends on such Exchangeable Shares. For a
more detailed description of the Exchange Rights and the Call Rights in
connection with the Exchangeable Shares, see "Description of Capital
Stock -- Voting and Exchange Trust Agreement."
Support Agreement. On the Effective Date, Pioneer and Pioneer Canada will
enter into a support agreement (the "Support Agreement") in the form attached
hereto as Annex H, whereby Pioneer will make certain covenants to Pioneer Canada
regarding the Exchangeable Shares. In the Support Agreement, Pioneer will
covenant as follows: (i) Pioneer will not declare or pay dividends on the
Pioneer Common Stock unless Pioneer Canada is able to and simultaneously pays an
equivalent dividend on the Exchangeable Shares; (ii) Pioneer will cause Pioneer
Canada to declare and pay an equivalent dividend on the Exchangeable Shares
simultaneously with Pioneer's declaration and payment of dividends on the
Pioneer Common Stock; (iii) Pioneer will advise Pioneer Canada in advance of the
declaration of any dividend on the Pioneer Common Stock and ensure that the
declaration date, record date and payment date for dividends on the Exchangeable
Shares are the same as that for the Pioneer Common Stock; (iv) Pioneer will take
all actions and do all necessary things to ensure that Pioneer Canada is able to
pay to the holders of the Exchangeable Shares the equivalent number of shares of
Pioneer Common Stock in the event of a liquidation, dissolution or winding-up of
Pioneer Canada, delivery of a Retraction Request by a holder of Exchangeable
Shares, or a redemption of Exchangeable Shares by Pioneer Canada; and (v)
Pioneer will not vote or otherwise take any action or omit to take any action
causing the liquidation, dissolution or winding-up of Pioneer Canada.
In order for Pioneer to perform in accordance with the Support Agreement,
Pioneer Canada must notify Pioneer of the occurrence of certain events, such as
the liquidation, dissolution or winding-up of Pioneer Canada and Pioneer
Canada's receipt of a Retraction Request from a holder of Exchangeable Shares.
See "Description of Capital Stock -- Support Agreement."
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THE COMBINATION AGREEMENT
Representations, Warranties and Covenants. The Combination Agreement
contains certain customary representations and warranties of each of Chauvco and
Pioneer relating to, among other things, their respective organization, capital
structures, qualification, operations, financial condition, compliance with
necessary regulatory or governmental authorities and other matters, including
their authority to enter into the Combination Agreement and to consummate the
Transaction. Pursuant to the Combination Agreement, each party has covenanted
that, until the earlier of the termination of the Combination Agreement or the
Effective Time, it will maintain its business, it will not take certain actions
outside the ordinary course without the other's consent and it will use its
commercially reasonable efforts to consummate the Transaction. The parties have
also agreed to advise each other of material changes and to provide the other
with interim financial information. Further, the parties have agreed to apply
for and use their commercially reasonable efforts to obtain all regulatory and
other consents and approvals required for the consummation of the Transaction,
to use their commercially reasonable efforts to effect the Transaction,
including the preparation and mailing of this Joint Proxy Statement, and to
provide the other party and their respective counsel with such information as
they may reasonably request. Pioneer agreed that all rights to indemnification
under the ABCA and under the charter documents and bylaws of Chauvco and its
subsidiaries for directors and officers of Chauvco will survive the Arrangement
and remain in full force and effect. Pioneer agreed to use its commercially
reasonable best efforts to cause the Exchangeable Shares to be listed on the TSE
as of the Effective Date. Chauvco has agreed to take such action as may be
necessary so that the Chauvco shareholder rights plan shall be waived
immediately prior to the Effective Time and not apply to the transactions
contemplated herein. Chauvco shall utilize its best efforts to keep the Chauvco
shareholder rights plan in full force and effect unamended until such waiver.
The Combination Agreement also provides that, unless and until the
agreement is terminated in accordance with the provisions thereof, Chauvco will
not (and it shall cause its directors, representatives, agents or affiliates not
to) take or cause to take (or cause any Chauvco subsidiaries to take), directly
or indirectly, any of the following actions with a party other than Pioneer and
its designees: (i) solicit, encourage, initiate or participate in any
negotiations, inquiries or discussions with respect to any offer or proposal to
acquire in any manner, directly or indirectly, all or a significant part of the
business or assets of Chauvco or more than 25% of the voting power of the
Chauvco Common Shares (each of the foregoing, an "Acquisition Transaction");
(ii) furnish or provide any information with respect to, or otherwise take any
action that facilitates, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to any inquiry, offer or
proposal for, an Acquisition Transaction; (iii) enter into or execute any
agreement or arrangement relating to an Acquisition Transaction; or (iv) make or
authorize any public statement, recommendation or solicitation with respect to
any Acquisition Transaction or any offer or proposal relating to an Acquisition
Transaction. Notwithstanding the foregoing agreements of Chauvco, prior to the
approval of the Combination Agreement and the Arrangement by the holders of
Chauvco Common Shares at the Chauvco Meeting, the Combination Agreement does not
prevent the Chauvco Board from: (i) engaging in discussions or negotiations with
(but not soliciting or initiating such discussions or negotiations or
encouraging inquiries from) a party concerning an unsolicited Acquisition
Transaction; or (ii) providing non-public information in connection with an
unsolicited Acquisition Transaction that has previously been provided to
Pioneer, in each case if the Chauvco Board first determines that such action is
required by reason of the fiduciary duties of the members of the Chauvco Board
to Chauvco or to the Chauvco Shareholders under applicable law and that such
unsolicited Acquisition Transaction involves consideration superior to the
consideration provided for in the Combination Agreement, provided that Chauvco
first notifies Pioneer of the determination by the board of directors of Chauvco
and further notifies that it is furnishing information to or entering into
discussions or negotiations with a party and keeps Pioneer informed of the
status (including all terms and conditions thereof but not the identity of such
person or entity) of such discussions or negotiations. In no event may the
Chauvco Board or any committee thereof withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Pioneer, the approval and
recommendation by such board of directors or such committee of the Combination
Agreement, the Plan of Arrangement or the Arrangement, or approve or recommend,
or propose to approve or recommend, any Acquisition Transaction except in the
case of a Superior Proposal. A "Superior Proposal" means a bona fide written
offer for an Acquisition Transaction to
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acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the shares and/or voting power of the Chauvco
Common Shares then outstanding or all or substantially all the assets of
Chauvco, and is otherwise on terms which the Chauvco Board determines to be more
favorable to Chauvco than the Arrangement for which financing is committed or in
the judgment of the Chauvco Board is reasonably capable of being financed by
such third party and for which such proposed transaction is reasonably likely to
be consummated without undue delay.
Disposition of Chauvco's Interest in Gabon and other International
Assets. The Combination Agreement provides that, in connection with the
transactions leading to the distribution of the CRI Shares in accordance with
the Arrangement, the purchase and sale agreement between CR and CRI with respect
to the transfer of CR's interest in the Gabon Securities to CRI shall be in a
form mutually acceptable to Chauvco and Pioneer Canada and shall provide that:
(i) CRI will assume and be responsible for and will indemnify, defend and hold
CR, Chauvco and Pioneer Canada harmless from and against any liabilities that
CR, Chauvco or Pioneer Canada may be or become subject to if any taxing
authority challenges the value placed on the Gabon Securities or the
corresponding value of the CRI Shares transferred to the Chauvco Shareholders
and Chauvco Optionholders; (ii) CRI will assume all liabilities with respect to
the underlying operations of the Gabon Subsidiaries being purchased; (iii) CRI
will assume and be responsible for and will indemnify, defend and hold CR,
Chauvco and Pioneer Canada harmless from and against any liabilities that CR,
Chauvco and Pioneer Canada may be or become subject to which relate to the
assets, business, operations, debts or liabilities of CR and Chauvco which are
being purchased by CRI and with respect to the transactions contemplated in
respect thereof (provided that with respect to tax matters, the extent of the
indemnity shall be limited to that set out in (i)); (iv) CR and Chauvco will
assume and be responsible for and will indemnify, defend and hold CRI harmless
from and against any liabilities CRI may be or become subject to which relate to
the assets, business, operations, debts or liabilities of CR and Chauvco which
are not being purchased by CRI; (v) Chauvco, subject to confidentiality
provisions, will retain copies of the books and records of such companies; (vi)
the Chauvco name shall not be used in connection with, and CRI shall not engage
in, any oil and gas operations in the western Canadian sedimentary basin for a
period of one (1) year from the Effective Date; and (vii) CRI will use its best
efforts to have Chauvco released from any and all guarantees Chauvco has given
to the Gabonese Government. In addition, Chauvco will provide an additional
C$13.5 million of funding into the Gabon Subsidiaries through CR between
September 3, 1997 and the Effective Date which shall remain in the Gabon
Subsidiaries for their operations and shall not be repaid to CR except to the
extent that the same may be reflected in the determination of the fair market
value of the Gabon Securities on the Effective Date.
Disposition of Chauvco's Interest in Alliance Pipeline Project. The
Alliance pipeline project (the "Alliance Pipeline Project" or "Alliance")
involves the design, construction and operation of a mainline natural gas
pipeline from northwestern Alberta and northwestern British Columbia to several
delivery points near Chicago, Illinois. In addition, the Alliance Pipeline
Project includes the construction and operation of lateral pipelines and related
facilities in Alberta and British Columbia and the construction and operation of
a plant to be located in Illinois which will be capable of extracting liquids.
The Combination Agreement provides that, on or prior to the Effective Time,
Chauvco shall enter into a transaction causing all of its rights and assets
relating to the Alliance Pipeline Project to be distributed to or through an
entity for a cash payment to Chauvco of C$13.5 million (plus any amounts funded
by Chauvco after September 3, 1997 for regular capital needs and commitments).
Chauvco currently anticipates that it will convey its approximate 20% interest
in the Alliance Pipeline Project prior to the Effective Time to various entities
owned directly or indirectly by a limited partnership formed under the laws of
the Province of Alberta (the "Partnership"). Chauvco shall be entitled to
provide funding and commitments in respect of the regular capital funding and
commitments of the Alliance Pipeline Project up to Closing provided that such
funding shall be repaid, and such commitments shall be assumed, by the new
Alliance entity on or before the Effective Time. Chauvco shall not be entitled
to commit to provide any additional funding to the Alliance Pipeline Project
other than in respect of such regularly scheduled capital commitments (and shall
notify Pioneer as and when such funding or commitments are provided) and, in
particular, Chauvco shall not be entitled to commit to the approximate $260
million equity financing commitment due in October, 1997. The purchase and sale
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agreement between the new Alliance entity and Chauvco with respect to the
transfer of Chauvco's interest in the Alliance Pipeline Project to the new
Alliance entity will be in a form mutually acceptable to Chauvco and Pioneer and
provide that (i) the new Alliance entity will assume and be responsible for and
will indemnify, defend and hold harmless Chauvco from and against any
liabilities, including any tax liabilities, Chauvco may be or become subject to
which relate in any manner whatever to the transfer of Chauvco's interest in the
Alliance Pipeline Project to the new Alliance entity and with respect to the
transactions contemplated in connection therewith, (ii) Chauvco will assume and
be responsible for and will indemnify, defend and hold harmless the new Alliance
entity from and against any liabilities the new Alliance entity may be or become
subject to which relate to the assets, business, debts and liabilities of
Chauvco unrelated to the Alliance Pipeline Project, and (iii) Chauvco, subject
to confidentiality provisions, will retain copies of the books and records
relating to Chauvco's interest in the Alliance Pipeline Project.
Chauvco intends to issue rights ("Chauvco Rights") to the Chauvco
Shareholders of record and resident in Canada on a date to be determined. One
Chauvco Right will be issued for each Chauvco Common Share. One Chauvco Right
and payment of the exercise price will entitle a Chauvco Shareholder to receive
one unit of the Partnership. The proceeds from the rights offering will be used
by Chauvco to acquire units of the Partnership which Chauvco will
contemporaneously distribute to those Chauvco Shareholders who have exercised
their Chauvco Rights. The Partnership will use the proceeds from the issuance of
the units to purchase Chauvco's interest in the Alliance Pipeline Project and to
meet its future capital commitments to the Alliance Pipeline Project. Chauvco
Shareholders who fully exercise their Chauvco Rights will be entitled to
subscribe, on a pro rata basis, for additional units available as a result of
Chauvco Rights not being exercised. Chauvco Shareholders who are not resident of
Canada will not be entitled to participate in the rights offering. The Chauvco
Rights otherwise issuable to such shareholders will be sold by a trustee and the
sales proceeds (less applicable brokerage fees and withholding taxes) will be
paid to non-resident shareholders. Arrangements will be made to provide Chauvco
Optionholders with the ability to acquire units of the Partnership.
The Partnership may sell special warrants ("Special Warrants") to certain
investors which may include Chauvco Shareholders prior to the closing of the
rights offering. The Special Warrants will entitle the holders thereof to
acquire units of the Partnership for no additional consideration on the basis of
one unit for each Special Warrant. The number of units which Chauvco
Shareholders who purchase Special Warrants will be entitled to receive upon the
exercise of the Special Warrants will be equal to the number of units that such
Chauvco Shareholders would have been entitled to receive had they exercised
their initial Chauvco Rights under the rights offering. The Chauvco Shareholders
who purchase Special Warrants will agree not to exercise or sell the Chauvco
Rights which they will receive under the rights offering, but will be entitled
to subscribe for additional units of the Partnership that are not subscribed for
by other Chauvco Shareholders on the same basis as the remaining Chauvco
Shareholders.
Chauvco and the Partnership have filed a preliminary prospectus with
Canadian securities commissions to qualify the Chauvco Rights and the units of
the Partnership issuable upon the exercise of the Chauvco Rights and the Special
Warrants. A final prospectus will be mailed to Chauvco Shareholders prior to the
Chauvco Meeting.
Conditions to Closing. The Combination Agreement provides that the
respective obligations of each party to complete the Transaction are subject to
a number of conditions, including the following material conditions: (a) the
Arrangement shall have been approved and adopted by the required vote of the
holders of Chauvco Common Shares; (b) the issuance of Pioneer Common Stock upon
the exchange of the Exchangeable Shares contemplated by the Combination
Agreement shall have been approved by the holders of Pioneer Common Stock; (c)
all consents, including the Final Order and any other regulatory approvals, that
are legally required for the consummation of the Transaction shall have
occurred, been filed or been obtained; (d) no order, decree or ruling or
statute, rule, regulation or order shall be threatened, enacted, entered or
enforced by any governmental agency that prohibits or renders illegal the
consummation of the Transaction; (e) there shall be no temporary restraining
order, preliminary injunction, permanent injunction or other order preventing
the consummation of the Transaction issued by any Canadian or U.S. federal,
provincial or state court remaining in effect, nor shall any proceeding seeking
any of the foregoing be pending; (f) the representations and warranties of the
parties shall be true and correct in all material respects as of the
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Effective Time as though made at and as of the Effective Time; (g) the parties
shall have performed in all material respects all agreements and covenants to be
performed by them under the Combination Agreement; (h) the parties shall have
received legal opinions dated as of the Closing Date as to matters customary to
transactions of the type contemplated by the Combination Agreement; (i) Mr.
James Baroffio shall have been elected to the Pioneer Board (a condition
precedent to Chauvco's obligations only) (Mr. Guy J. Turcotte shall, in
addition, be nominated as a director of Pioneer for election at Pioneer's 1998
annual stockholder's meeting) (see "-- Interests of Certain Persons in the
Transaction"); (j) the Pioneer Common Stock issuable pursuant to the Arrangement
and upon exchange of the Exchangeable Shares shall have been approved for
listing on the NYSE and the Exchangeable Shares shall have been approved for
listing on the TSE (a condition precedent to Chauvco's obligations only); (k)
holders of no more than 5% of the Chauvco Common Shares shall have notified
Chauvco of their intention to dissent from the Arrangement and the transactions
contemplated thereby (a condition precedent to Pioneer's obligations only); and
(l) there shall have been no event, change or effect on or prior to the
Effective Date resulting in a material adverse effect on either Chauvco or
Pioneer (a condition precedent to the other parties' obligations only).
Whether before or after the requisite approval by the Pioneer Stockholders
or the Chauvco Shareholders, the Combination Agreement may be terminated by
written notice by the terminating party to the other party hereto at any time
prior to the Effective Time, as follows: (a) by the mutual agreement of the
parties; (b) by either Chauvco or Pioneer in the event of a breach by the other
party of any representation, warranty, covenant or other agreement contained in
the Combination Agreement which has not been cured within 15 days after written
notice thereof (except that no cure period shall be provided for a matter which
by its nature cannot be cured and in no event shall such cure period extend
beyond the Termination Date, as defined below) provided that the party
purporting to terminate the Combination Agreement is not itself in material
breach of any representation, warranty, covenant or other agreement contained in
the Combination Agreement; (c) by Chauvco if the stockholders of Pioneer do not
approve the issuance of Pioneer Common Stock issuable upon exchange of the
Exchangeable Shares or any other matters related to the Plan of Arrangement
requiring their approval at the Pioneer Meeting; (d) by Pioneer if the Chauvco
Shareholders do not approve the Plan of Arrangement at the Chauvco Meeting; (e)
by either party, if such party's conditions precedent under the Combination
Agreement have not been satisfied or waived on or before 5:00 p.m. (Calgary,
Alberta time) on March 31, 1998 (the "Termination Date"), other than as a result
of a breach of the Combination Agreement by the terminating party; and (f) by
Chauvco prior to obtaining the approval of the Chauvco Shareholders of the Plan
of Arrangement, if: (i) the Chauvco Board has determined that, it is necessary
in order to comply with its fiduciary duties to Chauvco or the Chauvco
Shareholders under applicable law, to enter into an agreement with respect to or
to consummate a transaction constituting a Superior Proposal, (ii) Chauvco has
given notice to Pioneer that Chauvco has received a Superior Proposal from a
third party and intends to terminate the Combination Agreement and (iii) either
Pioneer has not revised its take-over proposal within five business days after
such notice or if Pioneer has revised its take-over proposal, the Chauvco Board
has determined that the third party's Acquisition Transaction is superior to
Pioneer's revised take-over proposal; provided that Chauvco may not effect such
termination without tendering the fee indicated below.
The Combination Agreement provides that termination fees are payable as
follows: (i) if the Combination Agreement is terminated by Chauvco pursuant to
item (c) above, a fee of C$25 million shall be paid by Pioneer to Chauvco; (ii)
if the Combination Agreement is terminated by Pioneer pursuant to item (d)
above, a fee of C$25 million shall be paid by Chauvco to Pioneer; (iii) if the
Combination Agreement is terminated by Chauvco pursuant to item (f) above, a fee
of C$40 million shall be paid by Chauvco to Pioneer; and (iv) if the Combination
Agreement is terminated by Pioneer pursuant to item (d) above and within 6
months of such termination definitive documentation with respect to an
Acquisition Transaction has been entered into or 50% or more of the outstanding
Chauvco Common Shares have been acquired pursuant to a tender offer made as an
Acquisition Transaction, then Chauvco shall pay to Pioneer, in addition to the
fee contemplated in item (ii) above, a fee of C$15 million contemporaneously
with the closing of such Acquisition Transaction.
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OTHER AGREEMENTS
Shareholders Agreements. Chauvco and Pioneer have entered into agreements
with certain holders of Chauvco Common Shares (Trimac Corporation, Gendis Inc.
and Guy J. Turcotte) and Pioneer Common Stock (Richard E. Rainwater, Scott D.
Sheffield and I. Jon Brumley) pursuant to which such holders have agreed, at the
Chauvco Meeting and the Pioneer Meeting, respectively, to vote their securities
in favor of the proposals to be brought before such meetings. In addition, such
holders have agreed to vote against any proposal that might materially adversely
affect the Transaction. Such Chauvco shareholders collectively own approximately
48% of the outstanding Chauvco Common Shares and such Pioneer stockholders
collectively own approximately 14% of the outstanding Pioneer Common Stock.
Affiliates Agreements. Rule 145 promulgated under the Securities Act
regulates the disposition in the United States of securities by "affiliates" of
Chauvco in connection with the Arrangement. Chauvco and Pioneer have entered
into agreements (the "Chauvco Affiliates Agreements") with each of the Chauvco
Affiliates, pursuant to which such persons have agreed that they will not sell,
pledge or otherwise dispose of any Exchangeable Shares or Pioneer Common Stock,
respectively, unless: (a) such transaction is permitted pursuant to the
provisions of Rule 145 under the Securities Act; (b) a registration statement
covering the transaction shall have been filed with the SEC and made effective
under the Securities Act, or (c) in the opinion of counsel reasonably acceptable
to Pioneer, is otherwise exempt from registration under the Securities Act.
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE TRANSACTION
An arrangement of a corporation under the ABCA requires approval by both
the Court and the securityholders of the subject corporation. Prior to the
mailing of this Joint Proxy Statement, Chauvco obtained the Interim Order
providing for the calling and holding of the Chauvco Meeting and other
procedural matters. A copy of the Interim Order is attached hereto as Annex D.
The Notice of Petition for the Final Order appears at the front of this Joint
Proxy Statement.
Subject to the approval of the Arrangement by the Chauvco Shareholders at
the Chauvco Meeting, the hearing in respect of the Final Order is scheduled to
take place on , 1997 at (Calgary time) in the Court at the
Court House, 611 4th Street S.W., Calgary, Alberta, Canada. All Chauvco
Shareholders and Chauvco Optionholders who wish to participate or be represented
or to present evidence or arguments at that hearing must serve and file a notice
of appearance as set out in the Notice of Petition for the Final Order and
satisfy any other requirements. At the hearing of the Application in respect of
the Final Order, the Court will consider, among other things, the fairness and
reasonableness of the Arrangement. The Court may approve the Arrangement as
proposed or as amended in any manner the Court may direct, subject to compliance
with such terms and conditions, if any, as the Court deems fit.
Assuming the Final Order is granted and the other conditions to the
Combination Agreement are satisfied or waived, it is anticipated that the
following will occur substantially simultaneously: Articles of Arrangement will
be filed with the Registrar under the ABCA to give effect to the Arrangement,
the Support Agreement and the Voting and Exchange Trust Agreement will be
executed and delivered, and the various other documents necessary to consummate
the transactions contemplated under the Combination Agreement will be executed
and delivered.
Subject to the foregoing, it is presently anticipated that the Effective
Time will occur on or about , 1997.
BACKGROUND OF THE TRANSACTION
The proposed Transaction predates the formation of Pioneer and has its
genesis in expansion plans held by one of Pioneer's predecessor companies,
Parker & Parsley. Parker & Parsley had been actively considering international
expansion as early as 1994 and had performed a number of evaluations and
entertained a few preliminary negotiations. During this time, Parker & Parsley
began refining its expansion focus toward the Western Hemisphere and began to
pursue combinations with producers that owned assets in Canada and South
America.
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During this period, Mr. Sheffield frequently attended industry conferences,
made presentations on Parker & Parsley, gathered information on other companies
and met with other oil and gas executives. Mr. Sheffield and other executives
attended a particular conference in September 1995 and met Mr. Turcotte of
Chauvco at a conference activity. The two exchanged general information
regarding their respective companies, views about the future prospects and
trends in the oil and gas industry. At that time Mr. Sheffield became impressed
with the track record of Chauvco's management and the assets and operations of
Chauvco. Upon returning from the conference, Mr. Sheffield apprised members of
Parker & Parsley's business development group of the meeting who then began to
assimilate a compilation of public information and to perform a preliminary
evaluation. Informal discussions were held between the companies at that time
regarding matters of common interest related to international projects.
Over the next several years, Parker & Parsley consummated a number of
acquisitions, divestitures and financial transactions as it continued to
implement its growth strategy. Included in these activities were discussions
relating to the Parker/Mesa Merger, the negotiations of which began in the late
fall of 1996.
Also at this time, Chauvco became concerned that the trading price of the
Chauvco Common Shares did not reflect the significant growth potential and value
of its three existing core operating areas in Canada, Argentina and Gabon, and
its other investment opportunities, such as its interest in the Alliance
Pipeline Project. Additionally, Chauvco's two major shareholders were
restructuring their operations and investments in order to maximize value for
their shareholders.
In February 1997, the Chauvco Board adopted a Shareholders Rights Plan
designed to encourage fair treatment of shareholders if there was to be an
unsolicited takeover bid for Chauvco. Preliminary discussions were also
initiated with Salomon Brothers and RBC DS regarding a strategic alternatives
review process to enhance shareholder value.
Between February and May 1997, Chauvco's executive management and its
financial advisors held extensive discussions regarding options to maximize
shareholder value, including a process and timing review, and transaction
structuring alternatives. Confidential evaluation materials were also organized
in anticipation of opening data rooms.
In March 1997, a senior member of Salomon Brothers' investment banking
group contacted Pioneer about Chauvco and generally discussed a preliminary
timetable for the strategic alternatives review, as well as briefly describing
the goal of the process and inquired as to Parker & Parsley's interest. Parker &
Parsley responded that it would be interested but that other projects might
hinder its ability to participate; nevertheless, Parker & Parsley reinitiated
its preliminary evaluation of Chauvco's properties, utilizing only updated
publicly available information. Pioneer had no contact with Chauvco personnel at
this time. At the same time, the Parker/Mesa Merger negotiations led to the
signing of a definitive agreement on April 10, 1997.
Also during this time, Chauvco proceeded with its established investment
programs on an aggressive "business as usual" basis in order to maintain its
shareholder value creation strategy. Chauvco experienced considerable success in
all three core operating areas, having a positive impact on its share price.
Chauvco's share price rose from the C$14.00 to C$15.00 range in February 1997 to
C$19.40 on May 2, 1997, the last trading day before announcement of its
strategic alternatives review process.
In early May 1997, Chauvco, together with its major shareholder, Gendis
Inc., officially announced its intention to pursue strategic alternatives,
subsequent to which Parker & Parsley signed a confidentiality agreement and
received a Confidential Evaluation Memorandum. After reviewing the Confidential
Evaluation Memorandum, at Salomon Brothers' request, Parker & Parsley verbally
reiterated its interest in pursuing the proposed transaction, particularly if
the transaction could be structured as an exchange of common stock. Parker &
Parsley informed Salomon Brothers that its early financial evaluation indicated
that Parker & Parsley would be prepared to offer a premium exceeding 30% of the
then current Chauvco Common Share price. Based on this conversation, Salomon
Brothers invited Parker & Parsley to the Chauvco data room in early June 1997.
Thirteen members of Parker & Parsley's senior management team and business
development group, including Mr. Sheffield, participated in four and one-half
days of data room meetings. One month of
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detailed technical review followed, including numerous further telephone
contacts between Parker & Parsley and Salomon Brothers as well as Chauvco.
Between May 20 and mid-July 1997 numerous parties executed confidentiality
agreements and were invited to Chauvco's data rooms for presentations by Chauvco
management and to review confidential material. In mid-July 1997, parties who
had been to Chauvco's data rooms were requested to provide proposals.
As the timing of the proposed Parker/Mesa Merger became clearer and members
of Parker & Parsley's senior management were chosen, a meeting was held in early
July 1997 to brief the members of Parker & Parsley's management committee
regarding the results to date of the technical review and related due diligence.
At that time, the management committee decided that, in light of the analysis
presented and current circumstances, Parker & Parsley would be willing to offer
a premium of 25% to 35% to the then current trading price of Chauvco Common
Shares, which at that time was approximately C$20.50 per share. Following the
meeting, a representative of Parker & Parsley communicated this decision
verbally to representatives of Salomon Brothers, who encouraged Parker & Parsley
to proceed in the process. At the same time, several areas of technical,
financial and legal due diligence that would be required by Parker & Parsley
during the next several weeks were discussed.
Parker & Parsley continued to refine its analysis, particularly with
respect to the Canadian assets of Chauvco, and several trips to both Calgary and
Buenos Aires, including direct meetings with Chauvco personnel, were initiated
for this purpose. During this period, discussions between Parker & Parsley and
representatives of Salomon Brothers continued and principally concerned the
timing of proposals and the possible use of Pioneer Common Stock as a viable
currency for a business combination. In addition, Salomon Brothers and Parker &
Parsley held discussions in mid-July regarding the valuation and prospects for
the international oil and gas assets held by Chauvco outside of Canada and
Argentina, principally in Gabon, as well as the potential Alliance Pipeline
Project. As a result of these discussions, the parties mutually agreed to
exclude these assets from future consideration in the transaction being
contemplated by Chauvco and Parker & Parsley. The discussions with Salomon
Brothers continued to develop and culminated in a request for a presentation to
members of Chauvco's senior management and board members about the assets,
operations and business prospects of Pioneer and on July 26, 1997 such a meeting
was held in Parker & Parsley's office in Midland, Texas with Mr. Turcotte and
three other Chauvco representatives receiving presentations from several senior
members of Parker & Parsley's management.
The next day Parker & Parsley's management committee met again for the
purpose of reviewing an updated analysis of Chauvco and to discuss a potential
bid for Chauvco particularly in light of the perceived acceptability of Pioneer
Common Stock as an acquisition currency. During that meeting the management
committee discussed the benefits of a business combination and, specifically,
the positive effect of the acquisition on the growth plans of Parker & Parsley,
the accretive nature of the acquisition and the potential benefits on the
balance sheet of Parker & Parsley.
Chauvco's stock price continued to appreciate and Parker & Parsley's
management committee began to evaluate a potential offering price that preserved
the benefits of the transaction but would represent an attractive price to the
Chauvco Shareholders. Parker & Parsley's management committee decided, in light
of potential timing concerns related to the pending Parker/Mesa Merger and
valuation issues, to suspend pursuit of the transaction with Chauvco, but to
present information to the Pioneer Board at the first Pioneer Board meeting to
be held on August 8, 1997.
On August 7, 1997, the Parker/Mesa Merger was approved, and the Pioneer
Board met the following day to consider and approve a number of business items
and an abbreviated analysis of a potential acquisition of Chauvco. At that time
the Pioneer Board concurred with management's recommendation, pending future
developments, not to immediately pursue the Chauvco transaction.
On August 15, 1997, representatives of Salomon Brothers contacted Mr.
Sheffield and requested a meeting to be held on August 17, 1997 to discuss a
potential acquisition of Chauvco by Pioneer. At that meeting representatives of
Salomon Brothers proposed that Pioneer acquire Chauvco's North American and
South American assets for a minimum of C$24 per Chauvco Common Share and that
Chauvco's West
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African properties and interests in the Alliance Pipeline Project be distributed
to Chauvco Shareholders. Based on these discussions, Pioneer and Mr. Brumley
began to informally poll the members of the Pioneer Board.
Representatives of Pioneer and Salomon Brothers then began to negotiate the
terms of a letter of intent, but such letter was never executed. After several
days of discussion, a set of preliminary terms was established on August 25,
1997, and several members of the management committee went to Calgary to
negotiate the terms of the Combination Agreement and related documents. At this
time, Pioneer hired Goldman Sachs to undertake a study to enable it to render
its opinion with respect to the fairness of the consideration to be paid by
Pioneer in its proposed acquisition of all of the Chauvco Common Shares.
On August 29, 1997, the Pioneer Board met to consider the proposed terms of
the transaction and agreed to reconvene on September 3, 1997 (where Goldman
Sachs made a presentation and delivered its opinion) and subsequently voted. The
Pioneer Board met for such purpose and, with one board member abstaining because
of a conflict of interest, those directors voting unanimously approved the
Combination Agreement and the Transaction. The board member who abstained did so
because he was a partner in a law firm that provided services to Chauvco in
connection with the Transaction.
At a Chauvco Board meeting held on September 3, 1997, the Chauvco Board
received a presentation by both Salomon Brothers and RBC DS with respect to the
valuation methodology employed in reaching their respective conclusions. RBC DS
provided an opinion to the Chauvco Board that the Arrangement is fair from a
financial point of view to the Chauvco Shareholders. The Chauvco Board also
received an opinion from Salomon Brothers that the Pioneer Common Stock,
Exchangeable Shares or combination thereof is fair, from a financial point of
view, to the Chauvco Shareholders, as consideration for the Chauvco Common
Shares after giving effect to the distribution of the CRI Shares and the
issuance of the Chauvco Rights. Copies of Salomon Brothers' and RBC DS' written
opinions to the Chauvco Board dated as of September 3, 1997 are attached as
Annex K and Annex L to this Joint Proxy Statement.
RECOMMENDATION OF PIONEER'S BOARD OF DIRECTORS; REASONS FOR THE TRANSACTION
THE PIONEER BOARD APPROVED THE COMBINATION AGREEMENT AND THE TRANSACTION
AND RECOMMENDS THAT HOLDERS OF PIONEER COMMON STOCK VOTE IN FAVOR OF THE
COMBINATION AGREEMENT AND THE TRANSACTION.
The Pioneer Board believes that the terms of the Combination Agreement and
the Transaction are fair to and in the best interest of Pioneer and its
stockholders, has approved the Combination Agreement and the Transaction and
recommends that the Pioneer Stockholders approve the Combination Agreement and
the Transaction. In making the determination to recommend approval of the
Transaction, the Pioneer Board did not quantify or otherwise attempt to assign
relative weights to the specific factors it considered while making its
determination. In reaching this determination, the Pioneer Board reviewed
presentations from, and discussed the terms and conditions of the Transaction
with, Pioneer senior management, representatives of its legal counsel and
representatives of Goldman Sachs, its financial advisor. The Pioneer Board
considered a number of factors, including those described below.
Establishment of New Core Areas. The Pioneer Board considered the
opportunities presented by the establishment of two new core areas in western
Canada and Argentina, the benefits of owning Canadian oil and gas reserves in
terms of the long-term supply and demand dynamics of the North American energy
markets, the attractive operating climate in Argentina and the similarity of the
reservoir characteristics in Argentina to Pioneer's domestic properties.
Production Growth. The Pioneer Board considered that the expected oil and
gas production volumes for the Chauvco properties, reinvestment projects and the
recent growth in production from the Chauvco properties will accelerate
Pioneer's expansion and growth strategies.
Reserve Growth Potential. The Pioneer Board considered the projected
reserves of the Chauvco properties based on an evaluation by its engineering
staff and believes that the complementary nature of the two companies will
provide a strong foundation for growth that will benefit the Pioneer
Stockholders.
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Accretion to Cash Flow. The Pioneer Board considered that the projected
and future results of the Transaction will be accretive to discretionary cash
flow by approximately 7% in 1998 and 15% in 1999.
Improved Balance Sheet. The Pioneer Board considered that upon
consummation of the Transaction, Pioneer's debt to book capitalization ratio
will decrease from 46% to 40%, which had been set as a target ratio, and that
other credit ratios will approach their targets as well.
Management. The Pioneer Board also considered the depth and breadth of
management experience of Mr. Turcotte and Mr. Baroffio, who have each agreed to
serve on the Pioneer Board if the Transaction is consummated. Both of these
individuals have extensive experience and successful track records as builders
of oil and gas companies and operations in foreign lands.
Combination Agreement. The Pioneer Board considered the terms and
conditions of the Combination Agreement, including the consideration to be paid
to Chauvco Shareholders and Chauvco Optionholders in the Transaction. The
Pioneer Board considered that the Exchange Ratio fluctuates if the average price
of Pioneer Common Stock is between $33.50 and $39.01 per share and that, as the
average price increases up to $39.01, the Exchange Ratio will decrease. The
Pioneer Board also considered the provisions of the Combination Agreement which
prohibit Chauvco and its officers, directors, employees, agents, affiliates and
other representatives, and those of Chauvco's subsidiaries, from soliciting or
encouraging any Acquisition Transaction (as herein defined) or, subject to the
fiduciary duties of the Chauvco Board, from engaging in any discussions or
negotiations with any third parties with respect to an Acquisition Transaction.
The Pioneer Board further considered the provisions of the Combination Agreement
which require Chauvco to pay to Pioneer a fee of C$25 million or C$40 million
under certain circumstances.
Shareholders Agreements. The Pioneer Board considered that Chauvco and
Pioneer have entered into agreements with certain holders of Chauvco Common
Shares and Pioneer Common Stock pursuant to which such holders have agreed, at
the Chauvco Meeting and the Pioneer Meeting, respectively, to vote their
securities in favor of the proposals to be brought before such meeting. In
addition, such holders have agreed to vote against any proposal that might
materially adversely affect the Transaction. Such Chauvco Shareholders
collectively own approximately 48% of the outstanding Chauvco Common Shares and
such Pioneer Stockholders collectively own approximately 16% of the outstanding
Pioneer Common Stock.
Fairness Opinion. The Pioneer Board received a presentation from Goldman
Sachs at the meeting of the Pioneer Board held on September 3, 1997, and
considered the written opinion of Goldman Sachs, rendered on September 3, 1997,
that, as of such date and based upon and subject to the factors and assumptions
set forth therein, the consideration to be paid by Pioneer pursuant to the
Combination Agreement was fair to Pioneer. A copy of Goldman Sachs' written
opinion to the Pioneer Board dated as of September 3, 1997 is attached as Annex
J to this Joint Proxy Statement.
RECOMMENDATION OF CHAUVCO'S BOARD OF DIRECTORS; REASONS FOR THE TRANSACTION
THE CHAUVCO BOARD BELIEVES THAT THE ARRANGEMENT IS FAIR AND IN THE BEST
INTERESTS OF CHAUVCO AND THE CHAUVCO SHAREHOLDERS, HAS VOTED UNANIMOUSLY TO
APPROVE THE ARRANGEMENT AND RECOMMENDS THAT THE CHAUVCO SHAREHOLDERS APPROVE THE
ARRANGEMENT.
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In reaching its conclusion, the Chauvco Board reviewed presentations from
and discussed the terms and conditions of the Arrangement with:
- Chauvco senior management;
- representatives of its legal counsel; and
- representatives of Salomon Brothers and RBC DS, its financial advisors.
The Chauvco Board considered a number of factors, including:
- Opinions of Experienced Financial Advisors. Each of Salomon Brothers and
RBC DS rendered an opinion to the Chauvco Board to the effect that the
consideration to be received by the Chauvco Shareholders in the
Transaction is fair to the Chauvco Shareholders from a financial point of
view. As part of its review of the consideration, RBC DS considered the
opportunity to participate in CRI and the Alliance Pipeline Project and
concluded that the combined consideration of the one CRI Share and the
opportunity to participate in the Alliance Pipeline Project to be
received for each Chauvco Common Share would be in the region of C$3.00
to C$4.50. Copies of Salomon Brothers' and RBC DS's written opinions to
the Chauvco Board dated as of September 3, 1997 are attached as Annex K
and Annex L to this Joint Proxy Statement.
- Evaluations of Interested Parties. Beginning in early May 1997, Chauvco,
through its financial advisors, conducted an extensive process to seek
industry participants to initiate a transaction to enhance shareholder
value. As a result, a large number of interested parties evaluated
Chauvco, and the Transaction compared favorably to all other proposals.
- Premium to Trading Price. The Transaction provides the Chauvco
Shareholders with a significant premium to the trading price of the
Chauvco Common Shares immediately preceding the announcement of the
Transaction.
- Increased Liquidity. The Pioneer Common Stock should provide Chauvco
Shareholders with increased liquidity.
- Retention of Gabon. Chauvco Shareholders retain the upside of Chauvco in
Gabon and other international opportunities by the spinoff of CRI to
Chauvco Shareholders through the distribution of the CRI Shares.
- Retention of Alliance. Chauvco Shareholders may retain the upside of
Chauvco in the Alliance Pipeline Project by the distribution to Chauvco
Shareholders of rights to acquire Chauvco's 20% interest in the Alliance
Pipeline Project.
- Pioneer Management. Pioneer's senior management, led by Jon Brumley and
Scott Sheffield, has a proven track record.
- Interest in Larger Entity. Chauvco Shareholders will acquire an interest
in Pioneer, which with Chauvco's Canadian and Argentine operations will
be one of the largest U.S. based independent oil and gas producers. The
strategic and operational fit between the two companies is exceptional.
- Retain Two Chauvco Directors. Chauvco Shareholders will retain the
benefit of two of Chauvco's directors by the addition of Messrs. Baroffio
and Turcotte to the Pioneer Board.
OPINIONS OF FINANCIAL ADVISORS
Opinion of Goldman Sachs
On September 3, 1997, Goldman Sachs delivered its written opinion to the
Board of Directors of Pioneer to the effect that, as of the date of such
opinion, and based upon and subject to the factors and assumptions set forth
therein, the consideration to be paid by Pioneer pursuant to the Combination
Agreement was fair to Pioneer.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED SEPTEMBER 3,
1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN IN CONNECTION WITH THE
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OPINION, IS ATTACHED HERETO AS ANNEX J TO THIS JOINT PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. PIONEER STOCKHOLDERS ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
the Combination Agreement; the Joint Proxy Statement/Prospectus dated June 27,
1997 of Pioneer, Parker & Parsley and Mesa; Annual Reports to Stockholders and
Annual Reports on Form 10-K of Parker & Parsley and Mesa for the five years
ended December 31, 1996; Annual Reports to Shareholders and Annual Information
Forms of Chauvco for the five years ended December 31, 1996; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of Pioneer, Parker &
Parsley and Mesa; certain unaudited interim reports of Chauvco; certain other
communications from Pioneer and Chauvco to their respective stockholders;
certain internal financial analyses and forecasts for Pioneer and Chauvco
prepared by their respective managements; and certain internal financial
forecasts for Pioneer and Chauvco on a combined basis, after giving effect to
the Transaction, prepared by the management of Pioneer. Goldman Sachs also held
discussions with members of the senior management of Pioneer and Chauvco
regarding the strategic rationale for, and potential benefits of, the
Transaction and the past and current business operations, financial condition
and future prospects of their respective companies. Goldman Sachs reviewed
certain information provided by Chauvco relating to its oil and gas reserves and
by Pioneer relating to the oil and gas reserves of Pioneer and Chauvco (the
"Reserve Information"), including, but not limited to, (i) year-end reserve
reports for Parker & Parsley prepared by its management and audited by
independent petroleum engineers, (ii) year-end reserve reports for Mesa prepared
by independent petroleum engineers, (iii) year-end reserve reports for the North
American properties of Chauvco prepared by its management and audited by
independent petroleum engineers, (iv) year-end reserve reports for the Argentine
properties of Chauvco prepared by independent petroleum engineers, and (v)
reserve estimates for Chauvco prepared by the management of Pioneer. In
addition, Goldman Sachs discussed the Reserve Information with the respective
managements of Pioneer and Chauvco and held discussions with members of senior
management of Pioneer regarding its due diligence examination of such Reserve
Information for Chauvco. In addition, Goldman Sachs reviewed the reported price
and trading activity for the Pioneer Common Stock and Chauvco Common Shares,
compared certain financial and stock market information for Pioneer and Chauvco
with similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the oil and gas industry specifically and in other industries
generally and performed such other studies and analyses as it considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. In addition, Goldman Sachs
has not made an independent evaluation or appraisal of the assets and
liabilities of Pioneer and Chauvco or any of their subsidiaries and, except for
the Reserve Information, Goldman Sachs has not been furnished with any such
evaluation or appraisal. With respect to such Reserve Information, Goldman Sachs
is not an expert in the evaluation of oil and gas properties, and it assumed
with Pioneer's consent that the reserve estimates for Chauvco prepared by the
management of Pioneer have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of Pioneer
and that such estimates approximate the actual reserves of Chauvco. Goldman
Sachs also assumed with Pioneer's consent that such information and the
financial forecasts, including estimates of liabilities of Chauvco after giving
effect to the transactions contemplated by the Plan of Arrangement, provided to
it and discussed with it with respect to Pioneer and Chauvco after giving effect
to the transactions contemplated by the Plan of Arrangement have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of Pioneer and that such forecasts will be realized
in the amounts and at the times contemplated thereby. Goldman Sachs' advisory
services and its opinion was provided for the information and assistance of the
Pioneer Board in connection with its consideration of the Transaction and such
opinion did not constitute a recommendation as to how any holder of Pioneer's
securities should vote with respect to the Transaction.
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The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its written opinion to the Pioneer
Board on September 3, 1997:
(i) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical trading prices and volumes for the Chauvco Common Shares and the
Pioneer Common Stock. In addition, Goldman Sachs analyzed the consideration
to be paid by Pioneer pursuant to the Combination Agreement in relation to
the historical average exchange ratios between shares of Pioneer Common
Stock and Chauvco Common Shares. Goldman Sachs reviewed the weighted
average stock prices for the prior 10, 20, 30, 60, 90, 180 and 360 day
periods ending August 29, 1997. The weighted average stock prices indicated
implied exchange ratios that ranged from 0.3557x to 0.4147x. Such implied
exchange ratios for periods involving data prior to August 7, 1997 were
based on weighted average stock prices of Parker & Parsley and Mesa in lieu
of Pioneer. Based on a per share price of Pioneer Common Stock of $39.94
(the per share closing price of Pioneer Common Stock on the NYSE on August
29, 1997), the Transaction represents an exchange ratio of 0.4515x.
(ii) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to Chauvco to corresponding
financial information, ratios and public market multiples for ten publicly
traded Canadian corporations: Anderson Exploration Ltd.; Canadian Natural
Resources Ltd.; Canadian Occidental Petroleum Ltd.; Gulf Canada Resources
Ltd.; Norcen Energy Resources Corp.; Northstar Energy Corp.; PanCanadian
Petroleum Ltd.; Ranger Oil Ltd.; Renaissance Energy Ltd.; and Talisman
Energy Inc. (the "Chauvco Selected Companies"). The Chauvco Selected
Companies were chosen because they are publicly-traded companies with
operations that for purposes of analysis may be considered similar to
Chauvco. Goldman Sachs calculated and compared various financial multiples
and ratios. The multiples of Chauvco were calculated using a price of (i)
C$19.40 per Chauvco Common Share (the closing price of the Chauvco Common
Shares on the TSE on May 2, 1997 (the last trading day prior to Chauvco's
public announcement that it was studying strategic alternatives)) and (ii)
C$21.00 per Chauvco Common Share (the closing price of the Chauvco Common
Shares on the TSE on August 29, 1997). The multiples and ratios for Chauvco
and each of the Chauvco Selected Companies were based on Institutional
Brokers Estimate Services ("IBES") median estimates and publicly available
information from respective year-end and interim reports. With respect to
the Chauvco Selected Companies, Goldman Sachs considered estimated calendar
year 1997 and 1998 earnings per share ("EPS") multiples that ranged from
17.4x to 189.2x for calendar year 1997 and 15.4x to 216.7x for calendar
year 1998, compared to 18.7x and 13.4x, respectively, for Chauvco based on
the closing price of Chauvco Common Shares on May 2, 1997; estimated
calendar year 1997 and 1998 discretionary cash flow ("DCF") multiples that
ranged from 5.0x to 8.3x for calendar year 1997 and 4.0x to 6.7x for
calendar year 1998, compared to 7.3x and 5.3x, respectively, for Chauvco
based on the closing price of Chauvco Common Shares on May 2, 1997;
estimated calendar year 1997 and 1998 unlevered DCF multiples that ranged
from 5.4x to 9.9x for calendar year 1997 and 4.6x to 8.5x for calendar year
1998, compared to 8.8x and 6.5x, respectively, for Chauvco based on the
closing price of Chauvco Common Shares on May 2, 1997; enterprise value as
a percentage of SEC PV 10 that ranged from 74% to 183%, compared to 177%
for Chauvco based on the closing price of Chauvco Common Shares on May 2,
1997; enterprise value per year-end 1996 proved reserve BOE (10:1) that
ranged from C$9.09 to C$13.65, compared to C$12.32 for Chauvco based on the
closing price of Chauvco Common Shares on May 2, 1997; and enterprise value
per year-end 1996 proved plus one-half probable BOE (10:1)that ranged from
C$6.35 to C$13.27, compared to C$10.32 for Chauvco based on the closing
price of Chauvco Common Shares on May 2, 1997.
Goldman Sachs also reviewed and compared certain financial information
relating to Pioneer to corresponding financial information, ratios and
public market multiples for seven publicly traded corporations: Anadarko
Petroleum Corp.; Apache Corp.; Burlington Resources, Inc./Louisiana Land
and Exploration Company (pro forma for announced merger); Enron Oil & Gas
Company; Oryx Energy Co.; Union Pacific Resources; and Vastar Resources,
Inc. (the "Pioneer Selected Companies"). The Pioneer Selected Companies
were chosen because they are publicly-traded companies with operations that
for purposes of analysis may be considered similar to Pioneer. Goldman
Sachs calculated and compared various financial multiples and ratios. The
multiples of Pioneer were calculated using a price of $39.94 per
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share of Pioneer Common Stock (the per share price of the Pioneer Common
Stock on the NYSE on August 29, 1997). The multiples and ratios for Pioneer
and each of the Pioneer Selected Companies were based on IBES median
estimates and publicly available information from respective annual and
quarterly reports. With respect to the Pioneer Selected Companies, Goldman
Sachs considered estimated calendar year 1997 and 1998 EPS multiples that
ranged from 17.6x to 48.9x for calendar year 1997 and 15.3x to 37.1x for
calendar year 1998, compared to 54.3x and 36.9x, respectively, for Pioneer;
estimated calendar year 1997 and 1998 DCF multiples that ranged from 4.9x
to 14.1x for calendar year 1997 and 4.5x to 11.4x for calendar year 1998,
compared to 6.7x and 6.2x, respectively, for Pioneer; and estimated
calendar year 1997 and 1998 unlevered DCF multiples that ranged from 4.9x
to 14.7x for calendar year 1997 and 4.6x to 12.2x for calendar year 1998,
compared to 8.1x and 8.2x, respectively, for Pioneer; enterprise value as a
percentage of SEC PV 10 that ranged from 75% to 114%, compared to 100% for
Pioneer; and enterprise value per year-end 1996 proved reserve BOE that
ranged from $6.60 to $11.91, compared to $7.39 for Pioneer.
(iii) Discounted Cash Flow Analysis. Goldman Sachs performed a
discounted cash flow analysis using Pioneer's management projections for
Chauvco. Goldman Sachs calculated a net present value of Chauvco's free
cash flows for the years 1997 through 2001. Goldman Sachs calculated
Chauvco's terminal values in the year 2001 based on multiples ranging from
4.0x DCF to 7.0x DCF. These terminal values were then discounted to present
value using discount rates. Based on this analysis the implied values per
Chauvco Common Share ranged from C$19.66 to C$43.01.
(iv) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to 39 selected transactions in the Canadian oil and
gas industry since 1995 (the "Canadian Selected Transactions"). Such
analysis indicated that for the Canadian Selected Transactions transaction
value per BOE (10:1) proved plus one-half probable reserves ranged from
C$2.48 to C$13.31, compared to C$8.03 for the Transaction. For purposes of
such analysis, reserves are reported on a gross basis (before royalty
interests).
Goldman Sachs also analyzed certain information relating to ten
selected transactions in the Argentine oil and gas industry since 1994 (the
"Argentine Selected Transactions"). Such analysis indicated that for the
Argentine Selected Transactions transaction value per BOE proved reserves
ranged from $2.26 to $5.95, compared to $8.59 for the Transaction.
(v) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma
analyses of the financial impact of the Transaction. Using earnings and DCF
estimates for Pioneer and Chauvco for 1997 and 1998 prepared by Pioneer
management, Goldman Sachs compared the EPS of the Pioneer Common Stock, on
a standalone basis, to the EPS of the common stock of the combined
companies on a pro forma basis. Goldman Sachs performed this analysis based
on the following two scenarios: (i) an exchange ratio of 0.4938 (the
"Maximum Case") and (ii) an exchange ratio 0.4515 (the "Minimum Case").
Based on such analyses, the Transaction would be dilutive to the Pioneer
Stockholders on an EPS basis in 1997 and 1998 in each of the Maximum Case
and Minimum Case. Goldman Sachs also compared the DCF per share of Pioneer
Common Stock, on a standalone basis, to the DCF per share of the combined
companies on a pro forma basis. Based on such analyses, the Transaction
would be dilutive to the Pioneer Stockholders on a DCF basis in 1997 and
accretive to the Pioneer Stockholders on a DCF basis in 1998 in each of the
Maximum Case and Minimum Case.
(vi) Contribution Analysis. Goldman Sachs reviewed certain historical
and estimated future operating and financial information (including, among
other things, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), net income to common, DCF, unlevered DCF, SEC PV
10, SEC PV 10 less debt, reserves and production for Pioneer, Chauvco and
the pro forma combined entity resulting from the Transaction based on
Pioneer's management financial forecasts for Pioneer and Chauvco. The
analysis indicated that (i) Pioneer would contribute 89.8% of combined SEC
PV 10, 91.0% of combined SEC PV 10 less debt, 82.5% of combined proved
reserves, 78.1% of combined proved plus one-half probable reserves, 75.4%
of combined proved plus probable reserves, 79.8% of combined market
capitalization as of August 29, 1997, and 82.4% of enterprise value as of
August 29, 1997; (ii) in
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estimated calendar 1997 Pioneer would contribute 80.5% of combined EBITDA,
103.5% of combined net income to common, 81.2% of combined DCF, 83.3% of
combined unlevered DCF, and 77.9% of combined production; and (iii) in
estimated calendar 1998, Pioneer would contribute 73.9% of combined EBITDA,
85.5% of combined net income to common, 70.2% of combined DCF, 73.9% of
combined unlevered DCF, and 70.9% of combined production. Goldman Sachs'
analysis indicated that Pioneer Stockholders would own 75.2% of the
combined company based on an exchange ratio 0.493827x and 76.9% of the
combined company based on an exchange ratio of 0.451467x.
In addition, Goldman Sachs analyzed the amount of accretion (dilution)
on a per share basis from Pioneer's perspective of EBITDA, net income to
common, DCF, unlevered DCF, SEC PV 10, SEC PV 10 less debt, reserves,
production, market capitalization and enterprise value. This analysis was
based on an exchange ratio of 0.451467x. Goldman Sachs' analysis indicated
that Pioneer Stockholders would experience, for estimated 1997 and
estimated 1998, respectively, a 4.6% dilution and 4.1% accretion in EBITDA,
a 25.8% and 10.1% dilution in net income to common, a 5.4% dilution and
9.5% accretion in DCF, a 7.8% dilution and 4.0% accretion in unlevered DCF,
and a 1.3% dilution and 8.5% accretion in production. This analysis also
indicated that Pioneer Stockholders would experience a 14.4% dilution in
SEC PV 10, a 15.5% dilution in SEC PV 10 less debt, a 6.9% dilution in
proved reserves, a 1.6% dilution in proved plus one-half probable reserves,
a 2.0% accretion in proved plus probable reserves, a 3.7% dilution in
market capitalization, and a 6.7% dilution in enterprise value.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
Goldman Sachs' analyses as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses and did
not assign relative weights to any of the analyses. No company or transaction
used in the above analyses as a comparison is identical to Pioneer or Chauvco or
the contemplated transaction. The analyses were prepared solely for purposes of
Goldman Sachs providing its opinion to the Pioneer Board as to the fairness of
the consideration to be paid by Pioneer and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Analyses based upon forecasts 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 based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of Pioneer, Chauvco,
Goldman Sachs or any other person assumes responsibility if future results are
different from those forecast. Goldman Sachs' opinion to the Pioneer Board
necessarily was based on the economic, market and other conditions as in effect
on, and the information made available to it as of, the date of its opinion. As
described above, Goldman Sachs' opinion to the Pioneer Board was one of many
factors taken into consideration by the Pioneer Board in making its
determination to approve the Combination Agreement and the Transaction. The
foregoing summary does not purport to be a complete description of the analysis
performed by Goldman Sachs and is qualified by reference to the written opinion
of Goldman Sachs set forth in Annex J hereto.
Goldman Sachs, 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 estate, corporate and other purposes. Goldman Sachs is
familiar with Pioneer having provided certain investment banking services to
predecessors of Pioneer from time to time, including having acted as financial
advisor to Parker & Parsley in its August 1997 merger with Mesa; having acted as
underwriters of public offerings of $150,000,000 of 8 7/8% Senior Notes due 2005
of Parker & Parsley in 1995 and common stock of Parker & Parsley in 1994; and
having acted as managing underwriters of a private offering of 3,776,400 Parker
& Parsley Capital LLC 6 1/4% Convertible Monthly Income Preferred Shares,
guaranteed by, and convertible into, common stock of Parker & Parsley in 1994.
Goldman Sachs also provided certain investment banking services to Mesa from
time to time. Pioneer selected Goldman Sachs to render its opinion because it is
a nationally recognized investment banking firm that has substantial experience
in transactions similar to the Transaction.
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Goldman Sachs provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of Pioneer and Chauvco for its own account and for the account of
customers.
Pursuant to a letter agreement dated August 28, 1997 (the "Engagement
Letter"), Pioneer exclusively authorized Goldman Sachs to undertake a study to
enable it to render its opinion with respect to the consideration to be paid in
the Transaction. Pursuant to the terms of the Engagement Letter, Pioneer agreed
to pay Goldman Sachs upon delivery of its opinion a fee of $1,000,000. Pioneer
has also agreed to reimburse Goldman Sachs for its reasonable out-of-pocket
expenses, including attorney's fees and disbursements plus any sales, use and
similar taxes, and to indemnify Goldman Sachs against certain liabilities,
including certain liabilities under the federal securities laws.
Opinion of Salomon Brothers
Chauvco retained Salomon Brothers to act as its financial advisor in
connection with the Transaction. On September 3, 1997, Salomon Brothers rendered
its opinion to the Chauvco Board to the effect that, based upon and subject to
certain assumptions, factors and limitations set forth in such written opinion
as described below, as of such date, the Pioneer Common Stock, Exchangeable
Shares or combination thereof to be received by the Chauvco Shareholders (the
"Pioneer Stock Consideration") was fair, from a financial point of view, to the
holders of Chauvco Common Shares as consideration for the Chauvco Common Shares
after giving effect to the distribution of the CRI Shares and the Chauvco
Rights.
THE FULL TEXT OF SALOMON BROTHERS' OPINION DATED SEPTEMBER 3, 1997, WHICH
SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS CONSIDERED BY
SALOMON BROTHERS, IS ATTACHED AS ANNEX K TO THIS JOINT PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. SALOMON BROTHERS' OPINION DELIVERED TO THE
CHAUVCO BOARD WAS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW,
OF THE PIONEER STOCK CONSIDERATION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY CHAUVCO SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE CHAUVCO
MEETING. THE SUMMARY OF THE SALOMON BROTHERS OPINION SET FORTH IN THIS JOINT
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION. CHAUVCO SHAREHOLDERS ARE URGED TO READ THE ENTIRE OPINION
CAREFULLY.
In connection with rendering its opinion, Salomon Brothers reviewed and
analyzed, among other things: (i) the Combination Agreement; (ii) certain
publicly available information concerning Chauvco; (iii) certain other internal
information, primarily financial in nature, including projections and estimates
of reserves, concerning the business and operations of Chauvco; (iv) certain
publicly available information concerning the trading of, and the trading market
for, the Chauvco Common Shares; (v) certain publicly available information
concerning Pioneer and its predecessor companies; (vi) certain other internal
information, primarily financial in nature, including projections and estimates
of reserves, concerning the business and operations of Pioneer; (vii) certain
publicly available information concerning the trading of, and the trading market
for, the Pioneer Common Stock and the common stocks of its predecessor
companies; (viii) certain publicly available information with respect to certain
other companies that Salomon Brothers believed to be comparable to Pioneer or
Chauvco and the trading markets for certain of such other companies' securities;
and (ix) certain publicly available information concerning the nature and terms
of certain other transactions that Salomon Brothers considered relevant to its
inquiry. Salomon Brothers also conducted discussions with certain officers and
employees of Pioneer and Chauvco to discuss the foregoing as well as other
matters that Salomon Brothers believed relevant to its inquiry.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it by Pioneer and Chauvco or publicly
available and has neither attempted independently to verify nor assumed
responsibility for verifying any of such information. Salomon Brothers did not
conduct any physical inspection of any of the properties or facilities of
Pioneer or Chauvco, nor did it make or obtain or assume any responsibility for
making or obtaining any independent evaluations or appraisals of any of such
properties or facilities. With respect to the projections of Pioneer and
Chauvco, Salomon Brothers assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Pioneer and Chauvco as to the
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respective future financial performance of Pioneer and Chauvco, respectively,
and Salomon Brothers expressed no view with respect to such projections.
In conducting its analysis and in arriving at its opinion, Salomon Brothers
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of operations of Pioneer (and its
predecessor companies) and Chauvco; (ii) the business prospects of Pioneer and
Chauvco; (iii) the historical and current market for the Pioneer Common Stock
(and the common stocks of the predecessor companies of Pioneer), for the Chauvco
Common Shares and for the equity securities of certain other companies that
Salomon Brothers believed to be comparable to Pioneer or Chauvco; and (iv) the
nature and terms of certain other transactions that Salomon Brothers believed to
be relevant. Salomon Brothers also took into account its assessment of general
economic, market and financial conditions and its knowledge of the oil and gas
industry as well as its experience in connection with similar transactions and
securities valuation generally.
Salomon Brothers' opinion was necessarily based upon conditions as they
existed and could be evaluated on the date of its opinion and Salomon Brothers
assumed no responsibility to update or revise its opinion based upon
circumstances or events occurring after the date of its opinion. Salomon
Brothers' opinion was limited to the fairness, from a financial point of view,
of the Pioneer Stock Consideration as consideration for the Chauvco Common
Shares after giving effect to the distribution of the CRI Shares and the
issuance of the Chauvco Rights, did not address the fairness of any other aspect
of the Transaction, including the fairness of the distribution of the CRI
Shares, the fairness of the issuance of the Chauvco Rights or the financial
viability of CRI or the Partnership, did not address Chauvco's underlying
business decision to effect the Transaction, and did not constitute a
recommendation to any holder of Chauvco Common Shares as to how such holder
should vote with respect to the Transaction. In addition, Salomon Brothers'
opinion did not constitute an opinion or imply any conclusions as to the likely
trading range for the Pioneer Common Stock or the Exchangeable Shares following
consummation of the Transaction. Set forth below is a brief summary of the
material financial analyses which Salomon Brothers provided to the Chauvco Board
at its September 3, 1997 meeting in connection with its opinion and does not
purport to be a complete description of analyses performed by Salomon Brothers.
As described above, Salomon Brothers' opinion and presentation to the Chauvco
Board were one of many factors taken into consideration by the Chauvco Board in
making its decision to approve the Combination Agreement. The following
quantitative information, to the extent it is based on market data, is based on
such data as it existed at August 29, 1997, and is not necessarily indicative of
current market conditions.
Summary of Analysis
General Valuation Approach. Salomon Brothers performed analyses intended
to (i) establish ranges of reference values for the Canadian and Argentine
operations of Chauvco (the "Operations"), (ii) establish ranges of reference
values for the Pioneer Stock Consideration to be issued in the Transaction and
(iii) compare the pro forma relative ownership by holders of Chauvco Common
Shares and holders of Pioneer Common Stock in the company resulting from the
Transaction to the relative contributions by the Operations and Pioneer to
certain attributes of the combined company.
Valuation of the Operations. Salomon Brothers determined ranges of
reference values for the Operations on the basis of three valuation approaches:
(i) a net asset value ("NAV") analysis based on the discounted cash flow value
of the projected oil and gas reserves of the Operations; (ii) a public market
analysis, which examines the market value of publicly traded common stocks of
exploration and producing ("E&P") companies as a multiple of certain financial
parameters; and (iii) a private market analysis, which examines the purchase
price of E&P companies in recent sale transactions as a multiple of certain
financial parameters.
In the NAV analysis, Salomon Brothers determined the present value of
projected cash flows estimated by Chauvco's management for the Operations (based
on assumed prices for oil on the New York Mercantile Exchange ("NYMEX") ranging
from $19.60 to $19.73 during the period from 1997 to 2001, and assumed NYMEX gas
prices ranging from $2.22 to $2.40 during the same period) at discount rates of
10% and 11% to
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arrive at a firm value, from which debt and other liabilities were deducted and
the value of non-oil and gas assets was added. Based on this analysis, Salomon
Brothers obtained a range of reference values for the Operations of C$17.48 to
C$25.25 per Chauvco Common Share.
In its public market analysis, Salomon Brothers obtained ranges of
multiples of market value of certain Canadian and international publicly traded
E&P companies to their reserves, production, estimated 1997 and 1998 earnings
before interest, taxes, depreciation and amortization ("EBITDA") and estimated
1997 and 1998 cash flow. Applying these multiples to such parameters with
respect to the Operations, Salomon Brothers obtained a range of reference values
for the Operations of C$19.00 to C$26.00 per Chauvco Common Share.
In its private market analysis, Salomon Brothers examined six merger and
acquisition transactions involving Canadian E&P companies and seven transactions
involving international E&P companies, and obtained ranges of multiples of the
purchase price in such transactions to the reserves, estimated EBITDA and
estimated cash flow of the acquired companies. Salomon Brothers then applied
these multiples to the corresponding parameters with respect to the Operations,
thereby arriving at a range of reference values for the Operations of C$19.86 to
C$25.40 per Chauvco Common Share.
Salomon Brothers noted that the implied value of the Pioneer Stock
Consideration of C$24.11 based upon the market value for Pioneer Common Stock at
August 29, 1997 compared favorably to the reference value ranges resulting from
its analyses.
Valuation of Pioneer Common Stock. Salomon Brothers performed the same
analyses with respect to Pioneer as it had with respect to Chauvco to obtain
ranges of reference values for the Pioneer Common Stock. Salomon Brothers then
compared those ranges with recent trading prices for the Pioneer Common Stock,
including the trading prices on which the terms of the Pioneer Stock
Consideration were determined.
In its NAV analysis, Salomon Brothers discounted to present value projected
cash flows estimated by Pioneer's management (based on assumptions similar to
those used for the Chauvco NAV analysis) at discount rates of 10.5% and 11.5%
and terminal value multiples of 6.5x and 7.5x to arrive at a firm value, from
which debt and other liabilities were deducted. Based on this analysis, Salomon
Brothers obtained a range of reference values for the Pioneer Common Stock of
$37.25 to $47.72 per share.
In its public market analysis, Salomon Brothers obtained ranges of
multiples of market value of eight U.S. publicly traded E&P companies to their
proven reserves, estimated 1997 and 1998 EBITDA and estimated 1997 and 1998 cash
flow. Applying these multiples to such parameters with respect to Pioneer,
Salomon Brothers obtained a range of reference values for the Pioneer Common
Stock of $37.00 to $45.00 per share.
In its private market analysis, Salomon Brothers examined six purchase and
sale transactions involving U.S. E&P companies, and obtained ranges of multiples
of the purchase price in such transactions to the proven reserves, estimated
1998 EBITDA and estimated 1998 cash flow of the acquired companies. Salomon
Brothers then applied these multiples to the corresponding parameters with
respect to Pioneer, thereby arriving at a range of reference values for the
Pioneer Common Stock of $39.00 to $46.00 per share.
Salomon Brothers noted that the trading price of the Pioneer Common Stock
at August 29, 1997 was $39.94 per share, the 10-day average of such trading
price for the period ended August 29, 1997 was $37.58 per share and the 52-week
high and low values of such trading price for the period ended August 29, 1997
(reflecting the trading price of Parker & Parsley for periods prior to the
Parker/Mesa Merger on August 7, 1997) were $24.63 and $39.94, respectively, and
that such historical trading prices generally were below or at the lower end of
the ranges of reference values obtained by Salomon Brothers in its analyses.
Contribution Analysis. Salomon Brothers calculated the relative
contribution by the Operations to the pro forma combined company resulting from
the Transaction with respect to various financial statistics, including latest
12 months, 1997 estimated and 1998 estimated EBITDA, 1997 and 1998 estimated
cash flow, reserves, 1997 and 1998 estimated production, equity value and firm
value. This analysis showed that, not taking into account synergies and
efficiencies potentially realizable from the transaction, Chauvco would
contribute between 17% and 19% of EBITDA, between 19% and 20% of cash flow, 18%
of reserves, 24% of
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production, 23% of equity value and 20% of firm value of the combined company.
By comparison, based on the trading price of the Pioneer Common Stock at August
29, 1997, the Pioneer Stock Consideration issuable to Chauvco Shareholders would
represent 22.5% of the pro forma equity of the combined company.
Engagement of Salomon Brothers. Salomon Brothers was retained by Chauvco
based on its experience and expertise as a financial advisor in connection with
mergers and acquisitions and with companies engaged in the oil and gas industry.
Salomon Brothers is an internationally recognized investment banking firm that
provides financial services in connection with a wide range of business
transactions. As part of its business, Salomon Brothers regularly engages in the
valuation of companies and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and for
other purposes.
Chauvco has agreed to pay Salomon Brothers the following cash fees in
connection with its engagement: (i) a retainer fee of C$200,000, which has been
paid, (ii) a fee of C$500,000 upon the execution of the Combination Agreement,
which has been paid, and (iii) a fee payable upon consummation of the
Transaction in an amount equal to the greater of (A) 75% of the aggregate market
value of the Pioneer Common Stock, Exchangeable Shares, CRI Shares and Chauvco
Rights at the Effective Time multiplied by the Fee Multiple (as defined below)
or (B) C$2,500,000, in each case less the fees described in the foregoing
clauses (i) and (ii). The "Fee Multiple" is defined to mean (i) the product of
0.0005 and the aggregate consideration, divided by the fully diluted number of
Chauvco Common Shares, less (ii) 0.005. Chauvco has also agreed to reimburse
Salomon Brothers for its reasonable out-of-pocket expenses and to indemnify
Salomon Brothers and certain related persons against certain liabilities,
including liabilities under the U.S. federal securities laws.
Opinion of RBC DS
The following is a summary of the RBC DS fairness opinion. RBC DS believes
that its analyses must be considered as a whole and that selecting portions of
the analyses or the factors considered by it, without considering all factors
and analyses together, could create a misleading view of the process underlying
the RBC DS fairness opinion. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial analysis or summary
description. Any attempt to do so could lead to undue emphasis on any particular
factor or analysis. The RBC DS fairness opinion is not to be construed as a
recommendation to any holder of Chauvco Common Shares as to whether to vote in
favor of the Arrangement. This summary is qualified in its entirety by the RBC
DS fairness opinion, a copy of which is attached as Annex L. CHAUVCO
SHAREHOLDERS ARE URGED TO READ THE RBC DS FAIRNESS OPINION IN ITS ENTIRETY.
RBC DS was formally engaged by the Chauvco Board through an agreement
between Chauvco and RBC DS dated February 28, 1997 which provides that RBC DS is
to be paid a fee for its services, the vast majority of which is contingent upon
the consummation of the Arrangement. The fee is variable based on the
consideration received by Chauvco Shareholders. Based on RBC DS's estimate of
the value of the consideration on the date of the RBC DS fairness opinion, the
fee payable would be approximately C$5.2 million. In addition, RBC DS is to be
reimbursed for its reasonable out-of-pocket expenses and to be indemnified by
Chauvco in certain circumstances.
In preparing the RBC DS fairness opinion, RBC DS reviewed and relied upon
certain financial information and operational information regarding Chauvco and
Pioneer and the Arrangement. RBC DS also conducted interviews and discussions
with Chauvco's and Pioneer's management and with Chauvco's independent oil and
gas reservoir engineering consultants. RBC DS relied upon and assumed the
completeness, accuracy and fair presentation of the information and
representations it received. RBC DS did not review any drafts of the Joint Proxy
Statement. RBC DS was not, to the best of its knowledge, denied access by
Chauvco to any information requested by RBC DS. RBC DS made a number of
assumptions, one of which was that all of the conditions required to implement
the Arrangement will be met. The RBC DS fairness opinion was rendered on the
basis of securities markets, economic, financial and general business conditions
prevailing as at the date thereof and the condition and prospects, financial and
otherwise, of Chauvco, Pioneer and their respective subsidiaries and affiliates,
as they were reflected in the information and as they were represented to RBC DS
in discussions with management of Chauvco and Pioneer, respectively. In its
analyses
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and in preparing the RBC DS fairness opinion, RBC DS made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of RBC DS or any party
involved in the Arrangement.
RBC DS assessed the fairness, from a financial point of view, of the
Arrangement to the Chauvco Shareholders based upon a number of factors. These
factors included (i) an analysis of multiples paid in recent comparable
acquisition transactions in the Canadian oil and gas industry, (ii) a net asset
value analysis which incorporates a discounted cash flow approach, (iii) a
comparison of the value offered to holders of Chauvco Common Shares under the
Arrangement to recent trading levels for the Chauvco Common Shares; and (iv) a
review of the strategic alternatives review process, which included the
solicitation of a wide range of parties concerning their potential interest in
making an acquisition of the Chauvco Common Shares or the assets of Chauvco or
reorganizing or recapitalizing Chauvco. RBC DS also reviewed the trading
multiples of publicly traded Canadian oil and gas companies comparable to
Chauvco, from the perspective of whether a public market value analysis might
exceed the precedent transaction values. However, RBC DS concluded that public
company multiples implied values that were below the precedent transaction
values. Given the foregoing and that public company values generally reflect
minority discount values rather than "en bloc" values, RBC DS did not rely on
this methodology.
In considering the value of the consideration being offered to holders of
Chauvco Common Shares under the Arrangement, RBC DS considered the aggregate of
the value derived from the Exchangeable Shares or shares of Pioneer Common
Stock, determined through a review of recent trading levels for the Pioneer
Common Stock and the estimated market price of the Pioneer Common Stock
subsequent to the Arrangement; and the estimated value of the CRI Shares and
opportunity to participate in Alliance. RBC DS did not consider the specific
circumstances, particularly with respect to income tax consequences, of any
particular Chauvco Shareholder.
In assessing the value of the Exchangeable Shares or the Pioneer Common
Stock being offered, RBC DS relied on the market trading value approach. Since
each holder of Chauvco Common Shares will receive a minority interest in Pioneer
and will not be able to effect a sale of 100% of Pioneer, RBC DS concluded it
was not appropriate to consider methodologies that are based on the assumption
of a change of control transaction. RBC DS believes that the market price of the
Pioneer Common Stock is an appropriate indicator of the value of the
Exchangeable Shares being offered to the Chauvco Shareholders under the
Arrangement, in view of the following: (i) Pioneer is well followed by equity
market analysts and trades on a comparable basis and in a manner consistent with
other comparable, publicly traded oil and gas producers in the United States;
(ii) based upon a composite of research analysts' forecasts of 1998 cash flow
for each of Chauvco and Pioneer, the Arrangement, if completed, will be
accretive to Pioneer's forecast cash flow per share; and (iii) Pioneer Common
Stock has a reasonably high degree of liquidity as evidenced by the average
daily volume of 733,762 shares since trading in Pioneer stock commenced on
August 8, 1997.
RBC DS also reviewed the trading history of other exchangeable shares
traded on the TSE versus the shares of their respective U.S. parents. RBC DS
concluded that such exchangeable shares generally track the underlying security
on an currency exchange rate adjusted basis and, as such, did not apply a
discount or premium to the Exchangeable Shares versus the underlying trading
value of Pioneer Common Stock.
During RBC DS' review of Pioneer, including meetings with Pioneer
management, RBC DS was not made aware of any material information regarding
Pioneer which had not been publicly disclosed which would reasonably be expected
to materially adversely affect the market price of the Pioneer Common Stock.
Based upon the closing price of Pioneer Common Stock on the NYSE on September 3,
1997, the date of the RBC DS fairness opinion, the value to be received per
Chauvco Common Share under the Arrangement in the form of Exchangeable Shares
would have been C$26.48. In addition to the Exchangeable Shares, Chauvco
Shareholders will receive the CRI Shares on a one-for-one basis and an
opportunity to participate in the Partnership.
In assessing the value of CRI, RBC DS relied on the market trading value
approach. Since holders of Chauvco Common Shares will receive a minority
interest in CRI and will not be able to effect a sale of 100% of CRI, RBC DS
concluded it was not appropriate to consider methodologies that are based on the
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assumption of a change of control transaction. RBC DS considered various
multiples of selected, publicly-traded companies which were deemed to be most
comparable to CRI. RBC DS particularly relied upon the capitalization of
discretionary cash flow approach which ascribes a common equity value based on a
capitalization of estimated 1997 and forecast 1998 discretionary cash flow. In
addition, RBC DS considered the capitalization of earnings before depreciation,
depletion, amortization, interest and income taxes ("EBITDA") approach, which
ascribes a value to total assets (the "Enterprise Value") before giving effect
to the manner in which they have been financed. The Enterprise Value plus excess
working capital, less actual debt and preferred shares, yields a common equity
value. In considering the value of the CRI Shares, RBC DS reviewed Chauvco
management's forecasts and found them to be reasonable. These forecasts for the
Gabon operations for the remainder of 1997 and for 1998 were utilized in RBC DS'
calculations. As a check on the reasonableness of this analysis, RBC DS
considered the offers received for Chauvco's assets in Gabon and the net present
value of fields in Gabon included in the independent engineering reports
prepared by Gilbert Laustsen Jung Associates Ltd.
In assessing the value of the opportunity to participate in the
Partnership, RBC DS considered: (i) the net investment by Chauvco in the
Alliance project to date; and (ii) an option value approach based on a review of
the underlying business opportunity. Given the relatively early stage of
development of the project, RBC DS relied primarily on the net investment to
date in determining an approximate value to the Chauvco Shareholders.
RBC DS concluded that these additional elements of consideration received
in the form of the CRI Shares and the opportunity to participate in the
Partnership, implied that the total consideration per Chauvco Common Share under
the Arrangement would be in the region of C$3.00 to C$4.50 per Chauvco Common
Share above the price implied by the Exchangeable Share. As part of RBC DS'
review of the fairness of the Arrangement from a financial point of view to the
holders of Chauvco Common Shares, RBC DS reviewed precedent transactions in the
Canadian oil and gas industry in order to compare the multiples paid under such
transactions to the multiples implied by the Arrangement. RBC DS concluded that
the implied transaction multiples for Chauvco under the Arrangement are
consistent with multiples paid in precedent transactions.
RBC DS also utilized the net asset value ("NAV") approach, which ascribes a
separate value for each category of asset and liability utilizing the
methodology appropriate in each case; the sum of total assets less total
liabilities yields the NAV. This approach ascribes value to the proved and
probable reserves existing at the time of valuation on the basis of discounted
future before-tax and after-tax cash flows, and does not anticipate the future
addition of reserves through an ongoing exploration and development program.
This approach is known as a "depletion" or "blowdown" evaluation and is a common
method of evaluation of petroleum interests (reserves and related production
facilities) in the oil and gas industry. Capital expenditures required to
develop existing reserves are deducted from reserve values. Provision is made
for costs associated with future well abandonment and reclamation of sites
related to such wells and associated plant and facility equipment. In addition,
a value is ascribed for other material assets, including undeveloped land,
utilizing the methodology appropriate in each case. RBC DS concluded that the
consideration offered by Pioneer for the Chauvco Common Shares represents a
premium to the range of the RBC DS estimates of NAV.
RBC DS also reviewed the recent trading levels for Chauvco Common Shares.
The closing price of the Chauvco Common Shares on the TSE on September 3, 1997,
the last trading day prior to the announcement of the Transaction, was C$22.00
per Chauvco Common Share. The consideration offered represents a premium of
between 34.0% and 40.8%. RBC DS concluded that this range of premiums is
consistent with premiums for recent takeover transactions in the oil and gas
sector in Canada.
At the direction of the Chauvco Board, RBC DS and Salomon Brothers
undertook a broad solicitation of interest from a wide range of parties
concerning their willingness to propose some form of transaction with Chauvco.
In addition, RBC DS received expressions of interest from parties who had become
aware of the solicitation process through the public announcement made by the
Chauvco Board. Upon execution of a confidentiality agreement, interested parties
were provided access to the management, technical staff and confidential
information of Chauvco. RBC DS had no reason to believe that any party with an
interest in acquiring Chauvco was not provided the opportunity to ascertain the
value of Chauvco and to make a
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proposal. RBC DS concluded that the Arrangement offers the highest consideration
to holders of Chauvco Common Shares of the various proposals received during the
solicitation process.
Given the basis and scope of the RBC DS fairness opinion and subject to the
assumptions and limitations contained therein, RBC DS concluded that, as at
September 3, 1997, the Arrangement is fair from a financial point of view to the
holders of Chauvco Common Shares.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Appointments to Pioneer Board of Directors. On the Effective Date, James
R. Baroffio, currently a Chauvco director, will be appointed as a Class II
Director to the Pioneer Board to serve until Pioneer's 1999 annual stockholders
meeting and will be nominated for re-election at Pioneer's 1999 annual
stockholders meeting. Also, Guy J. Turcotte, Chauvco's Chairman and Chief
Executive Officer, will be nominated as a director of Pioneer for election at
Pioneer's 1998 annual stockholders meeting.
Indemnification of Chauvco Officers and Directors. The Combination
Agreement provides that all rights to indemnification for Chauvco officers and
directors will survive the Arrangement and remain in full force and in
accordance with the ABCA and Chauvco's and each of its subsidiaries' charter
documents and bylaws.
Termination Fees. Chauvco has entered into executive involuntary
termination and severance agreements with each of the officers of Chauvco which
provide for a payment in the event that an officer's employment is terminated by
Chauvco at any time other than for just cause. In such event, Chauvco is
required to pay to such officer an amount equal to two times such officer's
monthly salary and benefits for each year the officer has been employed by
Chauvco, subject to a minimum payment equal to the officer's salary and benefits
for one year.
Chauvco has also created a staff severance plan which provides that an
employee will receive between three and six weeks wages per year employed in the
event of a change of control of Chauvco and the subsequent termination of the
employee.
Retention Bonuses. Chauvco has previously adopted an employee retention
plan which provides that Chauvco will pay a retention bonus to each employee
(including officers) of Chauvco on the date which is 180 days after there has
been a change of control, provided that the employee is still employed by
Chauvco on that date. The amount of the retention bonus for each employee varies
between two and six months' salary and benefits based on their category of
employment. If the employee's employment is terminated by Chauvco during such
180-day period, other than for just cause, the employee shall be entitled to a
pro rated share of the retention bonus based on the number of days of employment
following the change of control, subject to a minimum payment of one-half of the
retention bonus.
ACCOUNTING TREATMENT
The Transaction will be accounted for as a purchase of Chauvco by Pioneer
for U.S. GAAP purposes. For presentation of certain anticipated effects of the
accounting treatment on the combined financial position and results of
operations of Pioneer after giving effect to the purchase of Chauvco by Pioneer,
see "Unaudited Pro Forma Combined Financial Statements."
PROCEDURES FOR EXCHANGE BY CHAUVCO SHAREHOLDERS AND CHAUVCO OPTIONHOLDERS
Chauvco Shareholders. Enclosed with copies of this Joint Proxy Statement
delivered to the registered holders of Chauvco Common Shares is the Letter of
Transmittal and Election Form which, when duly completed and returned together
with a certificate for Chauvco Common Shares, will enable each Chauvco
Shareholder to receive the number of shares of Pioneer Common Stock,
Exchangeable Shares or a combination thereof (determined in accordance with the
Exchange Ratio and, in the case of a Canadian resident, the election of the
Chauvco Shareholder), CRI Shares and, if applicable, the Cash Payment, to which
such holder is entitled pursuant to the Arrangement. See "-- Transaction
Mechanics and Description of Exchangeable Shares and Other Features."
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No certificates representing fractional shares of Pioneer Common Stock or
Exchangeable Shares will be issued. In lieu of fractional shares of Pioneer
Common Stock or Exchangeable Shares, each Chauvco Shareholder who would
otherwise be entitled to receive such a fraction will be paid by Pioneer Canada
an amount of cash (rounded to the nearest whole cent) equal to the Canadian
dollar equivalent of the product of (i) such fraction, multiplied by (ii) the
Pioneer Stock Price.
Any use of the mails to transmit a certificate for Chauvco Common Shares
and a related Letter of Transmittal and Election Form is at the risk of the
Chauvco Shareholder. If these documents are mailed, it is recommended that
registered mail, with return receipt requested, properly insured, be used.
If the Arrangement proceeds and the Transaction is completed, the
certificates and Cash Payment, if any, issuable to a former holder of Chauvco
Common Shares who has complied with the procedures set out above, together with
a check in the amount, if any, payable in lieu of fractional shares will, as
soon as practicable after the later of the Effective Date and the date of
receipt of a certificate for Chauvco Common Shares and a related Letter of
Transmittal and Election Form, be (a) forwarded to the holder at the address
specified in the Letter of Transmittal and Election Form by first class mail or
(b) made available at the offices of The Montreal Trust Company of Canada for
pickup by the holder, if requested by the holder in the Letter of Transmittal
and Election Form.
If the Arrangement does not proceed, all certificates representing Chauvco
Common Shares transmitted with a related Letter of Transmittal and Election Form
will be returned to Chauvco Shareholders.
Where a certificate for Chauvco Common Shares has been destroyed, lost or
mislaid, the registered holder of that certificate should immediately contact
The Montreal Trust Company of Canada regarding the issuance of a replacement
certificate upon the holder satisfying such requirements as may be imposed by
Chauvco in connection with issuance of the replacement certificate.
Chauvco Optionholders.
Chauvco Optionholders must complete an Option Letter of Transmittal and
Election Form and deposit such form with The Montreal Trust Company of Canada
prior to the date that is two days before the Chauvco Meeting indicating the
election of the Chauvco Optionholder to pay or not to pay the Option Payment. In
the event that a Chauvco Optionholder has failed to make an election in the
Option Letter of Transmittal and Election Form, such Chauvco Optionholder shall
be deemed to have elected not to pay the Option Payment and will receive less
Pioneer Common Stock than the Chauvco Optionholder would have received if the
Chauvco Optionholder elected to pay the Option Payment. In the event that a
Chauvco Optionholder has elected to make the Option Payment but fails to make
the Option Payment on or before the delivery of the Securities to the Chauvco
Optionholder, The Montreal Trust Company of Canada shall be entitled to sell all
or any portion of the Pioneer Common Stock held on behalf of such Chauvco
Optionholder to satisfy the Option Payment and remit the same to Pioneer Canada.
See "-- Transaction Mechanics and Description of Exchangeable Shares and Other
Features."
No certificates representing fractional shares of Pioneer Common Stock will
be issued. In lieu of fractional shares of Pioneer Common Stock, each Chauvco
Optionholder who would otherwise be entitled to receive such a fraction will be
paid by Pioneer Canada an amount of cash (rounded to the nearest whole cent)
equal to the Canadian dollar equivalent of the product of (i) such fraction,
multiplied by (ii) the Pioneer Stock Price.
STOCK EXCHANGE LISTING
The Pioneer Common Stock currently trades on the NYSE. The shares of
Pioneer Common Stock to be issued in connection with the Transaction have been
approved for listing on the NYSE, subject to Pioneer Stockholder approval and
official notice of issuance. As a condition precedent to the Arrangement, the
Exchangeable Shares and the CRI Shares shall be listed for trading on the TSE.
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ELIGIBILITY FOR INVESTMENT IN CANADA
Qualified Investments. Provided the CRI Shares, Exchangeable Shares and
the shares of Pioneer Common Stock are listed on a prescribed stock exchange
(which currently includes the TSE and the NYSE), such securities will be
qualified investments under the Canadian Tax Act for trusts governed by
registered retirement savings plans, registered retirement income funds and
deferred profit sharing plans. The Voting Rights and Exchange Rights will not be
qualified investments under the Canadian Tax Act. However, as indicated under
"Income Tax Considerations to Chauvco Shareholders and Chauvco Optionholders --
Canadian Federal Income Tax Considerations -- Chauvco Shareholders Resident in
Canada," Chauvco is of the view that the fair market value of these rights is
nominal. For a description of the Voting Rights and the Exchange Rights, see
"Description of Capital Stock -- Voting and Exchange Trust Agreement."
Foreign Property. Provided the Exchangeable Shares are listed on a
prescribed stock exchange in Canada (which currently includes the TSE) and
Pioneer Canada continues to maintain a substantial presence in Canada, the
Exchangeable Shares will not be foreign property under the Canadian Tax Act for
trusts governed by registered pension plans, registered retirement savings
plans, registered retirement income funds and deferred profit sharing plans or
for certain other tax-exempt persons. Pioneer Canada will be considered to have
a substantial presence in Canada if it satisfies certain asset tests or if it
maintains an office in Canada and Pioneer Canada, or a corporation controlled by
it, employs more than five employees in Canada full time in the active conduct
of a business, other than an investment activity or a business carried on
through a partnership of which the corporation is not a majority interest
partner. Chauvco is of the view that following the Arrangement, Pioneer Canada
will satisfy this substantial presence test and expects that Pioneer Canada will
continue to satisfy the test.
The CRI Shares and the shares of Pioneer Common Stock will be foreign
property under the Canadian Tax Act as will the Voting Rights and Exchange
Rights.
REGULATORY MATTERS
The Transaction is subject to the premerger filing requirements of the HSR
Act, and on , 1997, Pioneer, Chauvco and Guy Turcotte made premerger
filings under the HSR Act with the FTC and the Antitrust Division of the
Department of Justice. On , 1997, the FTC notified Pioneer, Chauvco
and Guy Turcotte that their respective requests for early termination of the
waiting period under the HSR Act had been granted and that the waiting period
had been terminated.
The Transaction is also subject to the expiration of the applicable waiting
period under the Competition Act, Canada, and the receipt of necessary approvals
under the Investment Canada Act. On , 1997 Pioneer filed a short form
notification filing and an application for an advance ruling certificate under
the Competition Act and on , 1997 Pioneer made a review application
under the Investment Canada Act. Pioneer and Chauvco have applied for and expect
to receive rulings or orders of certain provincial securities regulatory
authorities in Canada to permit the issuance to Chauvco Shareholders of the CRI
Shares, Exchangeable Shares and Pioneer Common Stock and to permit resale of the
CRI Shares, Exchangeable Shares and Pioneer Common Stock in such provinces
without restriction by a shareholder other than a "control person."
RESALE OF EXCHANGEABLE SHARES, PIONEER COMMON STOCK AND CRI SHARES RECEIVED IN
THE TRANSACTION
United States. The issuance of Exchangeable Shares, Pioneer Common Stock
and CRI Shares to Chauvco Shareholders and Chauvco Optionholders will not be
registered under the Securities Act. Such shares will be issued in reliance upon
the exemption provided by Section 3(a)(10) of the Securities Act. Section
3(a)(10) exempts securities issued in exchange for one or more outstanding
securities from the general requirement of registration where the terms and
conditions of the issuance and exchange of such securities have been approved by
any court of competent jurisdiction, after a hearing upon the fairness of the
terms and conditions of the issuance and exchange at which all persons to whom
such securities will be issued have the right to appear. The Court is authorized
to conduct a hearing to determine the fairness of the terms and conditions of
the Arrangement, including the proposed issuance of securities in exchange for
other
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outstanding securities. The Court entered the Interim Order on ,
1997 and, subject to the approval of the Arrangement by the Chauvco
Shareholders, a hearing on the fairness of the Arrangement will be held on
, 1997 by the Court. See "-- Court Approval of the Arrangement and
Completion of the Transaction." Pioneer and Chauvco believe that the issuance by
Pioneer Canada of the Exchangeable Shares, the Pioneer Common Stock and the CRI
Shares in exchange for the Chauvco Common Shares and Chauvco Options is exempt
under Section 3(a)(10) of the Securities Act. Pioneer has received a letter from
the SEC confirming that the staff of the Division of Corporation Finance of the
SEC will not recommend any enforcement action to the SEC if Pioneer Canada
issues the Exchangeable Shares, the Pioneer Common Stock and the CRI Shares in
exchange for the Chauvco Common Shares and Chauvco Options in reliance upon such
exemption.
The Exchangeable Shares, Pioneer Common Stock and the CRI Shares will be
freely transferable under U.S. federal securities laws, except that Exchangeable
Shares, Pioneer Common Stock and the CRI Shares received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
Chauvco prior to the Transaction may be resold by them only in transactions
permitted by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated
under the Securities Act or as otherwise permitted under the Securities Act.
Rule 145(d) (1) generally provides that "affiliates" of either Chauvco or
Pioneer may not sell securities received in the Arrangement unless pursuant to
an effective registration statement or unless pursuant to the volume, current
public information, manner of sale and timing limitations of Rule 144. These
limitations generally require that any sales made by an affiliate in any
three-month period not exceed the greater of 1% of the outstanding shares of
Pioneer or the average weekly trading volume over the four calendar weeks
preceding the placement of the sell order and that such sales be made in
unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3)
generally provide that the foregoing limitations lapse for non-affiliates of
Pioneer after a period of one or two years, respectively, depending upon whether
certain currently available information continues to be available with respect
to Pioneer. Persons who may be deemed to be affiliates of an issuer generally
include individuals or entities that control, are controlled by, or are under
common control with, such issuer and may include certain officers and directors
of such issuer as well as principal shareholders of such issuer.
Chauvco and Pioneer have entered into affiliates agreements with each of
the Chauvco Affiliates restricting such persons in connection with the sale,
pledge or other disposal of Exchangeable Shares, Pioneer Common Stock and CRI
Shares. See, "-- Other Agreements -- Affiliates Agreements."
Pioneer has agreed that it will file and maintain in effect a registration
statement on Form S-3 covering the issuance of the Pioneer Common Stock from
time to time in exchange for the Exchangeable Shares. The shares of Pioneer
Common Stock issued from time to time in exchange for the Exchangeable Shares
will be therefore freely transferable under U.S. federal securities laws, except
that shares of Pioneer Common Stock received by persons who are deemed to be
"affiliates" of Chauvco prior to the consummation of the Transaction will be
subject to the same limitations described above that would apply if they
continued to hold Exchangeable Shares.
Canada. Pioneer and Chauvco have applied for and expect to receive rulings
or orders of certain provincial securities regulatory authorities in Canada to
permit the issuance to Chauvco Shareholders of the CRI Shares, Exchangeable
Shares and Pioneer Common Stock and to permit resale of the CRI Shares,
Exchangeable Shares and Pioneer Common Stock in such provinces without
restriction by a shareholder other than a "control person," provided that no
unusual effort is made to prepare the market for any such resale or to create a
demand for the securities which are the subject of any such resale and no
extraordinary commission or consideration is paid in respect thereof. Applicable
Canadian securities legislation provides a rebuttable presumption that a person
or company is a control person in relation to an issuer where the person or
company alone or in combination with others holds more than 20% of the
outstanding voting securities of the issuer. Upon completion of the Arrangement,
Chauvco will cease to be a reporting issuer and Pioneer Canada will become a
reporting issuer in certain of the provinces of Canada. Pioneer and Chauvco have
also applied on behalf of Pioneer Canada to exempt Pioneer Canada from certain
statutory financial, insider trading, and other reporting requirements in such
provinces on the condition that Pioneer files with the securities commissions of
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such provinces copies of certain of its reports filed with the SEC and that
holders of Exchangeable Shares receive certain materials that are sent to
holders of Pioneer Common Stock.
Pioneer and Chauvco have also applied for rulings or orders of certain
provincial securities regulatory authorities in Canada to permit the issuance of
Pioneer Common Stock to holders of Exchangeable Shares, and to permit the resale
of Pioneer Common Stock by such holders without the requirement of filing a
prospectus.
CONTINUANCE OF PIONEER CANADA UNDER THE ABCA
Pursuant to the Plan of Arrangement, at the Effective Time, Pioneer Canada,
which is currently incorporated pursuant to the BCCA, will be continued under
the ABCA. Prior to the Effective Time, Pioneer will cause the sole shareholder
of Pioneer Canada to pass a special resolution authorizing the continuance of
Pioneer Canada under the ABCA. Overall, the rights of a shareholder of a
corporation governed by the ABCA are similar to the rights of a shareholder of a
company governed by the BCCA; however, there are certain instances where
specific shareholder rights under the ABCA are not as broad as the rights
granted by the BCCA. Under the ABCA, a fundamental change, including an
amendment to the articles, amalgamation, arrangement, extraordinary sale or
continuance merely requires the approval of not less than two-thirds of the
votes cast by the shareholders who vote in respect of the resolution to approve
such change whereas under the BCCA the approval of three-quarters of the votes
cast is required. For further information regarding the differences between the
ABCA and BCCA, Pioneer Stockholders and Chauvco Shareholders should consult
their legal advisors and refer to the Acts.
BUSINESS COMBINATION COSTS
Pioneer and Chauvco expect to incur nonrecurring business combination costs
in connection with the Transaction estimated to be between $20 million and $30
million.
DISSENTERS' RIGHTS
See "Dissenting Shareholders' Rights."
INCOME TAX CONSIDERATIONS TO CHAUVCO SHAREHOLDERS
AND CHAUVCO OPTIONHOLDERS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Bennett Jones Verchere and Felesky Flynn, joint Canadian
tax counsel for Chauvco, the following is a summary of the principal Canadian
federal income tax considerations generally applicable to Chauvco Shareholders
who, for purposes of the Canadian Tax Act, hold their Chauvco Common Shares and
will hold their Exchangeable Shares, CRI Shares and shares of Pioneer Common
Stock as capital property and deal at arm's length with Chauvco and Pioneer.
All Chauvco Shareholders should consult their own tax advisors as to
whether, as a matter of fact, they hold their Chauvco Common Shares and will
hold their Exchangeable Shares, CRI Shares and shares of Pioneer Common Stock as
capital property for the purposes of the Canadian Tax Act. In addition, the
mark-to-market rules contained in the Canadian Tax Act relating to financial
institutions (including certain financial institutions, registered securities
dealers and corporations controlled by one or more of the foregoing) will deem
such financial institutions not to hold their Chauvco Common Shares,
Exchangeable Shares, CRI Shares and shares of Pioneer Common Stock as capital
property for purposes of the Canadian Tax Act. Chauvco Shareholders that are
financial institutions should consult their own tax advisors to determine the
tax consequences to them of the application of the mark-to-market rules.
This summary is based on the current provisions of the Canadian Tax Act,
the regulations thereunder, and joint Canadian tax counsels' understanding of
the current administrative practices of Revenue Canada, Customs, Excise and
Taxation ("Revenue Canada"). This summary takes into account the amendments to
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the Canadian Tax Act and regulations publicly announced by the Minister of
Finance prior to the date hereof (the "Proposed Amendments") and assumes that
all Proposed Amendments will be enacted in their present form. However, no
assurances can be given that the Proposed Amendments will be enacted in the form
proposed, or at all.
Except for the foregoing, this summary does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein.
WHILE THIS SUMMARY IS INTENDED TO ADDRESS ALL PRINCIPAL CANADIAN FEDERAL
INCOME TAX CONSIDERATIONS, IT IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO
BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR
HOLDER OF CHAUVCO COMMON SHARES OR CHAUVCO OPTIONS. THEREFORE, SUCH HOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR
CIRCUMSTANCES. NO ADVANCE INCOME TAX RULING HAS BEEN OBTAINED FROM REVENUE
CANADA TO CONFIRM THE TAX CONSEQUENCES OF ANY OF THE TRANSACTIONS DESCRIBED
HEREIN.
For purposes of the Canadian Tax Act, all amounts relating to the
acquisition, holding or disposition of shares of Pioneer Common Stock, including
dividends, adjusted cost base and proceeds of disposition must be converted into
Canadian dollars based on the prevailing United States dollar exchange rate at
the time such amounts arise.
Chauvco Shareholders Resident in Canada
The following portion of the summary is applicable to Chauvco Shareholders
who, for purposes of the Canadian Tax Act, are resident in Canada.
Transfer of Chauvco Common Shares to Pioneer Canada for CRI Shares, the
Cash Payment, and either, Exchangeable Shares, shares of Pioneer Common Stock or
a combination of both. Under the Arrangement, Chauvco Shareholders will transfer
their Chauvco Common Shares to Pioneer Canada in consideration for CRI Shares on
a one-for-one basis and, at their election, either Exchangeable Shares, shares
of Pioneer Common Stock or a combination of both. In certain circumstances, they
may also receive a Cash Payment from Pioneer Canada in lieu of a number of
Exchangeable Shares and shares of Pioneer Common Stock.
Chauvco Shareholders who elect (or, because of a failure to make an
election, are deemed to have elected) to only receive shares of Pioneer Common
Stock in consideration for their Chauvco Common Shares will recognize a capital
gain (or a capital loss) in an amount equal to the difference between (i) the
aggregate fair market value of the CRI Shares and shares of Pioneer Common Stock
and the amount of any Cash Payment so received, and (ii) the aggregate adjusted
cost base of their Chauvco Common Shares so transferred and reasonable costs of
disposition, and such Chauvco Shareholders will be deemed to have acquired their
CRI Shares and shares of Pioneer Common Stock at a cost equal to the respective
fair market value of such securities. Three-quarters of any capital gain
(referred to in the Canadian Tax Act as a "taxable capital gain") must be
included in income and three-quarters of any capital loss (referred to in the
Canadian Tax Act as an "allowable capital loss") may generally be used to offset
taxable capital gains in the year the loss arises, in any of the three prior
years or in any subsequent year.
A Chauvco Shareholder that is throughout the relevant taxation year a
"Canadian-controlled private corporation" (as defined in the Canadian Tax Act)
may be liable to pay an additional refundable tax of 6 2/3% on its "aggregate
investment income" for the year, which is defined to include taxable capital
gains (but not dividends or deemed dividends deductible in computing taxable
income).
If a Chauvco Shareholder is a corporation, the amount of any capital loss
arising from a disposition or deemed disposition of Chauvco Common Shares may be
reduced by the amount of dividends received or deemed to have been received by
it on the Chauvco Common Shares previously owned by such holder, to the extent
and under circumstances prescribed by the Canadian Tax Act. Similar rules may
apply where a
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corporation is a member of a partnership or a beneficiary of a trust that owns
Chauvco Common Shares or where a trust or partnership of which a corporation is
a beneficiary or a member is a member of a partnership or a beneficiary of a
trust that owns Chauvco Common Shares.
Capital gains realized by a Chauvco Shareholder who is an individual may be
subject to an alternative minimum tax. The Canadian Tax Act provides that the
tax payable by individuals (other than certain trusts) is the greater of the tax
otherwise determined and an alternative minimum tax. For purposes of computing
the alternative minimum tax, one-quarter of all capital gains are added back to
the individual's income as otherwise determined.
Chauvco Shareholders who elect to receive Exchangeable Shares (either
together with or in substitution for shares of Pioneer Common Stock) in
consideration for their Chauvco Common Shares will be entitled to make an
election as described below with Pioneer Canada under subsection 85(1) of the
Canadian Tax Act to defer the recognition of all or a portion of any taxable
capital gain arising on the disposition. Absent the making of such an election,
Chauvco Shareholders who elect to receive Exchangeable Shares will recognize a
capital gain (or a capital loss) in an amount equal to the difference between
(i) the aggregate fair market value of the CRI Shares, Exchangeable Shares and
shares of Pioneer Common Stock and the amount of any Cash Payment so received,
and (ii) the aggregate adjusted cost base of their Chauvco Common Shares so
transferred and reasonable costs of disposition. Such holders will be required
to include in income any such capital gain or capital loss in the manner and
subject to the rules described above, and will be deemed to have acquired their
CRI Shares, Exchangeable Shares and shares of Pioneer Common Stock at a cost
equal to the respective fair market value of such securities.
Chauvco believes that the Voting Rights and Exchange Rights received and
any Call Rights deemed to be conveyed to Pioneer by Chauvco Shareholders
pursuant to the Arrangement who elect to receive Exchangeable Shares will have
only nominal value and, therefore, that their receipt or conveyance, as the case
may be, will not result in any material Canadian income tax consequences. While
joint Canadian tax counsel believes it is unlikely, Revenue Canada could take
the position that the Voting Rights, Exchange Rights and Call Rights have
greater than nominal value, in which case the amount of any capital gain
realized by a Chauvco Shareholder who elects to receive Exchangeable Shares will
be increased.
If Revenue Canada successfully asserts that the Voting Rights and Exchange
Rights received by a Chauvco Shareholder have more than a nominal value, those
rights will have a cost equal to such amount. If Revenue Canada successfully
asserts that a holder of the Exchangeable Shares has received consideration for
granting the Call Rights, the holder will have a capital gain equal to the
amount of the consideration received. In general terms, any such capital gain
realized should reduce the amount of capital gain that the holder will otherwise
realize on a later disposition of the Exchangeable Shares.
Subsection 85(1) Tax Elections. Pioneer Canada has agreed that it will
jointly elect under subsection 85(1) of the Canadian Tax Act with Chauvco
Shareholders who elect to receive Exchangeable Shares, so as to permit such
holders to elect an amount which will be regarded as the proceeds of disposition
of their Chauvco Common Shares. Where such an election is made, the elected
amount cannot be (i) less than the greater of the adjusted cost base to such
holders of their Chauvco Common Shares so disposed of and the aggregate fair
market value of the CRI Shares and shares of Pioneer Common Stock and the amount
of any Cash Payment received, and (ii) more than the aggregate fair market value
of the Chauvco Common Shares so disposed of. The cost of the Exchangeable Shares
acquired will be the difference between the amount elected and the aggregate
fair market value of CRI Shares and shares of Pioneer Common Stock and the
amount of any Cash Payment received by the Chauvco Shareholder on the transfer.
A capital gain (or capital loss) will be realized to the extent that the
proceeds (the elected amount) deemed to have been received for the Chauvco
Common Shares, net of any reasonable costs associated with the disposition,
exceed (or are less than) the adjusted cost base to the holder of such Chauvco
Common Shares. A Chauvco Shareholder will be required to include in income any
such capital gain or capital loss in the manner and subject to the rules
described above. The cost of the CRI Shares and shares of Pioneer Common Stock
received will be equal to the fair market value of such securities.
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Chauvco Shareholders who wish to make an election under subsection 85(1) of
the Canadian Tax Act should obtain from any Revenue Canada District Taxation
Office two copies of the current election forms. It will be the responsibility
of each Chauvco Shareholder who wishes to make an election under subsection
85(1) of the Canadian Tax Act to complete all portions of the forms which are
applicable, especially the number and adjusted cost base of the Chauvco Common
Shares disposed of and the agreed amount, to sign the forms where required and
to forward the signed forms to Pioneer Canada within 90 days following the
Effective Time. Thereafter, subject to the forms complying with the provisions
of the Canadian Tax Act, the forms will be signed by Pioneer Canada and returned
to the Chauvco Shareholder for filing by the Chauvco Shareholder with Revenue
Canada. Chauvco Shareholders should consult with their own tax advisors to
determine whether any separate election forms must be filed with any provincial
taxing authority.
Each Chauvco Shareholder who wishes to make an election under subsection
85(1) of the Canadian Tax Act, or under any provincial legislation, should
submit the necessary forms to Pioneer Canada as soon as possible and, in any
event, within 90 days following the Effective Time. Pioneer Canada will not be
liable for any loss or damage resulting from the late filing of any election
form received by Pioneer Canada or from the invalidation of any election form
unless such validation is solely attributable to any act or omission of Pioneer
Canada.
CHAUVCO SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE TAX CONSEQUENCES TO THEM OF THE RECOGNITION OF A CAPITAL GAIN AS A
RESULT OF THE TRANSFER OF THEIR CHAUVCO COMMON SHARES TO PIONEER CANADA. UNLESS
A HOLDER ELECTS TO RECEIVE EXCHANGEABLE SHARES AND MAKES AN ELECTION UNDER
SUBSECTION 85(1) OF THE CANADIAN TAX ACT, A CAPITAL GAIN MAY BE REALIZED.
Dividends Paid on Exchangeable Shares. A shareholder who is an individual
will include dividends received or deemed to be received on the Exchangeable
Shares in computing the shareholder's income, and will be subject to the
gross-up and dividend tax credit rules normally applicable to taxable dividends
received from taxable Canadian corporations.
Subject to the special rules described below, in the case of a shareholder
that is a corporation, dividends received or deemed to be received on the
Exchangeable Shares will normally be deductible in computing its taxable income.
A shareholder that is a "private corporation" (as defined in the Canadian Tax
Act), or any other corporation resident in Canada and controlled or deemed to be
controlled by or for the benefit of an individual or a related group of
individuals, may be liable under Part IV of the Canadian Tax Act to pay a
refundable tax of 33 1/3% on dividends received or deemed to be received on the
Exchangeable Shares to the extent that such dividends are deductible in
computing the shareholder's taxable income.
Special rules will apply to certain corporations that receive dividends on
the Exchangeable Shares:
(a) In the case of a shareholder that is a specified financial institution,
a dividend received on its Exchangeable Shares will be deductible in computing
its taxable income only if either:
(i) the specified financial institution did not acquire the
Exchangeable Shares in the ordinary course of the business carried on by
such institution; or
(ii) at the time of the receipt of the dividend by the specified
financial institution, the Exchangeable Shares are listed on a prescribed
stock exchange in Canada (which currently includes the TSE) and the
specified financial institution, either alone or together with persons with
whom it does not deal at arm's length, does not receive (or is not deemed
to receive) dividends in respect of more than 10% of the issued and
outstanding Exchangeable Shares.
(b) If Pioneer Canada or any person with whom Pioneer Canada does not deal
at arm's length is a "specified financial institution" under the Canadian Tax
Act when a dividend is paid on an Exchangeable Share, then dividends received or
deemed to be received by a shareholder that is a corporation may not be
deductible in computing taxable income but, instead, may be fully included in
taxable income under Part I of the Canadian Tax Act. Pioneer Canada has informed
joint Canadian tax counsel that it is of the view that
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neither it nor any person with whom it does not deal at arm's length is a
specified financial institution at the current time, but there can be no
assurances that this status will not change prior to any dividend which is
received or deemed to be received by a corporate shareholder.
The Exchangeable Shares will be "taxable preferred shares" and "short-term
preferred shares" for purposes of the Canadian Tax Act. Accordingly, Pioneer
Canada will be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax Act
on dividends, other than excluded dividends, paid or deemed to be paid on the
Exchangeable Shares. Dividends received or deemed to be received on the
Exchangeable Shares will not be subject to the 10% tax under Part IV.1 of the
Canadian Tax Act applicable to certain corporations.
In the event the IRS imposes U.S. withholding tax with respect to dividends
paid on the Exchangeable Shares as set out in "-- United States Federal Income
Tax Considerations -- Non-US Holders -- Dividends," it is unlikely that a
Canadian resident Chauvco Shareholder will be entitled to a foreign tax credit
in Canada with respect to such U.S. withholding tax.
Redemption or Exchange of Exchangeable Shares. The disposition of an
Exchangeable Share for a share of Pioneer Common Stock will be a taxable
transaction. A disposition can occur as a redemption by Pioneer Canada or as an
acquisition by Pioneer. The Canadian federal income tax consequences of a
redemption differ from those of an acquisition. A holder exercising the right of
retraction in respect of an Exchangeable Share cannot control whether the share
will be acquired by Pioneer under the Retraction Call Right or redeemed by
Pioneer Canada if the Retraction Call Right is not exercised; however, a holder
who exercises the right of retraction will be notified if the Retraction Call
Right will not be exercised by Pioneer and the holder may cancel the Notice of
Retraction and retain the Exchangeable Share.
The following explains the tax treatment to a holder of an Exchangeable
Share on a redemption by Pioneer Canada and an acquisition by Pioneer.
(a) On a redemption (including a retraction) of an Exchangeable Share by
Pioneer Canada, a portion of the redemption proceeds may be deemed to be a
dividend received by the holder. The deemed dividend is calculated as the
amount, if any, by which the redemption proceeds exceeds the paid-up capital at
that time of the Exchangeable Share. The deemed dividend is subject to the tax
treatment accorded to dividends described above. Pioneer Canada is required to
calculate the deemed dividend and report the amount to the holder of the
Exchangeable Share. The holder of the Exchangeable Share may also have a capital
gain or capital loss as a result of the redemption. The holder of the
Exchangeable Share is considered to have disposed of the Exchangeable Share for
proceeds of disposition equal to the redemption proceeds less the amount of the
deemed dividend. In the case of a shareholder that is a corporation, in some
circumstances the amount of any deemed dividend may be treated as proceeds of
disposition, and not as a dividend, for purposes of calculating a capital gain.
(b) On the acquisition of an Exchangeable Share by Pioneer, the holder will
in general realize a capital gain (or a capital loss) equal to the amount by
which the proceeds of disposition of the Exchangeable Share, less any reasonable
cost of disposition, exceed (or are less than) the adjusted cost base to the
holder of the Exchangeable Share. A holder will be required to include in income
any such capital gain or capital loss in the manner and subject to the rules
described above. The acquisition of an Exchangeable Share by Pioneer will not
result in a deemed dividend to the holder of the Exchangeable Share.
The redemption proceeds in the case of a redemption by Pioneer Canada and
the proceeds of disposition in the case of an acquisition by Pioneer will be the
fair market value of a share of Pioneer Common Stock at the time of the
disposition plus the amount of all declared but unpaid dividends on the
Exchangeable Share.
The cost base of a share of Pioneer Common Stock received on the
retraction, redemption or exchange of an Exchangeable Share will be equal to the
fair market value of the share of Pioneer Common Stock at the time of such
event.
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The following example illustrates the different treatment for a redemption
by Pioneer Canada and an acquisition by Pioneer, assuming hypothetically that
the fair market value of the Pioneer Common Stock at the time of an exchange is
$50.00, the Exchangeable Shares have a paid-up capital at that time of $5.00 per
share and the adjusted cost base to the holder of the Exchangeable Share is
$10.00.
<TABLE>
<CAPTION>
ACQUISITION REDEMPTION
----------- ----------
<S> <C> <C>
Exchange Consideration...................................... $50.00 $50.00
Deemed Dividend(a).......................................... (b) 45.00
Proceeds of Disposition for capital gains purposes.......... 50.00 5.00
Adjusted Cost Base.......................................... 10.00 10.00
------ ------
Capital Gain (Capital Loss)(a).............................. $40.00 $(5.00)
====== ======
</TABLE>
- ---------------
(a) These line items (being the deemed dividend and the capital gain (or capital
loss)) must be reported by the former holder of the Exchangeable Share.
(b) There is no deemed dividend in the case of an acquisition of the
Exchangeable Shares by a person other than Pioneer Canada.
Dividends on CRI Shares and Pioneer Common Stock. Dividends paid on CRI
Shares and shares of Pioneer Common Stock will be included in the recipient's
income for the purposes of the Canadian Tax Act. Such dividends received by an
individual shareholder will not be subject to the gross-up and dividend tax
credit rules in the Canadian Tax Act. A corporation which is a shareholder will
include such dividends in computing its taxable income. United States or other
foreign non-resident withholding tax on such dividends will be eligible for
foreign tax credit or deduction treatment where applicable under the Canadian
Tax Act. Special considerations may also apply to the receipt of dividends by a
Canadian resident shareholder at a time when either CRI or Pioneer, as the case
may be, is a "foreign affiliate" of the corporate shareholder within the meaning
of the Canadian Tax Act.
Disposition of CRI Shares and Pioneer Common Stock. A disposition or
deemed disposition of a CRI Share and a share of Pioneer Common Stock by a
holder will generally result in a capital gain (or capital loss) equal to the
amount by which the proceeds of disposition, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
the share. Such holders will be required to include in income any such capital
gain or capital loss in the manner and subject to the rules described above.
Eligibility for Investment
Qualified Investments. Provided the CRI Shares, Exchangeable Shares and
the shares of Pioneer Common Stock are listed on a prescribed stock exchange
(which currently includes the TSE and the NYSE), such securities will be
qualified investments under the Canadian Tax Act for trusts governed by
registered retirement savings plans, registered retirement income funds and
deferred profit sharing plans. The Voting Rights and Exchange Rights will not be
qualified investments under the Canadian Tax Act. However, as indicated above,
Chauvco is of the view that the fair market value of these rights is nominal.
Foreign Property. Provided the Exchangeable Shares are listed on a
prescribed stock exchange in Canada (which currently includes the TSE) and
Pioneer Canada continues to maintain a substantial presence in Canada, the
Exchangeable Shares will not be foreign property under the Canadian Tax Act for
trusts governed by registered pension plans, registered retirement savings
plans, registered retirement income funds and deferred profit sharing plans or
for certain other tax-exempt persons. Pioneer Canada will be considered to have
a substantial presence in Canada if it satisfies certain asset tests or if it
maintains an office in Canada and Pioneer Canada, or a corporation controlled by
it, employs more than five employees in Canada full time in the active conduct
of a business, other than an investment activity or a business carried on
through a partnership of which the corporation is not a majority interest
partner. Chauvco has informed joint Canadian tax counsel that following the
Arrangement, Pioneer Canada will satisfy this substantial presence test and
expects that Pioneer Canada will continue to satisfy the test.
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The CRI Shares and the shares of Pioneer Common Stock will be foreign
property under the Canadian Tax Act as will the Voting Rights and Exchange
Rights.
Dissenting Chauvco Shareholders
A dissenting Chauvco Shareholder will realize a deemed dividend and a
capital gain (or a capital loss) based on the consideration received for its
Chauvco Common Shares, computed as generally described above in the case of a
redemption (including a retraction) of an Exchangeable Share by Pioneer Canada
for a share of Pioneer Common Stock under "Redemption or Exchange of
Exchangeable Shares." Dissenting Chauvco Shareholders should consult their own
tax advisors in respect of the treatment of such deemed dividends. Additional
income tax considerations may be relevant to dissenting Chauvco Shareholders who
fail to perfect or withdraw their claims pursuant to the right of dissent.
Chauvco Shareholders Not Resident in Canada
The following portion of the summary is applicable to Chauvco Shareholders
who, for purposes of the Canadian Tax Act, are neither resident in Canada nor
deemed to be resident in Canada and who do not use or hold and are not deemed to
use or hold their Chauvco Common Shares in carrying on a business in Canada
(referred to hereinafter as a "Non-Resident Holder").
Under the Arrangement, Non-Resident Holders will not be entitled to elect
to receive Exchangeable Shares and will instead transfer their Chauvco Common
Shares to Pioneer Canada in consideration for CRI Shares and shares of Pioneer
Common Stock (and possibly a Cash Payment). A Non-Resident Holder will only be
subject to taxation in Canada in respect of the disposition of Chauvco Common
Shares if such shares constitute "taxable Canadian property" (within the meaning
of the Canadian Tax Act). Generally, the Chauvco Common Shares will not be
taxable Canadian property unless the holder uses or holds, or is deemed to use
or hold, the Chauvco Common Shares in connection with carrying on a business in
Canada or the holder, either alone or together with persons with whom the holder
does not deal at arm's length, has owned (or had under option) 25% or more of
the issued shares of any class or series of the capital stock of Chauvco at any
time within five years preceding the date of the disposition.
A Non-Resident Holder will not generally be subject to tax under the
Canadian Tax Act on a disposition of the CRI Shares or the shares of Pioneer
Common Stock unless at the time of the disposition the shares are not listed on
a prescribed stock exchange in Canada and more than 50% of the value of such
shares is derived directly or indirectly from real property situated in Canada
or Canadian resource property. Similarly, Non-Resident Holders will not be
subject to tax under the Canadian Tax Act on dividends paid on the CRI Shares or
the shares of Pioneer Common Stock.
Chauvco Optionholders
Under the Arrangement, Chauvco Optionholders will transfer their Chauvco
Options to Pioneer Canada in consideration for CRI Shares and shares of Pioneer
Common Stock. Chauvco Optionholders who are residents of Canada for the purposes
of the Canadian Tax Act should be subject to tax in Canada on three-quarters of
the difference between (a) the aggregate fair market value of the CRI Shares and
the shares of Pioneer Common Stock received, and (b) the amount, if any, of the
Option Payment made by Pioneer Canada.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section discusses certain material U.S. tax considerations to Chauvco
Shareholders who receive CRI Shares and either Pioneer Common Stock or
Exchangeable Shares pursuant to the Arrangement, but it does not purport to be a
complete analysis of all the potential tax effects thereof. Unless otherwise
indicated, "U.S. tax" means United States federal income tax under the Internal
Revenue Code of 1986 (the "U.S. Code").
This discussion is based on the law in effect as of the date of this Joint
Proxy Statement. The legal conclusions contained herein represent the opinion of
Baker & Botts, L.L.P., United States counsel to
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Chauvco. No advance income tax ruling has been sought or obtained from the
United States Internal Revenue Service (the "IRS"), and there can be no
assurance that the IRS will not successfully challenge certain of the
conclusions reached in this discussion, particularly those as to which
uncertainty is indicated.
Except as specifically stated otherwise, the discussion does not address
state, local, or foreign taxes or federal tax aspects other than United States
federal income taxation under the U.S. Code, nor does it address all aspects of
such tax that may be applicable to the specific circumstances of a particular
Chauvco Shareholder. The discussion may not apply to Chauvco Shareholders that
are subject to special provisions of the U.S. Code, such as tax-exempt
organizations, financial institutions, insurance companies, broker-dealers,
persons having a "functional currency" other than the United States dollar,
Chauvco Shareholders who hold Chauvco Common Shares as part of a straddle, wash
sale, hedging or conversion transaction (other than by virtue of their
participation in the Arrangement), and Chauvco Shareholders who acquired their
Chauvco Common Shares through the exercise of employee stock options or
otherwise as compensation for services.
EACH CHAUVCO SHAREHOLDER IS URGED TO CONSULT WITH A TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE
FOREIGN TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP
OF PIONEER COMMON STOCK, CRI SHARES, AND EXCHANGEABLE SHARES.
U.S. Holders
General. This subsection is addressed to U.S. Holders that hold Chauvco
Common Shares as capital assets and who do not receive any Exchangeable Shares.
For purposes of the foregoing, a U.S. Holder means (a) a citizen or individual
resident of the United States, (b) a corporation or partnership created or
organized in or under the laws of the United States or any state thereof, (c) an
estate the income of which is includible in its gross income for United States
federal income tax purposes without regard to its source, or (d) a trust as to
which a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States fiduciaries
have the authority to control all substantial decisions of the trust. To
simplify the discussion, masculine pronouns will be used to refer to a single
U.S. Holder unless the discussion specifically refers to a U.S. Holder that is
not an individual.
Exchange of Chauvco Common Shares. Assuming that Chauvco was not at any
relevant time classified as a PFIC as defined below under the heading "Passive
Foreign Investment Company Considerations," each U.S. Holder will recognize
capital gain or loss in an amount equal to the difference between his basis in
the Chauvco Common Shares surrendered and the sum of the fair market value of
the Pioneer Common Stock and CRI Shares and the cash (if any) received in
exchange therefor. For U.S. tax credit purposes, any gain realized by a U.S.
Holder will generally be treated as U.S. source, except that, if under the
income tax treaty between the United States and Canada (the "Tax Treaty") any
Canadian tax is imposed on the exchange, the gain would be treated as Canadian
source at the election of the U.S. Holder. As a result, the Canadian tax would
generally be available as a credit against the U.S. tax attributable to such
gain.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the maximum capital
gains rate for individuals has been reduced to 20% for Chauvco Common Shares
held for more than 18 months before the exchange, but the applicable rate will
depend upon the holding period for the U.S. Holders of Chauvco Common Shares,
other taxable income, and other factors.
For purposes of computing gain or loss, and whether short-term or
long-term, on any subsequent disposition of Pioneer Common Stock or CRI Shares,
the U.S. Holder will have a tax basis in each share equal to its fair market
value on the date of receipt, and will have a holding period in the shares that
begins on the day after the date of receipt.
Dissenters. A U.S. Holder who exercises a right to dissent from the
Arrangement will recognize capital gain or loss on the exchange of Chauvco
Common Shares for cash in an amount equal to the difference between the amount
of cash received and his basis in the Chauvco Common Shares, except that a
portion of the amount received may be classified as interest for U.S. tax
purposes.
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Ownership and Disposition of CRI Shares. Assuming that CRI is also not a
PFIC for any year, dividends paid to a U.S. Holder with respect to CRI Shares
generally will constitute ordinary dividend income to the extent paid out of
CRI's earnings and profits as determined under U.S. tax principles. The amount
of a dividend paid in non-U.S. currency will be calculated by reference to the
exchange rate in effect on the date the dividend is distributed. Foreign
currency gain or loss may be realized on any currency received that is not
converted into United States dollars on such date. Dividends will generally be
treated as foreign source passive income for foreign tax credit limitation
purposes. Any foreign tax imposed on such dividends will generally be allowable
either as a credit against the holder's U.S. tax liability (subject to
applicable limitations) or as a deduction in computing U.S. taxable income. Gain
or loss recognized on the disposition of CRI Shares will generally be treated as
U.S. source for U.S. tax purposes.
Passive Foreign Investment Company Considerations. For U.S. tax purposes,
a corporation is classified as a passive foreign investment company ("PFIC") for
each taxable year in which either (a) 75 percent or more of its gross income is
passive income (as defined for U.S. tax purposes) or (b) on average for such
taxable year, 50 percent or more in value of its assets produce passive income
or are held for the production of passive income. For purposes of applying the
foregoing tests, a corporation is deemed to own the assets and receive the gross
income of its significant subsidiaries.
Chauvco believes that it did not constitute a PFIC for any year ending upon
or prior to the Arrangement, but it has not sought an opinion of counsel to that
effect. CRI will endeavor to avoid PFIC status, but there can be no assurance
that it will succeed in doing so. If CRI believes that it has become a PFIC for
a taxable year, it will endeavor so to notify U.S. Holders of CRI Shares.
If a corporation is a PFIC at any time in which a U.S. Holder owns its
shares and has not elected ("QEF Election") to treat the corporation as a
qualified electing fund, the gain recognized on the disposition of such shares
is taxed as ordinary income at rates that might be higher than those otherwise
applicable and an interest charge is imposed on such gain. The general effect of
a QEF Election is to require the U.S. Holder's pro rata share of the
corporation's income for each taxable year in which the corporation is
classified as a PFIC to be included in his taxable income, even if no dividend
distributions are received. The holder, however, can also elect to defer payment
of the taxes on such income, subject to an interest charge, until the shares are
transferred or a distribution on such shares is received. In addition, it is
possible that under the 1997 Act a U.S. Holder will be permitted beginning in
1998 to make a mark-to-market election with respect to shares of a PFIC in lieu
of incurring the special tax and interest charge on disposition of those shares.
Non-U.S. Holders
General. This subsection addresses the U.S. tax consequences of owning and
disposing of Exchangeable Shares, Pioneer Common Stock, and CRI Shares by
Chauvco Shareholders who are not U.S. Holders ("Non-U.S. Holders"). It is
expected that most Chauvco Shareholders who, for purposes of the Canadian Tax
Act, are resident or deemed to be resident in Canada will be Non-U.S. Holders. A
Non-U.S. Holder seeking benefits under an applicable tax treaty or an exemption
from U.S. withholding tax for "effectively connected income," as described
below, may be required to comply with additional certification and other
requirements in order to establish his entitlement to such benefits or
exemption. This discussion does not consider U.S. tax consequences that may be
relevant to a Non-U.S. Holder who is a United States expatriate or who has other
special facts and circumstances.
Dividends. Dividends received by a Non-U.S. Holder with respect to Pioneer
Common Stock that are not effectively connected with the conduct of a trade or
business in the United States will generally be subject to U.S. withholding tax.
The U.S. withholding tax rate is 30% unless reduced by treaty. Under the Tax
Treaty, the rate currently is 15 percent, generally, on dividends paid to
residents of Canada. With exceptions that CRI does not expect to be applicable,
dividends on the CRI Shares will not be subject to U.S. withholding tax. Neither
Pioneer Canada nor Pioneer intends to withhold any amount for U.S. withholding
tax on dividends paid to Non-U.S. Holders of Exchangeable Shares. There is some
possibility, however, that the IRS may successfully assert that U.S. withholding
tax is payable with respect to such dividends.
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Gain on Dispositions. A Non-U.S. Holder generally will not be subject to
U.S. tax on any gain recognized on the receipt, sale or exchange of the
Exchangeable Shares, CRI Shares, or Pioneer Common Stock, unless (a) such gain
is effectively connected with a trade or business in the United States, or, if a
tax treaty applies, is attributable to a permanent establishment maintained by
the Non-U.S. Holder in the United States, or (b) the Non-U.S. Holder is an
individual who is present in the United States for 183 days or more in the
taxable year of disposition, and certain other conditions are satisfied. In this
connection, any Non-U.S. Holder who at any time actually and constructively owns
more than 5% of either the Exchangeable Shares or the Pioneer Common Stock
should be aware that Pioneer is probably a "United States real property holding
corporation" within the meaning of section 897 of the U.S. Code, and therefore
such Non-U.S. Holder should seek advice whether his gain or loss would be deemed
to be effectively connected with a U.S. business.
U.S. Estate Tax. Pioneer Common Stock held by an individual Non-U.S.
Holder at the time of death will be deemed to be a U.S. situs asset for purposes
of U.S. estate tax law and therefore will generally be subject to the U.S.
estate tax, except as may otherwise be provided by an applicable tax or estate
tax treaty with the United States. No opinion is expressed as to the situs of
Exchangeable Shares for purposes of U.S. estate tax law. The CRI Shares will not
be considered U.S. situs assets for purposes of U.S. estate tax law.
Chauvco Optionholders
This section discusses certain material U.S. tax considerations to citizens
or residents of the United States who hold Chauvco Options that were received as
compensation for services ("U.S. Optionholders") and who receive Pioneer Common
Stock, CRI Shares, and the Cash Payment and cash (if any) upon the transfer of
Chauvco Options pursuant to the Arrangement. It is assumed that U.S.
Optionholders will hold such Pioneer Common Stock and CRI Shares as capital
assets. As used in this section, the term "U.S. tax" means United States federal
income tax under the U.S. Code.
The discussion is based on the law in effect as of the date of this Joint
Proxy Statement. The legal conclusions contained herein represent the opinion of
Baker & Botts, L.L.P. No advance income tax ruling has been sought or obtained
from the IRS.
The discussion does not address state, local, or foreign taxes or federal
tax aspects other than United States federal income taxation under the U.S.
Code, nor does it address all aspects of such tax that may be applicable to the
specific circumstances of a particular U.S. Optionholder.
EACH U.S. OPTIONHOLDER IS URGED TO CONSULT WITH A TAX ADVISOR WITH RESPECT
TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN
TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF
PIONEER COMMON STOCK AND CRI SHARES.
U.S. Optionholders will recognize ordinary income, taxable as compensation,
upon the receipt of Pioneer Common Stock, CRI Shares, and the Cash Payment and
cash (if any) pursuant to the Arrangement. The amount of such income will be the
fair market value of the Pioneer Common Stock and CRI Shares, increased by the
Cash Payment and any cash received and reduced, in the case of a U.S.
Optionholder who elects to make the Option Payment, by the amount of the Option
Payment.
Under certain circumstances, all or a portion of such income may be
excludible under section 911 of the U.S. Code. To the extent that the income is
not so excludible, Canadian tax imposed on such income may be available as a
credit against the U.S. tax attributable to the income. U.S. Optionholders
should consult their own tax advisors with respect to these matters.
The basis to the U.S. Optionholder of the Pioneer Common Stock and CRI
Shares will be their fair market value on the date of receipt, and the holding
period will begin on the day after such date. Gain recognized by a U.S.
Optionholder on a subsequent disposition of the Pioneer Common Stock will be
capital gain. Under the 1997 Act, the maximum capital gains rate for individuals
has been reduced to 20% for Pioneer Common Stock held for more than 18 months
before the disposition, but the applicable rate will depend upon the holding
period for the Pioneer Common Stock, other taxable income, and other factors.
Considerations as to the ownership and disposition by U.S. Optionholders of CRI
Shares are the same as those applicable to
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U.S. Holders. See "United States Federal Income Tax Considerations -- U.S.
Holders -- Ownership and Disposition of CRI Shares."
BUSINESS OF PIONEER
GENERAL
Pioneer was formed in April 1997 as a Delaware corporation and, prior to
August 7, 1997, had not conducted any significant activities. Effective as of
August 7, 1997, Parker & Parsley, formerly a Delaware corporation, and Mesa,
formerly a Texas corporation, completed their business combination pursuant to
an Amended and Restated Agreement and Plan of Merger dated as of April 6, 1997
(the "Merger Agreement"), among Parker & Parsley, Mesa, and its wholly-owned
subsidiaries, Pioneer and Mesa Operating Co., a Delaware corporation ("MOC").
Upon the terms and subject to the conditions of the Merger Agreement, (a) Mesa
merged with and into Pioneer, with Pioneer being the surviving corporation, and
(b) Parker & Parsley merged with and into a wholly-owned subsidiary of Pioneer,
Pioneer Natural Resources USA, Inc., a Delaware corporation, formerly known as
MOC ("Pioneer USA"), with Pioneer USA being the surviving corporation
(collectively, the "Parker/Mesa Merger").
Pioneer's business activities are conducted through wholly-owned
subsidiaries and are comprised of the business activities formerly conducted by
Parker & Parsley and Mesa. More than 90% of Pioneer's assets are held by Pioneer
USA. Domestic drilling and production operations are principally located in
Texas, Kansas, Oklahoma, Louisiana, New Mexico and offshore Gulf of Mexico.
International drilling and production operations are located in Argentina and
Guatemala.
Pioneer is a corporation governed by the DGCL and its principal executive
office is located at 1400 Williams Square West, 5205 N. O'Connor Blvd., Irving,
Texas 75039 (telephone number 972-444-9001).
OVERVIEW OF THE PIONEER ENTERPRISE
THE INFORMATION INCLUDED UNDER THIS HEADING "OVERVIEW OF THE PIONEER
ENTERPRISE" IS AS OF DECEMBER 31, 1996, GIVES EFFECT TO THE COMBINATION OF
PARKER & PARSLEY AND MESA (INCLUDING GIVING EFFECT TO THE GREENHILL
ACQUISITION), AND IS ON A PRO FORMA BASIS GIVING EFFECT TO THE TRANSACTION AS IF
IT HAD OCCURRED ON DECEMBER 31, 1996.
The Transaction will strengthen Pioneer's status as a preeminent
independent oil and gas company by combining Pioneer's long-lived, low cost oil
and gas reserves and gas processing facilities with Chauvco's high quality
reserves, significant growth potential and international assets and prospects.
After the Transaction, Pioneer will be the second largest independent oil and
gas exploration and production company in the United States, based on total
proved reserves, with a balanced oil and gas reserve base and significant
production and reserve growth potential. Led by a proven management team,
Pioneer will continue to have the financial strength and flexibility to pursue
an aggressive growth strategy through a coordinated balance of exploitation,
exploration and acquisition activities.
Pioneer's principal strengths and strategies are the following:
Reserves and Operating Areas
- Pioneer has 703 MMBOE of reserves, comprised of 2.3 Tcf of natural gas
and 315 MMBbls of crude oil and liquids, 85% of which are concentrated
in the United States, principally the MidContinent region and Texas.
Outside the United States, Pioneer has core operating areas in western
Canada and Argentina which account for 6% and 9% of proved reserves,
respectively.
- Pioneer's reserve base is long-lived, with an aggregate reserve to
production ratio of approximately 12 years, and well-balanced, with 55%
natural gas and 45% crude oil and liquids.
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- Pioneer operates wells representing approximately 80% of its total
proved reserves and is a dominant operator in the United States, in the
Hugoton, West Panhandle and Spraberry fields. Pioneer also operates in
western Canada and Argentina.
Drilling and Growth Opportunities
- Pioneer has approximately 4,700 drilling locations, of which
approximately 3,000 are in the United States, primarily in west Texas
and along the Texas and Louisiana coasts, and approximately 1700 are in
western Canada and Argentina.
- Pioneer has approximately 2.2 million net undeveloped acres, of which
approximately 700,000 are located in the United States and
approximately 1.5 million are located in western Canada and Argentina.
- Pioneer expects to invest 25% of its 1998 capital expenditure budget in
exploration activities, with the balance to be invested in development
drilling and exploitation activities.
Management
- Pioneer's management team is led by Jon Brumley and Scott Sheffield. Mr.
Brumley is the Chairman of the Board and Mr. Sheffield is the President
and Chief Executive Officer. Both Mr. Brumley and Mr. Sheffield are
proven leaders in the industry, with well established records of
successfully building oil and gas companies.
- The Pioneer Board will be enhanced and expanded to 16 members by the
addition of Guy Turcotte, Chauvco's Chief Executive Officer (subject to
Pioneer Stockholder approval), and James Baroffio, a member of the
Chauvco Board, both of whom are experienced leaders in the exploration
and production industry.
- With inside ownership of 17%, the Pioneer Board's and management team's
interests in creating value are aligned with those of its stockholders.
Objectives and Growth Strategy
- Increasing stockholder value. Pioneer's five-year growth goal is to
increase stockholder value by doubling operating cash flow through
increases in production. Although Pioneer's management team believes it
can reach this goal, there can be no assurances that cash flow from
operations will double or increase at all. See "Risk Factors" for a
discussion of certain risks associated with Pioneer's intent to pursue an
aggressive growth strategy.
- Development and production enhancement activities. Pioneer seeks to
increase reserves and production through exploitation activities,
including development drilling and recompletions in its core operating
areas.
- Exploration. Pioneer's exploration activities use the latest in seismic,
drilling and completion technology to identify and drill sites with high
reserve potential, such as those in the southern Louisiana transition
zone, the Gulf of Mexico, east Texas, western Canada and Argentina.
- Acquisitions. Pioneer pursues acquisitions to enhance existing core
areas or to establish new core areas. Pioneer's acquisition efforts focus
on opportunities to increase reserves and production through both
exploitation and exploration activities with a high degree of operational
control.
- Increasing natural gas processing capacity in core areas. Pioneer
intends to expand the processing capabilities of its gas processing
facilities and will strive to obtain additional dedications of third
party gas to these plants. By owning and operating these processing
facilities, Pioneer retains the processing margin on the gas it produces,
as well as on gas produced by third parties.
- Maintaining financial strength and flexibility. Pioneer intends to
maintain financial strength, flexibility and an investment grade rating
for its senior debt by seeking to: (i) maintain its credit ratios
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consistent with guidelines established by the major credit rating
agencies for investment grade companies; (ii) fund its development and
exploration activities primarily with internally generated cash flow;
(iii) continue a portfolio management approach to its assets so as to
direct future investments toward projects that enhance growth; (iv) use
hedging strategies to reduce price risk in supporting its capital
expenditure budget and its acquisition activities; and (v) reduce per
unit operating and general and administrative expenditures.
- Aligning the interests of its directors, officers, senior management, key
technical personnel and stockholders. Pioneer believes that it is
essential to align the interests of management and employees with those
of its stockholders through equity based compensation plans and ownership
of Pioneer Common Stock by directors, officers and employees. To attract,
retain and motivate quality personnel, Pioneer utilizes the Pioneer
Long-Term Incentive Plan and the Pioneer Employee Stock Purchase Plan.
See "Risk Factors -- Cautionary Statement Regarding Forward-Looking
Information."
MANAGEMENT OF PIONEER
Directors and Executive Officers
Set forth below is certain information concerning the directors and
executive officers of Pioneer.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE CLASS POSITION
- ---- --- -------- --------
<S> <C> <C> <C>
I. Jon Brumley............................. 58 III Chairman of the Board
Scott D. Sheffield......................... 44 II Director, President and Chief
Executive Officer
Timothy L. Dove............................ 40 Executive Vice President --
Business Development
Dennis E. Fagerstone....................... 48 Executive Vice President
Mel Fischer................................ 63 Executive Vice President --
World Wide Exploration
Mark L. Withrow............................ 49 Executive Vice President,
General Counsel and
Secretary
Lon C. Kile................................ 41 Executive Vice President
M. Garrett Smith........................... 36 Senior Vice President --
Finance
R. Hartwell Gardner........................ 62 I Director
John S. Herrington......................... 57 I Director
Kenneth A. Hersh........................... 34 II Director
James L. Houghton.......................... 66 I Director
Jerry P. Jones............................. 65 II Director
Boone Pickens.............................. 68 III Director
Richard E. Rainwater....................... 52 III Director
Charles E. Ramsey, Jr...................... 60 III Director
Arthur L. Smith............................ 44 III Director
Philip B. Smith............................ 45 I Director
Robert L. Stillwell........................ 60 II Director
Michael D. Wortley......................... 50 I Director
</TABLE>
The Pioneer Restated Certificate provides for a classified Board of
Directors, divided into three classes. The Class I directors' terms expire at
Pioneer's 1998 annual stockholders' meeting, the Class II directors' terms
expire at Pioneer's 1999 annual stockholders' meeting and the Class III
directors' terms expire at Pioneer's 2000 annual stockholders' meeting. Each
director elected at each such meeting serves for a term ending on the date of
the third annual stockholders' meeting after his election or until his earlier
death,
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resignation or removal. The class designation of each of Pioneer's directors is
indicated in the list of directors above.
Set forth below is a description of the backgrounds of the directors,
executive officers and advisor of Pioneer:
MR. BRUMLEY, graduate of the University of Texas with a B.A. and of the
Wharton School of Finance and Commerce with a M.B.A., has served as Chairman of
the Board of Directors of Pioneer since August 1997. He served as Chairman of
the Board of Directors and Chief Executive Officer of Mesa from August 1996
until August 1997. From 1986 to mid-1996, Mr. Brumley cofounded and served as
Chairman of the Board of Directors of Cross Timbers Oil Company and from 1974 to
1985, Mr. Brumley served as President and Chief Executive Officer of Southland
Royalty Company.
MR. SHEFFIELD, a distinguished graduate of the University of Texas with a
B.S. in Petroleum Engineering, has served as the President and Chief Executive
Officer and as a director of Pioneer since August 1997. He was the President and
a director of Parker & Parsley from May 1990 until August 1997 and was the
Chairman of the Board and Chief Executive Officer of Parker & Parsley from
October 1990 until August 1997. Mr. Sheffield was the sole director of Parker &
Parsley from May 1990 until October 1990. Mr. Sheffield joined Parker & Parsley
Development Company ("PPDC"), a predecessor of Parker & Parsley, as a petroleum
engineer in 1979. Mr. Sheffield served as Vice President -- Engineering of PPDC
from September 1981 until April 1985, when he was elected President and a
director. In March 1989, Mr. Sheffield was elected Chairman of the Board and
Chief Executive Officer of PPDC. Before joining PPDC's predecessor, Mr.
Sheffield was employed as a production and reservoir engineer for Amoco
Production Company.
MR. DOVE became Executive Vice President-Business Development of Pioneer in
August 1997. Mr. Dove joined Parker & Parsley in May 1994 as Vice
President -- International and was promoted to Senior Vice President -- Business
Development in October 1996, in which position he served until August 1997.
Prior to joining Parker & Parsley, Mr. Dove was employed with Diamond Shamrock
Corp., and its successor, Maxus Energy Corp, in various capacities in
international exploration and production, marketing, refining and marketing, and
planning and development. Mr. Dove earned a Bachelor of Science degree in
Mechanical Engineering from Massachusetts Institute of Technology in 1979 and
received his Masters of Business Administration in 1981 from the University of
Chicago.
MR. FAGERSTONE, a graduate of the Colorado School of Mines with a B.S. in
Petroleum Engineering, became an Executive Vice President of Pioneer in August
1997. Mr. Fagerstone served as Executive Vice President and Chief Operating
Officer of Mesa from March 1, 1997 until August 1997. From October 1996 to
February 1997, Mr. Fagerstone served as Senior Vice President and Chief
Operating Officer of Mesa and from May 1991 to October 1996, Mr. Fagerstone
served as Vice President -- Exploration and Production of Mesa. From June 1988
to May 1991, Mr. Fagerstone served as Vice President -- Operations of Mesa.
MR. FISCHER, a graduate of the University of California at Berkeley with a
Masters degree in Geology, became Executive Vice President -- World Wide
Exploration of Pioneer in August 1997. Mr. Fischer served as a director of
Parker & Parsley from November 1995 until August 1997. Prior to joining Parker &
Parsley as a director, Mr. Fischer worked in the petroleum industry for 32
years, starting as a Petroleum Geologist with Texaco in 1962, and retiring from
the position of President, Occidental International Exploration and Production
Company, in March, 1994. For the 10 years prior to becoming President of
Occidental International, Mr. Fischer held the position of Executive Vice
President, World Wide Exploration with Occidental Oil and Gas Corporation. He is
a registered geologist in the State of California, a member of the American
Association of Petroleum Geologists and an emeritus member of the Board of
Advisors for the Earth Sciences Research Institute at the University of Utah.
Effective February 1, 1997, Mr. Fischer expanded his duties with Parker &
Parsley when he was appointed to serve as Executive Vice President -- World Wide
Exploration for Parker & Parsley.
MR. WITHROW, a graduate of Abilene Christian University with a Bachelor of
Science degree in Accounting and Texas Tech University with a Juris Doctorate
degree, became Executive Vice President,
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General Counsel and Secretary of Pioneer in August 1997. Mr. Withrow was Vice
President -- General Counsel of Parker & Parsley from January 1991, when he
joined Parker & Parsley, to January 1995, when he was appointed Senior Vice
President, General Counsel. He was Parker & Parsley's Secretary from August 1992
until August 1997. Before joining Parker & Parsley, Mr. Withrow was the managing
partner of the law firm of Turpin, Smith, Dyer, Saxe & MacDonald, Midland,
Texas.
MR. KILE, a graduate of Oklahoma State University with a Bachelor of
Business Administration degree in Accounting, became Executive Vice President of
Pioneer in August 1997. Mr. Kile joined Parker & Parsley in 1985 and was
promoted to Senior Vice President -- Investor Relations in October 1996.
Previously, he was Vice President and Manager of the Mid-Continent Division.
Prior to that he held the position of Vice President -- Equity Finance &
Analysis and Vice President -- Marketing and Program Administration. Prior to
joining Parker & Parsley, he was employed as Supervisor -- Senior, Audit, in
charge of Parker & Parsley's audit, with Ernst & Young.
MR. SMITH (M. GARRETT), a graduate of The University of Texas with a
Bachelor of Science degree in Electrical Engineering and Southern Methodist
University with an M.B.A., became Senior Vice President -- Finance of Pioneer in
August 1997. Mr. Smith served as Vice President -- Corporate Acquisitions of
Mesa from January 1997 until August 1997. From October 1996 to December 1996,
Mr. Smith served as Vice President -- Finance of Mesa and from 1994 to 1996, he
served as Director of Financial Planning of Mesa. Mr. Smith was employed by BTC
Partners, Inc. (a former financial advisor to Mesa) from 1989 to 1994.
MR. GARDNER became a director of Pioneer in August 1997. He served as a
director of Parker & Parsley from November 1995 until August 1997. He graduated
from Colgate University with a B.A. in Economics and then earned a M.B.A. from
Harvard University. Until October 1, 1995, Mr. Gardner was the Treasurer of
Mobil Oil Corporation and Mobil Corporation from 1974 and 1976 respectively. Mr.
Gardner is a member of the Financial Executives Institute of which he served as
Chairman in 1986/1987 and is a Director of Oil Investment Corporation Ltd. and
Oil Casualty Investment Corporation Ltd. Pembroke, Bermuda.
MR. HERRINGTON, graduate of Stanford University with a B.A. in Economics
and the University of California Hastings college of Law with a J.D. and L.L.B.,
became a director of Pioneer in August 1997. He served as a director of Mesa
from January 1992 until August 1997. Since December 1991, Mr. Herrington has
been involved in personal investments and real estate activities. He was
Chairman of the Board of Harcourt Brace Jovanovich, Inc. (publishing) from May
1990 to November 1991 and served as a director from May 1989 to May 1990. Mr.
Herrington served as the Secretary of the Department of Energy of the United
States from February 1985 to May 1990.
MR. HERSH, graduate of Princeton University with a B.A. and Stanford
University Graduate School of Business with a MBA, became a director of Pioneer
in August 1997. He served as a director of Mesa from July 1996 until August
1997. Since 1994, he has served as Chief Investment Officer and director of
Rainwater, Inc. and as a Managing Partner of Natural Gas Partners investment
funds. From 1989 to 1994, he served as a Managing Partner of Natural Gas
Partners, L.P. and from 1985 to 1987, as a member of the energy group of Morgan
Stanley & Co. investment banking division. Mr. Hersh is a director of HS
Resources, Inc. and Titan Exploration Inc.
MR. HOUGHTON is a certified public accountant and a graduate of Kansas
University with a B.S. in Accounting, as well as a L.L.B. Mr. Houghton became a
director of Pioneer in August 1997. He served as a director of Parker & Parsley
from October 1991 until August 1997. Until October 1, 1991, Mr. Houghton was the
lead oil and gas tax specialist for the accounting firm of Ernst & Young, was a
member of Ernst & Young's National Energy Group, and had served as the Southwest
Regional Director of Tax. Mr. Houghton is a member of the American Institute of
Certified Public Accountants, a member of the Oklahoma Society of Certified
Public Accountants and a former Chairman of its Federal and Oklahoma Taxation
Committee and past President of the Oklahoma Institute on Taxation. He has also
served as a Director for the Independent Petroleum Association of America and as
a member of its Tax Committee. Since 1990, Mr. Houghton has served as trustee of
the J.E. and L.E. Mabee Foundation, Inc.
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MR. JONES earned a B.S. from West Texas State College in 1953 and a L.L.B.
from the University of Texas School of Law in 1959. Mr. Jones became a director
of Pioneer in August 1997. He served as a director of Parker & Parsley from May
1991 until August 1997. Mr. Jones has been an attorney with the law firm of
Thompson & Knight, P.C., Dallas, Texas since September 1959 and is a shareholder
in the firm. He has specialized in civil litigation, particularly in the area of
energy disputes.
MR. PICKENS, the founder of Mesa, is a graduate of Oklahoma State
University with a B.S. in geology and served as a director of Mesa from its
inception until August 1997 when he became a director of Pioneer. From January
1992 to August 1996, he served as Chairman of the Board of Directors and Chief
Executive Officer. From October 1985 to December 1991, Mr. Pickens served as
General Partner of Mesa, L.P., predecessor of Mesa, and as Director of Pickens
Operating Co. (the corporate general partner of Mesa, L.P.). From 1964 to
January 1987, Mr. Pickens served as Chairman of the Board and President of Mesa
in its original corporate form. Mr. Pickens is currently the Chairman of the
Board of BP Capital LLC and Pickens Fuel Corp.
MR. RAINWATER, a graduate of the University of Texas with a B.A. and the
Stanford University Graduate School of Business with a M.B.A., became a director
of Pioneer in August 1997. He served as a director of Mesa from July 1996 until
August 1997. Since 1986, Mr. Rainwater has been an independent investor and the
sole shareholder, President and a director of Rainwater, Inc. Mr. Rainwater was
the founder of Crescent Real Estate Equities, Inc. in 1994 and since that time
has served as Chairman of the Board. He was the co-founder of Mid Ocean Limited
in 1991, the founder of Columbia Hospital Corporation (predecessor to
Columbia/HCA Healthcare Corporation) in 1987 and the founder of ENSCO
International, Inc. in 1986. From 1970 to 1986, Mr. Rainwater served as the
Chief Investment Advisor to the Bass Family of Texas.
MR. RAMSEY is a graduate of the Colorado School of Mines with a Petroleum
Engineering degree and a graduate of the Smaller Company Management program at
the Harvard Graduate School of Business Administration. He became a director of
Pioneer in August 1997. From October 1991 until August 1997, Mr. Ramsey served
as a director of Parker & Parsley and began operating an independent management
and financial consulting firm. From June 1958 until June 1986, Mr. Ramsey held
various engineering and management positions in the oil and gas industry, and
for six years prior to October 1, 1991, was a Senior Vice President in the
Corporate Finance Department of Dean Witter Reynolds Inc. (Dallas, Texas
office). His industry experience includes 12 years of senior management
experience in the positions of President, Chief Executive Officer and Executive
Vice President of May Petroleum Inc. Mr. Ramsey is also a former director of
MBank Dallas, the Dallas Petroleum Club and Lear Petroleum Corporation.
MR. SMITH (ARTHUR L.) has a B.A. from Duke University, and is a graduate of
New York University's Stern School of Business with a M.B.A. in Economics. Mr.
Smith became a director of Pioneer in August 1997. He served as a director of
Parker & Parsley from August 1991 until August 1997. He is Chairman and Chief
Executive Officer of John S. Herold, Inc., a petroleum research and consulting
firm based in Stanford, Connecticut. Mr. Smith acquired control of John S.
Herold, Inc. in 1984 after nine years on Wall Street in institutional equity
research and corporate finance with Oppenheimer and Company, Inc., The First
Boston Corporation and Argus Research Corp. From 1988 to 1993, he served on the
Board of Directors of the New York Society of Security Analysts. Mr. Smith holds
the Chartered Financial Analyst (CFA) designation.
MR. SMITH (PHILIP B.), a graduate of Oklahoma State University with a B.S.
in mechanical engineering and the University of Tulsa with a M.B.A., became a
director of Pioneer in August 1997. He served as a director of Mesa from July
1996 until August 1997. In 1996, Mr. Smith founded PRIZE Petroleum, L.L.C. From
1991 to 1996, Mr. Smith served as President, Chief Executive Officer and a
director of Tide West Oil Company. From 1986 to 1991, he served as Senior Vice
President of Mega Natural Gas Company and from 1980 to 1986, he held executive
positions with two small exploration and production companies. From 1976 to
1980, Mr. Smith held various positions with Samson Resources Company and from
1974 to 1976, he was a production engineer with Texaco, Inc. Mr. Smith is a
director of HS Resources, Inc.
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MR. STILLWELL, a graduate of the University of Texas with a B.B.A. and the
University of Texas School of Law with a J.D., became a director of Pioneer in
August 1997. He served as a director of Mesa from January of 1992 until August
1997, as a member of the Advisory Committee of Mesa, L.P., a predecessor Mesa,
from December 1985 to December 1991 and from 1969 to January 1987, he served as
a director of Mesa in its original corporate form. Mr. Stillwell has been a
partner in the law firm of Baker & Botts, L.L.P. for more than the last five
years.
MR. WORTLEY, a graduate of Southern Methodist University with a B.A. in
Political Science, the University of North Carolina at Chapel Hill with a
Masters degree in Regional Planning, and Southern Methodist University School of
Law with a J.D., became a director of Pioneer in August 1997. He served as a
director of Parker & Parsley from April 1991 until August 1997. Mr. Wortley, a
partner with the law firm of Vinson & Elkins L.L.P. (Dallas, Texas office),
specializes in acquisitions and securities matters and serves as the co-head of
the Corporate Finance and Securities Section of the firm. He served on the Board
of Directors of Johnson & Wortley, P.C., from May 1994 until December 1994 and
from April 1990 to May 1993, as President and Chairman of the Board from
November 1991 to May 1993 and as the Managing Director from February 1992 to May
1993. From January 1989 until November 1991, he served as the Chairman of the
Corporate/Securities Department.
In addition to the directors of Pioneer, Edward O. Vetter, a graduate of
the Massachusetts Institute of Technology, became a Senior Advisor to both
Pioneer's Chairman and Chief Executive Officer beginning in August 1997 through
at least 1998. Mr. Vetter served as a director of Parker & Parsley from February
1992 until August 1997 and has in the past served as director of AMR
Corporation, American Airlines, Inc., Cabot Corporation, The Western Company of
North America and Champion International Corporation. Since 1977, Mr. Vetter has
been President of Edward O. Vetter & Associates, a management consulting firm in
Dallas, Texas. Mr. Vetter was the Energy Advisor to the Governor of Texas from
1979 to 1983, was chairman of the Texas Department of Commerce from 1987 to
1991, and was a Presidential appointee to the U.S. Competitiveness Policy
Council. He is a life trustee of the Massachusetts Institute of Technology and a
former member of the National Petroleum Council.
Compensation of Directors
As compensation for services as a director of Pioneer, each non-employee
director receives an annual retainer fee, which is paid 50% in cash and 50% in
the form of Pioneer Common Stock, or at the election of the director, 100% in
Pioneer Common Stock. The amount of the annual retainer fee is $40,000, or
$50,000 for such directors that serve on committees. In addition, each
non-employee director is reimbursed for travel expenses incurred in connection
with attending meetings of the Board of Directors or its committees and an
additional $2,500 for services as chairman of a committee. No additional fees
are paid for attending board or committee meetings. Executive officers of
Pioneer who serve as directors do not receive additional compensation for
serving on the Pioneer Board.
Indemnification
Pioneer has entered into indemnification agreements with each of its
directors and officers. These agreements require Pioneer to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law ("DGCL") and to advance expenses in connection with certain
claims against directors and officers. Each indemnification agreement also
provides that, upon a potential change in control or change in control of
Pioneer and if the indemnified director or officer so requests, Pioneer will
create a trust for the benefit of the indemnified director or officer in an
amount sufficient to satisfy payment of all liabilities and suits against which
Pioneer has indemnified the director or officer. See "Compensation of Executive
Officers -- Pioneer Indemnification."
Committees of the Board of Directors
The Pioneer Board has established three standing committees: the Audit
Committee, the Compensation Committee and the Executive Committee. Messrs.
Herrington, Houghton, Gardner and Jones serve on the
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Audit Committee, Messrs. Hersh, Ramsey, Smith (Arthur L.) and Smith (Philip B.)
serve on the Compensation Committee and Messrs. Brumley, Sheffield, Hersh,
Ramsey, Gardner and Smith (Philip B.) serve on the Executive Committee. The
functions of the Audit Committee are to recommend to the Pioneer Board the
appointment of independent auditors, to review the plan and scope of any audit
of Pioneer's financial statements and to review Pioneer's significant accounting
policies and other matters. The functions of the Compensation Committee are to
set the compensation of all officers and to administer the Pioneer Long-Term
Incentive Plan and the Pioneer Employee Stock Purchase Plan, provided where
necessary to comply with certain tax and securities provisions, a subcommittee
of Messrs. Ramsey, Smith (Arthur L.), Smith (Philip B.) and Gardner has been
formed in order to obtain the benefit of certain tax provisions. The functions
of the Executive Committee are to approve acquisition or divestiture
transactions by Pioneer up to $200 million, whether in cash or Pioneer
securities, and to act as a preliminary screening committee for the Pioneer
Board on transactions greater than $200 million.
COMPENSATION OF EXECUTIVE OFFICERS
The compensation paid to Pioneer's executive officers is administered by
the Compensation Committee of the Pioneer Board and generally consists of base
salaries, annual bonuses, awards made pursuant to Pioneer's Long-Term Incentive
Plan, contributions to the Pioneer-sponsored 401(k) retirement plan, and
miscellaneous perquisites. The following table summarizes the total compensation
for 1996, 1995, and 1994 awarded to, earned by or paid to the following persons
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE(a)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- -----------------------
AWARDS
OTHER ----------------------- ALL
ANNUAL RESTRICTED SHARES OTHER
NAME AND COMPEN- STOCK UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS(B) SATION(C) AWARDS(D) OPTIONS SATION(E)
- ------------------ ---- -------- -------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott D. Sheffield........ 1996 $390,000 $375,375 $ 47,770 $ -- $70,000 $87,990
Chairman of the Board, 1995 321,094 -- 12,592 -- 56,232 8,260
President, and Chief 1994 330,000 165,000 69,636 6,581 -- 8,260
Executive Officer
Timothy A. Leach*......... 1996 200,000 157,500 38,516 59,500 31,000 49,519
Executive Vice 1995 171,925 -- 8,992 -- 31,824 6,930
President 1994 120,000 84,000 33,409 1,763 -- 6,930
Steven L. Beal*........... 1996 175,000 133,875 33,021 59,500 25,000 41,269
Sr. Vice President, 1995 147,364 -- 7,192 -- 28,324 6,631
Chief Financial 1994 100,000 70,000 27,068 1,681 -- 4,500
Officer & Treasurer
Mark L. Withrow........... 1996 175,000 201,737 33,021 59,500 21,000 43,103
Sr. Vice President 1995 157,438 -- 7,192 -- 27,743 6,930
& General Counsel 1994 144,000 72,000 20,916 2,460 -- 6,930
David A. Chroback*........ 1996 175,000 133,875 32,870 59,500 21,000 41,077
Sr. Vice President 1995 143,125 -- 6,740 -- 27,493 6,441
1994 110,000 55,000 21,926 1,312 -- 4,950
Timothy L. Dove........... 1996 160,609 190,080 30,842 59,500 21,000 38,834
Sr. Vice President 1995 133,583 -- 6,934 199,988 15,000 6,011
1994(f) 84,359 40,833 20,916 -- 12,000 --
</TABLE>
- ---------------
* Resigned during 1997.
(a) See "-- Employee Investment Partnerships" for information about
Company-sponsored employee investment partnerships in which the Named
Executive Officers invested their own funds.
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<PAGE> 90
(b) Represents the amount awarded under Pioneer's annual bonus program and bonus
awards related to specific events in accordance with Pioneer's executive
compensation program administered by the Compensation Committee of the
Pioneer Board. In 1994 the annual bonus was paid one-half in cash and
one-half in restricted stock. In 1996, Mr. Sheffield received all of his
bonus in cash, and all other Named Executive Officers received one-half of a
previously established target level in restricted stock and the other
one-half of target plus any excess above target in cash. The amounts shown
in the Summary Compensation Table include both the cash and the value of
restricted stock awards. The amount of cash and the number and value of
shares of restricted stock awarded for each year under the annual bonus
program are as follows:
<TABLE>
<CAPTION>
RESTRICTED STOCK
AWARD
--------------------
CASH NUMBER VALUE OF
YEAR AWARD OF SHARES SHARES
---- -------- --------- --------
<S> <C> <C> <C> <C>
Mr. Sheffield...................................... 1996 $375,375 -- $ --
1995 -- -- --
1994 82,500 3,529 82,500
Mr. Leach.......................................... 1996 112,493 1,494 45,007
1995 -- -- --
1994 42,000 1,797 42,000
Mr. Beal........................................... 1996 94,502 1,307 39,373
1995 -- -- --
1994 35,000 1,497 35,000
Mr. Withrow........................................ 1996 102,377 1,307 39,373
1995 -- -- --
1994 36,000 1,540 36,000
Mr. Chroback....................................... 1996 94,502 1,307 39,373
1995 -- -- --
1994 27,500 1,176 27,500
Mr. Dove........................................... 1996 93,956 1,200 36,137
1995 -- -- --
1994 20,427 873 20,406
</TABLE>
The number of shares of the restricted stock awarded as annual bonuses was
calculated using the last closing sales price of Pioneer Common Stock
before the time of the award ($30.125 for 1996 and $23.375 for 1994).
Ownership of the restricted stock awarded in 1996 vests on August 13, 1997,
and ownership of the restricted stock awarded in 1994 vested on March 31,
1995. Subject to accelerated lapse in certain circumstances, the transfer
restrictions lapse on one-third of the shares on each of the first, second
and third anniversaries of the date of grant (February 13, 1997, for 1996
awards and November 15, 1994, for 1994 awards). In 1996, Mr. Withrow and
Mr. Dove each received restricted stock bonus awards of 2,436 shares valued
at $59,987 on the date of grant in recognition of their critical role in
the successful divestiture of Pioneer's Australasian assets. These shares
vested on April 3, 1997, and transfer restrictions lapse one-third each
year beginning from April 3, 1997. Dividends are paid on the restricted
stock at the same rate as they are paid on all other shares of Pioneer
Common Stock.
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<PAGE> 91
(c) Includes (i) cash payments to Mr. Sheffield equal to 50% of the federal
income tax liability associated with the cash bonus received in lieu of
restricted stock under the annual bonus program and cash payments to other
Named Executive Officers for federal income tax liability associated with
the receipt of restricted stock awards pursuant to the annual bonus program;
(ii) cash payments for a portion of the federal income tax liability
associated with the receipt of restricted stock pursuant to Pioneer's
Performance Unit Program which was discontinued in 1995; and (iii)
automobile allowances as shown below. Amounts not shown below represent
miscellaneous perquisites.
<TABLE>
<CAPTION>
FEDERAL TAX FEDERAL TAX
LIABILITY- LIABILITY-
ANNUAL PERFORMANCE AUTOMOBILE
YEAR BONUS PROGRAM UNIT PROGRAM ALLOWANCE
---- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Mr. Sheffield............................. 1996 $35,178 $ -- $10,200
1995 -- -- 10,200
1994 54,087 2,957 10,200
Mr. Leach................................. 1996 29,524 -- 6,600
1995 -- -- 6,600
1994 23,625 792 6,600
Mr. Beal.................................. 1996 25,829 -- 4,800
1995 -- -- 4,800
1994 19,121 755 4,800
Mr. Withrow............................... 1996 25,829 -- 4,800
1995 -- -- 4,800
1994 20,250 1,105 4,800
Mr. Chroback.............................. 1996 25,829 -- 4,800
1995 -- -- 4,800
1994 15,186 -- 4,800
Mr. Dove.................................. 1996 23,706 -- 4,800
1995 -- -- 4,800
1994 17,227 -- 2,800
</TABLE>
(d) The restricted stock awarded in 1996 represents grants on November 19, 1996,
to Messrs. Leach, Beal, Withrow, Chroback and Dove of 2,000 shares each of
common stock with vesting restrictions that lapse November 19, 1999. The
restricted stock awarded in 1995 to Mr. Dove represents a grant on June 1,
1995, of 10,389 shares of Pioneer Common Stock with vesting restrictions
that lapse June 1, 1998. The restricted stock awarded in 1994 represents
partial settlement of Performance Units through grants of Pioneer Common
Stock on December 30, 1994, of 321 shares to Mr. Sheffield, 86 shares to Mr.
Leach, 82 shares to Mr. Beal, 120 shares to Mr. Withrow and 64 shares to Mr.
Chroback. Vesting of the shares was accelerated so that 50% of the shares
vested on December 31, 1995, and the remaining 50% vested on December 31,
1996. The shares are subject to transfer restrictions that will lapse with
respect to one-third of the shares at the end of 1998, one-third of the
shares at the end of 1999 and one-third of the shares at the end of 2000.
Dividends are paid on the restricted stock at the same rate as they are paid
on all other shares of Pioneer Common Stock.
The values of the awards were calculated using the closing sales price of
Pioneer Common Stock of $29.75 on November 18, 1996, $19.25 on May 31,
1995, and $20.50 on December 30, 1994.
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<PAGE> 92
The total number and value of all shares of restricted stock that each
executive officer held on December 31, 1996, are as follows based on the
closing sales that day of $36.75:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
---------------- ----------
<S> <C> <C>
Mr. Sheffield........................................ 54,400 $1,999,200
Mr. Leach............................................ 16,969 623,611
Mr. Beal............................................. 16,185 594,799
Mr. Withrow.......................................... 24,908 915,369
Mr. Chroback......................................... 12,181 447,652
Mr. Dove............................................. 15,116 555,513
</TABLE>
(e) Includes (i) Pioneer contributions under Pioneer's 401(k) plan, (ii) 1996
Pioneer contributions to Pioneer's deferred compensation retirement plan for
executives, (iii) deemed payment of one-third of the principal and all
accrued interest related to a 1995 stock acquisition loan program and (iv)
$1,330 of premiums paid in each of 1996, 1995 and 1994 with respect to term
life insurance policies for the benefit of Mr. Sheffield.
<TABLE>
<CAPTION>
401(K) EMPLOYER NON-QUALIFIED SAVINGS PLAN STOCK ACQUISITION
NAME YEAR MATCH EMPLOYER MATCH LOAN AGREEMENT
- ---- ---- --------------- -------------------------- -----------------
<S> <C> <C> <C> <C>
Mr. Sheffield............... 1996 $6,750 $29,250 $50,660
1995 6,930 -- --
1994 6,930 -- --
Mr. Leach................... 1996 7,500 15,000 27,019
1995 6,930 -- --
1994 6,930 -- --
Mr. Beal.................... 1996 7,688 6,563 27,019
1995 6,930 -- --
1994 6,930 -- --
Mr. Withrow................. 1996 7,688 13,125 22,290
1995 6,631 -- --
1994 4,500 -- --
Mr. Chroback................ 1996 7,688 13,125 20,264
1995 6,441 -- --
1994 4,950 -- --
Mr. Dove.................... 1996 7,875 12,046 18,913
1995 6,011 -- --
1994 -- -- --
</TABLE>
(f) Mr. Dove joined Pioneer as an employee on April 28, 1994.
Stock Options. The Long-Term Incentive Plan provides for employee awards
in the form of stock options, stock appreciation rights, restricted stock, and
Performance Units payable in stock or cash. The maximum number of shares of
Pioneer Common Stock that may be issued under the Long-Term Incentive Plan is
equal to 10% of the total shares of Pioneer Common Stock outstanding from time
to time. The Long-Term Incentive Plan had 105,155 shares available for
additional awards at December 31, 1996.
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<PAGE> 93
The following table sets forth information about stock option grants made
during 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------
% OF
TOTAL
OPTIONS
NUMBER OF GRANTED EXERCISE
SECURITIES TO OR BASE
UNDERLYING EMPLOYEES PRICE
OPTIONS IN FISCAL PER SHARE EXPIRATION GRANT DATE
NAME GRANTED(A) YEAR (B) DATE VALUE(C)
- ---- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mr. Sheffield....................... 70,000 11.0% $29.75 11/19/01 $707,700
Mr. Leach........................... 31,000 4.9% 29.75 11/19/01 313,410
Mr. Beal............................ 25,000 3.9% 29.75 11/19/01 252,750
Mr. Withrow......................... 21,000 3.3% 29.75 11/19/01 212,310
Mr. Chroback........................ 21,000 3.3% 29.75 11/19/01 212,310
Mr. Dove............................ 21,000 3.3% 29.75 11/19/01 212,310
</TABLE>
- ---------------
(a) Stock options were granted under the Pioneer Long-Term Incentive Plan. The
options were granted on November 19, 1996, vest at the rate of one-third
each year commencing on the first anniversary of the grant date, and have a
term of five years. The Compensation Committee retains discretion, subject
to plan limits, to modify the terms of the options and to reprice the
options. In the event of a change in control as defined in the Pioneer
Long-Term Incentive Plan, each holder of an option will immediately be
granted corresponding stock appreciation rights and the options will
immediately become fully vested and exercisable in full.
(b) The exercise price per share is equal to the closing price of Pioneer Common
Stock on the NYSE composite tape on the day before the date of grant.
(c) The estimated grant date value of the options is determined using the
Black-Scholes model. The material assumptions and adjustments incorporated
in the Black-Scholes model in estimating the value of the options include
the following:
- An interest rate of 6.18% which represents the interest rate on a U. S.
Treasury security with a maturity date corresponding to the option term.
- Volatility of 32.22% calculated using daily stock prices for the 120-day
period prior to the grant date.
- Dividends at the rate of $.10 per share representing the annualized
dividends paid with respect to a share of common stock at the date of
grant.
No other adjustments were made to the model for non-transferability or risk
of forfeiture. The ultimate values of the options will depend on the future
market price of the Pioneer's stock, which cannot be forecast with reasonable
accuracy. The actual value, if any, an optionee will realize upon exercise of an
option will depend on the excess of the market value of Pioneer Common Stock
over the exercise price on the date the option is exercised.
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<PAGE> 94
The following table sets forth, for each Named Executive Officer,
information concerning the exercise of stock options during 1996 and the value
of unexercised stock options as of December 31, 1996.
AGGREGATED EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(B)
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Sheffield.............. 30,000 $541,250 66,666 103,334 $1,474,988 $1,077,512
Mr. Leach.................. 16,666 300,898 9,500 50,000 167,438 551,875
Mr. Beal................... 20,784 262,458 -- 41,666 -- 468,738
Mr. Withrow................ 12,500 147,063 4,334 37,666 76,387 440,738
Mr. Chroback............... 6,000 110,751 13,334 37,666 259,387 440,738
Mr. Dove................... -- -- 13,000 35,000 187,125 372,750
</TABLE>
- ---------------
(a) Amounts were calculated by multiplying the number of options exercised by
the market price of the Pioneer's Common Stock at the time of exercise minus
the exercise price.
(b) Amounts were calculated by multiplying the number of unexercised options by
the closing sales price of the Pioneer's Common Stock on December 31, 1996
($36.75) minus the exercise price.
Current Salaries. The 1997 salaries of the eight highest paid Pioneer
executive officers are $600,000, $600,000, $285,000, $275,000, $250,000,
$250,000, $250,000 and $235,000 for Messrs. Brumley, Sheffield, Fischer,
Fagerstone, Dove, Withrow, Kile and Smith.
Retirement Plan. Effective January 1, 1996, the Compensation Committee
approved a deferred compensation retirement plan for the executive officers of
the Pioneer. Each executive is allowed to contribute up to 25% of base salary.
The Pioneer provides a matching contribution of 100% of the employee's
contribution limited to the first 10% of the executive's base salary. The
Pioneer matching contribution vests immediately.
Employee Investment Partnerships. During 1994, the Pioneer formed a Direct
Investment Partnership to invest in all wells drilled by the Pioneer during that
year (except in certain circumstances where its participation would impose
additional costs on the Company). The Pioneer had also formed Direct Investment
Partnerships in 1992 and 1993. No partnerships were formed in 1995 or 1996, and
the Pioneer does not expect to form any new partnerships in the future.
The 1994 Direct Investment Partnership was formed in January 1994 with ten
employee participants. Mr. Chroback was the only Named Executive Officer who
participated. The total initial capital contributions were approximately
$144,000, with the employees contributing approximately $142,600 (99%) and the
managing general partner contributing approximately $1,400 (1%). The partnership
pays .34% of the costs and receives .34% of the revenues attributable to the
Company's interest in the wells in which the partnership participates. Mr.
Chroback contributed $11,167 and has received distributions of $9,184 since the
partnership formation.
The Direct Investment Partnership program replaced prior employee
partnership programs that had been sponsored by the Pioneer and its predecessors
during 1987 through 1991. As of December 31, 1996, the aggregate contributions
that have been made to those partnerships and the Direct Investment Partnerships
by the Named Executive Officers and the aggregate distributions that have been
received by the Named Executive Officers from those partnerships are as follows:
Mr. Sheffield contributed $643,334 and received $782,323 ($156,648 of which was
received during 1996); Mr. Leach contributed $361,255 and received $394,798
($75,397 of which was received during 1996); Mr. Withrow contributed $120,673
and received $91,716 ($21,330 of which was received during 1996); Mr. Beal
contributed $169,573 and received $219,264 ($40,014 of which was received during
1996); and Mr. Chroback contributed $80,667 and received $77,858 ($16,654 of
which was received during 1996).
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<PAGE> 95
Pioneer Severance Agreements. At the closing of the Parker/Mesa Merger,
Pioneer entered into a Severance Agreement (each, a "Pioneer Severance
Agreement") with each person who is a current officer of Pioneer.
The definition of "Change in Control" under a Pioneer Severance Agreement
means the occurrence of one or more of the following: (i) a person other than
Pioneer or certain affiliated companies or benefit plans becomes the beneficial
owner of 20% or more of the voting power of Pioneer's outstanding voting
securities (except acquisitions from Pioneer or in a transaction meeting the
requirements of the parenthetical exception in clause (iii) below); (ii) a
majority of the Board of Directors of Pioneer is not comprised of the members of
the Board of Directors of Pioneer immediately following the Parker/Mesa Merger
and persons whose elections as directors were approved by those directors or
their approved successors; (iii) Pioneer merges or consolidates with another
corporation or entity (whether Pioneer or the other entity is the survivor), or
Pioneer and the holders of the voting securities of such other corporation or
entity (or the stockholders of Pioneer and such other corporation or entity)
participate in a securities exchange (other than a merger, consolidation or
securities exchange in which Pioneer's voting securities are converted into or
continue to represent securities having the majority of voting power in the
surviving company, in which no person other than that surviving company owns 20%
or more of the outstanding shares of common stock or voting shares of the
surviving corporation (except persons whose ownership of that amount results
solely from their ownership in Pioneer before that transaction), and in which at
least a majority of the board of directors of the surviving corporation were
members of the incumbent board of Pioneer); (iv) Pioneer liquidates or sells all
or substantially all of its assets, except sales to entity having substantially
the same ownership as Pioneer; or (v) consummation of a business combination not
otherwise constituting a change in control but pursuant to which the Chief
Executive Officer is removed from, or replaced in, such capacity with respect to
the corporation resulting from the business combination. The definition of a
"Termination for Good Reason" under a Pioneer Severance Agreement means a
termination of employment by the officer within 30 days following notice of (i)
the demotion of the officer to a non-officer position or to an officer position
junior to the position specified in the relevant Pioneer Severance Agreement,
(ii) a reduction in such officer's base annual salary which exceeds certain
limits, or (iii) the failure by Pioneer to obtain from certain of its successors
an agreement to assume its obligations under the Pioneer Severance Agreement.
Each Pioneer Severance Agreement executed by such Mesa officer provides that (i)
Pioneer assumed Mesa's obligation under the Mesa Severance Plan to pay a
severance benefit upon the termination of such Mesa officer's employment within
one year after consummation of the Parker/Mesa Merger, and (ii) the Pioneer
Severance Agreement superseded and replaced all other terms and provisions of
the Mesa Severance Plan, except for the right to receive such payment. Each
Pioneer Severance Agreement executed by an officer of Parker & Parsley provided
that (i) Pioneer assumed Parker & Parsley's obligation under such officer's
Parker & Parsley Severance Agreement to make certain payments upon the
termination of such officer's employment within one year after consummation of
the Parker & Parsley Merger, and (ii) the Pioneer Severance Agreement superseded
and replaced all other terms and provisions of the Parker & Parsley Severance
Agreement to which such officer was a party, except for the right to receive
such payment. In addition, unless a Change in Control of Pioneer has occurred or
is pending or contemplated, beginning on the fifth anniversary of the
consummation of the Parker/Mesa Merger, Pioneer can terminate or amend each
Pioneer Severance Agreement, upon 60 days notice, without the officer's consent
so long as such amendment or termination is made to all Pioneer Severance
Agreements covering all such similarly situated officers of Pioneer.
The definition of "Change in Control" under a Pioneer Severance Agreement
includes a phrase relating to the sale of "all or substantially all" of the
assets of Pioneer. Although there is a developing body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. Accordingly, the ability of a stockholder of
Pioneer to determine when a Change in Control has occurred may be uncertain.
Pioneer Indemnification. Pursuant to the merger agreement relating to the
Parker/Mesa Merger, Pioneer agreed to indemnify, defend and hold harmless each
person who was at the time of the Parker/Mesa Merger or was at any time prior to
August 7, 1997, an officer or director of Mesa or Parker & Parsley or any of
their respective subsidiaries or an employee of Mesa or Parker & Parsley or any
of their respective subsidiaries
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<PAGE> 96
or who acted as a fiduciary under any employee benefit plans of Mesa or Parker &
Parsley or pension plans of Mesa or Parker & Parsley (the "Pioneer Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
attorneys' fees), liabilities or judgments or amounts that are paid in
settlement with the approval of the indemnifying party (which approval shall not
be unreasonably withheld) of or in connection with any threatened or actual
claim, action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person was a director,
officer, or such employee of Mesa or Parker & Parsley or any of their respective
subsidiaries whether pertaining to any matter existing or occurring at the time
of the Parker/Mesa Merger and whether asserted or claimed prior to, or at or
after, the time of the Parker/Mesa Merger ("Pioneer Indemnified Liabilities"),
including all Pioneer Indemnified Liabilities based in whole or in part on, or
arising out of, or pertaining to the merger agreement in connection with the
Parker/Mesa Merger or the transactions contemplated hereby, in each case to the
fullest extent permitted under applicable law (and Pioneer will pay expenses in
advance of the final disposition of any such action or proceeding to each
Pioneer Indemnified Party to the fullest extent permitted by law). Without
limiting the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Pioneer Indemnified Parties (whether
arising before or after the time of the Parker/Mesa Merger), (i) the Pioneer
Indemnified Parties may retain counsel reasonably satisfactory to them and
Pioneer shall pay all fees and expenses of such counsel for the Pioneer
Indemnified Parties; and (ii) Pioneer will use all commercially reasonable
efforts to assist in the vigorous defense of any such matter, provided that no
party shall be liable for any settlement effected without its written consent,
which consent shall not be unreasonably withheld. All rights to indemnification,
including provisions relating to advances of expenses incurred in defense of any
action or suit, existing in favor of the Pioneer Indemnified Parties in the
charter and bylaws of Mesa and Parker & Parsley with respect to matters
occurring through the time of the Parker/Mesa Merger survived the Parker/Mesa
Merger and shall continue in full force and effect for a period of six years
from the time of the Parker/Mesa Merger; provided, however, that all rights to
indemnification in respect of any Pioneer Indemnified Liabilities asserted or
made within such period shall continue until the disposition of such Pioneer
Indemnified Liabilities.
Pioneer is obligated to maintain certain directors' and officers' liability
insurance for the people who were directors and officers of Mesa and Parker &
Parsley immediately prior to the time of the Parker/Mesa Merger for six years
after such time.
For information regarding the current indemnification of Pioneer officers
and directors, see "-- Management of Pioneer -- Indemnification."
Chairman's Employment Agreement. Jon Brumley, Pioneer's Chairman, is a
party to an Employment Agreement, dated as of August 22, 1996 (the "Employment
Agreement"), with Pioneer's predecessor. The Employment Agreement provides that
if Mr. Brumley's employment is terminated prior to the expiration of the
two-year term other than for "cause") (as defined in the Employment Agreement)
or if Mr. Brumley terminates his employment for "good reason," then Mr. Brumley
shall be entitled, in addition to the payment of his salary, to a severance
payment of $1.6 million if the termination occurs within one year of the date of
the agreement, $1.2 million if the termination occurs more than one year but
less than 18 months after the date of the agreement or $800,000 if the
termination occurs after 18 months after the date of the agreement. "Good
reason" is defined in the Employment Agreement as (i) a reduction or diminution
of his position, titles, offices, duties, responsibilities or status with
Pioneer without cause and without his express written consent, (ii) a reduction
by Pioneer in his base salary in effect at the time, (iii) relocation of
Pioneer's executive offices to a site outside Dallas County or Tarrant County,
Texas, or (iv) any other breach by Pioneer of its obligations under the
Employment Agreement, which Pioneer fails to cure within a reasonable period of
time. The consummation of the Parker/Mesa Merger established "good reason"
because Mr. Brumley no longer served as chief executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Fischer, Mr. Ramsey (Chairman), Mr. Smith, (Arthur L.) and Mr. Wortley
served as members of the Compensation Committee of the Pioneer Board during
1996. None of them was an officer or employee, or
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<PAGE> 97
former officer or employee, of Pioneer during 1996. Mr. Fischer was employed by
Pioneer on February 1, 1997, and resigned from the Compensation Committee that
day.
Mr. Smith is the Chairman and Chief Executive Officer of John S. Herold,
Inc., which has provided financial services to Pioneer periodically since 1990.
During 1996, Pioneer paid John S. Herold, Inc. and a joint venture approximately
$60,405 as consideration for its services. Mr. Sheffield, Pioneer's Chairman,
President and Chief Executive Officer, owns less than 1% of the outstanding
common stock of John S. Herold, Inc.
Mr. Wortley is a partner of Vinson & Elkins L.L.P., which provided various
legal services to Pioneer during 1996 as Pioneer's primary outside corporate
counsel. The dollar amount of fees that Pioneer paid to Vinson & Elkins L.L.P.
during the last fiscal year of that law firm did not exceed 5% of that firm's
gross revenues for that year.
DESCRIPTION OF PIONEER LONG-TERM INCENTIVE PLAN
The description set forth below represents a summary of the principal terms
and conditions of the Pioneer Natural Resources Company Long-Term Incentive Plan
(the "Pioneer Long-Term Incentive Plan") and does not purport to be complete.
General
Pioneer may grant awards with respect to shares of Pioneer Common Stock
under the Pioneer Long-Term Incentive Plan to officers, directors, employees and
certain consultants and advisors. The awards under the Pioneer Long-Term
Incentive Plan include (i) incentive stock options qualified as such under U.S.
federal income tax laws, (ii) stock options that do not qualify as incentive
stock options, (iii) stock appreciation rights ("SARs"), (iv) restricted stock
awards, and (v) performance units.
The number of shares of Pioneer Common Stock that may be subject to
outstanding awards under the Pioneer Long-Term Incentive Plan at any one time is
equal to 10% of the total number of outstanding shares of Pioneer Common Stock
(treating as outstanding all shares of Pioneer Common Stock issuable within 60
days upon conversion or exchange of outstanding, publicly traded convertible or
exchangeable securities of Pioneer) minus the total number of shares of Pioneer
Common Stock subject to outstanding awards under any other stock-based plan for
employees or directors of Pioneer. Currently there are 5,474,349 shares of
Pioneer Common Stock available for awards under the Pioneer Long-Term Incentive
Plan. The number of shares authorized for award under the Pioneer Long-Term
Incentive Plan and the number of shares subject to an award under the Pioneer
Long-Term Incentive Plan will be adjusted for stock splits, stock dividends,
recapitalizations, mergers, and other changes affecting the capital stock of
Pioneer.
The Pioneer Board or any committee designated by it may administer the
Pioneer Long-Term Incentive Plan (as used for the Pioneer Long-Term Incentive
Plan, the "Committee"). Pioneer's Compensation Committee administers the plan.
The Committee has broad discretion to administer the Pioneer Long-Term Incentive
Plan, interpret its provisions, and adopt policies for implementing the Pioneer
Long-Term Incentive 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,
extend the exercise period for an award, determine whether performance
conditions have been satisfied, waive conditions and provisions of an award,
permit the transfer of an award to family trusts and other persons, and
otherwise modify or amend any award under the Pioneer Long-Term Incentive Plan.
Nevertheless, no awards for more than 250,000 shares or more than $2.5 million
in cash may be granted to any one employee in a calendar year.
Awards
The Committee determines the exercise price of each option granted under
the Pioneer Long-Term Incentive Plan. The exercise price for an incentive stock
option must not be less than the fair market value of the Pioneer Common Stock
on the date of grant, and the exercise price of non-qualified stock options must
not be less than 85% of the fair market value of the Pioneer Common Stock on the
date of grant. Stock options
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<PAGE> 98
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 Committee, holders may use shares of stock to pay the exercise price,
including shares issuable upon exercise of the option.
An SAR may be awarded in connection with or separate from a stock option.
An SAR is the right to receive an amount in cash or stock equal to the excess of
the fair market value of a share of the Pioneer Common Stock on the date of
exercise over the exercise price specified in the agreement governing the SAR
(for SARs not granted in connection with a stock option) or the exercise price
of the related stock option (for SARs granted in connection with a stock
option). An SAR granted in connection with a stock option will require the
holder, upon exercise, to surrender the related stock option or portion thereof
relating to the number of shares for which the SAR is exercised. The surrendered
stock option or portion will then cease to be exercisable. Such an SAR is
exercisable or transferable only to the extent that the related stock option is
exercisable or transferable. An SAR granted independently of a stock option will
be exercisable as the Committee determines. The Committee may limit the amount
payable upon exercise of any SAR. SARs may be paid in cash or stock, as the
Committee provides in the agreement governing the SAR.
A restricted stock award is a grant of shares of Pioneer Common Stock that
are nontransferable or subject to risk of forfeiture until specific conditions
are met. The restrictions will lapse in accordance with a schedule or other
conditions as the Committee determines, but in no event shall the forfeiture
period be less than three years. During the restriction period, the holder of a
restricted stock award may, in the committee's discretion, have certain rights
as a stockholder, including the right to vote the stock subject to the award or
receive dividends on that stock. Restricted stock may also be issued upon
exercise or settlement of options, SARs, or performance units.
Performance units are performance-based awards payable in cash, stock, or a
combination of both. The Committee may select any performance measure or
combination of measures as conditions for cash payments or stock issuances under
the Pioneer Long-Term Incentive Plan, except that performance measures for
executive officers must be objective measures chosen from among the following
choices: (a) total stockholder return (Pioneer Common Stock appreciation plus
dividends); (b) net income; (c) earnings per share; (d) cash flow per share; (e)
return on equity; (f) return on assets; (g) revenues; (h) costs; (i) costs as a
percentage of revenues; (j) increase in the market price of Pioneer Common Stock
or other securities; (k) the performance of Pioneer in any of the items
mentioned in clause (a) through (j) in comparison to the average performance of
the companies included in the Standard and Poors' Corporation 500 Composite
Stock Price Index; or (l) the performance of Pioneer in any of the items
mentioned in clause (a) through (j) in comparison to the average performance of
the companies used in a self-constructed peer group established before the
beginning of the performance period. The Committee may choose different
performance measures if the stockholders so approve, if tax laws or regulations
change so as not to require stockholder approval of different measures in order
to deduct the compensation related to the award for federal income tax purposes,
or if the Committee determines that it is in Pioneer's best interest to grant
awards not satisfying the requirements of Section 162(m) of the Internal Revenue
Code or any successor law.
Under the Pioneer Long-Term Incentive Plan, each non-employee director will
automatically receive 50% (and may elect to receive 100%) of the amount of the
director's annual retainer fee in the form of Pioneer Common Stock on the last
business day of the month in which the annual meeting of the stockholders is
held. Pioneer's initial directors received this award on the last day of August
1997. The number of shares included in each award is determined by dividing the
applicable percentage of the annual retainer fee by the closing sales price of
Pioneer Common Stock on the business day immediately preceding the date of the
award. When issued, the shares of Pioneer Common Stock awarded will be subject
to transfer restrictions that lapse on the earlier of the next annual meeting of
stockholders or the first anniversary date of the award if the person has
continued as a director through that date. If a non-employee director's services
as a director are terminated for any reason before the earlier of the next
annual meeting of stockholders or the first anniversary of the date of grant,
transfer restrictions on some of the shares will lapse (and the rest of the
shares will be forfeited) based on the number of regularly scheduled meetings of
the Pioneer Board that have been held since the last annual meeting and the
number of regularly scheduled meetings remaining to be held before the next
annual meeting of Pioneer's stockholders. The vesting of ownership and the lapse
of transfer restrictions may be accelerated in
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<PAGE> 99
the event of the death, disability, or retirement of the director or a change in
control of Pioneer. The Pioneer Long-Term Incentive Plan requires each
non-employee director to make an election under the Internal Revenue Code to
include the value of the stock in his income in the year of grant and provides
for a cash award to the non-employee director in an amount sufficient to pay the
federal income taxes due with respect to the award and the cash payment.
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 Pioneer Common Stock issuable pursuant
to the award or delivery of previously owned shares of Pioneer Common Stock, in
either case based on the fair market value of the shares.
The Committee has discretion to determine whether an award under the
Pioneer Long-Term Incentive Plan will have change-of-control features. The
Committee also has discretion to vary the change of control features as it deems
appropriate. The following describes the change of control features that Pioneer
generally expects may apply to awards, if any such feature applies. An award
agreement under the Pioneer Long-Term Incentive Plan may provide that, upon a
change of control of Pioneer, (1) the holder of a stock option will be granted a
corresponding cash SAR, (2) all outstanding SARs and options will become
immediately and fully vested and exercisable in full, (3) the restriction period
on any restricted stock award will be accelerated and the restrictions will
expire, and (4) the target payout opportunity attainable under the performance
units will be deemed to have been fully earned for all performance periods upon
the occurrence of the change of control and the holder will be paid a pro rata
portion of all associated targeted payout opportunities (based on the number of
complete and partial calendar months elapsed as of the change of control) in
cash within 30 days following the change of control or in stock effective as of
the change of control, for cash and stock-based performance units, respectively.
The award may also provide that it will remain exercisable for its original term
whether or not employment is terminated at or following a change of control. In
general, a change of control of Pioneer occurs in any of four situations: (1) a
person other than Pioneer or certain affiliated companies or benefit plans
becomes the beneficial owner of 20% or more of the voting power of Pioneer's
outstanding voting securities (except acquisitions from Pioneer or in a
transaction meeting the requirements of the parenthetical exception in clause
(3) below); (2) a majority of the Pioneer Board is not comprised of the members
of the Board of Directors immediately following the Parker/Mesa Merger and
persons whose elections as directors were approved by those directors or their
approved successors; (3) Pioneer merges or consolidates with another corporation
or entity (whether Pioneer or the other entity is the survivor), or Pioneer and
the holders of the voting securities of such other corporation or entity (or the
stockholders of Pioneer and such other corporation or entity) participate in a
securities exchange (other than a merger, consolidation or securities exchange
in which Pioneer's voting securities are converted into or continue to represent
securities having the majority or voting power in the surviving company, in
which no person other than the surviving company owns 20% or more of the
outstanding shares of common stock or voting shares of the surviving corporation
(except for persons with such ownership resulting solely from their ownership in
Pioneer before the transaction), and in which at least a majority of the board
of directors of the surviving corporation were members of the incumbent board of
Pioneer); or (4) Pioneer liquidates or sells all or substantially all of its
assets, except sales to an entity having substantially the same ownership as
Pioneer.
If a restructuring of Pioneer occurs that does not constitute a change in
control of Pioneer, the Committee may (but need not) cause Pioneer to take any
one or more of the following actions: (1) accelerate in whole or in part the
time of vesting and exercisability of any outstanding stock options and stock
appreciation rights in order to permit those stock options and SARs to be
exercisable before, upon, or after the completion of the restructure; (2) grant
each optionholder corresponding cash or stock SARs; (3) accelerate in whole or
in part the expiration of some or all of the restrictions on any restricted
stock award; (4) treat the outstanding performance units as having fully or
partially met their targets and pay, in full or in part, the targeted payout;
(5) if the restructuring involves a transaction in which Pioneer is not the
surviving entity, cause the surviving entity to assume in whole or in part any
one or more of the outstanding awards under the Pioneer Long-Term Incentive Plan
upon such terms and provisions as the Committee deems desirable; or
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<PAGE> 100
(6) redeem in whole or in part any one or more of the outstanding awards
(whether or not then exercisable) in consideration of a cash payment, adjusted
for withholding obligations. A restructure generally is any merger of Pioneer or
the direct or indirect transfer of all or substantially all of Pioneer's assets
(whether by sale, merger, consolidation, liquidation, or otherwise) in one
transaction or a series of transactions.
Without stockholder approval, the Pioneer Board may not amend the Pioneer
Long-Term Incentive Plan to increase materially the aggregate number of shares
of Pioneer Common Stock that may be issued under the Pioneer Long-Term Incentive
Plan (except for adjustments pursuant to the terms of the Pioneer Long-Term
Incentive Plan), reprice options or issue restricted stock with forfeiture
provisions which lapse in less than three years. Otherwise, the Pioneer Board
may at any time and from time to time alter, amend, suspend or terminate the
Pioneer Long-Term Incentive Plan in whole or in part and in any way, subject to
requirements that may exist in stock exchange rules or in securities, tax and
other laws from time to time. No award may be issued under the Pioneer Long-Term
Incentive Plan after the tenth anniversary of stockholder approval of the plan.
DESCRIPTION OF PIONEER EMPLOYEE STOCK PURCHASE PLAN
The description set forth below represents a summary of the principal terms
and conditions of the Pioneer Natural Resources Company Employee Stock Purchase
Plan (the "Pioneer Employee Stock Purchase Plan") and does not purport to be
complete.
General
A total of 750,000 shares of Pioneer Common Stock are reserved for issuance
under the Pioneer Employee Stock Purchase Plan. The purpose of the Pioneer
Employee Stock Purchase Plan is to provide employees of Pioneer who participate
in the Pioneer Employee Stock Purchase Plan with an opportunity to purchase
Pioneer Common Stock through payroll deductions. The Pioneer Employee Stock
Purchase Plan, and the right of participants to make purchases thereunder, is
intended to qualify under the provisions of Sections 421 and 423 of the Code.
The Pioneer Employee Stock Purchase Plan is administered by a Committee (as
used for the Pioneer Employee Stock Purchase Plan, the "Committee") appointed by
the Pioneer Board. Pioneer's Compensation Committee administers the Pioneer
Employee Stock Purchase Plan. All questions of interpretation of the Pioneer
Employee Stock Purchase Plan will be determined by the Committee, whose
decisions will be final and binding upon all participants.
Any persons (including officers of Pioneer) who have been employed by
Pioneer (or any of its parent or subsidiary corporations within the meaning of
Sections 424(e) and (f) of the Code) for at least six months and are employed
for at least 20 hours per week and more than five months in a calendar year will
be eligible to participate in the Pioneer Employee Stock Purchase Plan subject
to certain limitations imposed by Section 423(b) of the Code. Eligible employees
may become participants in the Pioneer Employee Stock Purchase Plan by
delivering to Pioneer an agreement authorizing payroll deductions prior to the
applicable offering date.
Offering Dates
The Pioneer Employee Stock Purchase Plan will be implemented by one
nine-month offering during each calendar year. The offering periods will
commence on January 1 and end on September 30 of each year. The first offering
period will commence January 1, 1998.
Purchase Price
The purchase price per share at which shares of Pioneer Common Stock will
be sold under the Pioneer Employee Stock Purchase Plan will be the lower of 85%
of the fair market value of the Pioneer Common Stock on the first day of each
nine-month period and 85% of the fair market value of the Pioneer Common
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<PAGE> 101
Stock on the last day of each offering period. The fair market value of the
Pioneer Common Stock on a given date will be the closing sales price of the
Pioneer Common Stock on the NYSE on such date.
The purchase price of the shares of Pioneer Common Stock to be purchased
under the Pioneer Employee Stock Purchase Plan will be accumulated by payroll
deductions during each offering period. The deductions may not exceed 15% of a
participant's eligible compensation, which is defined in the Pioneer Employee
Stock Purchase Plan to include all wages, salary, commissions and bonuses
received (including employee contributions to a 401(k) plan) during the offering
period. An employee may discontinue participation in the Pioneer Employee Stock
Purchase Plan, but may not otherwise increase or decrease the rate of payroll
deductions at any time during the offering period. Payroll deductions will
commence on the first payday on or following the first day of the offering
period and continue at the same rate until terminated as provided in the Pioneer
Employee Stock Purchase Plan.
Purchase of Stock; Exercise of Option
The maximum number of shares placed under option to a participant in an
offering period under the Pioneer Employee Stock Purchase Plan will be the
lesser of 1,000 or that number determined by dividing the amount of the
participant's total payroll deductions during the offering period (and any
carryover amounts from the preceding offering period) by the purchase price per
share under the Pioneer Employee Stock Purchase Plan. Unless a participant
withdraws from the Pioneer Employee Stock Purchase Plan, the participant's
option for the purchase of shares will be exercised automatically at the end of
each offering period for the maximum number of whole shares at the applicable
price. As soon as practicable following the end of each offering period, Pioneer
will cause a certificate to be issued in each participant's name representing
the total number of whole shares of Pioneer Common Stock acquired by the
participant through the exercise of the option. Any balance remaining in a
participant's account following the exercise of the participant's option in an
offering period will be carried over to the next offering period.
Notwithstanding the foregoing, no employee of Pioneer will be permitted to
subscribe for shares of Pioneer Common Stock under the Pioneer Employee Stock
Purchase Plan if, immediately after the grant of the option, the employee would
own 5% or more of the voting power or value of all classes of stock of Pioneer
or its subsidiaries (including stock which may be purchased under the Pioneer
Employee Stock Purchase Plan or pursuant to any other options), nor will any
employee be granted an option which would permit the employee to buy pursuant to
the Pioneer Employee Stock Purchase Plan more than $25,000 worth of stock
(determined at the fair market value of the shares at the time the option is
granted) in any calendar year.
Other Provisions
A participant may withdraw from the Pioneer Employee Stock Purchase Plan in
whole, but not in part, by signing and delivering to Pioneer a notice of
withdrawal from the Pioneer Employee Stock Purchase Plan. A participant may
elect to withdraw from the Pioneer Employee Stock Purchase Plan at any time
prior to 30 days before the last day of the offering period. Upon a withdrawal,
Pioneer shall refund to the participant the accumulated payroll deductions
credited to the participant's account, and the participant's payroll deductions
and interest in the offering shall terminate.
If any change is made in Pioneer's capitalization, such as a stock split,
stock combination, stock dividend, exchange of shares, or other
recapitalization, merger, or otherwise which results in an increase or decrease
in the number of outstanding shares of Pioneer Common Stock without receipt of
consideration by Pioneer, appropriate adjustments will be made by the Committee
in the shares subject to purchase under the Pioneer Employee Stock Purchase Plan
and in the purchase price per share.
An option granted to a participant under the Pioneer Employee Stock
Purchase Plan may not be pledged, assigned or transferred other than by will or
the laws of descent and distribution, and any participant's attempt to do so may
be treated by Pioneer as an election to withdraw from the Pioneer Employee Stock
Purchase Plan.
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The Board of Directors may at any time amend or terminate the Pioneer
Employee Stock Purchase Plan, except that such termination shall not affect
options previously granted nor may any amendment make any change in an option
granted prior thereto which adversely affects the rights of any participant
without the written consent of such participant. In additional, no amendment may
be made to the Pioneer Employee Stock Purchase Plan without prior approval of
the stockholders of Pioneer if such amendment would materially increase the
benefits accruing to participants under the Pioneer Employee Stock Purchase
Plan, increase the number of shares of Pioneer Common Stock that may be issued
under the Pioneer Employee Stock Purchase Plan (other than as a result of
anti-dilution provisions), change the class of individuals eligible for
participation in the Pioneer Employee Stock Purchase Plan, extend the term of
the Pioneer Employee Stock Purchase Plan, or cause options issued under the
Pioneer Employee Stock Purchase Plan to fail to meet the requirements for
employee stock purchase plans as defined in Section 423 of the Code.
RELATED PARTY TRANSACTIONS
Incentive Payment for Chairman. Brumley Partners, a Texas general
partnership consisting of Jon Brumley, Pioneer's Chairman, and a family member,
was admitted as a limited partner with a profits interest in DNR-Mesa Holdings,
L.P. ("DNR") pursuant to the Amended and Restated Agreement of Limited
Partnership of DNR-Mesa Holdings, L.P. dated November 8, 1996 (the "DNR
Agreement"). DNR is a major holder of shares of Pioneer Common Stock. See
"Security Ownership of Certain Beneficial Owners and Management." The profits
interest held by Brumley Partnership entitles it to receive approximately 3.76%
of the profits of DNR after the occurrence of "payout" (which is the receipt by
the other partners of partnership distributions equal to such partners' original
capital contributions plus an 8% rate of return). The Parker/Mesa Merger
resulted in the interest issued to Brumley Partners increasing approximately
5.65% (the post-payout equivalent of a $7.5 million capital contribution to
DNR).
DNR Consulting Fee. Pursuant to the terms of the stock purchase agreement
through which DNR bought the shares of Mesa Series B Preferred Stock, Mesa
agreed to pay DNR $400,000 per year (and up to $50,000 per year to cover
expenses) in consideration of the provision of investment analysis to Mesa by
DNR and its representatives. Upon consummation of the Parker/Mesa Merger,
Pioneer assumed Mesa's obligation with respect to payment of such fee.
Boone Pickens, a director of Pioneer and the former Chairman of the Board
of Directors and Chief Executive Officer of Mesa, effective January 1, 1997,
entered into a one year arrangement with Mesa which was assumed by Pioneer
whereby Mr. Pickens provides commodity market consulting in return for a
$400,000 fee which has already been paid, and will not continue beyond 1997.
Additionally, in 1994 Mr. Pickens was awarded a $950,000 bonus payment that has
been deferred until Mr. Pickens discontinues his service as a Pioneer director.
Effective March 1, 1997, Mesa conveyed certain assets and liabilities
relating to its compressed natural gas fueling business to Pickens Fuel Corp., a
California corporation controlled by Mr. Pickens, for a sales price of
$1,404,000. The conveyed assets primarily consisted of four (4) compressed
natural gas fueling stations in Arizona and California.
See "-- Compensation Committee Interlocks and Insider Participation" for a
discussion of fees paid to certain members of the Pioneer Board for services
rendered to Pioneer.
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CAPITALIZATION TABLE
The following table sets forth the capitalization of Pioneer as of June 30,
1997 (i) on a historical basis, (ii) pro forma to reflect the Parker/Mesa Merger
and the conversion of Pioneer's 6 1/4% Cumulative Monthly Income Convertible
Preferred Shares ("Preferred Shares") to Pioneer Common Stock, and (iii) pro
forma combined to also reflect the Transaction. This table should be read in
conjunction with (i) the Consolidated Financial Statements (and the related
notes) of both Pioneer and Mesa included elsewhere herein and (ii) the
Consolidated Financial Statements (and the related notes) of Chauvco.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------------
PRO FORMA
AUTHORIZED HISTORICAL PRO FORMA COMBINED
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Line of credit................................. 1,400,000 $ 40,000 $ 650,000 $ 818,691
8 7/8% senior notes due 2005................... 150,000 150,000 150,000 150,000
8 1/4% senior notes due 2007 (net of
discount).................................... 150,000 149,311 149,311 149,311
10 5/8% senior subordinated notes due 2006..... 325,000 -- 370,143(a) 370,143
11 5/8% senior subordinated discounted notes
due 2006..................................... 264,000 -- 206,395(a) 206,395
Fixed rate building loan....................... 13,000 9,598 9,598 9,598
5.87% senior unsecured notes due 2001.......... 60,000 -- -- 58,348
Other.......................................... 6,612 11,917 17,780
---------- ---------- ----------
Total long-term debt, including current
maturities................................... 355,521 1,547,364 1,780,266
---------- ---------- ----------
Preferred stock of subsidiary.................. 3,776 188,820 -- --
---------- ---------- ----------
Stockholders' equity:
Common stock................................. 370 736 961
Additional paid-in capital................... 465,234 1,592,895 2,542,481
Treasury stock............................... (34,460) -- --
Unearned compensation........................ (712) (712) (712)
Retained earnings............................ 124,479 124,479 124,479
---------- ---------- ----------
Total stockholders' equity..................... 554,911 1,717,398 2,667,209
---------- ---------- ----------
Total capitalization................. $1,099,252 $3,264,762 $4,447,475
========== ========== ==========
Common shares.................................. 500,000 35,054 74,409 96,933
Preferred shares............................... 100,000 -- -- --
</TABLE>
- ---------------
(a) Represents the fair market value of the debt issuance as of August 7, 1997
(date of acquisition from Mesa).
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PIONEER
The following table sets forth selected consolidated financial information
of Pioneer for the six months ended June 30, 1997 and 1996 and for each of the
five fiscal years in the period ended December 31, 1996. The unaudited
consolidated financial data as of and for the periods ended June 30, 1997 and
1996 have been prepared on a basis consistent with the audited Consolidated
Financial Statements and, in the opinion of management, include all adjustments,
consisting of normal recurring accrual adjustments, which are necessary for a
fair presentation of the results for the interim periods. This data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations of Pioneer and the Consolidated Financial
Statements of Pioneer and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------------------------------
1997 1996 1996 1995 1994(A) 1993(B) 1992
-------- -------- -------- -------- -------- ------- ------
(UNAUDITED)
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Oil and gas.......................... $ 198.6 $ 192.0 $ 396.9 $ 375.7 $ 337.6 $ 207.2 $135.1
Natural gas processing............... 11.8 11.1 23.8 33.2 39.2 77.5 54.6
Gas marketing........................ -- -- -- 76.8 103.0 43.8 12.1
Interest and other................... 2.8 2.4 17.5 11.4 6.9 4.4 4.2
Gain on disposition of assets,
net(c)............................. 2.7 95.3 97.1 16.6 9.5 23.2 4.2
-------- -------- -------- -------- -------- ------- ------
215.9 300.8 535.3 513.7 496.2 356.1 210.2
-------- -------- -------- -------- -------- ------- ------
Costs and expenses:
Oil and gas production............... 55.4 57.4 110.3 130.9 127.1 78.3 51.8
Natural gas processing............... 6.1 6.0 12.5 25.9 33.6 51.6 38.6
Gas marketing........................ -- -- -- 75.7 101.5 42.8 11.0
Depletion, depreciation and
amortization....................... 59.5 59.6 112.1 159.1 145.4 80.4 45.6
Impairment of oil and gas properties
and natural gas processing
facilities......................... -- -- -- 130.5 -- -- --
Exploration and abandonments......... 18.4 10.8 23.0 27.5 25.2 3.6 4.5
General and administrative........... 15.0 13.0 28.4 37.4 29.0 23.8 11.6
Interest............................. 20.2 26.1 46.2 65.4 50.6 23.3 14.7
Other................................ .8 1.3 2.5 11.3 4.3 3.9 2.3
-------- -------- -------- -------- -------- ------- ------
175.4 174.2 335.0 663.7 516.7 307.7 180.1
-------- -------- -------- -------- -------- ------- ------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change.......... 40.5 126.6 200.3 (150.0) (20.5) 48.4 30.1
Income tax benefit (provision)......... (14.5) (31.7) (60.1) 45.9 6.5 (17.0) (3.0)
-------- -------- -------- -------- -------- ------- ------
Income (loss) before extraordinary item
and cumulative effect of accounting
change............................... 26.0 94.9 140.2 (104.1) (14.0) 31.4 27.1
Extraordinary item..................... -- -- -- 4.3 (.6) -- --
Cumulative effect of accounting
change............................... -- -- -- -- -- 17.1 --
-------- -------- -------- -------- -------- ------- ------
Net income (loss)........................ $ 26.0 $ 94.9 $ 140.2 $ (99.8) $ (14.6) $ 48.5 $ 27.1
======== ======== ======== ======== ======== ======= ======
Income (loss) before extraordinary item
and cumulative effect of accounting
change per share:
Primary.............................. $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05
======== ======== ======== ======== ======== ======= ======
Fully diluted........................ $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05
======== ======== ======== ======== ======== ======= ======
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------------------------------
1997 1996 1996 1995 1994(A) 1993(B) 1992
-------- -------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) per share:
Primary.............................. $ .74 $ 2.66 $ 3.92 $ (2.83) $ (.49) $ 1.74 $ 1.05
======== ======== ======== ======== ======== ======= ======
Fully diluted........................ $ .71 $ 2.32 $ 3.47 $ (2.83) $ (.49) $ 1.74 $ 1.05
======== ======== ======== ======== ======== ======= ======
Dividends per share.................... $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10
======== ======== ======== ======== ======== ======= ======
Weighted average shares outstanding.... 35.4 35.7 35.7 35.3 30.1 27.9 25.8
Other Financial Data:
EBITDAEX(d)............................ $ 138.6 $ 223.0 $ 381.7 $ 232.5 $ 200.7 $ 155.7 $ 95.0
Cash flows from operating activities... 124.6 120.6 230.1 157.3 129.8 112.2 77.2
Cash flows from investing activities... (158.0) 147.7 13.7 (53.3) (446.0) (398.2) (111.8)
Cash flows from financing activities... 24.5 (228.4) (245.4) (107.9) 331.4 278.9 33.8
Capital expenditures................... 170.3 76.9 227.8 228.4 554.9 583.5 129.7
Ratio of earnings to fixed
charges(e)........................... 3.0 5.8 5.3 (e) (e) 3.0 2.9
Balance Sheet Data (end of period):
Working capital........................ $ 10.2 $ 57.1 $ 26.1 $ 31.5 $ 43.7 $ 39.5 $ 8.0
Property, plant and equipment, net..... 1,139.4 955.4 1,040.4 1,121.7 1,349.9 802.0 499.1
Total assets........................... 1,283.5 1,138.6 1,199.9 1,319.2 1,604.9 1,016.9 576.7
Long-term obligations.................. 376.8 328.0 329.0 603.2 727.2 544.3 225.9
Preferred stock of subsidiary.......... 188.8 188.8 188.8 188.8 188.8 -- --
Total stockholders' equity............. 554.9 504.4 530.3 411.0 509.6 348.8 295.0
</TABLE>
- ---------------
(a) Includes amounts relating to the acquisition of Bridge Oil Limited in July
1994 and the acquisition of properties from PG&E Resources Company in August
1994.
(b) Includes amounts relating to the acquisition of certain Prudential-Bache
Energy limited partnerships in July 1993. Also includes results of
operations related to Pioneer's interest in the Carthage gas processing
plant that had been deferred in 1992 and 1993 and the gain of $7.3 million
recognized on the sale of that interest on June 30, 1993.
(c) Includes a gain of $83.3 million in 1996 related to the disposition of
certain wholly-owned subsidiaries.
(d) EBITDAEX is presented because of its wide acceptance as a financial
indicator of a company's ability to service or incur debt. EBITDAEX (as used
herein) is calculated by adding interest, income taxes, depletion,
depreciation and amortization, impairment of oil and gas properties and
natural gas processing facilities and exploration and abandonment costs to
income (loss) before extraordinary item and cumulative effect of accounting
change. Interest includes accrued interest expense and amortization of
deferred financing costs. EBITDAEX should not be considered as an
alternative to earnings (loss) or operating earnings (loss), as defined by
generally accepted accounting principles, as an indicator of Pioneer's
financial performance, as an alternative to cash flow, as a measure of
liquidity or as being comparable to other similarly titled measures of other
companies.
(e) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes, extraordinary item and
cumulative effect of accounting change plus fixed charges net of interest
capitalized. Fixed charges consist of interest expense, interest capitalized
and the portion of rental expense attributable to interest. Pioneer's 1995
and 1994 earnings were inadequate to cover its fixed charges. The amount of
the deficiencies were $150.0 million in 1995 and $20.5 million in 1994.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PIONEER
Subsequent to June 30, 1997, the stockholders of Pioneer predecessor
entities, Parker & Parsley and Mesa, approved the merger agreement in connection
with the Parker/Mesa Merger that resulted in the formation of Pioneer. In
accordance with the provisions of Accounting Principles Board No. 16, "Business
Combinations," the Parker/Mesa Merger was treated as an acquisition of Mesa by
Parker & Parsley. The aggregate purchase consideration related to the assets and
liabilities of Mesa, including estimated nonrecurring merger transaction costs,
is $999.5 million. As a result, the historical financial statements of Pioneer
are those of Parker & Parsley and will present the addition of Mesa's assets and
liabilities as an acquisition by Pioneer in August 1997 and all references to
Pioneer contained herein refers to Parker & Parsley for dates prior to the
Parker/Mesa Merger. Consequently, the results included herein do not give effect
to the addition of Mesa's assets and liabilities and Mesa's results of
operations and are not indicative of future results of Pioneer.
General
Financial Performance for the six months ended June 30, 1997 compared with
the six months ended June 30, 1996. Pioneer reported net income of $26.0
million ($.74 per share) for the six months ended June 30, 1997, as compared to
net income of $94.9 million ($2.66 per share) for the same period in 1996. The
six months ended June 30, 1996 include $74.8 million ($2.10 per share), related
to net after-tax gains on asset dispositions, primarily due to the sale of
Pioneer's Australasian subsidiaries. Excluding production from Pioneer's
Australasian subsidiaries which were sold in 1996 and production from
nonstrategic domestic assets which were sold in 1996, average daily oil
production increased 13% to 31,787 Bbls per day for the six months ended June
30, 1997 from 28,049 Bbls per day for the same period in 1996, and average daily
gas production increased 16% to 215,230 Mcf per day from 184,759 Mcf per day
during the same period. As discussed more fully in "Results of Operations -- For
the Six Months Ended June 30, 1997 and 1996" below, Pioneer's financial
performance during 1997 has been positively affected by increases in oil and gas
production, decreases in production costs per BOE due to ongoing cost reduction
efforts, and a decrease in interest expense due to a decrease in Pioneer's
outstanding long-term indebtedness, offset by increases in exploration and
general and administrative expenses.
Net cash provided by operating activities was $124.6 million during the six
months ended June 30, 1997, consistent with net cash provided by operating
activities of $120.6 million for the same period in 1996.
Pioneer strives to maintain its outstanding indebtedness at a moderate
level in order to provide sufficient financial flexibility to fund future
opportunities. Pioneer's total book capitalization at June 30, 1997 was $1.1
billion, consisting of total long-term debt of $355.5 million, stockholders'
equity of $554.9 million and preferred stock of subsidiary of $188.8 million.
Debt as a percentage of total capitalization was 32% at June 30, 1997, up
slightly from 31% at December 31, 1996.
Financial Performance for the year ended December 31, 1996 compared with
the year ended December 31, 1995. Pioneer reported net income of $140.2 million
($3.92 per share) for the year ended December 31, 1996 as compared to a net loss
of $99.8 million ($2.83 per share) for the year ended December 31, 1995. Net
income for the year ended December 31, 1996 was positively affected by the
following items: (i) improved oil and gas prices, (ii) decreases in production
costs due to certain cost reduction efforts initiated in 1995 and 1996, (iii) a
decrease in oil and gas property depletion expense as a result of significant
increases in Pioneer's oil and gas reserves during 1995 and 1996, (iv) a
decrease in general and administrative expenses primarily resulting from the
implementation of measures during 1995 intended to reduce overall general and
administrative expenses, and (v) a decrease in interest expense due to a
decrease in Pioneer's outstanding long-term indebtedness. Net income for the
year ended December 31, 1996 also includes the following aftertax nonoperating
items: (i) aggregate gains of $76.3 million related to the disposition of
Pioneer's Australasian assets and certain nonstrategic domestic assets (see
"Significant Activities in 1996 -- Disposition of Australasian Assets" and
"Asset Dispositions" below), (ii) income of $7.4 million related to the
settlement of several litigation matters involving Pioneer's Hooker Natural Gas
Processing Plant and related assets (see "Significant Activities in
1996 -- Legal Actions" below), (iii) a loss of $2.8 million associated with the
write-off of certain tax attributes related to litigation contingencies that are
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no longer available and (iv) income of $400,000 from the operations of the
Australian assets and nonstrategic domestic assets prior to their sale in 1996.
Net income for December 31, 1995 includes the following after-tax nonoperating
items: (i) noncash charges of $84.8 million associated with the adoption of SFAS
121 (as defined in "For the Years Ended December 31, 1996, 1995 and
1994 -- Depletion Expense" below), (ii) charges of $6.9 million associated with
the amortization of deferred compensation awarded in 1993 and organizational
changes designed to reduce overall general and administrative expenses, (iii)
charges of $4.4 million consisting of previously capitalized financing fees and
expenses associated with certain legal matters, and (iv) net gains of $10.8
million associated with the disposition of nonstrategic assets.
Net cash provided by operating activities, before changes in operating
assets and liabilities, increased 39% to $228.5 million for the year ended
December 31, 1996 as compared to $164.2 million for the year ended December 31,
1995. This increase was primarily attributable to improved commodity prices
during 1996, declining production costs due to the improvements made in the
overall cost structure of Pioneer during 1995 and 1996 and decreased interest
expense due to a decrease in long-term debt.
Long-term debt has been reduced by $265.6 million to $320.9 million at
December 31, 1996 from $586.5 million at December 31, 1995 due principally to
the application of substantially all of the proceeds from the disposition of
Pioneer's Australasian and certain domestic assets to Pioneer's outstanding
indebtedness, as described below. Consequently, Pioneer's long-term debt to
total capitalization has been reduced to 31% at December 31, 1996 from 49% at
December 31, 1995.
Significant Activities for the Six Months Ended June 30, 1997
Drilling and Acquisition Activities. Pioneer's 1997 capital expenditure
budget has been increased to $335 million up from the previous budget of $270
million, reflecting planned expenditures of $215 million for exploitation
activities, $69 million for exploration activities and $51 million for oil and
gas property acquisitions in Pioneer's core areas of Texas, Oklahoma, New Mexico
and Louisiana. As of June 30, 1997, expenditures were on target with the new
budget totaling $187.3 million for the six-month period. During the first half
of 1997, Pioneer participated in the completion of 223 gross exploration and
development wells, including 152 wells in the Spraberry Division, 30 wells in
the Permian Division, 19 wells in the Gulf Coast Division, 16 wells in the
MidContinent Division and six wells in Argentina. Of these wells, 76 were in
progress at December 31, 1996. Of the total wells completed during the six
months ended June 30, 1997, 202 wells were completed successfully, which
resulted in a 91% success rate. In addition to the wells completed in the first
half of 1997, Pioneer had 131 wells in progress at June 30, 1997. In total
during 1997, Pioneer plans to drill approximately 620 development wells and 60
exploratory wells and to perform recompletions on over 150 wells.
In May of 1997, Pioneer acquired a 35% interest in approximately 375,000
acres within the Cotton Valley Pinnacle Reef Trend from Union Pacific Resources
Company ("UPRC") for $26.9 million. Pioneer and UPRC have signed an exploration
agreement to jointly explore and develop this area located in eastern Texas and
plan to begin drilling the first exploration well before the end of the year.
Also, during May of 1997, Pioneer finalized negotiations with Triton Energy
for a 40% working interest in a joint exploration program of two blocks in
Guatemala's South Peten Basin. Drilling on the Piedras Blancas #1 is expected to
be completed by the end of the year at an estimated total cost to Pioneer of
$3.7 million.
In addition, the Gulf Coast Division completed the acquisition of a
majority interest in the Maude Traylor field in Calhoun County, Texas for
approximately $8.8 million in February 1997. The acquisition represented an
average working interest of 87% in approximately 1,840 acres and five wells
which produce from the upper and lower Frio formations. Pioneer is currently
realizing gross gas production of 1.7 MMcf per day in this field, and since
Pioneer assumed operations the gross oil production rate has tripled to 161 Bbls
per day. Pioneer plans to drill up to nine additional wells during 1997 and 1998
on this acreage utilizing existing 3-D seismic information.
Also during February 1997, the Texas Railroad Commission (which regulates
oil and gas production) entered a favorable order on Pioneer's application to
allow administrative approval of uncontested applications
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to increase the density of the drilling in the Spraberry field from one well per
80 acres to one well in 40. Pioneer believes such reduced spacing may provide in
excess of 1,000 additional drilling locations which have the potential to add 70
million equivalent barrels to Pioneer's reserve base.
Asset Dispositions. For the six months ended June 30, 1997, Pioneer's
asset disposition activity primarily consisted of the sale of certain domestic
assets for proceeds of $10.7 million and resulted in a net gain of $1.9 million
and the sale of Pioneer's subsidiary with an ownership interest in oil and gas
properties in Turkey for proceeds of $1.6 million which resulted in the
recognition of a gain of $725 thousand. During the first half of 1996, Pioneer
sold certain wholly-owned Australasian subsidiaries for proceeds of $178.7
million and a pre-tax gain of $85.2 million and certain nonstrategic domestic
assets for proceeds of $45.9 million that resulted in the recognition of a
pre-tax net gain of $10 million.
Conversion of Subsidiary Preferred Shares to Common Stock. On July 28,
1997, Pioneer exercised its right to require each holder of 6 1/4% Cumulative
Monthly Income Convertible Preferred Shares ("Preferred Shares") to mandatorily
exchange all Preferred Shares for shares of Pioneer Common Stock. As a result of
the exchange, the $188.8 million reflected in the caption "Preferred stock of
subsidiary" in Pioneer's Consolidated Balance Sheet as of June 30, 1997 will be
reclassified into stockholders' equity with the issuance of approximately 6.7
million shares of Pioneer Common Stock in exchange for the 3,776,400 Preferred
Shares outstanding. In addition, Pioneer will no longer incur interest expense
associated with the Preferred Shares of approximately $12 million per year.
Pro Forma Earnings per Share. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128 "Earnings per Share" ("SFAS 128") which simplifies the existing standards
for computing earnings per share ("EPS") and makes them comparable to
international standards. Pioneer does not anticipate that its EPS as calculated
under SFAS 128 will differ significantly from its existing disclosures.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Specifically,
SFAS 130 requires that an enterprise (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. Although this statement is effective for fiscal years beginning after
December 15, 1997, Pioneer anticipates that it will early adopt the provisions
of SFAS 130 in its year ended December 31, 1997 consolidated financial
statements.
Comprehensive income consists of the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Specifically, this includes net income and other
comprehensive income, which is made up of certain changes in assets and
liabilities that are not reported in a statement of operations but are included
in the balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to, unrealized
gains for marketable securities and future contracts, foreign currency
translation adjustments and minimum pension liability adjustments.
Segment Reporting. In June 1997, the FASB issued Statement of Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which establishes standards for public business
enterprises for reporting information about operating segments in annual
financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
Pioneer operates in the one product line of oil and gas production in
limited geographic areas. This information and information about major customers
historically has been disclosed in Pioneer's annual
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financial statements. Pioneer plans to implement SFAS 131 in its year ended
December 31, 1998 financial statements.
Significant Activities in 1996
Exploration and Development Activities. Pioneer continues to realize the
benefits of its focused activities in the exploration and development of its
existing core areas. Since completing two major acquisitions in 1994, Pioneer
has devoted its efforts to exploitation and exploration of its existing property
base and Pioneer believes that substantial additional opportunities remain.
Drilling Activities. As was the case in 1994 and 1995, Pioneer's 1996
development drilling activities focused primarily on Pioneer's Permian Basin oil
properties and Gulf Coast gas properties. During 1996, Pioneer participated in
the drilling and completion of 599 gross exploration and development wells (482
of which were operated by Pioneer), including 326 in the Spraberry Division, 177
in the Permian Division, 48 in the MidContinent Division, 38 in the Gulf Coast
Division and 10 in other areas. Pioneer's total capital expenditures during 1996
were $233 million, approximately $212 million of which was spent on exploration
and development activities.
During 1996, Pioneer announced several discoveries and developments in
domestic locations. In November 1996, Pioneer announced a significant oil
discovery in the War-Wink West field in the Delaware Basin of West Texas. This
Company operated well, the University 18-34 #1, tested at rates of up to 720
barrels of oil per day and is currently producing at its expected allowable rate
of approximately 270 barrels of oil per day and 374 thousand cubic feet of gas
per day. Pioneer and Enserch Exploration, Inc. each own a 50% working interest
in this well, which is the first in their joint exploration and development of
the 4,500 acre War-Wink prospect. During 1997, Pioneer plans to continue its
development of this prospect by drilling two confirmation wells and an
additional two to four development wells. Pioneer and Enserch also control
approximately 30,000 additional acres in the Delaware Basin play in southeastern
New Mexico and West Texas where they intend to drill eight exploratory wells in
1997. In addition, on November 25, 1996, Pioneer announced the successful
completion of three development wells in the South Texas Lopeno field in which
Pioneer owns a 50% working interest. The three wells, operated by Pioneer, are
currently producing a total of 20 MMcf of natural gas per day. On December 19,
1996, Pioneer announced the successful completion of the S.E. Turner Gas Unit #2
in its Central Texas Gulf Coast Pawnee field in which Pioneer owns a 100%
working interest. The dual lateral horizontal unstimulated producer is currently
flowing at a rate of 3.1 MMcf per day. As a result of this successful activity,
Pioneer has identified an additional six horizontal prospects in the Pawnee
field and plans to begin developmental activity on these prospects in the first
quarter of 1997.
During 1996, Pioneer participated in several discoveries in the Confluencia
Sur field in the Nuequen Basin of Central Argentina in which Pioneer owns a
14.42% interest. In early 1996, Pioneer announced the successful completion of
two exploratory wells (the Naco x-1 and the Sierra de Reyes x-1) and, in January
1997, Pioneer announced the successful completion of three development wells,
also in the Confluencia Sur field. The three wells, the Sierra de Reyes 2, 3 and
4, operated by Petrolera Argentina San Jorge S.A., collectively tested 3,727
barrels of oil per day. Pioneer expects to drill an additional two to three
development wells in the Confluencia Sur field during the first six months of
1997 in order to increase daily oil production to 6,000 barrels (865 barrels net
to Pioneer's interest).
During 1997, Pioneer will continue with its emphasis on core 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 1994 and the 1995
and 1996 drilling programs which have added a large number of new locations to
which proved reserves have been assigned. Pioneer believes that its current
portfolio of undeveloped prospects provides attractive development and
exploration opportunities for at least the next three to five years.
Proved Reserves. Pioneer's proved reserves totaled 302.2 million BOE at
December 31, 1996, 296.8 million BOE at December 31, 1995 and 282.5 million BOE
at December 31, 1994. Pioneer achieved these annual increases in reserves
despite having sold reserves of 45.8 million BOE in 1996 and 34.8 million BOE in
1995. Excluding these sold reserves, total proved reserves increased 21% in 1996
and 28% in 1995. Oil reserves at
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year-end 1996 were 163.9 million Bbls compared to 147.3 million Bbls at year-end
1995 and 144.5 million Bbls at year-end 1994 (an 11% increase from 1995 to 1996
and a 2% increase from 1994 to 1995). Natural gas reserves at year-end 1996 were
829.4 Bcf, compared to 896.9 Bcf at year-end 1995 and 827.5 Bcf at year-end 1994
(an 8% decrease from 1995 to 1996 and an 8% increase from 1994 to 1995).
Reserve Replacement. For the eighth consecutive year, Pioneer was able to
replace its annual production volumes with proved reserves of crude oil and
natural gas, stated on an energy equivalent basis. During 1996, Pioneer added 75
million BOE resulting in reserve replacement of 314% of total production. Of the
75 million BOE reserve additions, 71.1 million BOE were added through
exploration and development drilling activities, 2.2 million BOE were added
through acquisitions of proved properties and 1.7 million BOE were the net
result of revisions. Reserves added by development drilling are primarily from
the identification of additional infill drilling locations and new secondary
recovery projects. Reserve revisions result from several factors including
changes in existing estimates of quantities available for production and changes
in estimates of quantities which are economical to produce under current pricing
conditions. Pioneer's reserves as of December 31, 1996 were estimated using a
price of $24.55 per Bbl and $3.97 per Mcf. Should prices decline in future
years, reserves may be revised downward for quantities which may be uneconomical
to produce at lower prices.
Pioneer's 1996 reserve replacement rate on a barrel of oil equivalent basis
was 314%, which included reserve replacement rates for oil and natural gas of
398% and 239%, respectively. Previous reserve replacement performance rates were
281% in 1995 (263% for oil and 297% for gas) and 537% in 1994 (549% for oil and
526% for gas). For the three year period ended December 31, 1996, the three year
average reserve replacement rate was 377%. Through 1994, Pioneer's reserve
replacement rate was primarily the product of its acquisition activities.
Beginning in 1995, and to a greater extent in 1996, the reserve replacement
rates have been influenced more by exploration and development activities and
less by acquisition activities. Pioneer seeks to achieve an annual reserve
replacement rate of at least 150% through the emphasis on its exploration and
development activities.
Finding Cost. Pioneer's acquisition and finding cost for 1996 was $3.10
per BOE as compared to the 1995 and 1994 acquisition and finding costs of $2.87
and $5.11 per BOE, respectively. The average acquisition and finding cost for
the three-year period from 1994 to 1996 was $3.99 per BOE representing an 18%
decrease from the 1995 three-year average rate of $4.84.
Disposition of Australasian Assets. On March 28, 1996, Pioneer completed
the sale of certain wholly-owned Australian subsidiaries to Santos Ltd., and on
June 20, 1996, Pioneer completed the sale of another wholly-owned subsidiary,
Bridge Oil Timor Sea, Inc., to Phillips Petroleum International Investment
Company. During the year ended December 31, 1996, Pioneer received aggregate
consideration of $237.5 million for these combined sales which consisted of
$186.6 million of proceeds for the equity of such entities, $21.8 million for
reimbursement of certain intercompany cash advances, and the assumption of such
subsidiaries' net liabilities, exclusive of oil and gas properties, of $29.1
million. The proceeds, after payment of certain costs and expenses, were
utilized to reduce Pioneer's outstanding bank indebtedness and for general
working capital purposes. Pioneer recognized an after-tax gain of $67.3 million
from the disposition of these subsidiaries.
Cost Reductions. Production costs per BOE declined 5% (from $4.83 to
$4.61) for the year ended December 31, 1996 as compared to the year ended
December 31, 1995. This decline is despite a 47% or $.29 per BOE increase in
production taxes resulting from oil and gas prices that were considerably higher
in 1996 as compared to 1995. The significant decline in the remaining components
of production costs, primarily lease operating expense, is the result of
Pioneer's emphasis on cost control efforts and the disposition of certain high
cost domestic nonstrategic oil and gas properties during 1995 and 1996. During
1995, Pioneer initiated programs to study specific opportunities for significant
future reductions in its entire cost structure. These programs have continued in
1996, and Pioneer expects production costs per BOE to continue to decline as
specific programs for further cost reductions are implemented.
Asset Dispositions. From time to time, Pioneer disposes of nonstrategic
assets in order to raise capital for other activities, reduce debt or eliminate
costs associated with nonstrategic assets. During the year ended
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December 31, 1996, Pioneer sold certain domestic nonstrategic oil and gas
properties, gas plants and other related assets for aggregate proceeds of
approximately $58.4 million. The proceeds from the asset dispositions were
initially used to reduce Pioneer's outstanding bank indebtedness and
subsequently to provide funding for a portion of Pioneer's 1996 capital
expenditures, including purchases of oil and gas properties in Pioneer's core
areas.
Commodity Prices. Pioneer benefited from the significantly higher oil and
gas prices during 1996. In 1996, Pioneer received an average oil price of $19.96
per Bbl and an average gas price of $2.27 per Mcf representing increases of 18%
and 23%, respectively, from 1995. The oil and gas prices that Pioneer reports
are based on the market price received for the commodities adjusted by the
results of Pioneer's hedging activities. Pioneer periodically enters into
commodity derivative contracts (swaps, futures and options) in order to (i)
reduce the effect of the volatility of price changes on the commodities Pioneer
produces and sells, (ii) support Pioneer's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related to
certain capital projects. During 1996, Pioneer's hedging activities reduced the
average price received for oil and gas sales 6% and 5%, respectively, as
discussed below.
Natural Gas. Pioneer employs a policy of hedging gas production based on
the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The average gas prices
per Mcf that Pioneer reports includes the effects of Btu content, gathering and
transportation costs, gas processing and shrinkage and the net effect of the gas
hedges. Pioneer reported an average gas price of $2.27 per Mcf for the year
ended December 31, 1996. Pioneer's average realized price for physical gas sales
(excluding hedge results) for the same period was $2.39 per Mcf. The comparable
average NYMEX prompt month closing for the year ended December 31, 1996 was
$2.50 per Mcf. At December 31, 1996, Pioneer had 28.9 Bcf of future gas
production hedged at a weighted average NYMEX price of $2.17 per Mcf.
Crude Oil. All material purchase contracts governing Pioneer's oil
production are tied directly or indirectly to NYMEX prices. The average oil
prices per Bbl that Pioneer reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges. Pioneer
reported an average oil price of $19.96 per Bbl for the year ended December 31,
1996. Pioneer's average realized price for physical oil sales (excluding hedge
results) for the same period was $21.33 per Bbl. The comparable average NYMEX
prompt month closing for the year ended December 31, 1996 was $22.03 per Bbl. At
December 31, 1996, Pioneer had 6.2 million barrels of future oil production
hedged at a weighted average NYMEX price of $19.39 per Bbl.
Capitalization. Pioneer strives to maintain its outstanding indebtedness
at a moderate level in order to provide sufficient financial flexibility for
future opportunities. Pioneer's total book capitalization at December 31, 1996
was $1 billion, consisting of total long-term debt of $326 million,
stockholders' equity of $530 million and preferred stock of subsidiary of $189
million. Pioneer attempts to maintain a debt to total capitalization ratio of
40% to 45% in order to achieve its goal of financial flexibility. Debt as a
percentage of total capitalization was 31% at December 31, 1996, down from 49%
at December 31, 1995. This decrease is primarily the result of the application
of the net proceeds from the disposition of Pioneer's Australian assets and the
disposition of certain other nonstrategic domestic assets described above to
Pioneer's outstanding indebtedness.
Legal Actions. On August 1, 1996, Dorchester Hugoton, Ltd. ("DHL"), Damson
Master Limited Partnership ("DMLP"), a wholly-owned subsidiary of Pioneer, and
their related entities entered into a settlement agreement resolving all
outstanding litigation between the parties that had arisen in connection with
DMLP's Hooker Plant, the Hooker Gathering System and certain other matters.
Pioneer recognized other income of $11.4 million ($7.0 million of which was
received in cash) associated with the settlement of these litigation matters.
Additionally, Pioneer will receive an annual formula-based production payment
with the first annual payment to begin in February 1997 and to continue
thereafter annually through February 2026. Pioneer estimates the total value of
the production payments to be at least $5.0 million, although such payments are
dependent on future gas prices and related transportation costs. The production
payments will be recognized as other income over the term of the production
payment contract.
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Pioneer believes that the costs for compliance with environmental laws and
regulations have not and will not have a material effect on Pioneer's financial
position or results of operations.
Results of Operations
For the Six Months Ended June 30, 1997 and 1996
Oil and Gas Production
The following table describes the results of Pioneer's oil and gas
production activities for the six months ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
<S> <C> <C>
Revenues:
Oil and gas............................................... $ 198,626 $ 192,014
Gain on disposition of assets, net(a)..................... 76 7,753
--------- ---------
198,702 199,767
--------- ---------
Costs and expenses:
Oil and gas production.................................... (55,392) (57,404)
Depletion................................................. (54,860) (54,773)
Exploration and abandonments.............................. (11,249) (4,586)
Geological and geophysical................................ (7,166) (4,851)
--------- ---------
(128,667) (121,614)
--------- ---------
Operating profit (excluding general and administrative
expenses and income taxes) $ 70,035 $ 78,153
========= =========
</TABLE>
- ---------------
(a) The 1997 amount does not include the gain related to the disposition of
Pioneer's subsidiary which owned an interest in oil and gas properties in
Turkey. The 1996 amount does not include the gain related to the disposition
of certain of Pioneer's wholly-owned Australasian subsidiaries.
<TABLE>
<S> <C> <C>
Worldwide:
Production:
Oil (MBbls)............................................ 5,753 5,721(a)
Gas (MMcf)............................................. 38,957 38,196(a)
Total (MBOE)...................................... 12,246 12,087
Average daily production:
Oil (Bbls)............................................. 31,787 31,432(a)
Gas (Mcf).............................................. 215,230 209,866(a)
Average oil price (per Bbl)............................... $ 19.20 $ 19.30
Average gas price (per Mcf)............................... 2.26 2.14
Costs (per BOE):
Lease operating expense................................ 3.26 3.60
Production taxes....................................... .91 .79
Workover costs......................................... .35 .36
-------- --------
Total production costs............................ 4.52 4.75
======== ========
Depletion.............................................. $ 4.48 $ 4.53
======== ========
</TABLE>
- ---------------
(a) Includes 616 MBbls (3,383 Bbls per day) and 4.5 Bcf (25,107 Mcf per day) of
production associated with certain nonstrategic assets which were sold
during 1996.
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<TABLE>
<S> <C> <C>
Domestic:
Production:
Oil (MBbls)............................................ 5,679 5,347(a)
Gas (MMcf)............................................. 38,957 36,269(a)
Total (MBOE)...................................... 12,172 11,392
Average daily production:
Oil (Bbls)............................................. 31,376 29,378(a)
Gas (Mcf).............................................. 215,230 199,278(a)
Average oil price (per Bbl)............................... $ 19.18 $ 19.29
Average gas price (per Mcf)............................... 2.26 2.15
Costs (per BOE):
Lease operating expense................................ 3.24 3.52
Production taxes....................................... .92 .84
Workover costs......................................... .35 .38
-------- --------
Total production costs............................ 4.51 4.74
======== ========
Depletion.............................................. $ 4.45 $ 4.46
</TABLE>
- ---------------
(a) Includes 266 MBbls (1,462 Bbls per day) and 2.6 Bcf (14,519 Mcf per day) of
production associated with certain nonstrategic assets which were sold
during 1996.
Oil and Gas Revenues. Revenues from oil and gas operations increased 3%
during the six months ended June 30, 1997 to $198.6 million, as compared to $192
million during the same period in 1996. The increase is primarily due to an
increase in the average gas price received and increases in oil and gas
production, offset by a slight decrease in the average price received per barrel
of oil.
The increase in oil and gas production during the six months ended June 30,
1997 as compared to the same period in 1996 is a direct result of the successes
of Pioneer's exploration and exploitation efforts. Such production growth
becomes particularly evident in light of the fact that a portion of the average
daily oil and gas production for the first half of 1996 related to properties
included in the 1996 sale of Pioneer's Australasian subsidiaries and the 1996
sale of certain nonstrategic domestic assets. Excluding production associated
with assets sold during 1996, average daily oil production increased 13% from
28,049 Bbls for the first half of 1996 to 31,787 Bbls for the first half of 1997
and average daily gas production increased 16% from 184,759 Mcf to 215,230 Mcf
for the same period.
The average oil price received for the six months ended June 30, 1997
decreased slightly (from $19.30 to $19.20 for the six months ended June 30, 1996
and 1997, respectively), while the average gas price received increased 6% (from
$2.14 to $2.26 for the six months ended June 30, 1996 and 1997, respectively).
Hedging Activities
The oil and gas prices that Pioneer reports are based on the market price
received for the commodities adjusted by the results of Pioneer's hedging
activities. Pioneer periodically enters into commodity derivative contracts
(swaps, futures and options) in order to (i) reduce the effect of the volatility
of price changes on the commodities Pioneer produces and sells, (ii) support
Pioneer's annual capital budgeting and expenditure plans and (iii) lock in
prices to protect the economics related to certain capital projects.
Crude Oil. All material purchase contracts governing Pioneer's oil
production are tied directly or indirectly to NYMEX prices. The average oil
price per Bbl that Pioneer reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges.
Pioneer's average realized price for physical oil sales (excluding hedge
results) for the six months ended June 30, 1997 was $20.24 per Bbl, while, as a
point of reference, the comparable average NYMEX prompt month closing per Bbl
for the same period was $21.36. Pioneer recorded net reductions to oil revenues
of $6 million for the six months ended June 30, 1997, as a result of its
commodity hedges.
104
<PAGE> 114
During the six months ended June 30, 1996, Pioneer realized an average
price for physical oil sales (excluding hedge results) of $19.84 per Bbl, while,
as a point of reference, the comparable average NYMEX prompt month closing per
Bbl for the same period was $20.60. Pioneer recorded net reductions to oil
revenues of $3.1 million for the six months ended June 30, 1996, as a result of
its commodity hedges.
Natural Gas. Pioneer employs a policy of hedging gas production based on
the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The average gas price
per Mcf that Pioneer reports includes the effects of Btu content, gathering and
transportation costs, gas processing and shrinkage and the net effect of the gas
hedges. Pioneer's average realized price for physical gas sales (excluding hedge
results) for the six months ended June 30, 1997 was $2.42 per Mcf, while as a
point of reference, the comparable average NYMEX prompt month closing per Mcf
for the same period was $2.25. Pioneer recorded a net reduction to gas revenues
of $6.1 million for the six months ended June 30, 1997, as a result of its
commodity hedges.
During the six months ended June 30, 1996, Pioneer realized an average
price for physical gas sales (excluding hedge results) of $2.22 per Mcf, while
as a point of reference, the comparable average NYMEX prompt month closing per
Mcf for the same period was $2.40. Pioneer recorded net reductions to gas
revenues of $3.1 million for the six months ended June 30, 1996, as a result of
its commodity hedges.
Production Costs. While total production costs per BOE decreased 5% to
$4.52 during the six months ended June 30, 1997 as compared to production costs
per BOE of $4.75 during the same period in 1996, the primary component of
production costs, lease operating expense, decreased 9% from $3.60 per BOE in
the first half of 1996 to $3.26 per BOE for the same period in 1997. These
reductions are primarily due to Pioneer's concentrated efforts to evaluate and
reduce all operating costs and the sale of certain high operating cost
properties during 1996. The success of these cost reduction efforts is partially
offset by a 15% or $0.12 per BOE increase in average production taxes per BOE
resulting from higher gas prices during the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996.
Depletion Expense. Depletion expense per BOE declined slightly to $4.48
during the six months ended June 30, 1997, as compared to $4.53 per BOE during
the same period in 1996, primarily due to reserves added by Pioneer's successful
drilling program during 1996 and 1997.
Exploration and Abandonments/Geological and Geophysical Costs. Exploration
and abandonments/geological and geophysical costs increased to $18.4 million
during the six months ended June 30, 1997 from $9.4 million during the same
period in 1996. The increase is largely the result of increased domestic
activity, both in exploratory drilling and geological and geophysical activity,
resulting from Pioneer's increased focus on exploration activities. During the
six months ended June 30, 1997, the domestic exploratory dry hole costs were
primarily related to 12 unsuccessful exploratory wells in the Gulf Coast
Division, six unsuccessful exploratory wells in the MidContinent Division and
two unsuccessful wells in the Permian Division, at a total cost of $6.8 million,
$1.7 million and $500 thousand, respectively, and additional costs of
approximately $700 thousand associated with wells which were determined to be
unsuccessful in 1996. These increases are offset by a decrease in leasehold
abandonment expenses. The following table sets forth the components of Pioneer's
1997 and 1996 first half expense:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Exploratory dry holes:
United States............................................. $ 9,701 $ 724
Foreign................................................... 219 580
Geological and geophysical costs:
United States............................................. 5,790 3,299
Foreign................................................... 1,376 1,552
Leasehold abandonments and other............................ 1,329 3,282
------- ------
$18,415 $9,437
======= ======
</TABLE>
105
<PAGE> 115
Approximately 21% of Pioneer's 1997 capital budget will be spent on
exploratory projects (compared to 16.7% in 1996 and 13.3% in 1995). Pioneer
currently anticipates that its 1997 exploration efforts will be concentrated in
the Gulf Coast Division, the Permian Division, the MidContinent Division,
Pioneer's newly acquired interests in the Cotton Valley Pinnacle Reef Trend and
its interests in Guatemala. Pioneer continues to review opportunities involving
exploration joint ventures in domestic or international areas outside Pioneer's
existing core operating areas.
Natural Gas Processing
Natural gas processing revenues increased 6% to $11.8 million for the six
months ended June 30, 1997 as compared to $11.1 million for the same period in
1996, and natural gas processing costs for the six months ended June 30, 1997 of
$6.1 million were consistent with 1996 costs of $6 million. The increases in
natural gas processing revenues are primarily due to increases in the prices of
NGL's and residue gas. The average price per Bbl of NGL's increased slightly
during the first half of 1997 compared to the first half of 1996 (from $13.25 in
1996 to $13.40 in 1997), and the average price per Mcf of residue gas increased
25% during the same period (from $2.01 in 1996 to $2.51 in 1997).
During the first half of 1996, Pioneer recognized noncash pre-tax charges
of $1.3 million related to abandonments of certain of Pioneer's gas processing
facilities and the cancellation of certain gas processing contracts.
General and Administrative Expense
General and administrative expense was $15 million for the six months ended
June 30, 1997, as compared to $13 million for the six months ended June 30,
1996. The increase is primarily due to severance costs of $1.4 million in the
second quarter of 1997 associated with certain reorganizations within Pioneer's
management structure as a result of the Parker/Mesa Merger.
Interest Expense
Interest expense for the six months ended June 30, 1997 decreased to $20.2
million as compared to $26.1 million for the same period in 1996. The decrease
is primarily due to a decrease in the weighted average outstanding balance of
Pioneer's indebtedness of $151.9 million for the six months ended June 30, 1997,
as compared to the same period in 1996. The decrease in Pioneer's indebtedness
was primarily the result of the application of proceeds from the sale of
Pioneer's Australasian subsidiaries and the sales of certain domestic assets
during 1996 to the outstanding balance of Pioneer's bank credit facility. The
weighted average interest rate on Pioneer's indebtedness during the six months
ended June 30, 1997 of 7.83% was comparable to the rate of 7.81% for the same
period in 1996.
During the six months ended June 30, 1997, Pioneer recorded a reduction in
interest expense of $700 thousand related to a series of interest rate swap
agreements which effectively convert $150 million of Pioneer's fixed rate
borrowings into floating rate obligations. During the same period in 1996, such
agreements resulted in a reduction in interest expense of $110 thousand.
Income Taxes
Pioneer's income tax provisions of $14.5 million for the six months ended
June 30, 1997 and $31.7 million for the six months ended June 30, 1996, reflect
the net provision resulting from the separate tax calculation prepared for each
tax jurisdiction in which Pioneer is subject to income taxes.
106
<PAGE> 116
For the Years Ended December 31, 1996, 1995 and 1994
Oil and Gas Production
The following table describes the results of Pioneer's oil and gas
production activities during 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS, EXCEPT AVERAGE PRICE
AND COST DATA)
<S> <C> <C> <C>
Revenues:
Oil and gas............................................... $396,931 $375,720 $337,602
Gain on disposition of oil and gas properties, net(a)..... 7,786 16,847 9,175
-------- -------- --------
Costs and expenses:....................................... 404,717 392,567 346,777
-------- -------- --------
Oil and gas production.................................... 110,334 130,905 127,118
Depletion................................................. 102,803 145,468 131,702
Impairment of oil and gas properties...................... -- 129,745 --
Exploration and abandonments.............................. 12,653 16,431 12,345
Geological and geophysical................................ 9,054 11,121 8,402
-------- -------- --------
234,844 433,670 279,567
-------- -------- --------
Operating profit (loss) (excluding general and
administrative expense and income taxes)............... $169,873 $(41,103) $ 67,210
======== ======== ========
</TABLE>
- ---------------
(a) The 1996 amount does not include the gain related to the disposition of
Pioneer's Australasian assets.
<TABLE>
<S> <C> <C> <C>
Worldwide:
Production:
Oil (MBbls)............................................ 11,275 12,902 12,147
Gas (MMcf)............................................. 75,851 85,295 79,674
Total (MBOE)........................................... 23,916 27,118 25,426
Average daily production:
Oil (Bbls)............................................. 30,805 35,348 33,279
Gas (Mcf).............................................. 207,244 233,685 218,285
Average oil price (per Bbl)............................... $ 19.96 $ 16.96 $ 15.40
Average gas price (per Mcf)............................... 2.27 1.84 1.89
Costs per BOE:
Lease operating expenses............................... 3.43 3.99 4.10
Production taxes....................................... .91 .62 .67
Workover costs......................................... .27 .22 .23
-------- -------- --------
Total production costs............................ $ 4.61 $ 4.83 $ 5.00
======== ======== ========
Depletion.............................................. $ 4.30 $ 5.36 $ 5.18
Domestic:
Production:
Oil (MBbls)............................................ 10,872 11,328 11,267
Gas (MMcf)............................................. 73,924 76,669 75,040
Total (MBOE)........................................... 23,193 24,106 23,774
Average daily production:
Oil (Bbls)............................................. 29,705 31,036 30,868
Gas (Mcf).............................................. 201,979 210,052 205,589
Average oil price (per Bbl)............................... $ 19.96 $ 16.70 $ 15.26
Average gas price (per Mcf)............................... 2.27 1.84 1.89
Costs per BOE:
Lease operating expense................................ 3.39 3.97 4.11
Production taxes....................................... .94 .70 .72
Workover costs......................................... .28 .25 .25
-------- -------- --------
Total production costs............................ $ 4.61 $ 4.92 $ 5.08
======== ======== ========
Depletion.............................................. $ 4.25 $ 5.19 $ 5.07
</TABLE>
107
<PAGE> 117
Oil and Gas Revenues. Revenues from oil and gas operations totaled $396.9
million in 1996, $375.7 million in 1995 and $337.6 million in 1994, representing
a 6% increase from 1995 to 1996 and an 11% increase from 1994 to 1995. The
increase from 1995 to 1996 is primarily attributable to the higher average
prices being received for both oil and gas production and increases in
production due to Pioneer's successful exploitation and exploration activities
in 1995 and 1996, offset by the decreased production resulting from the 1996
sale of Pioneer's Australasian assets and the 1995 and 1996 sales of certain
domestic assets. The average oil price received for the year ended December 31,
1996 increased 18% (from $16.96 in 1995 to $19.96 in 1996), while the average
gas price received increased 23% (from $1.84 in 1995 to $2.27 in 1996). The
increase from 1994 to 1995 is primarily due to (i) a full year of production in
1995 from properties purchased in 1994 offset by the production lost from those
properties sold in 1995, (ii) an increase in the average oil price received of
10% (from $15.40 per Bbl in 1994 to $16.96 per Bbl in 1995), and (iii) Pioneer's
successful development drilling activities during 1994 and 1995, which resulted
in increased production in 1995.
Excluding production from Pioneer's Australasian assets which were sold in
1996 and production from the nonstrategic domestic assets which were sold in
1995 and 1996, average daily oil production increased 13% from 25,718 Bbls for
the year ended December 31, 1995 to 29,100 Bbls for the year ended December 31,
1996 and average daily gas production increased 13% from 170,979 Mcf to 193,246
Mcf for the same period.
Production Costs. Production costs per BOE decreased in 1996 and 1995 by
approximately 5% and 3%, respectively (from $5.00 in 1994 to $4.83 in 1995 to
$4.61 in 1996). These reductions are primarily due to Pioneer's concentrated
efforts to evaluate and reduce all operating costs and the sale of certain high
operating cost properties (see "Asset Dispositions" above). The success of these
cost reduction efforts is particularly evident in light of the fact that
production costs per BOE declined in 1996 despite a 47% or $.29 per BOE increase
in average production taxes per BOE resulting from higher commodity prices. The
primary component of production costs, lease operating expense, decreased 14%
from $3.99 per BOE in 1995 to $3.43 per BOE in 1996. These costs represent the
majority of the oil and gas property operating expenses over which Pioneer has
control and the costs on which Pioneer has focused its reduction efforts.
Depletion Expense. Depletion expense per BOE decreased 20% in 1996 and
increased 3% in 1995. The decrease in depletion expense per BOE in 1996 is
primarily the result of the following factors: (i) the significant increase in
oil and gas reserves during 1995 and 1996 resulting from Pioneer's exploration
and development drilling activities, including revisions, and (ii) a reduction
in Pioneer's net depletable basis from charges taken in 1995 in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121") (see "Impairment of Oil and Gas Properties" below). The increase in
depletion expense per BOE during 1995 is primarily the result of increased
depletion rates resulting from the relatively short lives of the properties
acquired as part of the Bridge Oil Limited acquisition, when compared to
Pioneer's other properties, and the application of such increased rates to the
book basis allocated to the proved oil and gas properties acquired. The increase
in depletion expense from 1994 to 1995 was mitigated by Pioneer's adoption of
SFAS 121 in 1995 and the significant increase in oil and gas reserves at
December 31, 1995.
Impairment of Oil and Gas Properties. Pioneer adopted SFAS 121 effective
as of April 1, 1995, and, as a result of the review and evaluation of its
long-lived assets for impairment, Pioneer recognized noncash pre-tax charges of
$129.7 million ($84.3 million after-tax) related to its oil and gas properties
during 1995.
Exploration and Abandonments/Geological and Geophysical Costs. Exploration
and abandonments/geological and geophysical costs increased from $20.7 million
in 1994 to $27.6 million in 1995 and decreased to $21.7 in 1996. The decrease in
1996 is largely the result of decreased activity, both in exploratory drilling
and geological and geophysical activity, resulting from the sale in March 1996
of Pioneer's Australasian assets, offset by increases in geological and
geophysical activity in the United States as a result of Pioneer's increased
focus on exploitation and exploration activities. The increase from 1994 to 1995
is largely the result of increased expenses, both in exploratory drilling and
geological and geophysical costs, brought about by Pioneer's continued
evaluation of certain domestic and international exploratory projects acquired
as
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<PAGE> 118
part of the Bridge Oil Limited acquisition. The following table sets forth the
components of Pioneer's 1996, 1995 and 1994 exploration and
abandonments/geological and geophysical costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Exploratory dry holes:
United States....................................... $ 6,256 $ 2,491 $ 523
Australia and other foreign......................... 3,431 9,636 3,571
Geological and geophysical costs:
United States....................................... 7,042 2,302 3,834
Australia and other foreign......................... 2,012 8,819 4,568
Leasehold abandonments and other...................... 2,966 4,304 8,251
------- ------- -------
$21,707 $27,552 $20,747
======= ======= =======
</TABLE>
Natural Gas Processing
Natural gas processing revenues were $23.8 million in 1996, $33.3 million
in 1995 and $39.1 million in 1994; and natural gas processing costs were $12.5
million in 1996, $25.9 million in 1995 and $33.6 million in 1994. The 1996
natural gas processing revenues and costs decreased 29% and 52%, respectively,
when compared to the 1995 amounts primarily due to the sale of four gas plants
during 1995 and the sale of one gas plant during 1996. The 1995 natural gas
processing revenues and costs decreased 15% and 23%, respectively, when compared
to the 1994 amounts primarily as a result of the cancellation of certain gas
processing contracts related to four gas plants during 1994 and the sale of four
plants during 1995. The average price per Bbl of NGLs increased each year, by
30% in 1996 and 6% in 1995 (from $10.97 in 1994 to $11.59 in 1995 to $15.10 in
1996), while the average price per Mcf of residue gas increased by 55% in 1996
and declined by 16% in 1995 (from $1.66 in 1994 to $1.39 in 1995 to $2.15 in
1996).
During January 1996, Pioneer realized proceeds of $2.1 million from sales
of gas plants and related assets which resulted in Pioneer recognizing a net
gain of $639 thousand. In addition, in October 1995, Pioneer sold its interests
in the Cargray and Schafer plants located in Carson County, Texas. Pioneer
received net proceeds of $9.5 million from the disposition of such plants which
resulted in Pioneer recognizing a net gain of $4.6 million.
During 1996 and 1994, Pioneer recognized noncash pre-tax charges of $1.3
million and $4.5 million, respectively, related to abandonments of certain of
Pioneer's gas processing facilities and the cancellation of certain gas
processing contracts. Additionally, during 1995, Pioneer recognized a noncash
pre-tax impairment charge of $748,000 related to a natural gas processing
facility.
General and Administrative Expense
General and administrative expense was $28.4 million in 1996, $37.4 million
in 1995 and $28.9 million in 1994, representing a 24% decrease from 1995 to 1996
and a 29% increase from 1994 to 1995. The decrease from 1995 to 1996 is
primarily due to 1995 including pre-tax charges of $10.6 million associated with
the amortization of deferred compensation awarded in 1993 and organizational
changes implemented by Pioneer that were designed to reduce overall general and
administrative expenses and 1996 reflecting the benefits of those organizational
changes as well as additional cost reduction efforts in 1996. The significant
increase in general and administrative expense from 1994 to 1995 is partially
attributable to significant nonrecurring general and administrative expenses
included in each year. The 1995 amount includes the nonrecurring items noted
above while the 1994 amount includes $6 million of nonrecurring general and
administrative expenses resulting from the acquisition of Bridge Oil Limited,
some of which were eliminated as Pioneer consolidated Bridge Oil Limited's
United States operations with its own during the latter part of 1994.
Not only did total general and administrative expense decrease for the year
ended December 31, 1996 as compared to the year ended December 31, 1995, general
and administrative costs per BOE declined
109
<PAGE> 119
significantly as well, from $1.38 per BOE in 1995 to $1.19 per BOE in 1996, a
14% reduction. This decrease results from Pioneer's improvements in operating
efficiencies and increases in its oil and gas production.
Interest Expense
Interest expense was $46.2 million in 1996, $65.4 million in 1995 and $50.6
million in 1994. The decrease from 1995 to 1996 is due to a decrease of $226.3
million in the weighted average outstanding balance of Pioneer's indebtedness
for the year ended December 31, 1996 as compared to the year ended December 31,
1995, resulting primarily from the application of proceeds from the sale of
Pioneer's Australasian assets and the sales of certain domestic assets during
1995 and 1996, and a decrease in the weighted average interest rate on Pioneer's
indebtedness from 8.02% in 1995 to 7.83% in 1996. The increase from 1994 to 1995
was due primarily to (i) an increase of $109.2 million in the weighted average
outstanding balance of Pioneer's indebtedness due to the additional borrowings
required to finance the acquisition of Bridge Oil Limited and the properties
acquired from PG&E Resources in 1994, (ii) an increase in the weighted average
interest rate from 7.15% in 1994 to 8.02% in 1995 and (iii) a full year of
interest expense in 1995 versus six months in 1994 associated with certain
pre-acquisition obligations of Bridge Oil Limited. In addition, the 1996, 1995
and 1994 amounts include $12 million, $12 million and $9.1 million of interest,
respectively, associated with the preferred stock of Pioneer's subsidiary,
Parker & Parsley Capital LLC. The 1996, 1995 and 1994 amounts also include $1.3
million, $2 million and $2.3 million, respectively, of amortization of
capitalized loan fees.
During each of the years 1996, 1995 and 1994, Pioneer was a party to
various interest rate swap agreements. As a result, Pioneer recorded a reduction
in interest expense of $787 thousand for the year ended December 31, 1996 and
additional interest expense of $532 thousand and $2.2 million for the years
ended December 31, 1995 and 1994, respectively.
Income Taxes
Pioneer's income tax provision of $60.1 million for 1996 and its income tax
benefit of $45.9 million and $6.5 million (both of which exclude the tax effects
related to extraordinary items) for 1995 and 1994, respectively, reflect the net
provision or benefit, resulting from the separate tax calculation prepared for
each tax jurisdiction in which Pioneer is subject to income taxes. For 1996,
1995 and 1994 Pioneer had effective total tax rates of approximately 30%, 31%
and 32%, respectively. In 1996, the effective tax rate is lower than the
applicable tax rate as a result of the tax effects of the 1996 sale of certain
of Pioneer's subsidiaries. The effective tax rates in 1995 and 1994 are lower
than the applicable tax rate for each year because the effective rates reflect
the amortization of foreign permanent differences.
Extraordinary Items
In October 1995, Pioneer transferred cash and certain oil and gas
properties with an aggregate estimated value of $1.1 million in full
satisfaction of a non-recourse note secured by the properties, the balance of
which was approximately $7.7 million. As a result, Pioneer recognized an
extraordinary gain on the early extinguishment of debt of $4.3 million (net of
related tax expense of $2.3 million).
In 1994, Pioneer acquired Bridge Oil Limited and as a result of this
acquisition, Pioneer assumed the obligations of certain indentures issued by
that company. Upon a change in control of Bridge Oil Limited, those indentures
were redeemable for cash at the option of the holder at a one percent premium.
The majority of the holders chose to exercise their call option which resulted
in the recognition of an after-tax loss on early extinguishment of debt of $628
thousand.
Capital Commitments, Capital Resources and Liquidity
Capital Commitments. Pioneer's primary needs for cash are for exploration,
development and acquisitions of oil and gas properties, repayment of principal
and interest on outstanding indebtedness and working capital obligations.
110
<PAGE> 120
Pioneer's cash expenditures during the first half of 1997 for additions to
oil and gas properties totaled $169.5 million. This amount includes $30.8
million for the acquisition of properties and $138.7 million for development and
exploratory drilling. Pioneer's acquisition activities during the first half of
1997 primarily consisted of (i) a 35% interest in approximately 375,000 acres
within the Cotton Valley Pinnacle Reef Trend from UPRC for $26.9 million funded
by $11.1 million in cash and a note payable to UPRC of $15.8 million and (ii) an
87% average working interest in the Maude Traylor field in Calhoun County, Texas
for approximately $8.8 million. Significant drilling expenditures in the first
half of 1997 included $56.2 million in the unitized portion of the Spraberry
field of the Permian Basin (including $24.9 million in the Driver unit, $10
million in the Merchant unit, $9.2 million in the North Pembrook unit, $3.8
million in the Preston unit, $3.3 million in the Midkiff unit and $3.2 million
in the Shackelford unit) and $9.3 million in other portions of the Spraberry
field, $31.2 million in the onshore Gulf Coast region, $21.1 million in other
areas of the Permian Basin, $14.8 million in the MidContinent region and $6.1
million internationally in Argentina and Guatemala.
Pioneer's cash expenditures during 1996, 1995 and 1994 for additions to oil
and gas properties (including individual property acquisitions, but not
including company acquisitions) totaled $219.4 million, $215.7 million and
$247.1 million, respectively. The 1996 amount includes $198.4 million for
development and exploratory drilling, and, as in 1994 and 1995, Pioneer's
drilling activities were focused primarily in the Spraberry field of the Permian
Basin. Significant drilling expenditures in 1996 included $87.1 million in the
unitized portion of the Spraberry field of the Permian Basin (including $46.2
million in the Driver unit, $16.1 million in the Shackelford unit, $7.9 million
in the North Pembrook unit, $4.4 million in the Preston unit and $4.1 million in
the Merchant unit), $18.2 million in other portions of the Spraberry field,
$35.4 million in other areas of the Permian Basin, $31.7 million in the onshore
Gulf Coast region, $14.1 million in the MidContinent region and $11.9 million in
Argentina and Australia (prior to its sale in March 1996). Additions to natural
gas processing facilities during 1996, 1995 and 1994 primarily represented costs
associated with Pioneer's Spraberry natural gas processing facilities.
Pioneer's 1997 capital expenditure budget has been increased to $335
million, up from the previous budget of $270 million, reflecting planned
expenditures of $215 million for exploitation activities, $69 million for
exploration activities and $51 million for oil and gas property acquisitions in
Pioneer's core areas of Texas, Oklahoma, New Mexico and Louisiana. The
significant increase in the capital expenditure budget is indicative of the many
exciting exploration, exploitation and acquisition opportunities available to
Pioneer. Funding for Pioneer's capital expenditure budget will be primarily
provided by cash flows generated by operating activities and by proceeds
resulting from Pioneer's ongoing divestiture program for nonstrategic assets .
In addition, Pioneer may periodically be required to borrow funds under its $350
million bank facility in order to fund these commitments to the extent that they
exceed such internally-generated cash flows. In addition to the above
expenditures, an additional $100 million is expected to be spent during the
second half of 1997 with respect to activities related to Mesa oil and gas
properties.
Funding for Pioneer's working capital obligations is provided by
internally-generated cash flows. Funding for the repayment of principal and
interest on outstanding debt may be provided by any combination of
internally-generated cash flows, proceeds from the disposition of nonstrategic
assets or alternative financing sources as discussed in "Capital Resources"
below.
Capital Resources. Pioneer's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of nonstrategic assets. Pioneer expects that these resources
will be sufficient to fund its capital commitments in 1997.
Operating Activities. Net cash provided by operating activities was $124.6
million during the six months ended June 30, 1997, consistent with net cash
provided by operating activities of $120.6 million for the same period in 1996.
Net cash provided by operating activities increased 46% during the year ended
December 31, 1996 and 21% in 1995 (from $129.8 million in 1994 to $157.3 million
in 1995 to $230.1 million in 1996). These increases are primarily attributable
to stronger oil and gas prices combined with declining production costs due to
improvements in Pioneer's overall cost structure in 1995 and 1996.
Financing Activities. Pioneer had an outstanding balance under its bank
facility at June 30, 1997 of $40.6 million (including outstanding letters of
credit of $617,000), leaving approximately $309.4 million of
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<PAGE> 121
unused borrowing base immediately available. The weighted average interest rate
for the six months ended June 30, 1997 on Pioneer's indebtedness was 7.83% as
compared to 7.81% for the six months ended June 30, 1996 (taking into account
the effect of interest rate swaps). On July 31, 1996, Pioneer entered into an
Amended and Restated Credit Agreement, which has a current borrowing base of
$350 million. Interest rates on the facility vary depending on the amount
outstanding. The outstanding balance under such Credit Agreement at December 31,
1996 was $9 million leaving approximately $340.1 million of unused borrowing
base immediately available, net of outstanding letters of credit of $872
thousand. Pioneer, through its subsidiaries, has other long-term indebtedness,
consisting primarily of a $10 million fixed-rate building loan. The weighted
average interest rate for the year ended December 31, 1996 on Pioneer's
indebtedness was 7.83% as compared to 8.02% for the year ended December 31, 1995
and 7.15% for the year ended December 31, 1994 (taking into account the effect
of interest rate swaps).
In October 1996, Pioneer announced an odd-lot repurchase program for
shareholders who, as of October 7, 1996, individually owned 99 or fewer shares
of Pioneer Common Stock. Pioneer purchased a total of 772,986 shares for $23.3
million which were added to Pioneer's shares held in treasury.
During 1995, Pioneer completed two public issuances of senior notes. The
aggregate net proceeds from the two senior note issuances of approximately
$295.9 million were utilized to repay a portion of Pioneer's outstanding U.S.
bank indebtedness. At December 31, 1996, the outstanding balances on the notes
totaled $299.3 million.
During 1994, Pioneer accessed the capital markets on three occasions: the
issuance of 3,776,400 6 1/4% Cumulative Guaranteed Monthly Income Convertible
Preferred Shares by Pioneer's wholly-owned special purpose finance subsidiary in
March 1994, which resulted in net proceeds of $182.2 million; the issuance of
2,360,000 shares of Common Stock in June 1994, which resulted in net proceeds of
approximately $57.6 million; and the issuance of 4,500,000 shares of Common
Stock in November 1994, which resulted in net proceeds of approximately $107
million. The net proceeds of each of these offerings were used by Pioneer to
reduce the outstanding balance of its bank indebtedness.
As Pioneer continues to pursue its strategy, it may utilize alternative
financing sources, including the issuance for cash of fixed rate long-term
public debt, convertible securities or preferred stock. Pioneer may also issue
securities in exchange for oil and gas properties, stock or other interests in
other oil and gas companies or related assets. Additional securities may be of a
class preferred to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
by the Pioneer Board.
On August 7, 1997, the successor to Parker & Parsley and MOC, Pioneer
Natural Resources USA, Inc. (the "Borrower"), entered into two Credit Facility
Agreements ("Credit Facility Agreements") with a syndicate of banks (the
"Banks") that refinanced the credit facilities of Parker & Parsley and Mesa as
of the date of merger of the two companies. One Credit Facility Agreement (the
"Primary Facility") provides for a $1.1 billion credit facility. The maturity
date for the Primary Facility is August 7, 2002. The second Credit Facility
Agreement (the "364-day Facility") provides for a $300 million credit facility
with a maturity date of August 5, 1998. The Borrower has the option to renew the
364-day Facility for another period of 364 days by notifying the Banks in
writing of such election not more than 60 days and not less than 45 days prior
to the maturity date. The prior credit agreements of Parker & Parsley and Mesa
were paid in full following the Parker/Mesa Merger utilizing proceeds from
initial borrowings against the new Primary Facility of $675 million.
Sales of Nonstrategic Assets. During the six months ended June 30, 1997
and 1996, proceeds from the sale of domestic nonstrategic assets totaled $12.3
million and $45.9 million, respectively. In addition, during the first half of
1996, Pioneer sold certain Australasian subsidiaries resulting in cash proceeds
of $178.7 million.
During 1996, 1995 and 1994, proceeds from the sale of domestic nonstrategic
assets totaled $58.4 million, $175.1 million and $109 million, respectively. In
addition, during 1996, Pioneer sold certain subsidiaries resulting in cash
proceeds of $183.2 million. The proceeds from these sales were utilized to
reduce Pioneer's
112
<PAGE> 122
outstanding bank indebtedness and for general working capital purposes. Pioneer
anticipates that it will continue to sell nonstrategic properties from time to
time to increase capital resources available for other activities and to achieve
administrative efficiencies.
Liquidity. At June 30, 1997, Pioneer had $9.8 million of cash and cash
equivalents on hand, compared to $18.7 million at December 31, 1996 and $19.9
million at December 31, 1995. Pioneer's ratio of current assets to current
liabilities was 1.11 at June 30, 1997 and 1.29 at December 31, 1996 and 1.28 at
December 31, 1995.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MESA
The following table sets forth selected financial information of Mesa for
each of the six months ended June 30, 1997 and 1996 and for the five fiscal
years in the period ended December 31, 1996. The unaudited consolidated
financial data as of and for the periods ended June 30, 1997 and 1996 have been
prepared on a basis consistent with the audited Consolidated Financial
Statements and, in the opinion of management, include all adjustments,
consisting of normal recurring accrual adjustments, which are necessary for a
fair presentation of the results for the interim periods. This data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations of Mesa and the Consolidated Financial
Statements of Mesa and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total operating revenue........ $ 172.1 $ 152.0 $ 311.4 $ 235.0 $ 228.7 $ 222.2 $ 237.1
Total operating expenses....... 124.1 105.6 214.7 187.0 200.0 200.2 210.9
-------- -------- -------- -------- --------- --------- --------
Operating income............... 48.0 46.4 96.7 48.0 28.7 22.0 26.2
-------- -------- -------- -------- --------- --------- --------
Net interest expense (a)....... (47.5) (66.9) (113.4) (132.7) (131.3) (131.3) (129.9)
Other income (b)............... (2.5) 26.1 25.0 27.1 19.2 6.9 14.5
-------- -------- -------- -------- --------- --------- --------
Income (loss) from continuing
operations (c)............... $ (2.0) $ 5.6 $ 8.3 $ (57.6) $ (83.4) $ (102.4) $ (89.2)
-------- -------- --------- --------- --------
Dividends on preferred stock... (11.1) (9.5)
-------- --------
Income (loss) from continuing
operations applicable to
common stock (c)............. $ (13.1) $ (1.2)
======== ========
Income (loss) from continuing
operations per common
share........................ $ (0.20) $ 0.09 $ (0.02) $ (0.90) $ (1.42) $ (2.61) $ (2.31)
======== ======== ======== ======== ========= ========= ========
Weighted average common shares
and common share equivalents
outstanding.................. 64.3 64.1 64.2 64.1 58.9 39.3 38.6
Other Financial Data:
EBITDAEX (d)................... $ 102.7 $ 135.2 $ 228.6 $ 183.4 $ 160.3 $ 142.4 $ 178.1
Cash flows from operating
activities................... 87.8 78.6 101.3 69.2 48.6 32.5 (28.4)
Cash flows from investing
activities................... (371.7) (19.8) (45.0) (41.4) (40.3) 37.5 (17.0)
Cash flows from financing
activities................... 288.0 (33.6) (188.7) (22.1) (3.6) (88.5) (29.5)
Capital expenditures........... 372.0 19.7 50.2 42.3 32.6 29.6 69.2
Ratio of earnings to fixed
charges (e).................. (e) 1.1 (e) (e) (e) (e) (e)
Balance Sheet Data (end of
period):
Working capital................ $ 11.9 $ 18.4 $ 14.8 $ 43.8 $ 115.7 $ 76.2 $ 102.9
Property, plant and equipment,
net.......................... 1,351.7 1,048.7 1,046.4 1,104.8 1,130.4 1,191.8 1,280.3
Total assets................... 1,505.5 1,413.5 1,213.9 1,486.8 1,484.0 1,533.4 1,676.5
Long-term debt, including
current maturities........... 1,108.3 1,201.7 808.1 1,236.7 1,223.3 1,241.3 1,286.2
Stockholders' equity........... 263.5 73.7 265.5 67.0 124.6 112.1 184.4
</TABLE>
- ---------------
(a) Net interest expense represents total interest expense less interest income.
(b) See "Business of Pioneer -- Management's Discussion and Analysis of
Financial Condition and Results of Operations of Mesa -- Results of
Operations-- Other Income (Expense)" for additional detail.
(c) Loss from continuing operations excludes a $59.4 million ($.92 per common
share) extraordinary loss on debt extinguishment for 1996. Net loss
attributable to common stock was $60.6 million ($.94 per common share) for
the year ended December 31, 1996. Net loss and net loss per share for the
years ended December 31, 1995, 1994, 1993 and 1992 and the three months
ended March 31, 1997 and 1996 are the same as loss from continuing
operations and loss from continuing operations per common share shown above.
(d) EBITDAEX is presented because of its wide acceptance as a financial
indicator of a company's ability to service or incur debt. EBITDAEX (as used
herein) is calculated by adding interest, income taxes, depletion,
depreciation and amortization, and exploration costs to loss from continuing
operations applicable to common stock. Interest includes accrued interest
expense and
113
<PAGE> 123
amortization of deferred financing costs. EBITDAEX should not be considered
as an alternative to earnings (loss) or operating earnings (loss), as
defined by generally accepted accounting principles, as an indicator of
Mesa's financial performance, as an alternative to cash flow, as a measure
of liquidity or as being comparable to other similarly titled measures of
other companies.
(e) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as loss from continuing operations applicable to common stock
plus fixed charges. Fixed charges consist of interest expense, capitalized
interest and preferred stock dividends. Earning were inadequate to cover
fixed charges for the years ended December 31, 1996 through 1992 by $1.3
million, $58.5 million, $83.5 million, $105.3 million and $91.6 million,
respectively, and for the six months ended June 30, 1997 by $24.2 million.
114
<PAGE> 124
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF MESA
Subsequent to June 30, 1997, the stockholders of Pioneer predecessor
entities, Parker & Parsley and Mesa, approved the merger agreement in connection
with the Parker/Mesa Merger that resulted in the formation of Pioneer. In
accordance with the provisions of Accounting Principles Board No. 16, "Business
Combinations", the Parker/Mesa Merger was treated as an acquisition of Mesa by
Parker & Parsley. As a result, the historical financial statements of Pioneer
are those of Parker & Parsley and will present the addition of Mesa's assets and
liabilities as an acquisition by Pioneer in August 1997. The results discussed
below relate to the activity of Mesa prior to the Parker/Mesa Merger and are not
indicative of future results of Pioneer.
1997 Developments
On February 7, 1997, Mesa entered into a stock purchase agreement to
purchase 100% of the outstanding capital stock of Greenhill Petroleum
Corporation ("Greenhill") from Western Mining Corporation (USA) for $277 million
exclusive of the cash acquired. Mesa paid $277 million for Greenhill at the
closing of the transaction on April 15, 1997, net of cash acquired. The
Greenhill Acquisition was accounted for under the purchase method of accounting.
However, because the purchase agreement provides for an effective date of
January 1, 1997, Mesa received the benefits of all Greenhill production and cash
flow from the effective date to the closing date as part of the assets acquired.
Under the purchase agreement, Mesa paid interest on the $270 million purchase
price (less the $15 million deposit) at an annual rate of 10% from the effective
date to the closing date. The purchase price was subject to adjustment for
certain title and environmental matters and the final adjusted purchase price
paid was $277 million exclusive of the cash acquired.
On February 6, 1997, Mesa purchased all of MAPCO Inc.'s ("MAPCO")
condensate and natural gas liquids production in the West Panhandle field for
$66 million, effective as of January 1, 1997 (the "Liquids Acquisition"). The
Liquids Acquisition has been accounted for under the purchase method of
accounting.
Results of Operations
For the Six Months ended June 30, 1997 and 1996
Mesa reported a net loss applicable to common stock of $13.1 million for
the six months ended June 30, 1997, compared with net income of $5.6 million for
the same period in 1996.
The following table presents a summary of the results of operations of Mesa
for the periods indicated (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1997 1996
---------------- -----------------
<S> <C> <C>
Revenues.................................................... $172,137 $151,965
Operating and administrative costs.......................... (64,673) (52,690)
Depreciation, depletion and amortization(1)................. (59,417) (52,892)
-------- --------
Operating income............................................ 48,047 46,383
Interest expense, net of interest income.................... (47,571) (66,949)
Other....................................................... (2,493) 26,170
-------- --------
Net income (loss)........................................... $ (2,017) $ 5,604
Dividends on preferred stock................................ (11,105) --
-------- --------
Net income (loss) applicable to common stock................ $(13,122) $ 5,604
======== ========
</TABLE>
- ---------------
(1) Depreciation, depletion and amortization includes impairment of long-lived
assets.
115
<PAGE> 125
Revenues
The table below presents, for the periods indicated, the revenues,
production and average prices received from sales of natural gas, natural gas
liquids and oil and condensate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues (in thousands):
Natural gas............................................... $ 88,810 $ 94,810
Natural gas liquids....................................... 50,439 43,115
Oil and condensate........................................ 26,087 8,847
Other..................................................... 6,801 5,193
-------- --------
Total............................................. $172,137 $151,965
======== ========
Natural Gas Production (MMcf):
Hugoton................................................... 21,608 25,054
West Panhandle............................................ 8,712 9,568
Greenhill................................................. 964 --
Gulf Coast and other...................................... 5,685 8,454
-------- --------
Total............................................. 36,969 43,076
======== ========
Natural Gas Liquids Production (MBbls):
Hugoton................................................... 1,503 1,712
West Panhandle............................................ 1,688 1,457
Gulf Coast and other...................................... 45 71
-------- --------
Total............................................. 3,236 3,240
======== ========
Oil and Condensate Production (MBbls):
West Panhandle............................................ 469 76
Greenhill................................................. 600 --
Gulf Coast and other...................................... 346 402
-------- --------
Total............................................. 1,415 478
======== ========
Weighted average sales price (1):
Natural gas (per Mcf)..................................... $ 2.40 $ 2.17
Natural gas liquids (per Bbl)............................. $ 15.57 $ 13.52
Oil and condensate (per Bbl).............................. $ 18.43 $ 18.55
</TABLE>
- ---------------
(1) Includes $0.08, $0.13 and $4.15 from hedging natural gas, natural gas
liquids and oil and condensate, respectively, in the six months ended June
30, 1997.
Mesa's natural gas production declined in 1997 as a result of natural
production declines in the Hugoton field and the Gulf Coast and a post-payout
reduction in Mesa's working interest in certain Gulf Coast wells in early 1997.
Mesa's combined natural gas liquids and oil and condensate production increased
in 1997 as a result of the acquisition of condensate and natural gas liquid
interests from MAPCO effective January 1, 1997, and the Greenhill Acquisition
effective April 15, 1997.
Mesa anticipates that total production for 1997 will increase over 1996 as
a result of the previously mentioned acquisitions and ongoing development
activities. A field compression expansion program currently underway in the
Hugoton field is expected to increase production in the second half of 1997. The
recently completed East Cameron 322/323 drilling program is also expected to
increase Gulf Coast production in the second half of 1997.
116
<PAGE> 126
The following table shows the effects of Mesa's hedging activities on its
prices for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
----------------------------------
NATURAL NATURAL OIL AND
GAS GAS LIQUIDS CONDENSATE
($/MCF) ($/BBL) ($/BBL)
------- ----------- ----------
<S> <C> <C> <C>
Actual price received.................................. $2.32 $15.44 $14.28
Effect of hedging...................................... 0.08 0.13 4.15
----- ------ ------
Average price.......................................... $2.40 $15.57 $18.43
===== ====== ======
</TABLE>
As a result of physical sales contracts and other hedging arrangements,
Mesa's estimated fixed price profile is as follows:
<TABLE>
<CAPTION>
PERCENT OF FLOOR CEILING
PRODUCTION PRICE PRICE
---------- ------ -------
<S> <C> <C> <C>
Last Six Months of 1997
Natural Gas ($/MMBtu net to Mesa).................... 55% $ 2.22 $ 2.24
Natural Gas Liquids ($/Bbl net to Mesa).............. 10% $17.13 $17.13
Crude Oil ($/Bbl NYMEX equivalent)................... 36% $20.56 $22.63
Calendar Year 1998
Natural Gas ($/MMBtu net to Mesa).................... 16% $ 2.67 $ 2.73
Crude Oil ($/Bbl NYMEX equivalent)................... 6% $19.90 $19.90
</TABLE>
In addition to these hedges, Mesa entered into an eight-year agreement
covering 13,000 MMBtus of natural gas per day beginning January 1, 1997. Under
this agreement, Mesa will receive the NYMEX Henry Hub natural gas price plus
$0.52 per MMBtu for the first two years and 10% of the NYMEX West Texas
Intermediate crude oil price for the remaining six years.
Costs and Expenses
Mesa's aggregate costs and expenses increased approximately 18% in the six
months ended June 30, 1997, compared to the same period in 1996. Lease operating
expenses increased as a result of increased field and plant gas usage and an
increase in the cost of gas used in operations, higher gathering fees in the
West Panhandle, and the addition of costs for the Greenhill properties acquired
in the second quarter of 1997. Exploration charges for the six months ended June
30, 1997, increased as compared to the same period in 1996 reflecting the dry
hole costs associated with Vermilion 348. General and administrative expenses
decreased primarily as a result of lower legal expenses and a significant
reduction in personnel in Mesa's natural gas vehicle equipment business and
administrative functions. 1996 general and administrative expenses include a
$3.6 million charge associated with such reduction in personnel. General and
administrative expenses for the six months ended June 30, 1997 include $4.9
million in severance costs paid to Mesa's former chief executive officer.
Depreciation, depletion and amortization is calculated quarterly on a unit-of-
production basis. Depreciation expense increased as a result of the downward
revision of reserves at the end of 1996 and the higher per unit basis in the
Greenhill properties. The impairment of long-lived assets for 1997 relates to
the sales of Mesa's remaining natural gas vehicles businesses early in the third
quarter of 1997. The impairment of long-lived assets for the six months ended
June 30, 1996, relates to the adoption of a new accounting requirement (SFAS No.
121) in 1996.
Other Income (Expense)
Interest income and interest expense in the six-month period ended June 30,
1997, decreased from such income and expense during the same period in 1996 as
average cash balances and aggregate debt outstanding decreased.
117
<PAGE> 127
Average long-term debt and interest rates for the periods indicated are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1996
----- -------
<S> <C> <C>
Average long-term debt outstanding (in millions)............ $954 $1,215
Effective interest rate..................................... 9.3% 11.8%
</TABLE>
Results of operations for the six-month period ended June 30, 1997 and
1996, include certain items which are either non-recurring or are not directly
associated with Mesa's oil and gas producing operations. The following table
sets forth the amounts of such items for the periods indicated (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Gains from investments...................................... $ -- $ 9,349
Gain from adjustment of contingency reserve................. -- 15,000
Other....................................................... (2,493) 1,821
------- -------
Total other income................................ $(2,493) $26,170
======= =======
</TABLE>
The gains from investments relate to Mesa's investments in marketable
securities and energy futures contracts, which included NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized.
In the mid-to-late 1980's, as a result of regulatory changes, Mesa settled
a number of natural gas purchase contracts. At that time, Mesa established a
reserve for amounts possibly payable to third parties as a result of the
settlements. In 1996, as a result of reaching tentative agreement in negotiation
with certain of the parties, Mesa determined that $15 million of the amount
previously reserved was no longer required.
For the Years Ended December 31, 1996, 1995 and 1994
The following table presents a summary of the results of operations of Mesa
for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues........................................... $ 311,411 $234,959 $ 228,737
Operating and administrative costs................. (111,422) (101,203) (106,330)
Depreciation, depletion and amortization........... (103,301) (85,791) (93,724)
--------- -------- ---------
Operating income................................... 96,688 47,965 28,683
Interest expense, net of interest income........... (113,386) (132,708) (131,300)
Other.............................................. 25,037 27,175 19,264
--------- -------- ---------
Net income (loss) before extraordinary item........ 8,339 (57,568) (83,353)
Extraordinary loss on debt extinguishment.......... (59,386) -- --
--------- -------- ---------
Net loss......................................... $ (51,047) $(57,568) $ (83,353)
========= ======== =========
</TABLE>
118
<PAGE> 128
Revenues, Production and Average Price Data
The table below presents, for the years indicated, the revenues, production
and average prices received from sales of natural gas, natural gas liquids and
oil and condensate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues (in thousands):
Natural gas.......................................... $184,595 $129,534 $139,580
Natural gas liquids.................................. 97,561 75,321 72,771
Oil and condensate................................... 18,180 19,594 7,877
Helium and other..................................... 11,075 10,510 8,509
-------- -------- --------
Total........................................ $311,411 $234,959 $228,737
======== ======== ========
Natural Gas Production (MMcf):
Hugoton.............................................. 46,821 48,871 51,986
West Panhandle....................................... 19,268 20,357 22,983
Gulf of Mexico....................................... 17,909 8,073 7,359
Other................................................ 3 11 11
-------- -------- --------
Total........................................ 84,001 77,312 82,339
======== ======== ========
Natural Gas Liquids Production (MBbls):
Hugoton.............................................. 3,315 3,524 3,430
West Panhandle....................................... 2,978 2,994 3,423
Gulf of Mexico....................................... 163 48 53
Other................................................ 4 5 5
-------- -------- --------
Total........................................ 6,460 6,571 6,911
======== ======== ========
Oil and Condensate Production (MBbls):
Hugoton.............................................. -- -- --
West Panhandle....................................... 211 118 164
Gulf of Mexico....................................... 665 1,025 337
Other................................................ 63 52 45
-------- -------- --------
Total........................................ 939 1,195 546
======== ======== ========
Weighted average sales price:
Natural gas (per Mcf)
Hugoton........................................... $ 2.06 $ 1.32 $ 1.57
West Panhandle.................................... 2.23 1.83 1.80
Gulf of Mexico.................................... 2.58 1.59 1.81
Other............................................. .77 .54 1.29
-------- -------- --------
Total........................................ $ 2.19 $ 1.65 $ 1.67
======== ======== ========
Natural gas liquids (per Bbl)
Hugoton.............................................. $ 14.60 $ 10.76 $ 10.03
West Panhandle....................................... 16.06 12.33 11.06
Gulf of Mexico....................................... 15.51 11.37 11.52
Other................................................ 13.96 8.77 8.58
-------- -------- --------
Average*.......................................... $ 15.21 $ 11.48 $ 10.55
======== ======== ========
</TABLE>
119
<PAGE> 129
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Oil and condensate (per Bbl)
Hugoton.............................................. $ -- $ -- $ --
West Panhandle....................................... 18.74 14.13 13.38
Gulf of Mexico....................................... 19.95 16.57 15.18
Other................................................ 20.07 16.48 14.43
-------- -------- --------
Average*.......................................... $ 19.39 $ 16.32 $ 14.58
======== ======== ========
</TABLE>
- ---------------
* Includes the effects of hedging activities. See "-- Natural Gas Prices."
Total revenues from sales of natural gas, NGLs and oil and condensate
increased from 1995 to 1996 primarily due to increased prices received in 1996.
The increase in total revenues from sales of natural gas, NGL, and oil and
condensate from 1994 to 1995 is primarily attributable to increased oil and
condensate production in 1995, increased liquids prices in 1995 and
approximately $12.7 million of natural gas hedge gains recognized in 1995. These
factors offset the decrease in natural gas and natural gas liquids production
and the lower market prices for natural gas production in 1995.
Natural Gas Revenues. Natural gas revenues increased by 42% from 1995 to
1996. Average prices were significantly higher in 1996 than in 1995. The average
price received for market price-based production was $0.81 per Mcf, or 61%,
higher in 1996 than in 1995. Mesa's hedge losses decreased the reported prices
for such production by $0.02 per Mcf in 1996. The higher market prices in 1996
were the result of increased demand primarily due to a colder than normal
1995/1996 winter. Natural gas production from the Gulf of Mexico increased 122%
from 1995 to 1996 due to the South Marsh Island drilling program. Natural gas
revenues decreased by 7% from 1994 to 1995. In 1995 production was lower in both
the Hugoton and West Panhandle fields due to timing and duration of equipment
maintenance and weather-related reduction in demand, respectively. Average
natural gas prices were slightly lower in 1995 than in 1994. The average price
received for market price-based production was $0.22 per Mcf, or 14%, lower in
1995 than in 1994. Mesa's hedge gains increased the reported prices for such
production by $0.20 per Mcf in 1995. The lower market prices in 1995 were a
function of a surplus supply of natural gas. See "-- Natural Gas Prices."
NGL Revenues. NGL revenues increased by 29% from 1995 to 1996. Average
prices in 1996 were 32% higher than in 1995 due to improved market conditions.
The increase in prices was partially offset by a 2% decline in production. NGL
revenues increased by 4% in 1995 compared to 1994. Hugoton field NGL production
was slightly higher despite lower natural gas production reflecting improved
yields from the Satanta Plant. West Panhandle field NGL production decreased in
1995 in proportion to the lower natural gas production. The lower production was
offset by higher average prices in 1995 due to improved market conditions for
NGLs.
Oil and Condensate Revenues. Oil and condensate revenues were slightly
lower in 1996 than in 1995. Oil production in the Gulf of Mexico was down 35%
due to natural oil production decline from the successful drilling in 1994. The
production decrease was offset by an increase of 19% in average prices received
in 1996 compared to 1995 due to improved market conditions. Oil and condensate
revenues increased approximately 150% from 1994 to 1995. Gulf of Mexico
production increased in late 1994 due to successful drilling results. Average
oil and condensate prices were also higher in 1995 by $1.74 per Bbl.
120
<PAGE> 130
Natural Gas Prices. Substantially all of Mesa's natural gas production is
sold under short or long-term sales contracts. The following table shows Mesa's
natural gas production sold under fixed price contracts and production sold at
market prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Natural gas production (MMcf):
Sold under fixed price contracts......................... 5,198 15,212 13,935
Sold at market prices.................................... 78,803 62,100 68,404
------ ------ ------
Total production............................... 84,001 77,312 82,339
====== ====== ======
Percent sold at market prices............................ 94% 80% 83%
====== ====== ======
</TABLE>
In addition to its fixed price contracts, Mesa will, when circumstances
warrant, hedge the price received for its market-sensitive production through
natural gas futures contracts, swaps and other financial instruments as well as
physical sales arrangements. The following table shows the effects of Mesa's
fixed price contracts and hedging activities on its natural gas prices:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Average natural gas prices (per Mcf):
Fixed price contracts..................................... $3.21 $2.12 $2.16
Market prices received.................................... 2.14 1.33 1.55
Hedge gains (losses)...................................... (.02) .20 .01
----- ----- -----
Total market prices............................... $2.12 $1.53 $1.56
----- ----- -----
Total average prices.............................. $2.19 $1.65 $1.67
===== ===== =====
</TABLE>
The average natural gas prices under fixed price contracts increased in
1996 due to the expiration of certain lower priced contracts in 1995.
Gains and losses from hedging activities are included in natural gas
revenues when the applicable hedged natural gas is produced. Mesa recognized
losses from hedging activities of $1.8 million in 1996, and gains of $12.7
million in 1995 and $895,000 in 1994.
Costs and Expenses
Mesa's aggregate costs and expenses increased by approximately 15% from
1995 to 1996. Lease operating expenses increased 10% from 1995 to 1996 due to
higher production and fuel costs in the West Panhandle and Hugoton fields and
slightly higher overall production. Production and other taxes increased 9% from
1995 to 1996 due to increased revenues partially offset by lower tax rates for
Hugoton field production. Exploration charges in 1996 were lower than in 1995
due to a greater emphasis being placed on lower risk development drilling
throughout 1996. General and administrative ("G&A") expenses increased in 1996
due to a $9.3 million charge relating to a reduction in personnel associated
with the Recapitalization, partially offset by lower costs resulting from the
personnel reduction and lower legal expenses. Depreciation, depletion and
amortization ("DD&A") expense, which is calculated quarterly on a
unit-of-production basis, was higher primarily due to a decrease in estimated
reserves and an impairment of long-lived assets of approximately $6.8 million in
connection with the adoption of a new accounting standard (SFAS No. 121).
Mesa's aggregate costs and expenses declined by approximately 7% from 1994
to 1995. Lease operating expenses declined marginally due to decreased
production. Production and other taxes decreased 14% from 1994 to 1995 due to
decreased production in the Hugoton and West Panhandle fields and lower tax
rates for Hugoton field production in 1995. Exploration charges in 1995 were
greater than in 1994 reflecting increased exploration activities in the Gulf of
Mexico and consist primarily of exploratory dry-hole expense. G&A
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<PAGE> 131
expenses were lower in 1995 than in 1994 primarily due to lower legal expenses
and a reduction in employee benefit expenses. DD&A expense was lower in 1995
than in 1994 primarily due to lower equivalent production in 1995, oil and gas
reserve increases in the Hugoton and West Panhandle fields in the fourth
quarters of 1994 and 1995, and additional reserve discoveries in the Gulf of
Mexico in 1994 and 1995.
The table below presents Mesa's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
years ended December 31 (in thousands, except per Mcf of natural gas equivalent
data):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
PER PER PER
TOTAL MCFE TOTAL MCFE TOTAL MCFE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Lease operating expense:
Hugoton...................................... $13,545 $ .20 $12,703 $ .18 $12,549 $ .17
West Panhandle............................... 28,896 .75 25,989 .67 26,910 .60
Gulf of Mexico............................... 10,476 .46 9,848 .68 11,136 1.15
Other........................................ 1,530 3.79 907 2.57 623 2.00
------- ----- ------- ----- ------- -----
54,447 .42 49,447 .40 51,218 .40
------- ----- ------- ----- ------- -----
Production and Other Taxes:
Hugoton...................................... 16,297 .24 15,004 .21 17,505 .24
West Panhandle............................... 3,472 .09 3,216 .08 3,099 .07
Gulf of Mexico............................... 19 -- 34 -- 68 .01
Other........................................ 283 .70 149 .42 634 2.04
------- ----- ------- ----- ------- -----
20,071 .16 18,403 .15 21,306 .17
------- ----- ------- ----- ------- -----
Total production costs............... $74,518 $ .58 $67,850 $ .55 $72,524 $ .57
======= ===== ======= ===== ======= =====
</TABLE>
Other Income (Expense)
Interest expense in 1996 was $27.5 million lower than in 1995 due to lower
average aggregate debt outstanding at lower average interest rates. Average
aggregate debt outstanding and average interest rates fell to $1,036.0 million
and 11.34%, respectively, from $1,246.9 million and 11.64% in 1995. Interest
expense in 1995 was not materially different from 1994 as average aggregate debt
outstanding and average interest rates did not change materially. Non-cash
interest expense representing accretion of discount on long-term debt totaled $8
million, $39 million and $79 million in 1996, 1995 and 1994, respectively.
Interest income decreased $8.2 million from 1995 to 1996 due to lower
average cash balances in 1996. Interest income increased from $13.5 million in
1994 to $15.9 million in 1995 as a result of higher average cash balances and
higher average interest rates earned on these cash balances in 1995.
Results of operations for the years 1996, 1995, and 1994 include certain
items which are either non-recurring or are not directly associated with Mesa's
oil and gas producing operations. The following table sets forth the amounts of
such items (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Gains from investments...................................... $ 9,418 $18,420 $ 6,698
Gains from collections from Bicoastal Corporation........... 2,548 6,352 16,577
Gain from adjustment of contingency reserve................. 15,000 -- --
Other....................................................... (1,929) 2,403 (4,011)
------- ------- -------
Total other income................................ $25,037 $27,175 $19,264
======= ======= =======
</TABLE>
The gains from investments relate primarily to energy futures contracts,
which include New York Mercantile Exchange ("NYMEX") futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. Mesa's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of
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<PAGE> 132
operations for such reporting period whether or not such gains or losses have
been realized. Gains from collections from Bicoastal Corporation represent
returns on Mesa's investment in Bicoastal subsequent to the confirmation of its
bankruptcy plan. No additional payments from Bicoastal are expected. In the
second quarter of 1996, Mesa revalued certain contingencies associated primarily
with contracts which were settled in the mid-to-late 1980s. As a result of the
revaluation, Mesa recorded a gain of $15 million in the second quarter of 1996.
Production Allocation Agreement
Effective January 1, 1991, Mesa entered into the Production Allocation
Agreement ("PAA") with Colorado Interstate Gas Company ("CIG") which allocates
77% of the production from the West Panhandle field to Mesa and 23% to CIG.
During 1996, 1995, and 1994, Mesa produced and sold 72%, 71%, and 69%,
respectively, of total production from the field; the balance of field
production was sold by CIG. Mesa records its 77% ownership interest in natural
gas production as revenue. The difference between the net value of production
sold by Mesa and the net value of its 77% entitlement is accrued as a gas
balancing receivable. The revenues and costs associated with such accrued
production are included in results of operations.
The following table presents the incremental effect on production and
results of operations from entitlement production recorded in excess of actual
sales as a result of the PAA (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues accrued............................................ $ 8,112 $ 4,260 $ 8,662
Costs and expenses accrued.................................. (2,766) (1,576) (3,075)
------- ------- -------
Recorded to receivable...................................... 5,346 2,684 5,587
------- ------- -------
Depreciation, depletion and amortization.................... (2,546) (1,680) (3,713)
------- ------- -------
Total............................................. $ 2,800 $ 1,004 $ 1,874
======= ======= =======
Production Accrued:
Natural gas (MMcf)........................................ 1,734 1,155 2,386
Natural gas liquids (MBbls)............................... 269 171 355
</TABLE>
At December 31, 1996, the long-term gas balancing receivable under the PAA
due from CIG was $47.9 million net of accrued costs which is included in other
assets in the consolidated balance sheet. Approximately $18 million of the
long-term gas balancing receivable relating to the PAA is attributable to
MAPCO's interest in liquids purchased by Mesa pursuant to the Liquids
Acquisition. The provisions of the PAA allow for periodic and ultimate cash
balancing to occur. The PAA also provides that CIG may not take in excess of its
23% share of ultimate production.
Capital Resources and Liquidity
In August of 1996, Mesa completed a recapitalization (the
"Recapitalization") of its balance sheet by issuing new equity and repaying and
refinancing substantially all of its then existing long-term debt. The
Recapitalization included (i) a sale by private placement of approximately 58.8
million shares of a new class of Series B Preferred Stock for $133 million to
DNR, whose sole general partner is Rainwater, Inc., a Texas corporation owned by
Richard E. Rainwater, and (ii) the issuance to Mesa's then existing stockholders
of rights (the "Rights Offering") to purchase a new class of Series A Preferred
Stock. The Rights Offering was substantially over subscribed and resulted in
such stockholders' purchase of approximately 58.6 million shares of Series A
Preferred Stock for $132 million. In addition, as part of the Recapitalization,
Mesa entered into the new seven-year $525 million Credit Facility with a group
of banks, issued and sold $475 million of senior subordinated notes consisting
of $325 million of 10 5/8% senior subordinated notes due in 2006 and $150
million initial accreted value of 11 5/8% senior subordinated discount notes due
in 2006.
The Recapitalization enhances Mesa's ability to compete in the oil and gas
industry by substantially increasing its cash flow available for investment and
improving its ability to attract capital. The ability to
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<PAGE> 133
redirect cash flow to acquisition, exploitation and exploration activities and
plant expansion rather than debt service allows Mesa to pursue its aggressive
growth strategy. Specifically, Mesa's financial condition improved significantly
as a result of the Recapitalization due to (i) a significant reduction in total
debt outstanding (see table below), (ii) a reduction in annual cash interest
expense through lower debt balances and lower interest rates, and (iii) the
extension of maturities on its long-term debt.
Mesa Operating Co., a Delaware corporation and a wholly-owned subsidiary of
Mesa, is the borrower under the Credit Facility and the issuer under the senior
subordinated notes and the senior discount notes. Mesa is the guarantor on the
Credit Facility and on both the senior subordinated notes and the senior
discount notes.
The Credit Facility is secured by liens on substantially all of Mesa's
assets and matures on June 30, 2003. Borrowings under the Credit Facility bear
interest, at Mesa's option, at Interbank Eurodollar rates plus 1 1/2%, CD rates
plus 1 1/2%, Fed Funds rates plus 1% or the prime rate plus 1/2%. Mesa has
entered into a two-year interest rate swap ending on August 28, 1998, that fixes
the interest rate on $250 million of borrowings under the Credit Facility at
approximately 7 3/4%. The borrowing base for the Credit Facility is determined
based on the value of Mesa's proved oil and gas reserves and was initially set
at $525 million. The borrowing base at December 31, 1996 was $525 million and,
as of such date, $319 million was outstanding under the Credit Facility. Mesa
currently has a commitment letter from The Chase Manhattan Bank, N.A. to amend
and restate the Credit Facility to increase the total amount of the Credit
Facility to $650 million in connection with the Greenhill Acquisition.
Borrowings under the Credit Facility will be used to fund the Greenhill
Acquisition. The Credit Facility restricts, among other things, Mesa's ability
to incur additional indebtedness, create liens, pay dividends, acquire stock or
make investments, loans or advances.
The amounts outstanding under the senior subordinated notes and the senior
discount notes at December 31, 1996 were approximately $325 million and $159
million, respectively, and both the senior subordinated notes and the senior
discount notes are unsecured and mature in 2006. The senior subordinated notes
bear interest at a rate of 10 5/8%, payable semiannually. The senior discount
notes do not accrue interest until July 1, 2001, however, the accreted value of
such notes will increase at a rate of 11 5/8% compounded semiannually until such
date. Beginning July 1, 2001, the senior discount notes will bear interest at a
rate of 11 5/8% compounded semiannually. Prior to July 1, 1999, Mesa may, at its
option, on any one or more occasions, redeem up to 33 1/3% of the aggregate
principal amount of each of the senior subordinated notes and the senior
discount notes at a redemption price equal to 110% of the principal amount or
accreted value thereof with proceeds of equity offerings.
The indentures governing the senior subordinated notes and the senior
discount notes contain certain covenants that, among other things, limit the
ability of Mesa and its restricted subsidiaries to incur additional indebtedness
and issue redeemable stock, pay dividends, make investments, make certain other
restricted payments, enter into certain transactions with affiliates, dispose of
assets, incur liens and engage in Parker/Mesa Merger and consolidations.
Summarized long-term debt (in thousands) and year-end interest rates are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ---------------------
AVERAGE AVERAGE
INTEREST INTEREST
BALANCE RATE BALANCE RATE
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Fixed Rate Debt................................ $483,772 10.95% $1,170,307 11.7%
Variable Rate Debt............................. 319,000 7% 61,131 8.25%
Other.......................................... 5,305 N/A 5,305 N/A
-------- ----------
Total................................ $808,077 $1,236,743
======== ==========
</TABLE>
Cash Flow from Operating Activities
Net cash provided by operating activities increased 46% from 1995 to 1996
primarily as a result of sales of investments and a reduction in net loss as
compared to 1995 before extraordinary, non-operating, loss on debt
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<PAGE> 134
extinguishment. Net cash provided by operating activities increased 30% from
1994 to 1995 primarily as a result of the $43 million litigation settlement in
1994.
Price Risk Management
In order to mitigate the potential negative effects of volatile commodity
prices, Mesa entered into over-the-counter commodity and natural gas basis swap
agreements with financial institutions and gas marketing companies. A commodity
swap has the effect of fixing the absolute price or setting a trading range for
a specific product. A natural gas basis swap "fixes" the differential between
Mesa's physical gas delivery points and the NYMEX Henry Hub.
As a result of physical sales contracts and other hedging arrangements,
Mesa's estimated fixed price profile is as follows:
<TABLE>
<CAPTION>
PERCENT OF FLOOR CEILING
PRODUCTION PRICE PRICE
---------- ------ -------
<S> <C> <C> <C>
Last Six Months of 1997
Natural Gas ($/MMBtu net to Mesa)......................... 55% $ 2.22 $ 2.24
Natural Gas Liquids ($/Bbl net to Mesa)................... 10% $17.13 $17.13
Crude Oil ($/Bbl NYMEX equivalent)........................ 36% $20.56 $22.63
Calendar Year 1998
Natural Gas ($/MMBtu net to Mesa)......................... 16% $ 2.67 $ 2.73
Crude Oil ($/Bbl NYMEX equivalent)........................ 6% $19.90 $19.90
</TABLE>
In connection with acquisitions, Mesa has and Pioneer expects to continue
to enter into hedging arrangements for all or a portion of the production on the
acquired properties. Regarding the Greenhill Acquisition, Mesa hedged
approximately 100% of its 1997 expected natural gas production at approximately
$2.60 per MMBtu and approximately 30% of Greenhill's projected crude oil
production at approximately $22.60 per barrel. Through the use of a collar, Mesa
created a $19.25 floor and a $25.50 cap for approximately 20% of the 1997
expected Greenhill crude oil production. For the year 1998, Mesa fixed
approximately 40% of the projected Greenhill natural gas production around
$2.35. With respect to the Liquids Acquisition, Mesa sold approximately 100% of
the crude oil and natural gas liquids at a net price of $21.00 per barrel and
$18.66 per barrel, respectively, for the first three quarters of 1997.
In addition to these hedges, Mesa entered into an eight year agreement for
13,000 MMBtus of natural gas per day beginning in early 1997. Under this
agreement, Mesa will receive NYMEX Henry Hub plus $0.52 per MMBtu for the first
two years and 10% of the NYMEX WTI crude oil price for the remaining six years.
Net Operating Loss Carryforwards
At December 31, 1996, Mesa had a regular tax net operating loss ("NOL")
carryforward of approximately $560 million. Additionally, Mesa had an
alternative minimum tax loss carryforward available to offset future alternative
minimum taxable income of approximately $535 million. If not used, these
carryforwards will expire between 2007 and 2011. As a result of the
Recapitalization, Pioneer's ability to carry forward Mesa's NOLs is subject to
the limitations of Section 382 of the Internal Revenue Code of 1986, which, in
general, limits the utilization of NOL carryforwards subsequent to a substantial
change (generally more than 50%) in corporate stock ownership. Notwithstanding
the above limitations, Pioneer expects the NOLs available in 1997 to be
sufficient to offset any taxable income that may be generated in 1997.
Other
Pioneer, as did its predecessor, Mesa, recognizes its ownership interest in
natural gas production as revenue. Actual production quantities sold may be
different from Pioneer's ownership share of production in a given period.
Pioneer records these differences as gas balancing receivables or as deferred
revenue. Mesa's net gas balancing overproduction represented less than 1% of
total equivalent production for the six months ended
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<PAGE> 135
June 30, 1997, compared with net gas balancing underproduction amounting to
approximately 3.7% of total equivalent production during the same period in
1996. The gas balancing receivable or deferred revenue component of natural gas
and natural gas liquids revenues in future periods is dependent on future rates
of production, field allowables and the amount of production taken by Pioneer or
by its joint interest partners.
See Mesa's Financial Statements and related notes included elsewhere herein
for information regarding the status of certain pending litigation.
Management does not anticipate that inflation will have a significant
effect on Pioneer's operations.
Mesa believes that the costs for compliance with current environmental laws
and regulations have not had and will not have a material effect on Mesa's or
Pioneer's financial position or results of operation.
The Financial Accounting Standards Board has recently issued several new
accounting standards. The standards are not anticipated to significantly impact
the financial results of Mesa.
BUSINESS DESCRIPTION
Recent Developments
Greenhill Acquisition. On April 15, 1997, Pioneer's predecessor, Mesa,
acquired all of the outstanding capital stock of Greenhill. As of December 31,
1996, Greenhill's properties, which are concentrated in four producing areas,
had estimated proved reserves of approximately 23 MMBbls of oil and 42 Bcf of
gas or an aggregate of approximately 30 MMBOE. The estimated future net cash
flows before income taxes from the Greenhill reserves, as of December 31, 1996,
aggregated approximately $441 million and had a net present value, discounted at
10%, of approximately $300 million. For the year ended December 31, 1996, net
production from the Greenhill reserves was 2.5 MMBbls of oil and 6.0 Bcf of gas.
These properties have had cumulative historical production of over 930 MMBOE.
The Greenhill properties are concentrated in the inland waters of
Louisiana, the Texas Gulf Coast, offshore in the Gulf of Mexico and in the
Permian Basin, with approximately 48% of the reserves in inland waters of
Louisiana, 12% in the Texas Gulf Coast, 11% offshore in the Gulf of Mexico and
28% in the Permian Basin. Pioneer operates over 90% of its properties. The
Greenhill properties include 522 producing wells, over 200 development projects,
significant exploration potential, including a number of subsalt and deeper zone
drilling prospects, and extensive 3-D seismic data on approximately 52,800 gross
acres (49,000 net acres).
Pioneer has currently identified 45 development wells and 132 recompletions
on the Greenhill properties, and expects to initiate 44 of these projects in
1997 and at least 25 in 1998. The projects will require an investment of at
least $65 million during 1997 and 1998. With the additional development
projects, Pioneer expects to increase net production from the Greenhill
properties from the current 9,300 BOE per day, to over 12,000 BOE per day in
1998. In addition, Pioneer has identified a number of exploration opportunities,
including a deeper zone and two subsalt prospects, which Pioneer expects to
evaluate further with advanced 3-D seismic data processing.
The three fields located in Louisiana, Timbalier Bay, Grand Bay and Delta
Farms, are considered giant fields by industry standards having historical
cumulative production of more than 100 MMBOE each with Timbalier Bay being the
third largest field in Louisiana having historical cumulative production of more
than 390 MMBOE. The Timbalier Bay and Grand Bay fields both lie on the flanks of
the Terrebonne Trough, the most prolific depositional basin in Louisiana. This
Miocene basin has produced over 24 Tcf and 13 billion barrels of oil
historically. The combination of the size and structural and stratigraphic
complexity of these fields has resulted in large numbers of distinct reservoirs
and fault blocks in each field, which lend themselves to further exploration and
exploitation using 3-D seismic data.
The Eugene Island 208 field, located in federal waters offshore, is a salt
dome with complex faulting separating the producing reservoirs. Pioneer expects
to use 3-D seismic data to identify and exploit hydrocarbon accumulations in
each of these fields.
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<PAGE> 136
The Texas Gulf Coast properties are concentrated in three areas: the Rich
Ranch area located in Liberty County and the Linscomb and Bobcat Run areas
located in Orange County. A new 3-D survey is under evaluation over the Rich
Ranch field which is expected to assist in defining additional structural and
stratigraphic opportunities. The Permian Basin interests consist of five active
water flood field units and four other non-unitized leases in Lea County, New
Mexico, and Andrew and Yoakum Counties, Texas, three of which hold potential for
increased oil recovery through CO(2) flooding.
The Greenhill properties include more than 150 square miles of proprietary
modern 3-D seismic data covering Timbalier Bay and Grand Bay fields, a
speculative seven square mile 3-D survey over the Linscomb and Bobcat Run fields
and a newly shot 11 square mile 3-D seismic survey at Rich Ranch. Pioneer plans
to conduct further 3-D seismic surveys over the Greenhill properties to assist
in its exploitation and exploration efforts.
Liquids Acquisition. On February 6, 1997, Pioneer's predecessor, Mesa,
purchased all of the condensate and NGL production interests in the West
Panhandle field of MAPCO Inc. for $66 million. The Liquids Acquisition,
effective as of January 1, 1997, increases Pioneer's interest in NGLs produced
from the West Panhandle field properties that Pioneer operates to approximately
96%. Pioneer has been recovering such NGLs at its Fain plant since December 1996
and Pioneer believes that the Liquids Acquisition is an important step in
Pioneer's strategic objective of expanding its NGL and gas processing business.
The transaction is expected to result in 850,000 Bbls of additional production
in 1997 and the addition of an estimated 11 MMBbls of proved reserves in 1997.
Financial Management
Pioneer strives to maintain its outstanding indebtedness at levels whereby
it maintains sufficient financial flexibility for future exploration,
development and acquisition opportunities. While Pioneer may occasionally incur
higher levels of debt to take advantage of opportunities, management's objective
is to maintain a flexible capital structure and to strengthen Pioneer's
financial position by reducing debt through an increase in equity capital or
through the divestiture of nonstrategic assets. If the Transaction described in
this Joint Proxy Statement is consummated, Pioneer will have achieved a leverage
ratio that is in line with its target of a debt to book capitalization ratio of
40%, on a pro forma combined basis as of June 30, 1997.
Properties
The information included under this heading "Properties" has been prepared
to give effect to the combination of Parker & Parsley and Mesa (including the
Greenhill Acquisition).
Reserves. Pioneer had proved reserves of over 600 MMBOE at December 31,
1996, comprised of 1.9 Tcf of natural gas and 282 MMBbls of crude oil and
liquids, with an SEC PV10 of approximately $4.4 billion. On a BOE basis, 86% of
Pioneer's total proved reserves at December 31, 1996 are proved developed
reserves. Pioneer operates approximately 85% of its total proved reserves based
on the December 31, 1996 SEC PV10. Based on reserve information as of December
31, 1996, and using Pioneer's reserve report production information for 1997,
the reserve-to-production ratio associated with Pioneer's proved reserves is
approximately 12 years on a BOE basis.
In addition, proved NGLs of 12.6 million Bbls were attributable to
Pioneer's interests in gas processing rights in reserves contractually or
economically dedicated to Pioneer's natural gas processing plants at December
31, 1996. The SEC PV10 from those dedicated proved reserves was $44.3 million at
December 31, 1996 (using a constant weighted average price of $11.46 per Bbl and
a 10% discount rate). For the year ended December 31, 1996, average daily
production from Pioneer's interests in natural gas processing plants was 2,327
Bbls of NGLs.
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<PAGE> 137
The following table summarizes (a) the estimated proved reserves and
estimated future cash flows associated with Pioneer's oil and gas properties by
major area of operation as of December 31, 1996, and (b) the average daily
production associated with Pioneer's oil and gas properties by significant
reserve base during 1996, in each case as estimated in accordance with the
definitional requirements under rule 4-10(a) of Regulation S-X.
<TABLE>
<CAPTION>
COMBINED
COMBINED PROVED RESERVES 1996 AVERAGE
AS OF DECEMBER 31, 1996 DAILY PRODUCTION(A)
------------------------------------------ --------------------------
NATURAL SEC 10 NATURAL
OIL GAS VALUE OIL GAS
(MBBLS) (MMCF) MBOE (000) (BBLS) (MCF) BOE
------- --------- ------- ---------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
United States:
Hugoton.................... 45,418 691,412 160,653 $1,129,700 9,057 127,926 30,378
Spraberry.................. 112,301 284,576 159,730 1,119,950 17,638 42,182 24,668
West Panhandle............. 46,469 288,444 94,543 611,400 8,713 52,645 17,487
Permian.................... 41,391 119,710 61,343 515,461 8,606 35,481 14,520
Gulf Coast................. 4,345 252,335 46,401 445,337 2,166 92,309 17,551
MidContinent............... 2,769 167,120 30,622 238,400 1,294 31,813 6,596
Greenhill.................. 23,430 41,897 30,413 300,259 6,831 16,393 9,563
Houston.................... 2,308 27,332 6,863 67,600 2,262 48,932 10,417
Other...................... 2,749 35,061 8,593 45,080 184 202 218
------- --------- ------- ---------- ------ ------- -------
281,180 1,907,887 599,161 4,473,187 56,751 447,883 131,398
Australia(b)................. -- -- -- -- 955 5,265 1,833
Argentina.................... 1,105 1,108 1,290 8,041 145 -- 145
------- --------- ------- ---------- ------ ------- -------
Total.............. 282,285 1,908,995 600,451 $4,481,228 57,851 453,148 133,376
======= ========= ======= ========== ====== ======= =======
</TABLE>
- ---------------
(a) The 1996 average daily production is calculated using a 366-day year and
without making pro forma adjustment for any acquisitions, divestitures or
drilling activity that occurred during the year.
(b) Represents production associated with Pioneer's Australian subsidiaries
prior to their divestiture in 1996.
The estimates of Pioneer's proved reserves as of December 31, 1996, are
based upon (a) with respect to the former Parker & Parsley properties, (i)
reserve reports audited by Netherland, Sewell & Associates, Inc., independent
reserve engineers, for Parker & Parsley's major domestic properties (which
represented approximately 52% of the total SEC PV10 of Parker & Parsley's
domestic proved reserves at December 31, 1996), and (ii) reserve reports
prepared by Parker & Parsley's engineers for all other Parker & Parsley domestic
properties and its Argentine properties, and (b) with respect to the former Mesa
properties, (i) the reserve report of Williamson Petroleum Consultants, Inc.,
independent reserve engineers, with respect to Mesa's reserves in the Hugoton
and West Panhandle fields, which represented approximately 95% of Mesa's total
proved reserves, and (ii) the report of Mesa's internal reserve engineers with
respect to Mesa's Gulf of Mexico, Greenhill and other properties. The estimate
of the reserves related to Pioneer's interests in natural gas processing rights
for proved reserves contractually or economically dedicated to Pioneer's natural
gas processing plants is based on evaluations prepared by Pioneer's engineers.
Numerous uncertainties exist in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond Pioneer's control. This Joint Proxy
Statement contains estimates of Pioneer's proved oil and gas reserves and the
related future net revenues therefrom, which are based on various assumptions,
including those prescribed by the SEC. Actual future production, oil and gas
prices, revenues, taxes, capital expenditures, operating expenses, geologic
success and quantities of recoverable oil and gas reserves may vary
substantially from those assumed in the estimates and such variances may be
material. In addition, Pioneer's reserves may be subject to downward or upward
revisions based on production performance, purchases or sales of properties,
results of future development, prevailing oil and gas prices and other factors.
Therefore, estimates of the SEC PV10 of proved
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<PAGE> 138
reserves contained in this Joint Proxy Statement should not be construed as
estimates of the current market value of Pioneer's proved reserves.
Pioneer has not provided, and Parker & Parsley did not provide during 1996,
estimates of total proved oil and gas reserves to any federal authority or
agency, other than the SEC. During 1996, Pioneer's predecessor, Mesa, filed a
Form EIA-23, which included reserve estimates as of December 31, 1995, with the
Energy Information Administration of the Department of Energy.
Description of Properties. Pioneer manages its domestic oil and gas
properties based upon their geographic area, and, as a result, Pioneer has
divided its domestic operations into six operating divisions: the Spraberry
Division, the Permian Division, the MidContinent Division, the West Panhandle
Division, the Houston Division and the Gulf Coast Division. In addition, Pioneer
has an international group that manages Pioneer's ownership in oil and gas
properties outside the United States. At December 31, 1996, Pioneer's only
properties outside the U.S. were located in Argentina.
- Spraberry Division. The Spraberry field was discovered in 1949 and
encompasses eight counties in West Texas. The field is approximately 150
miles long and 75 miles wide at its widest point. The oil produced is
West Texas Intermediate Sweet, and the gas produced is casinghead gas
with an average Btu content of 1,400 Btu per Mcf. The oil and gas is
produced from three formations, the upper and lower Spraberry and the
Dean, at depths ranging from 6,700 feet to 9,200 feet. The center of the
Spraberry field was unitized in the late 1950's and early 1960's by the
major oil companies but until the late 1980's experienced very limited
development activity. Pioneer has focused its acquisition and development
drilling activities in the unitized portion of the Spraberry field due to
the dormant condition of the properties and the high net revenue
interests available. Pioneer believes the area offers excellent
opportunities to enhance oil and gas reserves because of the hundreds of
undeveloped infill drilling locations and the ability to reduce operating
expenses through economies of scale. In February 1997, the Texas Railroad
Commission (which regulates oil and gas production) entered a favorable
order on an application by Pioneer's predecessor, Parker & Parsley, to
allow administrative approval of uncontested applications to increase the
density of drilling in the Spraberry field from one well per 80 acres to
one well in 40. Pioneer believes such reduced spacing may provide in
excess of 1,000 additional drilling locations which based on Pioneer's
drilling results on 40-acre spacing to date, have the potential to add 70
million equivalent barrels to Pioneer's reserve base.
Pioneer continues to realize the benefits of its focus on the Spraberry
field through significant reserve additions due to development drilling
and identification of a large number of new drilling locations each year.
As a result, Pioneer plans to continue to devote a great deal of its
capital budget and operating resources to the ongoing development of the
Spraberry field. Specifically, Pioneer has allocated $88 million of its
1997 exploration and development budget to drill approximately 225
development wells and to perform approximately 50 recompletions in the
Spraberry field.
- Permian Division. Pioneer is involved in acquisition and development
activities in the Permian Division which includes all of West Texas and
Southeastern New Mexico except for the Spraberry field. The Iatan field
in Mitchell County, Texas, the Lusk and Dagger Draw fields in Eddy
County, New Mexico, the Abell (Devonian) field in Crane and Pecos
Counties of Texas and the Ozona field in Crockett and Sutton Counties of
Texas are core areas for Pioneer's Permian Division operations in terms
of existing production, production and reserve growth, and identification
of additional drilling locations. During 1996, the Permian Division
expanded its growth strategy to include significant emphasis on
exploration activities in order to produce a more balanced portfolio. In
November 1996, Pioneer's predecessor, Parker & Parsley, announced a
significant oil discovery in the War-Wink West Field in the Delaware
Basin of West Texas. This Pioneer operated well, the University 18-34 #1,
tested at rates of up to 720 barrels of oil per day and is currently
producing at its expected allowable rate of approximately 270 barrels of
oil per day and 374 thousand cubic feet of gas per day. Pioneer and
Enserch Exploration, Inc. ("Enserch") each own a 50% working interest in
this well, which is the first in their joint exploration and development
of the 4,500 acre War-Wink prospect. In addition, during 1996, Parker &
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<PAGE> 139
Parsley experienced successful results from its exploratory efforts in
the Permian reef play of the Southeastern Shelf of the Midland Basin.
Pioneer will continue to focus on the development of the existing
properties utilizing waterflood procedures and secondary recovery
technologies as these efforts have consistently resulted in increased
production, reserve additions due to development drilling, and new
drilling locations. In addition, all of the fields in this operational
group have been screened for feasibility for carbon dioxide (CO(2)) flood
implementation, and Pioneer plans to move forward in utilizing this
technology in 1997. During 1997, Pioneer plans to continue its
development of the War-Wink prospect by drilling two confirmation wells
and an additional two to four development wells. Pioneer and Enserch also
control approximately 30,000 additional acres in the Delaware Basin play
in Southeastern New Mexico and West Texas where they intend to drill
eight exploratory wells in 1997. Also during 1997, Pioneer plans to
perform additional 3-D seismic data interpretation in order to exploit
the Midland Basin successes.
In total, Pioneer anticipates spending $45 million in 1997 in this area
to drill approximately 220 wells and to perform recompletions on
approximately 90 targeted wells. Eighty percent of these planned
expenditures are devoted to development activities.
- MidContinent Division. The MidContinent Division includes properties
located in the Hugoton Field in Kansas and other properties located in
Oklahoma. Pioneer plans to engage in both acquisitions and divestitures
of oil and gas properties in order to position this portfolio of
properties for significant growth through development and exploratory
drilling opportunities. During 1997, Pioneer plans to spend approximately
$23 million in the MidContinent Division on exploitation and exploration
activities. This activity includes drilling approximately 45 development
wells and performing recompletions on approximately 20 targeted wells.
The Hugoton field in southwest Kansas is one of the largest producing gas
fields in the continental United States. Pioneer's Hugoton properties
accounted for approximately 27% of its equivalent proved reserves and 26%
of the present value of estimated future net cash flows determined as of
December 31, 1996, in accordance with SEC guidelines. Pioneer's Hugoton
properties represent approximately 13% of the proved reserves in the
field and are located on over 230,000 net acres, covering approximately
400 square miles. Pioneer's properties are concentrated in the central
fairway of the field and benefit from better reservoir characteristics,
including thicker productive zones, higher porosity and higher
permeability than properties on the edges of the field. Management
believes that, as a result, Pioneer's Hugoton properties will have a
longer productive life and higher natural gas recoveries than properties
located near the edge of the Hugoton field. Pioneer has working interests
in approximately 1,100 wells in the Hugoton field, 950 of which it
operates, and royalty interests in approximately 800 wells. Pioneer owns
substantially all of the gathering and processing facilities which
service its production from the Hugoton field, which allows Pioneer to
control the production, gathering, processing and sale of its gas and
associated NGLs to various major intrastate and interstate pipelines
through its direct interconnects.
Pioneer's Hugoton properties are capable of producing approximately 200
MMcf of wet gas per day (i.e., gas production at the wellhead before
processing and before reduction for royalties). Substantially all of
Pioneer's Hugoton production is processed through its Satanta plant. See
"-- Natural Gas Processing -- Satanta Natural Gas Processing Plant."
Production in the Hugoton field is subject to allowables set by state
regulators. Pioneer estimates that it and other major producers in the
Hugoton field produced at or near capacity in 1996 and expects such
practice to continue.
From 1992 until August 1997, Pioneer's predecessor, Mesa, invested over
$78 million in capital expenditures in its Hugoton properties to
construct the Satanta Plant and related facilities, and to upgrade
gathering and compression facilities, production equipment and pipeline
interconnects, and Pioneer intends to continue to invest in such
properties, in order to maintain production capacity and marketing
flexibility. Additionally, Pioneer intends to submit an application to
the Kansas Corporation Commission (the "KCC") to allow infill drilling
into the Council Grove Formation. Pioneer believes that such infill
drilling could increase production from its Hugoton properties. There can
be no
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<PAGE> 140
assurance that the application will be approved or as to the timing of
receipt of such approval if such approval is obtained.
The KCC is the state regulatory agency that regulates oil and gas
production in Kansas. The KCC is responsible for the determination of
market demand (allowables) for the Hugoton field and the allocation of
allowables among the more than 9,000 wells in the field.
Twice each year, the KCC sets the field wide allowable production at a
level estimated to be necessary to meet the Hugoton market demand for the
summer and winter production periods. The field wide allowable is then
allocated among individual wells determined by a series of calculations
that are principally based on each well's pressure, deliverability and
acreage. The allowables assigned to individual wells are affected by the
relative production, testing, and drilling practices of all producers in
the field, as well as the relative pressure and deliverability
performance of each well.
Generally, field wide allowables are influenced by overall gas market
supply and demand in the United States as well as specific nominations
for gas from the parties who produce or purchase gas from the field.
Since 1987, field wide allowables have increased in each year except
1991. The total Hugoton field allowable in 1996 was 600 Bcf of wellhead
gas.
In 1994 the KCC issued an order establishing new field rules which
modified the formulas used to allocate allowables among wells in the
Chase formation portion of the Hugoton field. The standard pressure used
in each well's calculated deliverability was reduced by 35%, greatly
benefitting Pioneer's high deliverability wells. Also, the new rules
assign a 30% greater allowable to 640 acre units with infill wells than
to similar units without infill wells. Substantially all of Pioneer's
Hugoton infill wells have been drilled. Pioneer's share of the allowables
from the field increased from approximately 10% in late 1993 to
approximately 14% after the new field rules were implemented in 1994.
Pioneer's share of the field allowable averaged 13% in 1996.
The net Hugoton field production of Pioneer's predecessor, Mesa,
decreased to approximately 67 Bcfe in 1996 compared with 70 Bcfe in 1995
as a result of equipment maintenance in 1996. Pioneer expects its Hugoton
field production will decline slightly from 1996 levels each year through
1998. Beginning in 1999, Pioneer expects annual production declines due
to normal depletion.
- West Panhandle Division. The West Panhandle properties are located in the
Texas panhandle. Natural gas from these properties is produced from
approximately 600 wells, all of which Pioneer operates, on over 185,000
net acres. All of Pioneer's West Panhandle production is processed
through Pioneer's Fain natural gas processing plant. See "-- Natural Gas
Processing -- Fain Natural Gas Processing Plant."
Pioneer's West Panhandle reserves are owned and produced pursuant to
contracts with CIG, the first of which was executed in 1928 by
predecessors of both companies. An amendment to these contracts, the PAA,
allocates 77% of the production from the West Panhandle field properties
to Pioneer and 23% to CIG, effective as of January 1, 1991. Under the
associated agreements, Pioneer operates the wells and production
equipment and CIG owns and operates the gathering system by which Pioneer
and CIG's production is delivered to the Fain plant. CIG also performs
certain administrative functions. Each party reimburses the other for its
respective share of certain costs and expenses incurred for the joint
account.
As of December 31, 1996, Pioneer's West Panhandle properties represented
approximately 16% of Pioneer's equivalent proved reserves and
approximately 14% of the present value of estimated future net cash
flows, determined in accordance with SEC guidelines. Pioneer has
identified over 100 locations that have additional production potential
in new areas or deeper zones, of which Pioneer plans to redrill 58 in
1997 and the balance in 1998. Additionally, Pioneer has identified
approximately 500 locations that have potential for infill drilling.
Pioneer intends to apply to the Texas Railroad Commission for approval of
such infill drilling, but there can be no assurance that Pioneer will be
able to obtain such regulatory approval or as to the timing of receipt of
such approval if such approval is obtained.
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<PAGE> 141
Pioneer's production of wellhead gas from the West Panhandle field is
governed by the PAA and other contracts with CIG. Pioneer was
contractually limited to take wellhead gas production up to a maximum of
32 Bcf in 1996, but actually took only 27 Bcf primarily due to a
weather-related decrease in demand in 1996. Beginning in 1997 Pioneer is
not subject to annual contractual production limitations and will have
the right to take and market as much gas as it can produce, subject to
specific CIG seasonal and daily entitlements as provided for under the
contracts. Assuming continuation of existing economic and operating
conditions, Pioneer expects production from its existing West Panhandle
properties will be 37 Bcf of wellhead gas in 1997.
The PAA contains provisions which allocate 77% of ultimate production
after January 1, 1991 to Pioneer and 23% to CIG. As a result, Pioneer
records 77% of total annual West Panhandle production as sales,
regardless of whether Pioneer's actual deliveries are greater or less
than the 77% share. The difference between Pioneer's 77% entitlement and
the amount of production actually sold by Pioneer to its customers is
recorded monthly as production revenue with corresponding accruals for
operating costs, production taxes, depreciation, depletion and
amortization, and gas balancing receivables. At December 31, 1996,
Pioneer had cumulative production which was less than its 77% entitlement
since January 1, 1991, and a long-term gas balancing receivable of $48
million was recorded in Pioneer's balance sheet in other assets. In
future years, as Pioneer sells to customers more than its 77% entitlement
share of field production, this receivable will be realized.
- Houston Division. Pioneer's Houston Division properties are located in
the Gulf of Mexico offshore Texas and Louisiana, and represent
approximately 1% of Pioneer's equivalent proved reserves and
approximately 2% of the present value of estimated future net cash flows
as determined in accordance with SEC guidelines at December 31, 1996.
From late 1994 until August 1997, Pioneer's predecessor, Mesa, directed a
greater portion of its capital spending towards exploration and
development in the Gulf of Mexico. During that time, Mesa successfully
completed 21 out of 24 wells adding 63 Bcfe to proved reserves. As a
result, Mesa's offshore production increased by approximately 50% on an
Mcfe basis from 1994 to 1995, and by an additional 58% on an Mcfe basis
from 1995 to 1996. Pioneer currently plans to drill up to seven
exploratory wells on its existing properties in the remainder of 1997.
Because Pioneer has existing production facilities offshore, it has been
able to bring new wells on production quickly and at a lower cost than
could be achieved otherwise. Pioneer currently owns interests in 56
blocks in the Gulf of Mexico, which cover an aggregate of approximately
141,000 net acres.
Pioneer owns approximately 600 square miles of 3-D seismic data in and
around its existing Gulf of Mexico properties. Pioneer plans to acquire
an additional 100 square miles of 3-D seismic data covering these
properties in 1997. After the procurement of additional 3-D seismic data,
Pioneer will have 3-D seismic data covering approximately 90% of its
existing Gulf of Mexico properties. Application of 3-D seismic technology
to Pioneer's Gulf of Mexico acreage represents a significant future
opportunity to increase reserves and cash flow through exploratory and
development drilling.
Pioneer currently anticipates spending approximately $53 million on
identified development and exploration projects on its existing Gulf of
Mexico properties during 1997. In 1996, Pioneer's predecessor, Mesa,
purchased 11 blocks covering 57,340 gross (39,685 net) acres in the Gulf
of Mexico. Mesa paid $1.7 million for its share of the 11 blocks, 6 of
which are located in areas where Pioneer, as successor to Mesa, has
producing interests. Pioneer, as successor to Mesa, was high bidder on
four blocks covering 17,500 acres in the March 1997 federal lease sale in
the Gulf of Mexico, and was subsequently awarded those blocks by the MMS
for approximately $0.7 million.
- Gulf Coast Division. The Gulf Coast Division includes onshore oil and gas
properties located in South and East Texas, Louisiana, Mississippi and
Alabama. The primary producing formations in this region include the
Wilcox, Frio and Yegua formations in Texas and the Cretaceous formation
in Mississippi. The addition of the domestic properties acquired as a
part of the Bridge Oil Limited acquisition (primarily in South Texas and
Louisiana), positioned Pioneer to be better able to pursue and realize
future economic growth in this area.
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The strategy for the Gulf Coast Division has been to emphasize the growth
of natural gas reserves. To accomplish this, Pioneer has devoted the
majority of its domestic exploration efforts to this region as well as
its investment in and utilization of 3-D seismic technology. In addition,
Pioneer is successfully employing newer drilling techniques such as
drilling horizontal wells. Utilization of 3-D seismic technology during
1996 yielded substantial results in Pioneer's Lopeno field which produces
from the Wilcox formation. Gross gas production increased from 14 MMcf
per day to 38 MMcf per day in 1996 in this area as a result of drilling
six development wells, most of which were identified through the 3-D
project, and Pioneer has identified several additional drilling locations
after interpreting 3-D seismic data. In addition, Pioneer experienced
successful results in its Central Texas Pawnee field which produces from
the Edwards formation after drilling a successful horizontal well in late
1996. This well, the S.E. Turner Gas Unit #2, in which Pioneer owns a
100% working interest, is currently flowing at a rate of 3.1 MMcf per
day. Pioneer plans to drill two additional horizontal wells and to
initiate a 3-D project in this field during 1997 in order to exploit the
1996 successes.
Overall, Pioneer plans to continue its emphasis on exploration activities
in the Gulf Coast Division with a total budget of $45 million being
devoted to drilling approximately 25 exploratory wells and 40 development
wells.
- International. Pioneer owns interests in Argentina consisting of a 14.42%
interest in the Confluencia block and a 15% interest in the China Muerta
block, both in the Neuquen Basin of Central Argentina. During 1996,
Pioneer's predecessor, Parker & Parsley, participated in several
discoveries in the Confluencia Sur field in the Confluencia block. In
early 1996, Parker & Parsley announced the successful completion of two
exploratory wells (the Naco x-1 and the Sierra de Reyes x-1), and, in
January 1997, Parker & Parsley announced the successful completion of
three development wells, also in the Confluencia Sur field. The three
wells, the Sierra de Reyes 2, 3 and 4, operated by Petrolera Argentina
San Jorge S.A., collectively tested 3,727 barrels of oil per day, and
current gross production for the field is at a facility-constrained rate
of 2,520 Bbls of oil per day. Pioneer expects to drill an additional two
to three development wells in the Confluencia Sur field during the first
six months of 1997 in order to increase daily oil production. During May
1997, Pioneer finalized negotiations with Triton Energy for a 40% working
interest in a joint exploration program of two blocks in Guatemala's
South Peters Basin. Drilling on the Piedras Blancas #1 is expected to be
completed by the end of the year at an estimated total cost to Pioneer of
$3.7 million.
- Other Properties. Pioneer's non-oil and gas tangible properties include
buildings, leasehold improvements, and office equipment, primarily in
Midland and Irving, Texas, and certain other assets. Non-oil and gas
tangible properties represent less than 1% of the net book value of
Pioneer's properties.
Oil and Gas Mix
Pioneer seeks to maintain a strategic balance between oil and natural gas
reserves and production. While Pioneer's reserve and production mix may vary
somewhat on a short-term basis as Pioneer takes advantage of market conditions
and specific acquisition and development opportunities, management believes that
a relative mix of approximately 50% oil and 50% natural gas is in the best
long-term interests of Pioneer and its stockholders. Pioneer's reserve mix was
47% oil and 53% gas at December 31, 1996, and its production mix was 43% oil and
57% gas during 1996, in each case giving effect to the combination of Parker &
Parsley and Mesa (including the Greenhill Acquisition).
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<PAGE> 143
Productive Wells
The following table sets forth the number of productive oil and gas wells
attributable to Pioneer's properties as of June 30, 1997 and December 31, 1996,
1995, 1994, 1993 and 1992, giving effect to the combination of Parker & Parsley
and Mesa (including the Greenhill Acquisition with respect to the June 30, 1997
information).
<TABLE>
<CAPTION>
COMBINED COMBINED
GROSS PRODUCTIVE WELLS(A) NET PRODUCTIVE WELLS(A)
------------------------- ------------------------
OIL GAS TOTAL OIL GAS TOTAL
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1997:
United States............................... 8,992 2,455 11,447 5,427 822 6,249
Argentina................................... 6 -- 6 1 -- 1
----- ----- ------ ----- ----- -----
Total............................... 8,998 2,455 11,453 5,428 822 6,250
===== ===== ====== ===== ===== =====
Year ended December 31, 1996:
United States............................... 5,748 3,560 9,308 3,141 2,143 5,284
Argentina................................... 5 -- 5 1 -- 1
----- ----- ------ ----- ----- -----
Total............................... 5,753 3,560 9,313 3,142 2,143 5,285
===== ===== ====== ===== ===== =====
Year ended December 31, 1995:
United States............................... 6,317 4,229 10,546 3,221 2,154 5,374
Australia and Other Foreign................. 112 450 562 27 54 81
===== ===== ====== ===== ===== =====
Total............................... 6,429 4,679 11,108 3,248 2,208 5,455
===== ===== ====== ===== ===== =====
Year ended December 31, 1994:
United States............................... 8,284 5,310 13,594 4,450 3,123 7,574
Australia and Other Foreign................. 83 542 625 19 70 89
----- ----- ------ ----- ----- -----
Total............................... 8,367 5,852 14,219 4,469 3,193 7,663
===== ===== ====== ===== ===== =====
Year ended December 31, 1993:
United States............................... 9,300 4,169 13,469 2,814 2,892 5,706
Australia and Other Foreign................. -- -- -- -- -- --
----- ----- ------ ----- ----- -----
Total............................... 9,300 4,169 13,469 2,814 2,892 5,706
===== ===== ====== ===== ===== =====
Year ended December 31, 1992:
United States............................... 4,591 3,760 8,351 1,696 2,750 4,445
Australia and Other Foreign................. -- -- -- -- -- --
----- ----- ------ ----- ----- -----
Total............................... 4,591 3,760 8,351 1,696 2,750 4,445
===== ===== ====== ===== ===== =====
</TABLE>
- ---------------
(a) Productive 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. Any well in which one of the multiple completions is an
oil completion is classified as an oil well.
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Leasehold Acreage. The following table sets forth information about
Pioneer's developed, undeveloped and royalty leasehold acreage as of December
31, 1996 giving effect to the combination of Parker & Parsley and Mesa (but not
the Greenhill Acquisition).
<TABLE>
<CAPTION>
COMBINED COMBINED
DEVELOPED ACREAGE UNDEVELOPED ACREAGE COMBINED
------------------------ ------------------------ ROYALTY
GROSS ACRES NET ACRES GROSS ACRES NET ACRES ACREAGE
----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
United States:
Onshore...................... 1,693,632 944,286 1,070,707 621,287 563,908
Offshore..................... 155,832 64,028 94,830 76,863 --
Argentina(a).................... 5,718 825 1,816,429 262,111 --
--------- --------- --------- --------- -------
Total................... 1,855,182 1,009,139 2,981,966 960,261 563,908
========= ========= ========= ========= =======
</TABLE>
- ---------------
(a) Effective February 22, 1997, Pioneer relinquished its interests in the
Laguna Blanca and Las Lajas blocks in the Neuquen Basin of Central Argentina
which represents 1,199,670 gross and 173,113 net undeveloped acres included
in the table at December 31, 1996.
Drilling Activities. The information included under this heading "Drilling
Activities" has been prepared by giving effect to the combination of Parker &
Parsley and Mesa (including the Greenhill Acquisition with respect to the June
30, 1997 information).
Pioneer seeks to increase its oil and gas reserves, production and cash
flow by concentrating on drilling development wells and by conducting additional
development activities such as recompletions. From the beginning of 1992 through
June 30, 1997, Pioneer drilled 2,429 gross (1,644 net) wells, 96% of which were
successfully completed as productive wells, at a total cost (net to Pioneer's
interest) of $935.5 million. During 1996, Pioneer drilled 648 gross (435.5 net)
wells for a total cost of approximately $251.6 million, 80% of which was spent
on development wells and related facilities. Pioneer's current 1997 capital
expenditure budget is $475 million which Pioneer has allocated as follows: $300
million to development drilling and production enhancement activities, $100
million to exploration activities and $75 million to oil and gas property
acquisitions.
Pioneer believes that its current property base, which has been
significantly enhanced and expanded by the development of properties acquired in
prior years, provides a substantial inventory of prospects for continued
reserve, production and cash flow growth. Pioneer currently has a portfolio of
over 3,000 drilling locations. Pioneer believes that its current portfolio of
undeveloped prospects provides attractive development and exploration
opportunities for at least the next three to five years.
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<PAGE> 145
The following table sets forth the number of gross and net productive and
dry wells in which Pioneer had an interest that were drilled and completed
during the six months ended June 30, 1997 and the years ended December 31, 1996,
1995, 1994, 1993 and 1992. 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 Pioneer of productive wells compared
to the costs of dry wells.
<TABLE>
<CAPTION>
COMBINED GROSS WELLS COMBINED NET WELLS
------------------------------------------------ ----------------------------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------- JUNE 30, ---------------------------------------
1997 1996(B) 1995 1994 1993 1992 1997 1996(B) 1995 1994 1993 1992
---------- ------- ---- ---- ---- ---- ---------- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States:
Productive wells:
Development........... 207 583 452 313 391 265 163.1 398.4 321.0 217.9 265.0 160.0
Exploratory........... 10 38 31 6 2 5 6.4 25.2 18.3 3.5 1.6 4.1
Dry holes:
Development........... 1 7 7 3 2 3 1.0 4.4 2.1 2.7 1.0 3.0
Exploratory........... 21 10 20 3 1 2 15.4 6.0 8.7 1.6 1.0 1.3
--- --- --- --- --- --- ----- ----- ----- ----- ----- -----
239 638 510 325 396 275 185.9 434.0 350.1 225.7 268.6 168.4
--- --- --- --- --- --- ----- ----- ----- ----- ----- -----
Australia:
Productive wells:
Development........... -- 2 6 1 -- -- -- .3 1.4 .2 -- --
Exploratory........... -- -- 1 2 -- -- -- -- .3 .5 -- --
Dry holes:
Development........... -- 1 -- -- -- -- -- .2 -- -- -- --
Exploratory........... -- 1 9 3 -- -- -- .2 2.8 2.5 -- --
--- --- --- --- --- --- ----- ----- ----- ----- ----- -----
-- 4 16 6 -- -- -- .7 4.5 3.2 -- --
--- --- --- --- --- --- ----- ----- ----- ----- ----- -----
Argentina:
Productive wells:
Development........... 0 3 -- -- -- -- .0 .4 -- -- -- --
Exploratory........... 1 -- 1 -- -- -- .1 -- .1 -- -- --
Dry holes:
Development........... 4 -- -- -- -- -- .6 -- -- -- -- --
Exploratory........... 1 3 7 -- -- -- .1 .4 1.0 -- -- --
--- --- --- --- --- --- ----- ----- ----- ----- ----- -----
6 6 8 -- -- -- .8 .8 1.1 -- -- --
--- --- --- --- --- --- ----- ----- ----- ----- ----- -----
Total............. 245 648 534 331 396 275 186.7 435.5 355.7 228.9 268.6 168.4
=== === === === === === ===== ===== ===== ===== ===== =====
Success ratio(a).......... 89% 97% 92% 97% 99% 98% 91% 97% 96% 97% 99% 97%
</TABLE>
- ---------------
(a) Represents those wells that were successfully completed as productive wells.
(b) The 1996 amounts include only three months of activity related to Pioneer's
Australian properties. The remaining foreign drilling activities primarily
relate to Pioneer's interests in Argentine oil and gas properties.
The following table sets forth information about Pioneer's wells that were
in progress at June 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
COMBINED COMBINED
------------------------ ------------------------
JUNE 30, 1997 DECEMBER 31, 1996
------------------------ ------------------------
GROSS WELLS NET WELLS GROSS WELLS NET WELLS
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
United States:
Development.................................. 100 72.5 122 91.6
Exploratory.................................. 32 22.5 10 7.3
--- ---- --- ----
Total................................ 132 95.0 132 98.9
=== ==== === ====
Argentina:
Exploratory.................................. 1 .4 2 .3
=== ==== === ====
</TABLE>
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Exploratory Activities
Pioneer plans to allocate resources to increasing its exploration
opportunities with a focus on generating a portfolio of short to medium term
impact projects. Pioneer currently anticipates that approximately 25% of its
1997 capital budget will be spent on exploratory projects. The majority of the
1997 exploratory budget is allocated to domestic activities within the onshore
Gulf Coast, east Texas and Permian Basin areas. Pioneer's international
exploration efforts will primarily be devoted to Central and South America.
Exploratory drilling involves greater risks of dry holes or failure to find
commercial quantities of hydrocarbons than development drilling or enhanced
recovery activities. See "Risk Factors -- Replacement of Reserves." Pioneer is
currently involved in 3-D seismic projects in the Gulf Coast region, the Permian
Basin, other domestic locations and in international locations.
Natural Gas Processing
Through its natural gas processing plants, Pioneer extracts raw NGLs and
crude helium from the wellhead natural gas stream. The NGLs are then transported
and fractionated into their constituent hydrocarbons such as ethane, propane,
normal butane, isobutane, and natural gasolines. The NGLs and helium are then
sold pursuant to contracts providing for market-based prices.
Pioneer processes its natural gas production for the extraction of NGLs and
helium to enhance the market value of the gas stream. In recent years, Pioneer's
predecessor made substantial capital investments to enhance its natural gas
processing and helium extraction capabilities in the Hugoton and West Panhandle
fields. Pioneer owns and operates its processing facilities, which allows
Pioneer to (i) capture the processing margin, as third-party processing
agreements generally available in the industry result in retention of a
significant portion of the processing margin by the contract processor, (ii)
control the quality of the residue gas stream, permitting it to deliver gas
directly to pipelines for sales to local distribution companies, marketing
companies and end users, and (iii) realize value from premium products such as
crude helium. Pioneer believes that the ability to control its production stream
from the wellhead through its processing facilities to disposition at central
delivery points enhances its marketing opportunities and competitive position in
the industry.
Satanta Natural Gas Processing Plant. The Satanta plant was built in 1993
and has the capacity to process 250 MMcf of natural gas per day, enabling
Pioneer to extract NGLs from substantially all of the gas produced from its
Hugoton field properties as well as third party producers' gas. The Satanta
plant also has the ability to extract helium from the gas stream. In 1996 the
Satanta plant averaged 193 MMcf per day of inlet gas and produced a daily
average of 10.6 MBbls of NGLs, 706 Mcf of contained helium and 144 MMcf of
residue natural gas.
In November 1996, Pioneer's predecessor, Mesa, commenced a natural gas
processing alliance with Anadarko Petroleum Corporation ("Anadarko") and Western
Resources Midcontinent Market Center, which provides for Pioneer to process up
to 55 MMcf per day of Anadarko's gas at Pioneer's Satanta plant. Such agreement
filled excess capacity at the Satanta plant. Pioneer is also focusing its
efforts on obtaining additional dedications of third party natural gas to the
Satanta plant and, if successful, plans to expand the plant's processing
capacity.
Fain Natural Gas Processing Plant. The Fain plant, which was built in the
1960's and had its most recent substantial upgrade in 1993, currently has inlet
capacity of 140 MMcf per day. In 1996 the Fain plant averaged 77 MMcf per day of
inlet gas and produced a daily average of 8.2 MBbls of NGLs and condensate, 14
Mcf of contained helium and 59 MMcf of residue natural gas.
In December 1996, Pioneer's predecessor, Mesa, entered into a natural gas
processing agreement with CIG and MAPCO, which provides for Pioneer to initially
process approximately 8.5 Bcf of natural gas per year of third party gas at the
Fain Plant. The agreement has a primary term through December 2009. Effective
January 1, 1997, Mesa purchased from MAPCO and its affiliates all of their
liquids attributable to the processing agreement above as well as rights to
condensate from CIG's gathering system. It is expected that this purchase will
increase Pioneer's condensate and NGL production by approximately 850 MBbls in
1997.
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Such arrangements have filled excess capacity at the Fain plant. Pioneer plans
to install a nitrogen rejection unit at the Fain plant in early 1998 to improve
the quality of the residue natural gas stream and increase NGL and helium
recoveries.
Marketing of Production
The information included under this heading "Marketing of Production" has
been prepared by combining the results of operations of Parker & Parsley and
Mesa (including the Greenhill Acquisition).
General. Production from Pioneer's properties is marketed consistent with
industry practices, which include the sale of oil at the wellhead to third
parties, the sale of gas to third parties and, with respect to gas processing,
the sale of dry (or residue) natural gas, helium, condensate and NGLs to third
parties. Sales prices for oil and gas production and gas processing are
negotiated based on factors normally considered in the industry such as the spot
price for gas or the posted price for oil, price regulations, distance from the
well to the pipeline, well pressure, estimated reserves, quality of gas and
prevailing supply conditions. Due to a number of market forces, including the
seasonal demand for natural gas, both sales volumes from Pioneers's properties
and sales prices received vary on a seasonal basis. Sales volumes and price
realizations for natural gas are generally higher during the first and fourth
quarters of each calendar year.
Gas Marketing. Effective January 1, 1996, Pioneer's predecessor, Parker &
Parsley, along with Apache Corporation and Oryx Energy Company, formed Producers
Energy Marketing, LLC ("ProEnergy"), a natural gas marketing company organized
to create a direct link between gas producers and purchasers. The venture is
structured to flow through the benefits arising out of the expanded services and
the economies of scale from the aggregation of substantial volumes of gas. For a
period of five years, Pioneer, as successor to Parker & Parsley, is obligated to
sell to ProEnergy all gas production (subject to certain exclusions relative to
immaterial volumes) that is owned or controlled by Pioneer, or any affiliate, in
North America (onshore and offshore), which is not subject to a binding and
enforceable gas sales contract in effect on July 1, 1996.
On August 29, 1997, Pioneer announced its plan to withdraw as a member of
ProEnergy effective January 1, 1998, as a result of the merger between Parker &
Parsley and Mesa. After January 1, 1998, Pioneer plans to market its own equity
gas.
West Panhandle Gas Sales Contracts. Most of Pioneer's West Panhandle field
residue natural gas is sold pursuant to gas purchase contracts with two major
customers in the Texas Panhandle area.
Approximately 9 Bcf per year of residue natural gas is sold to a gas
utility that serves residential and commercial customers in Amarillo, Texas,
under the terms of a long-term agreement dated January 2, 1993, which supersedes
the original contract that had been in effect since 1949. The agreement contains
a pricing formula for the five year period from 1993 through 1997 whereby 70% of
the volumes sold to the gas utility are sold at fixed prices and the other 30%
of volumes sold are priced at a regional market index based on spot prices plus
$0.10 per Mcf. The fixed portion of the price formula was $2.85 per Mcf in 1994,
$2.99 per Mcf in 1995, $3.21 per Mcf in 1996 and escalates to $3.45 per Mcf in
1997. Prices for 1998 and beyond will be determined by renegotiation. Pioneer
provides the gas utility with peaking service, granting it the right to take, on
a daily basis, residue gas attributable to 100 Mmcf per day of Pioneer's
production under the PAA. The average price received by Pioneer for natural gas
sales to the gas utility in 1996 was $2.94 per Mcf.
Effective January 1, 1996, Pioneer's predecessor, Mesa, entered into a
four-year contract with a marketing company which serves the local electric
power generation facility and various other markets within and outside Amarillo,
Texas. The contract provides for the sale of Pioneer's West Panhandle field gas
which is in excess of the volumes sold to the gas utility and other existing
industrial customers. The price for gas sold under this contract is a regional
market index determined monthly based on spot prices plus $0.02 per MMBtu. In
1996, Mesa sold approximately 8 Bcf of residue natural gas to the marketing
company for an average of $1.95 per Mcf.
Prior to 1993, the right of Pioneer's predecessor, Mesa, to sell natural
gas produced from the West Panhandle field was based, in part, upon contractual
requirements to serve customers in Amarillo, Texas, and its environs. An
amendment to the PAA in 1993 removed this restriction, and Pioneer now has the
right to
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market its production elsewhere. Pioneer believes that the right to market
production outside the Amarillo area will ensure that Pioneer receives
competitive terms for its West Panhandle field production. Through 1999,
Pioneer's West Panhandle field production is under contract to customers as
described above.
NGL and Helium Sales. NGL production from both the Satanta and Fain plants
are sold by component pursuant to a contractual arrangement with MAPCO, a major
transporter and marketer of NGLs, through 2008 at the greater of MidContinent or
Gulf of Mexico prices at the time of sale. Crude helium is sold to an industrial
gas company under a long-term agreement that provides for annual price
adjustments based on market prices.
Significant Purchasers. Pioneer's two primary purchasers of crude oil are
Mobil Oil Corporation ("Mobil") and Genesis Crude Oil, L.P. ("Genesis"), both of
which purchase oil pursuant to contracts that provide for prices that are based
on prevailing market prices. Approximately 13% and 10% of Pioneer's 1996 oil and
gas revenues, were attributable to sales to Mobil and Genesis, respectively.
During 1996, Pioneer's primary purchasers of natural gas, including natural gas
liquids, were MAPCO and Western Resources, Inc, which accounted for 12% and 11%,
respectively, of oil and gas revenues. Pioneer 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 or natural gas products.
Hedging Activities. Pioneer periodically enters into commodity derivative
contracts (swaps, futures and options) in order to (i) reduce the effect of the
volatility of price changes on the commodities Pioneer produces and sells, (ii)
support Pioneer's annual capital budgeting and expenditure plans and (iii) lock
in prices to protect the economics related to certain capital projects.
Combining the results of operations of Parker & Parsley and Mesa, during the six
months ended June 30, 1997, hedging activities had no impact on the average
price oil and gas prices received and increased the average price received for
natural gas liquids by 1% and during 1996, Pioneer's hedging activities reduced
the average price received for oil and gas sales 5% and 3%, respectively, as
discussed below.
Natural Gas. Pioneer employs a policy of hedging gas production based on
the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The average gas prices
per Mcf that Pioneer reports includes the effects of Btu content, gathering and
transportation costs, gas processing and shrinkage and the net effect of the gas
hedges. During the six months ended June 30, 1997, Pioneer reported and realized
an average gas price of $2.79 per Mcf. Pioneer reported an average gas price of
$2.25 per Mcf for the year ended December 31, 1996. Pioneer's average realized
price for physical gas sales (excluding hedge results) for the same period and
on the same basis was $2.32 per Mcf. The comparable average NYMEX prompt month
closing for the six months ended June 30, 1997 and the year ended December 31,
1996 was $2.25 per Mcf and $2.50 per Mcf, respectively.
Crude Oil. All material purchase contracts governing Pioneer's oil
production are tied directly or indirectly to NYMEX prices. The average oil
prices per Bbl that Pioneer reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges. During
the six months ended June 30, 1997, Pioneer reported and realized an average oil
price of $21.01 per Bbl. Pioneer reported an average oil price of $20.19 per Bbl
for the year ended December 31, 1996. Pioneer's average realized price for
physical oil sales (excluding hedge results) for the same period and on the same
basis was $21.24 per Bbl. The comparable average NYMEX prompt month closing for
the six months ended June 30, 1997 and the year ended December 31, 1996 was
$21.36 per Bbl and $22.03 per Bbl, respectively.
NGL. During the six months ended June 30, 1997 Pioneer received
approximately $400 thousand (or $0.13 per Bbl) relating to its natural gas
liquids hedging activities.
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Future Production. At June 30, 1997, Pioneer had future production hedged
as follows:
<TABLE>
<CAPTION>
% OF
PRODUCTION PRICE
PRODUCT YEAR HEDGED UNIT RANGE
------- ---- ---------- ---- -------------
<S> <C> <C> <C> <C>
Natural gas........................................... 1997 44% Mcf $ 2.09-$2.21
1998 11% Mcf $ 2.37-$2.40
1999 1% Mcf $ 1.86
Crude Oil............................................. 1997 30% Bbl $18.76-$18.85
1998 6% Bbl $ 18.70
Natural gas liquids................................... 1997 10% Bbl $ 17.13
</TABLE>
Production, Price and Cost Data
The table below sets forth combined production, price and cost data with
respect to Pioneer's properties for the six months ended June 30, 1997 and years
ended December 31, 1996, 1995, 1994, 1993 and 1992 giving effect to the
combination of Parker & Parsley and Mesa (including the Greenhill Acquisition
for the periods ended June 30, 1997 and December 31, 1996).
<TABLE>
<CAPTION>
COMBINED
SIX
MONTHS
ENDED COMBINED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES:
Production information:
Annual production:
Oil (MBbls)............................................ 7,747 14,311 12,523 11,814 8,287 5,716
Gas (MMcf)............................................. 77,342 164,149 154,201 157,594 120,619 114,163
NGL (MBbls)............................................ 3,236 6,460 6,571 6,911 5,050 4,840
Total (MBOE)....................................... 23,873 48,129 44,794 44,991 33,440 29,583
Average daily production:
Oil (Bbls)............................................. 42,801 39,101 34,310 32,367 22,704 15,617
Gas (Mcf).............................................. 427,304 448,495 422,468 431,764 330,463 311,921
NGL (Bbls)............................................. 17,878 17,650 18,003 18,934 13,836 13,224
-------- ------- ------- ------- -------- -------
Total (BOE)........................................ 131,896 131,500 122,724 123,262 91,617 80,828
Average prices:
Oil (per Bbl).......................................... $ 19.20 $ 20.20 $ 16.67 $ 15.22 $ 16.41 $ 18.81
Gas (per Mcf).......................................... $ 2.37 $ 2.29 $ 1.79 $ 1.82 $ 1.90 $ 1.79
NGL (Bbls)............................................. $ 15.59 $ 15.10 $ 11.46 $ 10.53 $ 12.16 $ 12.33
Revenue (per BOE)...................................... $ 16.03 $ 15.84 $ 12.52 $ 12.00 $ 12.77 $ 12.54
Average costs:
Production costs (per BOE):
Lease operating expense.............................. $ 3.46 $ 3.26 $ 3.40 $ 3.53 $ 3.62 $ 3.14
Production taxes..................................... .74 .74 .53 .57 .60 .54
Workover............................................. .20 .15 .14 .14 .12 .10
-------- ------- ------- ------- -------- -------
Total.............................................. $ 4.40 $ 4.15 $ 4.07 $ 4.24 $ 4.34 $ 3.78
Depletion expense (per BOE)............................ $ 4.79 $ 4.70 $ 4.64 $ 4.70 $ 4.86 $ 5.05
</TABLE>
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<TABLE>
<CAPTION>
COMBINED
SIX
MONTHS
ENDED COMBINED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
AUSTRALIA AND ARGENTINA:(a)
Production information:
Annual production:
Oil (MBbls)............................................ 74 403 1,574 880 -- --
Gas (MMcf)............................................. -- 1,927 8,626 4,634 -- --
NGL (MBbls)............................................ -- -- -- -- -- --
Total (MBOE)....................................... 74 724 3,012 1,652 -- --
Average daily production:
Oil (Bbls)............................................. 409 1,101 4,312 2,411 -- --
Gas (Mcf).............................................. -- 5,265 23,633 12,696 -- --
NGL (Bbls)............................................. -- -- -- -- -- --
Total (BOE)........................................ 409 1,979 8,251 4,527 -- --
Average prices:
Oil (per Bbl).......................................... $ 20.76 $ 19.81 $ 18.78 $ 17.12 $ -- $ --
Gas (per Mcf).......................................... $ -- $ 1.95 $ 1.88 $ 1.89 $ -- $ --
NGL (Bbls)............................................. $ -- $ -- $ -- $ -- $ -- $ --
Revenue (per BOE)...................................... $ 20.76 $ 16.21 $ 15.21 $ 14.43 $ -- $ --
Average costs:
Production costs (per BOE):
Lease operating expense................................ $ 5.96 $ 4.75 $ 4.12 $ 3.89 $ -- $ --
Production taxes....................................... .23 -- -- -- -- --
Workover............................................... -- -- -- -- -- --
-------- ------- ------- ------- -------- -------
Total.............................................. $ 6.19 $ 4.75 $ 4.12 $ 3.89 $ -- $ --
Depletion expense (per BOE)............................ $ 9.59 $ 5.73 $ 6.74 $ 6.77 $ -- $ --
TOTAL:
Production information:
Annual production:
Oil (MBbls)............................................ 7,821 14,714 14,097 12,694 8,287 5,716
Gas (MMcf)............................................. 77,342 166,076 162,827 162,228 120,619 114,163
NGL (MBbls)............................................ 3,236 6,460 6,571 6,911 5,050 4,840
Total (MBOE)....................................... 23,947 48,853 47,806 46,643 33,440 29,583
Average daily production:
Oil (Bbls)............................................. 43,210 40,202 38,622 34,778 22,704 15,617
Gas (Mcf).............................................. 427,304 453,760 446,101 444,460 330,463 311,921
NGL (Bbls)............................................. 17,878 17,650 18,003 18,934 13,836 13,224
Total (BOE)........................................ 132,305 133,479 130,975 127,789 91,617 80,828
Average prices:
Oil (per Bbl).......................................... $ 19.21 $ 20.19 $ 16.91 $ 15.35 $ 16.41 $ 18.81
Gas (per Mcf).......................................... $ 2.37 $ 2.29 $ 1.80 $ 1.83 $ 1.90 $ 1.79
NGL (Bbls)............................................. $ 15.59 $ 15.10 $ 11.46 $ 10.53 $ 12.16 $ 12.33
Revenue (per BOE)...................................... $ 16.04 $ 15.85 $ 12.69 $ 12.09 $ 12.77 $ 12.54
Average costs:
Production costs (per BOE):
Lease operating expense.............................. $ 3.47 $ 3.28 $ 3.44 $ 3.54 $ 3.62 $ 3.14
Production taxes..................................... .73 .73 .49 .55 .60 .54
Workover............................................. .20 .15 .13 .13 .12 .10
-------- ------- ------- ------- -------- -------
Total.............................................. $ 4.40 $ 4.16 $ 4.06 $ 4.22 $ 4.34 $ 3.78
Depletion expense (per BOE)............................ $ 4.81 $ 4.72 $ 4.78 $ 4.77 $ 4.86 $ 5.05
</TABLE>
- ---------------
(a) Represents production associated with Pioneer's Australian subsidiaries
prior to their divestiture in 1996.
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 Pioneer's growth,
and Pioneer 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
Pioneer's competitors are substantially larger and have greater financial and
other resources than Pioneer.
Markets. Pioneer's ability to produce and market oil and gas profitably
depends on numerous factors beyond Pioneer'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
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exceeded demand, with resulting declines in the price of oil and gas. Although
Pioneer 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 Pioneer produces will be lower than
those currently available. Any significant decline in the price of oil or gas
would adversely affect Pioneer's revenues, profitability and cash flow and
could, under certain circumstances, result in a reduction in the carrying value
of Pioneer's oil and gas properties.
GOVERNMENTAL REGULATION
Oil and gas exploration and production are subject to various types of
regulation by local, state and federal agencies. Pioneer's operations are also
subject to state conservation laws and regulations, 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 wells. Each state generally imposes a production or severance tax
with respect to production and sale of oil and gas within their respective
jurisdictions. The regulatory burden on the oil and gas industry increases
Pioneer's cost of doing business and, consequently, affects its profitability.
The Outer Continental Shelf Lands Act (the "OCSLA") requires that all
pipelines operating on or across the Outer Continental Shelf (the "OCS") provide
open-access, nondiscriminatory service. Although the Federal Energy Regulatory
Commission ("FERC") has chosen not to impose the regulations of Order No. 509,
which implements the OCSLA, on gatherers and other nonjurisdictional entities,
FERC has retained the authority to exercise jurisdiction over those entities if
necessary to permit nondiscriminatory access to service on the OCS. In addition,
gathering lines are currently exempt from FERC's jurisdiction, regardless of
whether they are on the OCS, but FERC could eliminate this exception. Commencing
May 1994, FERC issued a series of orders in individual cases that delineate its
current gathering policy. FERC's gathering policy was retained and clarified
with regard to deep water offshore facilities in a statement of policy issued in
February 1996. FERC's new gathering policy does not address its jurisdiction
over pipelines operating on or across the OCS pursuant to the OCSLA. If FERC
were to apply Order No. 509 to gatherers on the OCS, eliminate the exemption of
gathering lines and redefine its jurisdiction over gathering lines, these acts
could result in a reduction in available pipeline space for existing shippers in
the Gulf of Mexico and elsewhere, such as Pioneer.
The United States Minerals Management Service (the "MMS") is conducting an
inquiry into certain natural gas contract settlement agreements from which
producers, such as Pioneer, on federal oil and gas leases have received
settlement proceeds that the MMS claims are royalty-bearing and into the extent
to which producers, such as Pioneer, have paid appropriate royalty on those
proceeds. Because of the complex nature of the calculations necessary to
determine potential royalty liability, it is impossible to predict, what, if
any, additional or different royalty obligation may be asserted or ultimately
recoverable with respect to any of Pioneer's prior natural gas contract
settlement agreements.
Additional proposals and proceedings that might affect the oil and gas
industry are considered from time to time by Congress, FERC, state regulatory
bodies and the courts. Pioneer cannot predict when or if any such proposals
might become effective or their effect, if any, on Pioneer's operations.
ENVIRONMENTAL AND HEALTH CONTROLS
Pioneer's operations are subject to numerous federal, state and local laws
and regulations relating to environmental and health protection. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict the type, quantities and concentration of various substances that can
be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas and impose substantial
liabilities for pollution resulting from oil and gas operations. These laws and
regulations may also restrict air or other discharges resulting from the
operation of natural gas processing plants, pipeline systems and other
facilities that Pioneer owns. Although Pioneer believes that compliance with
environmental laws and regulations will not have a material adverse effect on
operations or earnings, risks of substantial costs and
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liabilities are inherent in oil and gas operations, and there can be no
assurance that significant costs and liabilities, including potential criminal
penalties, will not be incurred. Moreover, it is possible that other
developments, such as stricter environmental laws and regulations or claims for
damages to property or persons resulting from Pioneer's operations, could result
in substantial costs and liabilities.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
with respect to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
hazardous substances released at the site. Persons who are or were responsible
for releases of hazardous substances under CERCLA may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment.
Pioneer generates wastes, including hazardous wastes, that are subject to
the federal Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes. The U.S. Environmental Protection Agency and various state agencies
have limited the approved methods of disposal for certain hazardous and
nonhazardous wastes. Furthermore, certain wastes generated by Pioneer's oil and
natural gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes," and therefore be
subject to more rigorous and costly operating and disposal requirements.
Pioneer currently owns or leases, and has in the past owned or leased,
properties that for many years have been used for the exploration and production
of oil and gas. Although Pioneer has 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 owned or leased by
Pioneer or on or under other locations where such wastes have been taken for
disposal. In addition, some of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under Pioneer's control. These properties and the wastes disposed
thereon may be subject to CERCLA, RCRA and analogous state laws. Under such
laws, Pioneer could be required to remove or remediate previously disposed
wastes or property contamination or to perform remedial plugging operations to
prevent future contamination. For instance, until the past few years, it has
been customary within the oil industry to dispose of tank bottoms in close
proximity to the crude oil storage tanks in which they are accumulated. However,
at least two separate federal courts have recently ruled that the sludges that
accumulate at the bottom of crude oil storage tanks (commonly called "tank
bottoms") may be classified as hazardous substances subject to regulation and
liability under CERCLA. Consequently, wastes subject to classification as
hazardous substances may have been disposed of or released on or under Pioneer's
properties or on or under other properties in connection with the operation of
Pioneer's properties.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as Pioneer, to prepare and implement spill
prevention control plans, countermeasure plans, and facility response plans
relating to the possible discharge of oil into surface waters. The Oil Pollution
Prevention Act of 1990 ("OPA") amends certain provisions of the federal Water
Pollution Control Act of 1972, commonly referred to as the Clean Water Act
("CWA") and other statutes as they pertain to the prevention of and response to
oil spills into navigable waters. The OPA subjects owners of facilities to
strict joint and several liability for all containment and cleanup costs and
certain other damages arising from a spill, including, but not limited to, the
costs of responding to a release of oil to surface waters. The CWA provides
penalties for any discharges of petroleum products in reportable quantities and
imposes substantial liability for the costs of removing a spill. State laws for
the control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground.
OPA requires responsible parties to establish and maintain evidence of
financial responsibility to cover removal costs and damages resulting from an
oil spill. OPA calls for a financial responsibility increase from $35 million to
$150 million to cover pollution cleanup for offshore facilities. In August 1993,
MMS, which has
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been charged with implementing certain segments of OPA, issued its advanced
notice of proposed rulemaking that would increase financial responsibility
requirements for offshore lessees and permittees to $150 million as required by
OPA. Due to the OPA's broad definition of "offshore facility," Pioneer could
become subject to the financial responsibility rule if it is proposed and
adopted; to date, however, the MMS has not formally proposed the financial
responsibility regulations. On May 9, 1995, the U.S. House of Representatives
passed a bill that would lower the financial responsibility requirements
applicable to offshore facilities to $35 million (the current requirement under
the federal Outer Continental Shelf Lands Act). The bill allows the limit to be
increased to $150 million if a formal risk assessment indicates the increase to
be warranted. It would also define "offshore facility" to include only coastal
oil and gas properties. A U.S. Senate bill that would also lower the financial
responsibility requirements for offshore facilities was passed in late 1995. The
Senate bill would reduce the scope of "offshore facilities" subject to this
financial assurance requirement to those facilities seaward of the U.S.
coastline that are engaged in drilling for, producing or processing oil or that
have the capacity to transport, store, transfer, or handle more than 1,000
barrels of oil at a time. Currently, the House and Senate bills are being
reconciled in Conference Committee. The Clinton Administration has indicated
support for these changes to the OPA financial responsibility requirements.
Pioneer cannot predict the final form of the financial responsibility
requirements that will be ultimately established, but any role that requires
Pioneer to establish evidence of financial responsibility in the amount of $150
million has the potential to have a material adverse effect on Company
operations and earnings. Pioneer does not believe that the rule to be proposed
by the MMS will be any more burdensome to it than it will be to other similarly
situated oil and gas companies.
Under current federal regulations concerning offshore operations, the MMS
is authorized to require lessees to post supplemental bonds to cover their
potential leasehold abandonment costs. By letter dated November 9, 1995,
Pioneer's predecessor was advised by the MMS that it does not qualify for a
waiver from supplemental bond requirements and that Pioneer may be required to
post supplemental bonds covering its potential obligations with respect to
offshore operations. Pioneer's predecessor executed a guaranty of abandonment
liability (area wide) with the MMS on April 26, 1996, in satisfaction of these
obligations.
In 1993 a number of companies in New Mexico, including Pioneer's
predecessor, were named in a preliminary information request from the
Environmental Protection Agency (the "EPA") as persons who may be potentially
responsible for costs incurred in connection with the Lee Acres Landfill site.
Although Pioneer did not directly dispose of any materials at the site, it may
have contracted to transport materials from its operations with certain trucking
companies also named in the information request. To the extent any materials
produced by Pioneer may have been transported to the site, Pioneer believes that
such materials were rainwater and/or water produced from natural gas wells,
which Pioneer believes are exempt or excluded from the definitions of "hazardous
waste" or "hazardous substance" under applicable Federal environmental laws,
although the EPA may assert a contrary position. Since submitting its response
to the information request in April 1994, Pioneer has not received any
additional inquiries or information from the EPA concerning the site, including
whether Pioneer is, in fact, asserted to be a responsible party for the site or
what potential liability, if any, Pioneer may face in connection with this
matter.
Many states in which Pioneer operates have recently begun to regulate
naturally occurring radioactive materials ("NORM") and NORM wastes that are
generated in connection with oil and gas exploration and production activities.
NORM wastes typically consist of very low-level radioactive substances that
become concentrated in pipe scale and in production equipment. State regulations
may require the testing of pipes and production equipment for the presence of
NORM, the licensing of NORM-contaminated facilities and the careful handling and
disposal of NORM wastes. Pioneer believes that the growing regulation of NORM
will have a minimal effect on Pioneer's operations because Pioneer generates
only a very small quantity of NORM on an annual basis.
Pioneer does not believe that its environmental risks are materially
different from those of comparable companies in the oil and gas industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or processing or a material
increase in the costs of production, development, exploration or processing or
otherwise adversely affect Pioneer's operations and financial condition.
144
<PAGE> 154
Pioneer employs an environmental specialist charged with monitoring
regulatory compliance. Historically, Pioneer has performed an environmental
review as part of the due diligence work on potential acquisitions, including
acquisitions of oil and gas properties. Pioneer is not aware of any material
environmental legal proceedings pending against it or any significant
environmental liabilities to which it may be subject.
EMPLOYEES
At August 31, 1997, Pioneer had 1,104 employees.
LITIGATION
Pioneer is a party to various legal proceedings incidental to its business,
including, but not limited to, the proceedings described below, involving claims
in oil and gas leases or interests, other claims for damages in amounts not in
excess of 10% of its current assets and other matters, none of which Pioneer
believes to be material.
Masterson. In February 1992 the current lessors of an oil and gas lease
(the "Gas Lease") dated April 30, 1955, between R. B. Masterson, et al., as
lessor, and CIG, as lessee, sued CIG in Federal District Court in Amarillo,
Texas, claiming that CIG had underpaid royalties due under the Gas Lease. Under
the agreements with CIG, Pioneer, as successor to Mesa, has an entitlement to
gas produced from the Gas Lease. In August 1992 CIG filed a third-party
complaint against Pioneer for any such royalty underpayments which may be
allocable to Pioneer. The plaintiffs alleged that the underpayment was the
result of CIG's use of an improper gas sales price upon which to calculate
royalties and that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the "Gas
Lease Amendment"). The plaintiffs also sought a declaration by the court as to
the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of Pioneer's
defenses. Pioneer and CIG filed stipulations with the court whereby Pioneer
would have been liable for between 50% and 60%, depending on the time period
covered, of an adverse judgment against CIG for post-February 1988 underpayments
of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, the defendants asked the court for a judgment that the
plaintiffs take nothing. The court, on June 7, 1995, entered final judgment that
the plaintiffs recover no monetary damages. The plaintiffs have filed a motion
for new trial on which the court has not yet ruled. Pioneer cannot predict
whether the court will grant such motion or, if it does not, whether the
plaintiffs will appeal the court's final judgment.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and
Pioneer in state court in Amarillo, Texas, similarly claiming underpayment of
royalties under the "favored-nations" clause, but based upon the above-described
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The
plaintiffs also claim underpayment of royalties since June 7, 1995 under the
"favored-nations" clause based upon either the pricing-scheme to pricing-scheme
method or their previously alleged higher price method. Pioneer believes it has
several defenses to this action and intends to contest it vigorously. Pioneer
has not yet determined the amount of damages, if any, that would be payable if
such action were determined adversely to Pioneer.
The federal court in the above-referenced first suit issued an order on
July 29, 1996 which stayed the state suit pending a decision by the court on the
plaintiff's motion for new trial.
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<PAGE> 155
Based on the jury verdict and final judgment, Pioneer does not expect the
ultimate resolution of either of these lawsuits to have a material adverse
effect on its financial position or results of operations.
Shareholder Litigation. On July 3, 1995, Robert Strougo filed a class
action and derivative action in the District Court of Dallas County, Texas,
160th Judicial District, against T. Boone Pickens, Paul W. Cain, John L. Cox,
John S. Herrington, Wales H. Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell,
and J. R. Walsh, Jr., each of whom is a present or former director of Pioneer or
its predecessor. The class action is purportedly brought on behalf of a class of
Pioneer shareholders and alleges, inter alia, that the Board of Directors of
Pioneer (the "Board") infringed upon the suffrage rights of the class and
impaired the ability of the class to receive tender offers by adoptions of the
shareholder rights plan. The lawsuit is also brought derivatively on behalf of
Pioneer and alleges, inter alia, that the Board breached fiduciary duties to
Pioneer by adopting the shareholder rights plan and by failing to consider the
sale of Pioneer. The lawsuit seeks unspecified damages, attorneys' fees, and
injunctive and other relief. Two other lawsuits filed by Herman Krangel, Lilian
Krangel, Jacquelyn A. Cady, and William A. Montagne, Jr., in the District Court
of Dallas County have been consolidated into this lawsuit. A third lawsuit filed
by Deborah M. Eigen and Adele Brody as a derivative lawsuit in the U.S. District
Court for the Northern District of Texas, Dallas Division, intervened in this
lawsuit. On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed pending
a Special Litigation Committee investigation by Pioneer to decide whether the
case should be dismissed.
Kansas Ad Valorem Tax. The Natural Gas Policy Act of 1978 allows a
"severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for natural gas. Based on the FERC ruling that
the Kansas ad valorem tax was such a tax, Mesa collected the Kansas ad valorem
tax in addition to the otherwise maximum lawful price. FERC's ruling was
appealed to the United States Court of Appeals for the District of Columbia,
which held in June 1988 that FERC failed to provide a reasoned basis for its
findings and remanded the case to FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals of the FERC's action in the D.C.
Circuit. Various natural gas producers challenged the FERC's orders on two
grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify
for reimbursement under the NGPA; and (2) the FERC's ruling should, in any
event, have been applied prospectively. Other parties challenged the FERC's
orders on the grounds that the FERC's ruling should have been applied
retroactively to December 1, 1978, the date of the enactment of the NGPA and
producers should have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem taxes collected with
respect to production since October 4, 1983 as opposed to June 28, 1988.
Petitions for rehearing were denied November 6, 1996. Various natural gas
producers subsequently filed a petition for writ of certiori with the United
States Supreme Court seeking to limit the scope of the potential refunds to tax
bills rendered on or after June 28, 1988 (the effective date originally selected
by the FERC). Williams Natural Gas Company filed a cross-petition for certiori
seeking to impose refund liability back to December 1, 1978. Both petitions were
denied on May 12, 1997.
Mesa filed a petition for adjustment with the FERC on June 24, 1997. Mesa
is unable at this time to predict the final outcome of this matter or the
amount, if any, that will ultimately be refunded. No provision for liability has
been made to the accompanying financial statements. Mesa is seeking waiver or
set-off with respect to that portion of the refund associated with (i)
non-recoupable royalties, (ii) non-recoupable Kansas property taxes based, in
part, upon the higher prices collected, and (iii) interest for all periods.
TRANSFER AGENT
The transfer agent and registrar for the Pioneer Common Stock is
Continental Stock Transfer & Trust Company.
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<PAGE> 156
BUSINESS OF CHAUVCO
GENERAL
Chauvco was incorporated under the laws of the Province of Alberta on
January 16, 1981 and continued under the ABCA on November 20, 1984. Chauvco is
registered to carry on business in the provinces of Alberta, Saskatchewan,
British Columbia and Manitoba in Canada. Chauvco also carries on business in
Argentina in the provinces of Tierra del Fuego, Neuquen, Rio Negro, and Santa
Cruz. During 1996, Chauvco began development operations in Gabon, in central
west Africa.
Chauvco has historically grown both through its own exploration and
development activities and through acquisitions. Chauvco has and will continue
to examine and, if considered desirable, pursue available acquisition,
exploration or development opportunities in Canada and elsewhere in the world.
Chauvco's principal executive offices are located at 2900, 255 - 5th Avenue
S.W., Calgary, Alberta, Canada T2P 3G6 and its telephone number is (403)
231-3100.
Chauvco's activities are concentrated on the acquisition, exploration,
development and production of petroleum and natural gas reserves in Canada in
the provinces of Alberta and British Columbia and in Argentina in the provinces
of Tierra del Fuego and Neuquen. In 1996, Chauvco began development operations
in Gabon in central west Africa.
Until 1992, all of Chauvco's petroleum and natural gas reserves and related
production revenues were based in Canada. Chauvco maintains a reserve base and
an inventory of undeveloped petroleum and natural gas rights throughout western
Canada. Chauvco's primary focus has been on internally generating oil and gas
prospects in the western Canadian sedimentary basin which provide satisfactory
rates of return. In such prospects, Chauvco strives to obtain operatorship and
maintain a high working interest ownership position. In December, 1996 Chauvco
added to its Canadian reserve base by successfully negotiating the acquisition
of Tidal Resources Inc. ("Tidal"). The transaction, which closed on January 3,
1997, added production of 10 million cubic feet per day of natural gas and 1,500
barrels per day of oil. The C$55 million acquisition was financed with existing
bank credit facilities.
Chauvco began international operations in 1992 through acquisition of
various interests in exploration, exploitation and production lands in
Argentina. Chauvco continues to have an active development and exploratory
drilling program in Argentina.
In 1996 Chauvco began operations in Gabon, central west Africa, under two
separate contracts. In July 1996, Chauvco negotiated a production sharing
contract ("PSC") for the Remboue Permit. Chauvco is aggressively pursuing the
start up of its operations on this prospect and began producing operations from
the field in the August 1997. Chauvco also entered into a farm in agreement on
the Mondah Bay Block, also in Gabon, where an offshore exploration well was
drilled earlier in 1997.
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<PAGE> 157
MANAGEMENT OF CHAUVCO
The name, municipality of residence and principal occupation of each of the
directors and officers of Chauvco and the number of Chauvco Common Shares
beneficially owned, directly or indirectly, or over which control or direction
is exercised by each as of August 31, 1997 are set forth in the following table:
Directors
<TABLE>
<CAPTION>
CHAUVCO
COMMON
SHARES
BENEFICIALLY
NAME AND OWNED
MUNICIPALITY DIRECTLY OR
OF RESIDENCE DIRECTOR SINCE PRINCIPAL OCCUPATION INDIRECTLY
- ---------------------------- ---------------- --------------------------------------- ------------
<S> <C> <C> <C>
James R. Baroffio(2)(4) April 25, 1996 Corporate Director 1,800
Moraga, California
Albert D. Cohen(5) March 3, 1988 Chairman & Chief Executive Officer, 68,750
Winnipeg, Manitoba Gendis Inc. (retail merchandising)
Bernard F. Isautier(4) April 25, 1996 Corporate Director Nil
Papeete, French Polynesia
G. Allan MacKenzie(3) April 28, 1994 President & Chief Operating Officer, 1,000
Winnipeg, Manitoba Gendis Inc. (retail merchandising)
Patrick J. Matthews(1)(4) March 3, 1988 Vice President, Finance, Gendis Inc. 1,000
Winnipeg, Manitoba (retail merchandising)
John R. McCaig(3)(6) August 9, 1989 Chairman, Trimac Corporation 4,002
Calgary, Alberta (transportation and oilfield services)
Stephen W.C. Mulherin(1)(4) April 28, 1994 Partner Nil
Calgary, Alberta Polar Capital Corporation (investment
management)
W. Glen Russell April 25, 1996 President & Chief Operating Officer of 7,000
Calgary, Alberta Chauvco
Guy J. Turcotte January 19, 1981 Chairman and Chief Executive Officer 1,212,972
Calgary, Alberta of Chauvco
Antonie Vanden March 3, 1988 President Nil
Brink(1)(2)(4) Tokay Resources Ltd.
Calgary, Alberta (natural resource company)
Francis G. Vetsch(2)(3) March 3, 1988 President 30,000
Calgary, Alberta Quantex Resources Ltd.
(natural resource company)
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Corporate Governance & Nominating Committee
(4) Member of the Strategic Issues Committee
(5) Mr. Albert D. Cohen has an 18.8% interest in Gendis Inc.
(6) Mr. John R. McCaig exercises joint control over a 14.0% interest in Trimac
Corporation
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<PAGE> 158
Management
<TABLE>
<CAPTION>
CHAUVCO
COMMON SHARES
BENEFICIALLY
OWNED
NAME AND MUNICIPALITY DIRECTLY OR
OF RESIDENCE PRINCIPAL OCCUPATION INDIRECTLY
- ---------------------------------------- --------------------------------------- -----------------
<S> <C> <C>
Guy J. Turcotte Chairman and Chief Executive Officer 1,212,972
Calgary, Alberta of Chauvco
W. Glen Russell President & Chief Operating Officer of 7,000
Calgary, Alberta Chauvco
James K. Wilson Senior Vice President, Finance & 2,300
Calgary, Alberta Administration and Chief Financial
Officer of Chauvco
M. Simon Hatfield Vice President, International Nil
Calgary, Alberta Exploration of Chauvco
Dennis L. Robertson Vice President, Acquisitions & 17,000
Calgary, Alberta Evaluations of Chauvco
Stephen H. White Vice President, Business Development of 21,000
Calgary, Alberta Chauvco
Glen C. Schmidt Vice President, Canada of Chauvco Nil
Calgary, Alberta
Martin A. Lambert Partner, Bennett Jones Verchere Nil
Calgary, Alberta (barristers and solicitors) and
Secretary of Chauvco
</TABLE>
Each of the above listed individuals has been engaged in the principal
occupation or in other capacities with the same firm or organization for the
last five years except for Mr. Baroffio who prior to November 1, 1994 was
President of Chevron Canada Resources; Mr. Isautier who prior to January 1,
1996, was President and C.E.O. of Canadian Occidental Petroleum Ltd.; Mr.
Mulherin who prior to February 1997 was Vice President of Trimac Limited; Mr.
Russell who prior to February 15, 1995 was Senior Vice President and Chief
Operating Officer; Gulf Canada Resources Limited; Mr. Vetsch who prior to
January 1, 1993 was Chairman of the Board, Chauvco; and Mr. Hatfield who prior
to December 12, 1994 was Manager, Geology and Geophysics, Frontiers and
International, PetroCanada Inc.
Pursuant to the Combination Agreement, two of the directors of Chauvco will
become directors of Pioneer. Dr. J. R. Baroffio will be appointed as a director
of Pioneer at the Effective Time, and Mr. G. J. Turcotte will be nominated for
election as a director at Pioneer's 1998 annual meeting. Further information
with respect to these individuals is provided below.
DR. J.R. BAROFFIO joined Standard Oil Company of California (which changed
its name to Chevron Corporation) as a Development Geologist in 1958. In 1964 he
received his doctorate in geology and engineering from the University of
Illinois while on a three year educational leave of absence from Chevron. He
rejoined Chevron and has held numerous technical and managerial positions in
Texas, Louisiana, California, Colorado and Alberta, Canada since then, including
Regional Vice President Northern Region, Denver from 1986-88, Vice President of
Exploration, Chevron U.S.A. from 1988 to 1989 and finally, President of Chevron
Canada Resources, Calgary, Alberta from 1989 until his retirement in 1995. He
has served on various Boards and Committees both within and outside the oil and
gas industry, including, member of the Rocky Mountain Oil and Gas Association
("RMOGA"), member of RMOGA's Operating and Executive Committees, President elect
of the Colorado Petroleum Association and past President of the World Affairs
Council of Orange County, California.
GUY J. TURCOTTE founded Chauvco in January, 1981 and was appointed Chairman
of the Board and Chief Executive Officer on January 1, 1993. From 1984 to 1988,
and from 1989 to 1994, Mr. Turcotte served
149
<PAGE> 159
on the board of the Canadian Association of Petroleum Producers (CAPP) (formerly
IPAC). He has also served on various Boards in the industry and is currently on
the Board of Directors of Gendis Inc., Trans-Dominion Energy Corporation,
Alliance Pipeline Ltd., and is a member of the Young Presidents' Organization.
Mr. Turcotte received the Independent Petroleum Association of Canada Chairman's
Award in 1990 and the Wall Street Transcript Gold Award for the outstanding
Chief Executive Officer of Canadian Junior Oil Producers in 1990. In 1991, he
received the same award in the Canadian Intermediate Oil Producer category and
the Pinnacle Award honoring Entrepreneurship in Alberta.
As of August 31, 1997, all the directors and officers of Chauvco as a group
beneficially owned or controlled, directly or indirectly, 1,366,824 common
shares representing 2.8% of the issued and outstanding Chauvco Common Shares.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation of Chauvco's Chief Executive Officer ("C.E.O.") and each of
Chauvco's four other most highly compensated executive officers (collectively,
the "Named Executive Officers") measured by base salary during the fiscal year
ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ----------------------------
OTHER
ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDER OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR (C$)(1) (C$)(2) (C$)(3) GRANTED(#) (C$)(4)
------------------ ---- ------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Guy J. Turcotte........................... 1996 275,040 -- 7,708 70,000 14,532
Chairman & C.E.O. 1995 273,787 -- 7,708 -- 14,469
1994 258,750 -- 7,636 100,000 13,636
W. Glen Russell(5)........................ 1996 210,000 -- 7,780 -- 7,601
President & C.O.O. 1995 52,500 -- 1,695 125,000 1,712
Guimar Vaca Coca.......................... 1996 156,996 -- 152,572 30,000 --
General Manager, Latin American 1995 228,162 -- 186,593 -- --
1994 147,517 -- 188,953 53,800 45,075
James K. Wilson........................... 1996 150,900 -- 7,708 31,050 8,272
Senior Vice-President, Finance 1995 143,959 -- 7,708 -- 7,859
and Administration & C.F.O. 1994 124,619 -- 7,636 37,300 6,795
M. Simon Hatfield(6)...................... 1996 139,950 -- 7,780 28,650 6,125
Vice-President, 1995 135,000 -- 7,708 -- 4,509
International Exploration 1994 7,000 -- 553 25,000 370
</TABLE>
- ---------------
(1) Salary reviews are performed February 1st of each year, therefore salary
reported represents 1 month at the rate in effect from January 1 to January
31 and 11 months at the rate in effect from February 1 to December 31. For
Mr. Vaca Coca the amount reported in 1995 includes a retroactive increase
paid during the year 1995, effective for the year 1994.
(2) No bonuses were paid to Named Executive Officers during the years reported.
(3) The amounts in this column include car allowance, club memberships and
parking. For Mr. Vaca Coca, the amount includes income taxes and social
security taxes paid to Argentine tax authorities (C$94,833 in 1996,
C$106,626 in 1995 and C$104,064 in 1994), cost of living allowance (C$43,737
in 1996, C$59,782 in 1995 and C$61,662 in 1994), house expenses (C$11,075 in
1996, C$17,302 in 1995 and C$17,402 in 1994) and car expenses (C$2,927 in
1996, C$2,883 in 1995 and C$5,826 in 1994).
(4) The amounts in this column, except the amounts relating to Mr. Vaca Coca,
include Chauvco's contributions under the group employee registered
retirement savings plan and in respect of term life insurance premiums.
Named Executive Officers participate on the same basis as all other
employees. For Mr. Vaca Coca, the amount represents Director's fees paid by
Chauvco's Argentine subsidiaries during 1994.
(5) Mr. Russell joined Chauvco on October 2, 1995. The salary paid to Mr.
Russell in 1995 covers the period from October 2, 1995 to December 31, 1995.
(6) Mr. Hatfield joined Chauvco on December 12, 1994. The salary paid to Mr.
Hatfield in 1994 covers the period from December 12, 1994 to December 31,
1994.
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<PAGE> 160
EMPLOYEE STOCK OPTION PLAN
In order to provide a long-term incentive for officers and employees of
Chauvco, on March 3, 1988, the Chauvco Board adopted an employee stock option
plan. On November 10, 1995, the Board of Directors adopted an updated and
revised stock option plan (the "Employee Stock Option Plan") which complies with
the revised guidelines of the TSE. The Employee Stock Option Plan generally
provides that the Board of Directors may from time to time in its discretion
grant to officers or employees of Chauvco the right to purchase Chauvco Common
Shares. The exercise price per Chauvco Common Share is equal to the closing
market price of the common shares on the date immediately preceding the date of
grant.
Unless otherwise approved by the Chauvco Board, options vest over a five
year period with the first 20% of the award becoming exercisable after one year,
the second 20% after two years, the third 20% after three years, the fourth 20%
after four years, and the final 20% after five years.
The following table sets forth certain information relating to the stock
options granted to the C.E.O. and to each of the Named Executive Officers
pursuant to the terms of Chauvco's Employee Stock Option Plan during the year
ended December 31, 1996.
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARKET VALUE
OF SHARES
% OF TOTAL UNDERLYING
OPTIONS OPTIONS AT
SECURITIES GRANTED TO EXERCISE DATE OF
UNDER OPTIONS EMPLOYEES IN PRICE GRANT
NAME GRANTED(#) 1996 (C$/SHARE) (C$/SHARE) EXPIRATION DATE
---- ------------- ------------ ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Guy J. Turcotte....... 70,000 7.6 $12.25 $12.25 February 14, 2004
W. Glen Russell....... nil n/a n/a n/a n/a
Guimar Vaca Coca...... 30,000 3.3 $12.25 $12.25 February 14, 2004
James K. Wilson....... 31,050 3.4 $12.25 $12.25 February 14, 2004
M. Simon Hatfield..... 28,650 3.1 $12.25 $12.25 February 14, 2004
</TABLE>
The following table indicates that no stock options were exercised by the
C.E.O. or any of the Named Executive Officers during the year ended December 31,
1996. The table details as at December 31, 1996 the number of vested and
unvested options that were unexercised and the value of such options where they
were in the money.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 1996
AND FINANCIAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SECURITIES AGGREGATE VALUE OF UNEXERCISED
ACQUIRED ON VALUE IN-THE-MONEY OPTIONS
EXERCISE REALIZED UNEXERCISED OPTIONS AT AT DECEMBER 31, 1996
(#) ($) DECEMBER 31, 1996(#) (C$)(1)
----------- --------- ----------------------- ----------------------
NAME VESTED NON-VESTED VESTED NON-VESTED
---- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Guy J. Turcotte........... nil -- 340,000 210,000 $873,000 $129,500
W. Glen Russell........... nil -- 25,000 100,000 $ 65,000 $260,000
Guimar Vaca Coca.......... nil -- 45,520 78,280 nil $ 55,500
James K. Wilson........... nil -- 14,920 53,540 nil $ 57,443
M. Simon Hatfield......... nil -- 10,000 43,650 nil nil
</TABLE>
- ---------------
(1) Based on December 31, 1996 close on the TSE of $14.10 per share.
LONG TERM INCENTIVE PLANS
Chauvco has a group registered retirement savings plan ("Group RRSP"),
established in 1990, for full-time employees. Under the Group RRSP, Chauvco
matches the employee contribution as to 3% in year one, 4% in year two, and 5%
in year three and each year thereafter based on the employee's annual base
earnings.
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<PAGE> 161
Each employee may select from a variety of investment options for his or her
funds. Employees may make additional voluntary contributions by payroll
deduction or periodic lump sums up to the maximum limits allowed under the
Canadian Tax Act. All contributions to the Group RRSP are full vested when made
and the employee contributions may be withdrawn by the employee at any time,
subject to payment of applicable taxes, or transferred annually to a personal
registered retirement savings plan.
Other than the Group RRSP and Employees Stock Option Plan, details of which
are provided above, Chauvco does not have any plans which provide compensation
intended to serve as incentive for performance to occur over a period longer
than one year.
COMPOSITION OF THE COMPENSATION COMMITTEE
The Compensation Committee is composed of three unrelated directors of
Chauvco. Messrs. Vanden Brink, Baroffio and Vetsch served as the members of the
Committee during the fiscal year ended December 31, 1996, with Mr. Vanden Brink
acting as Chairman. From March 3, 1988 to January 1, 1993, Mr. Vetsch was
Chairman of the Chauvco Board.
REPORT ON EXECUTIVE COMPENSATION
COMPONENTS OF COMPENSATION
Chauvco's compensation policy is composed of base salary and benefits and
the award of stock options.
The Compensation Committee's role is to approve the overall compensation
paid by Chauvco to its employees, based on industry medians from surveys
conducted by independent consulting firms and taking into consideration a number
of factors including the education and experience of the individual, the
individual's performance and the financial performance of Chauvco. The
Compensation Committee makes specific recommendations to the Chauvco Board on
compensation with respect to Named Executive Officers and other senior officers.
The policies of the Compensation Committee are designed to recognize and reward
individual performance as well as provide a competitive industry level of
compensation. Salaries for all employees are reviewed annually following
performance reviews and adjusted on February 1st of each year.
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<PAGE> 162
Share participation through the Employee Stock Option Plan is used as a
reward for annual performance and an incentive for future performance. The
Compensation Committee determines the number of stock options to be granted to
employees and makes recommendations to the Chauvco Board regarding the number of
stock options to be granted to senior officers. The Compensation Committee
reviews the total number of stock options issued in the past to determine grant
sizes, and applies the internal limits set by the Compensation Committee.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The policy of the Compensation Committee with respect to the compensation
for the C.E.O. is to set the C.E.O.'s base salary at approximately the median
for public companies of comparable size and complexity, using competitive data
from industry surveys to help determine the level of compensation. The C.E.O.'s
salary is also based on Chauvco's overall success.
DIRECTORS' COMPENSATION
During 1996, directors who were not full time employees of Chauvco were
paid an annual fee of C$10,000, a fee of C$750 for each directors' meeting and
committee meeting attended in person and a fee of C$375 for each directors'
meeting and committee meeting attended by telephone. The person who served as
Chairman of each of the committees received a fee of C$1,000 for each committee
meeting attended in person or by telephone. Total remuneration to directors for
the year was C$188,375.
CAPITALIZATION
The following table sets forth the capitalization of Chauvco as at certain
dates:
<TABLE>
<CAPTION>
OUTSTANDING AS AT
---------------------------------------
DESCRIPTION AUTHORIZED JUNE 30, 1997 AUGUST 31, 1997
- ------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Operating line of credit....... C$ 20,000,000 Nil C$ 5,509,000
Commercial paper............... C$100,000,000 C$ 97,000,000 C$100,000,000
Term bank loan................. C$220,000,000 C$108,346,000 C$120,000,000
5.87% Senior notes payable..... U.S.$ 60,000,000 C$ 80,580,000 C$ 80,580,000
(U.S.$ 60,000,000) (U.S.$ 60,000,000)
Common shares.................. unlimited C$216,660,000 C$217,080,000
(48,435,262 shares) (48,463,892 shares)
</TABLE>
NOTES:
(1) As of June 30, 1997, the balance of retained earnings was C$201,246,000.
(2) Outstanding stock options granted to employees as of June 30, 1997 were for
2,943,815 Chauvco Common Shares.
PRINCIPAL HOLDERS
On August 31, 1997, Chauvco had outstanding 48,463,892 Chauvco Common
Shares. To the knowledge of the management of Chauvco, the only persons or
companies beneficially owning, directly or indirectly, or exercising control or
direction over, more than 10% of the issued and outstanding Chauvco Common
Shares as at August 31, 1997 were 3106829 Canada Inc., a wholly-owned subsidiary
of Gendis Inc., who of record and beneficially owns 14,688,610 Chauvco Common
Shares representing approximately 30.3% of all issued and outstanding Chauvco
Common Shares, and Trimac Corporation who of record and beneficially owns
6,873,392 Chauvco Common Shares representing approximately 14.2% of all issued
and outstanding Chauvco Common Shares.
153
<PAGE> 163
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CHAUVCO
The following table sets forth selected historical consolidated financial
information for Chauvco for the six months ended June 30, 1997 and 1996 and for
each of the five fiscal years in the period ended December 31, 1996. The
unaudited consolidated financial data as of and for the periods ended June 30,
1997 and 1996 have been prepared on a basis consistent with the audited
Consolidated Financial Statements and, in the opinion of management, includes
all adjustments, consisting of normal recurring accrual adjustments, which are
necessary for a fair presentation of the results for the interim periods. This
data should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations of Chauvco and the Consolidated
Financial Statements of Chauvco and the related notes thereto included elsewhere
herein. See Note 11 to the Consolidated Financial Statements for a
reconciliation of Canadian generally accepted accounting principles ("GAAP") in
Canadian dollars to United States (U.S.) GAAP in Canadian dollars.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1997 1996 1996 1995 1995 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA:
Canadian GAAP
Revenue............... C$102,526 C$ 86,739 C$178,543 C$170,314 C$164,381 C$136,794 C$121,906
Net income............ 19,178 16,979 34,131 25,425 29,052 28,220 22,726
Net income per
share............... 0.40 0.35 0.71 0.54 0.65 0.64 0.53
U.S. GAAP
Revenue............... 102,526 86,739 178,543 170,314 164,381 (a) (a)
Net income............ 21,280 19,259 41,276 33,337 24,562 (a) (a)
Net income per
share............... 0.44 0.40 0.85 0.71 0.55 (a) (a)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, AS OF DECEMBER 31,
--------- --------------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL
POSITION DATA:
Canadian GAAP
Working capital
(deficiency)......... C$ (3,912) C$ (7,441) C$ 7,477 C$ (749) C$(11,872) C$ 631
Total assets........... 830,493 637,436 590,490 564,652 384,603 332,052
Long-term debt......... 285,926 127,207 139,087 180,715 51,405 50,303
Shareholders' equity... 417,906 397,751 362,892 281,442 250,277 219,958
U.S. GAAP
Working capital........ (3,912) (7,441) 7,477 (a) (a) (a)
Total assets........... 782,264 585,453 526,601 (a) (a) (a)
Long-term debt......... 285,926 127,207 139,087 (a) (a) (a)
Shareholders' equity... 391,375 369,118 327,114 (a) (a) (a)
</TABLE>
- ---------------
(a) U.S. GAAP information for these periods is not available.
154
<PAGE> 164
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CHAUVCO
Certain amounts that follow are based on assumptions regarding future
events. Actual results will vary from the estimated results, and the variation
may be significant.
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
(THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AND PER UNIT
AMOUNTS)
<S> <C> <C>
Net earnings................................................ 19,178 16,979
per share................................................. 0.40 0.35
Cash flow from operations................................... 59,518 48,448
per share................................................. 1.23 1.00
Capital expenditures........................................ 199,169 46,205
Long term debt.............................................. 285,926 144,816
Shareholders' equity........................................ 417,906 380,008
Petroleum and natural gas sales............................. 123,576 104,017
Average prices (excluding hedging)
Oil ($/Bbl)............................................... 24.64 23.36
Gas ($/Mcf)............................................... 1.77 1.41
Common shares outstanding at period end..................... 48,435 48,293
Weighted average shares outstanding......................... 48,397 48,284
</TABLE>
In April 1997, Chauvco purchased an additional 50% working interest in the
Chinchaga, Alberta property for C$28 million. Chauvco has also acquired over 15
thousand additional acres to expand its exploratory land base in the Chinchaga
area. Together, the acquisitions of Tidal and the additional acquired interest
in Chinchaga have doubled Chauvco's Canadian gas reserves to approximately 360
billion cubic feet. Chauvco expects to participate in drilling approximately 15
development and exploration wells in each of the next three or four years at
Chinchaga.
Reserve additions for the first six months have been approximately 175% of
expected 1997 production. Chauvco has concluded two significant acquisitions in
Canada as well as delivering excellent drilling results in Argentina and Gabon.
Chauvco's Remboue production field in Gabon has been developed with 10
horizontal wells set to come on-stream in the third quarter. Significant
additional blocks in Gabon have also been acquired in the second quarter.
Alliance Pipeline Project continues to progress on schedule for a November 1,
1999 on-stream target date. Financial and operating results point to confirmed
significant growth in the near future.
Chauvco's financial results for the first half of 1997 included a 13%
increase in net earnings to C$19.2 million (C$0.40 per share) from C$17.0
million (C$0.35 per share) in 1996. Cash flow increased 23% to C$59.5 million
(C$1.23 per share) from C$48.4 million (C$1.00 per share) in the prior year.
Revenues were 19% higher at C$123.6 million compared to C$104.0 million in
1996 due to increased natural gas volumes in both Argentina and Canada, higher
oil production in Argentina and better commodity prices. Wellhead crude oil
prices rose 5% to C$24.64 per barrel from C$23.36 per barrel in the previous
year, while natural gas prices rose 26% to C$1.77 per thousand cubic feet from
C$1.41 per thousand cubic feet in 1996.
Total operating expenses increased due to the higher production volumes. On
a unit of production basis after processing income recoveries, costs were
relatively unchanged at C$4.16 BOE (10:1) compared to C$4.11 BOE (10:1) in 1996.
Depletion, depreciation and amortization expenses were 26% above the prior year
as a result of increased production volumes and capital investment.
Total capital expenditures, including C$87 million for acquisitions of
Tidal and Chinchaga property interests, were C$199.2 million for the first half,
compared to C$46.2 million for the first half of the previous year. Increased
drilling activities in Argentina and Canada, together with new operations in
Gabon, account for Chauvco's expanded capital investment program in 1997.
155
<PAGE> 165
Fiscal 1996 Compared With Fiscal 1995
Major Transactions
In the first quarter of 1996 Chauvco completed construction of the Martin
Creek Pipeline, approximately 90 miles north of Fort St. John, British Columbia.
Chauvco has significant acreage and reserves in the area. The pipeline allows
Chauvco to transport corporate and third party gas out of the area at attractive
prices. Industry reaction to the pipeline project has been positive with three
producers committing to transport gas through the pipeline.
During the year, Chauvco renegotiated its unsecured loan facilities with a
syndicate of two Canadian banks and one foreign controlled Canadian bank,
raising available limits from C$125 million to C$150 million. The interest rate
on the outstanding debt is variable and approximates the lenders' prime rate.
During the year Chauvco became a sponsor of the Alliance Pipeline Project
which is proposed to be built from northeastern British Columbia to the United
States midwest. When operational, Chauvco's management believes that this new
pipeline will have a positive impact on the Canadian gas market, as this new
outlet to the midwestern United States market is expected to increase natural
gas export volumes from Canada in excess of one billion cubic feet per day. In
addition to improved market access, the cost of transportation will be less than
alternative facilities currently in place. Chauvco's management anticipates the
linkage of this project to Chauvco's operations centered at Martin Creek in
northeastern British Columbia.
In Argentina, expansion of gas processing facilities at Tierra del Fuego
was completed in the fourth quarter of 1996. The expansion will allow handling
of increased production volumes committed for delivery under a contract to a
petrochemical plant in Chile. The pipeline to connect the new facilities to the
Chilean pipeline system was installed in 1996 and tested in January 1997.
Natural gas deliveries under the contract to the plant in Chile commenced in
January 1997 at a rate of 17 million cubic feet per day.
The Canadian business unit was successful during 1996 in its effective
rationalization of properties. Most significantly, in November, Chauvco through
a swap agreement increased its working interest in the Rycroft oil pool in
Alberta, Chauvco's third largest oil producing property, from 31% to 56.6% and
became operator of that property.
Internationally, Chauvco was successful in 1996 in securing two new
ventures in Gabon, central west Africa. In July, Chauvco announced the
successful negotiation of a PSC for the Remboue Block and is aggressively
pursuing the start-up of its operations on this prospect. During the year
Chauvco drilled one appraisal well and two development wells, and expects to
begin production operations from the field in the third quarter of 1997. In the
third quarter of 1996, Chauvco entered into a farm-in agreement with Santa Fe
Energy Resources of Houston on the Mondah Bay Block where an offshore
exploration well is expected to be drilled in the second quarter of 1997. After
satisfying drilling obligations, Chauvco will hold 50% of this 377,816 acre
block which is situated in reasonably close proximity to the Remboue Block.
Effective January 3, 1997 Chauvco was successful in acquiring 100% of Tidal
for C$55 million. Tidal was a Calgary based junior oil and gas exploration and
production company with estimated proved reserves of 4.9 million barrels of oil
and 37.1 billion cubic feet of natural gas. Probable additional reserves include
3.8 million barrels of oil and 26.4 billion cubic feet of natural gas.
Production is approximately 10 million cubic feet per day of natural gas and
1,500 barrels per day of oil. Tidal's operations are focused in two main areas,
the Chinchaga area in northwestern Alberta and the Haas area of North Dakota.
156
<PAGE> 166
Results of Operations
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AND PER UNIT
AMOUNTS)
<S> <C> <C>
Net earnings................................................ 34,131 25,425
per share................................................. 0.71 0.54
Cash flow from operations................................... 100,602 95,081
per share................................................. 2.08 2.01
Capital expenditures........................................ 148,798* 86,249
Long term debt.............................................. 127,207 139,087
Shareholders' equity........................................ 397,751 362,892
Petroleum and natural gas sales............................. 215,947 206,497
Average prices (excluding hedging)
Oil ($/Bbl)............................................... 25.13 20.35
Gas ($/Mcf)............................................... 1.46 1.32
Common shares outstanding at year end....................... 48,353 48,278
Weighted average shares outstanding......................... 48,300 47,339
</TABLE>
- ---------------
* Includes $54.9 million for the Tidal acquisition.
Overall 1996 revenue increased by 5% to C$215.9 million from C$206.5
million in 1995. The primary reasons for the increase in revenue were higher
crude oil prices and higher natural gas prices in Canada partially offset by
lower oil and natural gas production.
Average WTI prices rose by 20% in 1996 to C$22.01 per barrel from C$18.38
per barrel in 1995. Chauvco's average wellhead prices were C$25.13 per barrel, a
23% increase from the 1995 average of C$20.35 per barrel as a result of the rise
in WTI prices and reduced quality discounts for Canadian crude oil grades.
Natural gas prices increased 11% in 1996 to average C$1.46 per thousand
cubic feet from C$1.32 per thousand cubic feet in 1995. Natural gas prices in
North America were generally strong during most of the year, with prices in
Alberta remaining depressed as a result of continued supply/demand imbalance
within the province and a lack of transportation capacity from the province. In
Argentina prices remained stable throughout the year at C$1.37 per million cubic
feet in Tierra del Fuego and increased slightly to C$1.71 per million cubic feet
in Neuquen. However, a higher proportion of volume from the lower priced fields
reduced the average price.
Chauvco's business strategies are designed to enable Chauvco to effectively
manage risks inherent in the industry which are outside of it's control.
Consistent with this strategy, crude oil and natural gas prices were hedged on a
portion of sales volumes throughout the year. Reflecting the longer term view of
the markets taken by Chauvco and the continuing strength of oil prices, a loss
of C$9.8 million was recorded in 1996 on hedging activities.
Canadian average royalty rates rose to 20.3% of revenue in 1996 from 19.5%
in the prior year. Average Canadian royalty rates rose as a result of higher
commodity prices and royalty rate increases. The decline in gas royalties in
1996 reflects prior year adjustments relating to the new crown royalty structure
in Canada. Argentine average royalty rate decreased to 12.4% of revenue from
13.3% in the prior year due to prior year adjustments included in 1995 which
caused a higher than normal royalty rate percent in 1995. Chauvco does not
anticipate increases in average royalty rates in 1997.
Chauvco's operating expenses, after processing revenues, decreased 11% to
C$42.5 million from C$47.6 million in the prior year. This was the result of
volume decreases of 9% on a BOE (10:1) basis and a decrease in the cost per BOE
(10:1) of 2% to C$4.17 per BOE (10:1) from C$4.25 per BOE (10:1) in the prior
year. Canadian gas operating costs decreased to C$0.44/MCF mainly due to the
significant offset of gas processing revenue in the British Columbia area.
Interest expense decreased 13% to C$11.3 million from C$13.0 million in
1995 due to lower debt balances during 1996 and a decrease in interest rates.
The average cost of funds for floating rate debt was 6.2%, a decrease from 7.7%
in 1995 as a result of lower interest rates in Canada. Included in the current
years
157
<PAGE> 167
expense is C$0.9 million for the costs of Chauvco's interest rate hedges
(1995 -- C$0.5 million) and C$1.8 million for a sovereign risk insurance policy
for Argentine assets (1995 -- C$0.9 million).
Administration costs, net of overhead recoveries, increased 7% to C$20.4
million from C$19.0 million in 1995. The majority of the increase reflects
higher spending levels on international new ventures. During the year, C$10.9
million of administration expenses were capitalized, a 6% increase from C$10.3
million in 1995. The increase reflects a higher level of activity
internationally.
Depletion, depreciation and amortization expenses increased 1% to C$66.4
million in 1996 from C$65.5 million in 1995. This reflects an overall rate
increase to C$6.50 per BOE (10:1) compared to C$5.85 per BOE (10:1) in 1995 due
to the higher cost of reserve replacement. Included in depletion expense is
C$1.6 million of international new venture costs incurred in countries where no
further business development is planned (1995 -- C$0.4 million). The current
year's expense also includes a C$2.7 million provision for future site
restoration and abandonment of wells and facilities (1995 -- C$1.7 million).
Income taxes increased 36% in 1996 to C$9.0 million from C$6.6 million in
1995. The overall income tax rate remained unchanged at 21% of earnings compared
to 1995. Current income taxes increased to C$9.0 million in 1996 from C$3.6
million in 1995 as a result of higher taxable earnings in Canada. Marginally
higher average effective tax rates in Canada resulted from increased
non-deductible Crown royalty payments.
Net earnings for 1996 were C$34.1 million (C$0.71 per share) a 34% increase
from C$25.4 million (C$0.54 per share) in 1996. Net earnings for 1997 are
expected to increase due to increased production from both Canadian and
international operations.
Changes in Cash Position
Cash flow increased in 1996 to C$100.6 million (C$2.08 per share) from
C$95.1 million (C$2.01 per share) in 1995. The major reasons for the increase
were higher commodity prices, coupled with reduced interest costs and operating
expenses. Canadian cash flow increased to C$61.7 million in 1996 from C$61.2
million in 1995 as a result of increased revenue and reduced interest costs
offset by higher administration costs. Argentine cash flow increased to C$38.9
million in 1996 from C$33.9 million in 1995 due to higher revenue and lower
operating costs.
Chauvco repaid a net C$11.9 million of outstanding commercial paper and
bank debt during the year and increased long term receivables by C$3.5 million
as a result of higher value added tax receivables in Argentina. Value added
taxes are expected to be recovered over the next several years from tax
collected on a portion of our Argentine revenue.
Total investing activities of C$100.9 million in 1996 was 16% higher than
the C$87.3 million invested in the prior year. After adjustment for the
acquisition of Tidal petroleum and natural gas capital expenditures increased
59.4% in 1996 to C$133.3 million from C$83.6 million in 1995 as a result of new
exploration and development activities in Gabon, central west Africa.
Expenditures for Gabon were C$13.6 million to year end 1996. Costs incurred for
pipeline construction in northwestern British Columbia and Tierra del Fuego,
Argentina amounted to C$14.4 million.
Other Canadian investing activities in 1996 included C$2.1 million toward
the proposed Alliance Pipeline Project. The pipeline, supported by several oil
and gas producers, is to run from northeastern British Columbia to the
midwestern United States. Subject to regulatory approvals, construction on the
pipeline is expected to begin in the summer of 1998.
Chauvco spent C$3.2 million on site restoration activities in 1996.
Liquidity and Capital Resources
In 1996, Chauvco reduced total debt from C$139.1 million to C$127.2
million. At year end, debt stood at just under 1.3 times 1996 cash flow. In
January 1997, Chauvco used available bank credit facilities to finance its
acquisition of Tidal for C$55 million.
158
<PAGE> 168
Total debt at year end consisted of: C$80.6 million of senior notes with an
effective fixed interest rate of 6.5% per annum and repayable beginning in
August 1998; C$43.0 million of outstanding commercial paper which generally
revolves every 30 to 60 days and C$3.6 million of bank borrowing under a C$150
million revolving term loan facility. Due to the term loan nature and available
undrawn capacity within the bank credit facility, the commercial paper is
classified as long-term debt. The bank debt revolves until June 2, 1997 at which
time, with the agreement of Chauvco's bankers, the revolving term may be
extended. Without mutual agreement to renew the facility, the loan would convert
to a non-revolving five-year term loan, with repayments due in 1997 of
approximately C$0.7 million. Such payments would be funded from cash flow.
Outlook
The price of crude oil during 1996 averaged U.S.$22.01 per barrel, a 20%
improvement from U.S.$18.38 per barrel in the prior year. Prices were very
strong from September through December averaging U.S.$25.12 per barrel in the
final month of the year. Crude oil prices in Canadian dollar terms improved over
1995 prices as a result of reduced quality discounts for all grades of Canadian
crude oil combined with strong demand.
The NYMEX Henry Hub natural gas price was significantly higher in 1996 than
1995, averaging U.S.$2.50 per Mmbtu versus U.S.$1.69 per Mmbtu in the prior
year. Henry Hub prices rallied significantly in late 1996 as a result of
infrastructure constraints in the U.S. northeast and significant withdrawals
from storage caused by very cold winter weather across most of the North
American continent.
Canadian natural gas prices were weak until later in the year due to an
oversupply situation and a lack of pipeline capacity from Alberta. Prices late
in 1996 have risen as a result of very cold weather in Alberta and British
Columbia, which necessitated significant storage withdrawals.
Slow growth rates in both Canada and the U.S. in late 1995 resulted in the
central banks of both countries reducing the short-term interest rate to
stimulate their economies. Canadian interest rates in 1996 have continued to
decline to record low levels. The Bank of Canada prime rate average decreased
28% from 8.6% in 1995 to 6.18% in 1996. The Canadian dollar has remained stable
throughout the year averaging U.S.$0.73, relatively unchanged from 1995.
Based upon our assumption of U.S.$20.00 WTI crude oil prices, a stronger
Canadian dollar relative to the U.S. dollar and unchanged Canadian natural gas
prices, Chauvco forecasts that both 1997 earnings and cash flow will increase
from 1996 levels as new production is brought on stream. In addition to the C$55
million acquisition of Tidal, Chauvco is planning a 1997 capital expenditure
program that will exceed Chauvco's cash flow by approximately 20%. Chauvco will
be flexible in allocating the capital expenditures between Canada, Argentina,
Gabon and other international opportunities, choosing to fund those
opportunities that offer the best return on investment.
Fiscal 1995 Compared With Fiscal 1994
Results of Operations
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AND PER UNIT
AMOUNTS)
<S> <C> <C>
Net earnings................................................ 25,425 29,052
per share................................................. 0.54 0.65
Cash flow from operations................................... 95,081 97,362
per share................................................. 2.01 2.19
Capital expenditures........................................ 86,249 216,990
Long term debt.............................................. 139,087 180,715
Shareholders' equity........................................ 362,892 281,442
Petroleum and natural gas sales............................. 206,497 189,061
Average prices (excluding hedging)
Oil ($/Bbl)............................................... 20.35 17.96
Gas ($/Mcf)............................................... 1.32 1.58
Common shares outstanding at year end....................... 48,278 44,538
Weighted average shares outstanding......................... 47,339 44,441
</TABLE>
159
<PAGE> 169
Overall revenue increased by 9% to C$206.5 million from C$189.1 million in
1994. The primary reasons for the increase in revenue were higher crude oil
prices and higher natural gas production volumes in Argentina, offset by
significantly lower natural gas prices in Canada.
Average WTI prices rose by 7% in 1995 to $18.38 per barrel from $17.19 per
barrel in 1994. Chauvco's average wellhead prices were C$20.35 per barrel, a 13%
increase from the 1994 average of C$17.96 per barrel as a result of the rise in
WTI prices, a lower average Canadian dollar relative to the U.S. dollar and
reduced quality discounts for Canadian crude oil grades.
Natural gas prices fell 16% in 1995 to average C$1.33 per thousand cubic
feet from C$1.58 per thousand cubic feet in 1994. Natural gas prices in North
America were generally weak during most of the year, with prices in Alberta
being extremely depressed as a result of an acute supply/demand imbalance within
the province and a lack of transportation capacity from the province.
Average royalty rates rose to 19.5% of revenue in 1995 from 17.6% in the
prior year. Average Canadian royalty rates rose as a result of changes in the
method of calculation of provincial royalties in Alberta. Argentine average
royalty rate rose to 13.3% of revenue from 9.6% in the prior year. The prior
years percentage was reduced as a result of recognizing some royalty reduction
related to 1992 and 1993. Chauvco does not anticipate increases in average
royalty rates in 1996 when compared to average 1995 rates.
Chauvco's operating expenses, after processing revenues, increased 24% to
C$47.6 million from C$38.5 million in the prior year. This was the result of
volume increases of 5% on a BOE (10:1) basis and an increase in the cost per BOE
(10:1) of 18% to C$4.25 per BOE (10:1) from C$3.61 per BOE (10:1) in the prior
year. Costs in Canada rose as a result of handling increased volumes of water
production on several oil properties and the fixed costs associated with
shutting in several natural gas properties. Argentine costs rose as a result of
higher unit costs on production from the Neuquen basin related principally to
those properties acquired in late 1994. Chauvco anticipated that average
operating costs would rise slightly in both Canada and Argentina in 1996.
Interest expense increased 27% to C$13.0 million from C$10.2 million in
1994 from increased borrowing used to finance acquisitions during 1994 coupled
with higher average rates in 1995. The average cost of funds for the floating
rate debt was 7.7%, an increase from 5.9% in 1994 as a result of higher interest
rates in Canada. Included in the current years expense is C$0.5 million for the
costs of Chauvco's interest rate hedges (1994 -- C$1.1 million) and C$0.9
million for a sovereign risk insurance policy for Argentine assets (1994 --
C$0.3 million).
Administration costs, net of overhead recoveries, increased 37% to C$19.0
million from C$13.8 million in 1994. The majority of the increase was the result
of additional staff in Argentina and expenses of Chauvco's international new
ventures group that was formed in early 1995. Administration expenses rose to
C$1.69 per BOE (10:1) from C$1.29 per BOE (10:1) in 1994. This level is higher
than our long term goal of C$1.20 per BOE (10:1) and is the result of the
expanded operating base in Argentina and the formation of the international new
ventures group in 1995. Chauvco anticipates that the average cost per BOE (10:1)
will be reduced as additional production is realized on an international basis.
During the year, C$10.3 million of administration expenses were
capitalized, a 43% increase from C$7.2 million in 1994, as a result of the
expenses incurred on Chauvco's international new ventures.
Depletion, depreciation and amortization expenses increased 4% to C$65.5
million in 1995 from C$62.8 million in 1994. This reflects a 5% production
increase on a BOE (10:1) basis coupled with an overall rate decrease to C$5.85
per BOE (10:1) compared to C$5.88 per BOE (10:1) in 1994. In 1995, Chauvco
adopted the heat equivalency method of converting natural gas reserves and
production to equivalent barrels of crude oil for purposes of calculating
depletion, depreciation and amortization expense. The heat equivalency method is
the basis of conversion employed by the vast majority of oil and gas companies
operating in Canada. The current year's expense includes C$1.7 million
(1994 -- C$1.5 million) for the future site restoration and abandonment of wells
and facilities.
160
<PAGE> 170
Income taxes decreased 42% in 1995 to C$6.6 million from C$11.6 million in
1994. The overall income tax rate declined to 20% of earnings from 28.5% in 1994
as a result of a higher portion of Chauvco's earnings being derived from the
Tierra del Fuego properties which have a preferential tax regime. Current income
taxes fell to C$3.6 million in 1995 from C$5.2 million in 1994 as a result of
lower levels of taxable earnings in Canada. Higher average effective tax rates
in Canada resulted from increased non-deductible Crown royalty payments.
Net earnings for 1995 were C$25.4 million (C$0.54 per share) a 12% decrease
from C$29.1 million (C$0.65 per share) in 1994. Net earnings for 1996 are
expected to decrease slightly, the result of lower commodity prices and higher
administration and operating expenses.
Changes in Cash Position
Cash flow decreased slightly in 1995 to C$95.1 million (C$2.01 per share)
from C$97.4 million (C$2.19 per share) in 1994. The major reason for the
decrease was higher operating, interest and administration expenses offset by a
small increase in operating revenues. Canadian cash flow fell to C$61.2 million
in 1995 from C$70.8 million in 1994 as a result of lower operating income and
reduced investment income. Argentine cash flow increased to C$33.9 million in
1995 from C$26.6 million in 1994 due to higher operating income, offset by
higher interest and administration expenses.
Chauvco raised C$55.4 million from a share equity issue concluded in March
1995. Chauvco repaid a net C$41.7 million of outstanding commercial paper and
bank debt during the year and increased long term receivables by C$13.2 million
as a result of value added tax receivables in Argentina arising from purchases
made in late 1994 and during 1995. Chauvco anticipates recovering the value
added taxes over the next several years from tax collected on a portion of its
Argentine revenue.
Total investing activities of C$87.3 million in 1995 was 60% lower than the
C$216.6 million invested in the prior year. Normal petroleum and natural gas
capital expenditures were reduced 34% in 1995 to C$84.7 million from C$129.1
million in 1994 as a result of a more conservative capital investment program in
light of significantly lower natural gas prices. During 1995 Chauvco did not
conclude any significant acquisitions versus C$85.2 million invested in two
acquisitions in Argentina during 1994.
161
<PAGE> 171
PETROLEUM AND NATURAL GAS OPERATIONS
Reserves. At December 31, 1996, Chauvco's proven and probable reserves,
before royalties, were estimated at 74.9 million barrels of crude oil and NGLs
and 664.6 billion cubic feet of natural gas of which 53% of the crude oil and
36% of the natural gas reserves are in North America. Reserve totals include 8.7
million barrels of crude oil and NGLs and 63.5 billion cubic feet of natural gas
acquired from Tidal. At the end of 1996, Chauvco held petroleum and natural gas
rights in approximately 2.2 million net acres of land, of which 1.8 million net
acres were undeveloped. During 1996, daily crude oil and NGLs production
averaged 18,609 barrels per day while natural gas production averaged 93.2
million cubic feet per day.
Consolidated Reserves and Future Net Revenue
The following table summarizes the changes in Chauvco's working interest
share of petroleum and natural gas reserves before royalties from December 31,
1995 to December 31, 1996.
<TABLE>
<CAPTION>
CANADA ARGENTINA GABON TOTAL
------ --------- ------ ------
<S> <C> <C> <C> <C>
PROVEN RESERVES RECONCILIATION CRUDE OIL AND NGLS (MBBLS)
December 31, 1995........................................... 26,539 18,468 -- 45,007
Production.................................................. (5,512) (1,299) -- (6,811)
Discoveries, extensions, acquisitions and dispositions*..... 5,977 513 5,453 11,943
Revisions................................................... 250 (897) -- (647)
------ ------ ------ ------
December 31, 1996........................................... 27,254 16,785 5,453 49,492
------ ------ ------ ------
PROVEN AND PROBABLE RESERVES RECONCILIATION CRUDE OIL AND
NGLS (MBBLS)
December 31, 1995........................................... 34,559 25,607 -- 60,166
Production.................................................. (5,512) (1,299) -- (6,811)
Discoveries, extensions, acquisitions and dispositions*..... 10,040 819 11,989 22,848
Revisions................................................... 509 (1,850) -- (1,341)
------ ------ ------ ------
December 31, 1996........................................... 39,596 23,277 11,989 74,862
------ ------ ------ ------
PROVEN RESERVES RECONCILIATION NATURAL GAS (BCF)
December 31, 1995........................................... 162.8 372.3 -- 535.1
Production.................................................. (14.7) (19.3) -- (34.0)
Discoveries, extensions, acquisitions and dispositions*..... 43.5 4.0 -- 47.5
Revisions................................................... (11.5) (12.8) -- (24.3)
------ ------ ------ ------
December 31, 1996........................................... 180.1 344.2 -- 524.3
------ ------ ------ ------
PROVEN AND PROBABLE RESERVES RECONCILIATION NATURAL GAS
(BCF)
December 31, 1995........................................... 190.5 458.2 -- 648.7
Production.................................................. (14.7) (19.3) -- (34.0)
Discoveries, extensions, acquisitions and dispositions*..... 77.1 10.0 -- 87.1
Revisions................................................... (14.4) (22.8) -- (37.2)
------ ------ ------ ------
December 31, 1996........................................... 238.5 426.1 -- 664.6
------ ------ ------ ------
</TABLE>
- ---------------
* Reserves attributed to Canada for the Tidal acquisition include 4,926 MBbls
proven and 3,763 MBbls of probable crude oil and NGLs and 37.1 Bcf proven
and 26.4 Bcf of probable natural gas reserves.
162
<PAGE> 172
The following tables summarize Chauvco's consolidated reserves and
estimated future net revenue, including Alberta Royalty Tax Credits to be
derived therefrom, as evaluated by the independent petroleum consulting firms,
Martin Petroleum and Associates and Gilbert Laustsen Jung Associates Ltd.
Canadian and U.S. reserves include those attributed to the acquisition of Tidal.
All evaluations of future net production revenue set forth in the tables are
stated prior to provision for income taxes and indirect costs and after
deduction of royalties. It should not be assumed that the discounted net
revenues shown below represent the fair market value of the reserves.
<TABLE>
<CAPTION>
GROSS RESERVES(1) NET RESERVES(1)
------------------------------ ------------------------------
CRUDE OIL CRUDE OIL
AND NATURAL AND NATURAL
CONDENSATE NGLS GAS CONDENSATE NGLS GAS
(MBBLS) (MBBLS) (BCF) (MBBLS) (MBBLS) (BCF)
---------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CRUDE OIL AND NATURAL GAS RESERVES BASED
ON ESCALATING PRICE ASSUMPTIONS
Proved Reserves(2)
Producing(3)........................... 31,544.8 5,113.6 376.4 26,457.6 4,215.2 321.7
Non-Producing(4)....................... 5,327.4 1,548.1 121.2 4,444.2 1,320.0 102.9
Undeveloped............................ 5,899.6 58.5 26.7 4,916.7 45.9 21.7
-------- ------- ----- -------- ------- -----
Total Proved................... 42,771.8 6,720.2 524.3 35,818.5 5,581.1 446.3
Probable Reserves(5)..................... 23,385.4 1,985.1 140.3 19,104.8 1,614.2 117.7
-------- ------- ----- -------- ------- -----
Total Proved and Probable
Reserves..................... 66,157.2 8,705.3 664.6 54,923.3 7,195.3 564.0
======== ======= ===== ======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
DISCOUNTED AT THE RATE OF
---------------------------------
UNDISCOUNTED 8% 10% 12%
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
PRESENT WORTH BEFORE TAX OF FUTURE NET
PRODUCTION REVENUE BASED ON ESCALATING PRICE
ASSUMPTIONS (6)(7)(9)(10)(THOUSANDS OF
DOLLARS)
Proved Reserves(2)
Producing(3)................................ C$ 952,742 C$622,327 C$573,400 C$531,949
Non-Producing(4)............................ 347,913 110,141 87,623 71,024
Undeveloped................................. 78,448 53,128 48,970 45,344
----------- --------- --------- ---------
Total Proved........................ 1,379,103 785,596 709,993 648,317
Probable Reserves at 50%(5)................... 307,727 110,400 92,756 79,547
----------- --------- --------- ---------
Total Proved and Probable
Reserves.......................... C$1,686,830 C$895,996 C$802,749 C$727,864
=========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
GROSS RESERVES(1) NET RESERVES(1)
------------------------------ ------------------------------
CRUDE OIL CRUDE OIL
AND NATURAL AND NATURAL
CONDENSATE NGLS GAS CONDENSATE NGLS GAS
(MBBLS) (MBBLS) (BCF) (MBBLS) (MBBLS) (BCF)
---------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CRUDE OIL AND NATURAL GAS RESERVES BASED
ON CONSTANT PRICE ASSUMPTIONS(6)(8)(9)
Proved Reserves(2)
Producing(3)........................... 31,558.5 5,106.6 374.9 26,566.9 4,207.6 321.3
Non-Producing(4)....................... 5,327.0 1,548.1 121.2 4,646.2 1,319.7 101.7
Undeveloped............................ 5,897.0 56.7 26.0 4,890.4 44.3 22.2
-------- ------- ----- -------- ------- -----
Total Proved................... 42,782.5 6,711.4 522.1 36,104.4 5,571.6 445.2
Probable Reserves(5)..................... 23,440.2 1,983.5 139.9 19,403.3 1,612.7 116.1
-------- ------- ----- -------- ------- -----
Total Proved and Probable
Reserves..................... 66,222.7 8,694.9 662.0 55,507.3 7,184.3 561.3
======== ======= ===== ======== ======= =====
</TABLE>
163
<PAGE> 173
<TABLE>
<CAPTION>
DISCOUNTED AT THE RATE OF
---------------------------------
UNDISCOUNTED 8% 10% 12%
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
PRESENT WORTH BEFORE TAX OF FUTURE NET
PRODUCTION REVENUE BASED ON CONSTANT PRICE
ASSUMPTIONS (THOUSANDS OF DOLLARS)
Proved Reserves(2)
Producing(3)................................ C$ 834,221 C$576,117 C$535,377 C$500,358
Non-Producing(4)............................ 217,094 78,740 64,254 53,278
Undeveloped................................. 62,094 44,939 41,830 39,061
----------- --------- --------- ---------
Total Proved........................ 1,113,409 699,796 641,461 592,697
Probable Reserves at 50%(5)................... 199,640 88,596 76,764 67,472
----------- --------- --------- ---------
Total Proved and Probable
Reserves.......................... C$1,313,049 C$788,392 C$718,225 C$660,169
=========== ========= ========= =========
</TABLE>
164
<PAGE> 174
NOTES TO CONSOLIDATED ESCALATING AND CONSTANT PRICE RESERVES AND ESTIMATED
FUTURE NET REVENUE TABLES
(1) "Gross reserves" are defined as the total Chauvco working interest share of
reserves. "Net reserves" are defined as Chauvco's gross reserves less all
royalties and governments share of profit oil in excess of corporate income
taxes payable to the government and others.
(2) "Proved reserves" are those reserves estimated as recoverable under current
technology and existing economic conditions in the case of constant price
and cost analysis and anticipated economic conditions in the case of
escalated price and cost analysis from that portion of a reservoir which
can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data,
including the reserves to be obtained by enhanced recovery processes
demonstrated to be economic and technically successful in the subject
reservoir.
(3) "Proved producing reserves" are those proved reserves that are actually on
production or, if not producing, that could be recovered from existing
wells or facilities and where the reason for the current non-producing
status is the choice of the owner rather than the lack of markets or some
other reason. An illustration of such a situation is where a well or zone
is capable but is shut-in because its deliverability is not required to
meet contract commitments. Producing reserves require near zero capital to
be expended in order to be produced.
(4) "Proved non-producing reserves" are those proved reserves that are not
currently producing either due to lack of facilities and/or markets.
(5) "Probable reserves" are those reserves which analysis of drilling,
geological, geophysical and engineering data does not demonstrate to be
proved under current technology and existing economic conditions but where
such analysis suggests the likelihood of their existence and future
recovery. Probable reserves to be obtained by the application of enhanced
recovery processes, will be the increased recovery over and above that
estimated in the proved category, which can be realistically estimated for
the pool on the basis of enhanced recovery processes which can be
reasonably expected to be instituted in the future. For purposes of this
information circular, Chauvco has reduced its present worth values on
probable reserves by 50% to account for geological and engineering risk
factors.
(6) "Net production revenue" is income derived from the sale of net reserves of
petroleum and natural gas, less all capital costs, production taxes and
operating costs and before provision for income taxes and administrative
overhead costs.
(7) The escalating price assumptions assume the continuance of current laws and
regulations and any increases in wellhead selling prices and take into
account inflation with respect to future operating and capital costs. In
the escalating price assumption evaluation contained in the reserve
reports, operating and capital costs have been escalated in accordance with
Note 10 below. The oil and gas price forecasts effective January 1, 1997
are summarized as follows:
<TABLE>
<CAPTION>
CRUDE OIL PROPANE BUTANE
----------------------------------------------------------- ----------- -----------
EDMONTON CITY
WTI ARGENTINA FIELD GABON FIELD GATE ARGENTINA ARGENTINA
(U.S.$/BBL) (U.S.$/BBL) (U.S.$/BBL) (CS/BBL) (U.S.$/BBL) (U.S.$/BBL)
----------- --------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997................. 21.00 18.78 18.10 27.40 13.61 15.39
1998................. 21.00 16.71 18.10 27.40 12.13 13.72
1999................. 21.00 17.67 18.10 27.40 12.77 14.43
2000................. 21.50 18.63 18.60 28.00 13.39 15.14
2001................. 22.25 19.12 19.35 29.00 13.75 15.54
2002................. 23.00 19.60 20.10 30.00 14.08 15.92
2003................. 23.75 20.07 20.85 31.00 14.42 16.13
2004................. 24.50 20.55 21.60 32.00 14.76 16.69
2005................. 25.25 21.02 22.35 33.00 15.10 17.07
Thereafter........... +3.5% +3.5% +3.5% +3.5% +3.5% +3.5%
<CAPTION>
NATURAL GAS
-----------------------
ARGENTINA CANADA
(U.S.$/MCF) C$/MMBTU)
----------- ---------
<S> <C> <C>
1997................. 1.07 1.55
1998................. 1.09 1.75
1999................. 1.14 1.95
2000................. 1.14 2.15
2001................. 1.16 2.30
2002................. 1.18 2.45
2003................. 1.20 2.55
2004................. 1.26 2.70
2005................. 1.28 2.85
Thereafter........... +3.5% +3.5%
</TABLE>
(8) The constant price assumptions assume the continuance of current laws,
regulations and operating costs in effect on the date of the reserve
reports. The Canadian net production revenue was derived using a WTI price
of $21.00 (Edmonton City Gate crude oil price of C$27.40) in 1997 and 1997
gas prices,
165
<PAGE> 175
ranging from C$1.25/Mmbtu to C$1.70/Mmbtu depending upon the contract and
have not been escalated beyond 1997. In addition, operating and capital
costs have not been increased on an inflationary basis. Average field
prices for crude of $18.85/Bbl in Argentina and $18.10/Bbl in Gabon were
also derived using a WTI price of $21.00/Bbl. Argentina average field
prices of $13.75/Bbl, $15.54/Bbl and $1.07/mcf were used for propane,
butane and natural gas respectively.
(9) Total capital costs, net to Chauvco, necessary to achieve the estimated
future net proved and probable production revenues, based on escalating
price and cost assumptions, are estimated to be C$104.6 million with C$53.9
million, C$26.2 million and C$5.3 million of such costs to be incurred in
fiscal years 1997, 1998 and 1999, respectively. The comparable values for
the constant cost assumptions are C$98.7 million with C$53.6 million,
C$24.8 million, C$7.2 million in 1997, 1998 and 1999 respectively. These
values relate to the total proved and probable reserve cases.
(10) The costs used in the Escalating Price Assumption case have been escalated
by 3.5% per year beginning in 1998.
Description of Properties
Thompson/Alliance. The Thompson Lake area is located 130 miles southeast
of Edmonton, Alberta. In 1996, additional water handling facilities were
installed to optimize production and reserve recovery. There are currently
90 oil wells (85.5 net wells) in the area. Working interest production
averaged 2,583 and 496 barrels per day for Thompson and Alliance during
1996, respectively. Chauvco's average interest is 94.5% in Thompson and
100% in Alliance.
Spirit River/Rycroft. Chauvco has interests in the Spirit River/Rycroft
area (40 miles north of Grande Prairie, Alberta) which consists of four
separate oil units, plus some minor non-unit reserves. During 1996 Chauvco
increased its interest in the Rycroft properties by an average of 22%. The
interests vary from 35.4% to 56.6% in the Rycroft Units. Chauvco now
operates this area.
A recent and successful drilling program in the major Rycroft unit will be
followed up with the drilling of additional wells planned for 1997. A
workover program to stimulate the wells was also successful during 1996.
Average production from Rycroft was 1,521 barrels per day of oil and 0.9
million cubic feet of natural gas per day during 1996. With the change in
ownership, the average net production from these properties has reached
2,663 barrels per day.
Cherhill. Chauvco owns an 93% working interest in the Cherhill Banff H
Pool Unit after purchasing an additional 10% during 1996. The unit is
located 65 miles northwest of Edmonton, Alberta. Oil and gas have been
produced concurrently since a gas plant was built and the pool was
unitized during 1993. The average production for 1996 was 372 barrels per
day of oil with 3.2 million cubic feet per day of solution and associated
natural gas. There are currently 17 wells (15.9 net oil wells) in the
Unit.
Killam. The Chauvco ownership interests in the Killam area, located
approximately 90 miles southeast of Edmonton, Alberta vary from 23 to 50%.
There are currently 50 producing (20.2 net) oil wells at Killam.
Production averaged approximately 400 barrels per day of oil and minor
amounts of conserved solution gas during 1996.
Choice. The Choice property, located approximately 120 miles northeast of
Calgary, is comprised of an oil Unit, and various non-unit oil and gas
wells. Chauvco's working interest production from the Choice property
averaged 1,065 barrels per day of oil together with minor volumes of
natural gas during 1996. The Company owns an average 96% of the oil
production. There are 50 producing oil wells (48 net oil wells) and three
gas wells (1.9 net gas wells) in the property.
Nevis. The Nevis property is located approximately 20 miles east of Red
Deer, Alberta. In 1996 Chauvco reviewed and identified Nisku/Leduc
exploration potential in the Nevis area. Three 3-D seismic programs were
completed in the third quarter of 1996. Production from Nevis was 273
barrels of oil per day and an average 3.5 million cubic feet of natural
gas per day during 1996.
166
<PAGE> 176
Swalwell. The Swalwell property is located approximately 42 miles
northeast of Calgary. In 1996 Chauvco continued exploitation of the Nisku
C&D pool. Three wells were drilled resulting in two producing oil wells.
One additional drilling location is tentatively planned for 1997. Also in
1996, Chauvco began the exploitation of an acquisition in the area
completed in the fourth quarter of 1995. Two Nisku wells were drilled and
cased, one being a horizontal well. Incremental oil production from the
vertical well is averaging 70 barrels per day and the horizontal well
tested at a flowing rate of 75 barrels per day. Pumping equipment was
installed in January 1997. Uphole potential was also evaluated on the
acquired lands.
Four recompletions were done for incremental production of 2.0 million
cubic feet of natural gas per day. Additional recompletions are planned
for 1997 along with two Pekisko drilling locations. Chauvco made two minor
acquisitions in 1996 and is pursuing additional interests in the area. The
average oil production from Swalwell during 1996 was 569 barrels per day
along with 2.3 million cubic feet per day of natural gas.
David. The David property is located approximately 180 miles northeast of
Calgary. Chauvco owns a 100% working interest in certain producing
properties in the David area of east central Alberta where there are 21
producing wells which are operated by Chauvco. A waterflood recovery
project has been operating there successfully since 1989. During 1996 the
average oil production was 2,294 barrels per day.
Martin Creek. The Martin Creek property, located 85 miles north of Fort
St. John, B.C., commenced production in March, 1993 through an existing
competitor's facility. Chauvco completed construction of its own
compression facility in 1995 and a 12-inch pipeline connecting the Martin
Creek area to Westcoast Transmission's Aitken Creek gas plant in the first
quarter of 1996 to handle Chauvco and third party production from the
area. Chauvco's share of production averaged 9.6 million cubic feet per
day of gas during 1996 from 10 wells (8.93 net wells).
Tierra del Fuego. The Tierra del Fuego production concession is located
in the extreme southern portion of Argentina, approximately 1,500 miles
south of the country's capital, Buenos Aires. Crude oil, natural gas,
condensate and NGLs are produced from six separate fields in which Chauvco
has a 35% working interest. Chauvco's share of production during 1996
averaged 1,622 barrels per day of oil and condensate, 530 barrels per day
of propane and butane, and 44.0 million cubic feet per day of natural gas.
The most significant area is the San Sebastian field which accounts for
approximately 40% of crude oil and condensate production, 100% of propane
and butane production, and 84% of natural gas sales from the concession.
In Argentina, expansion of gas processing facilities at Tierra del Fuego
was completed in the fourth quarter of 1996. The expansion will allow
handling of increased production volumes committed for delivery under a
gas contract to a petrochemical plant in Chile. The pipeline to connect
the new facilities to the Chilean pipeline system was installed in 1996
and tested in January 1997. Natural gas deliveries under the contract to
the methanol plant in Chile commenced in January 1997 at a rate of 17.0
million cubic feet per day.
Neuquen. Chauvco's operated production in Argentina is concentrated in
the Neuquen Basin which is located about 925 miles southwest of the
country's capital city and just to the east of the Andes Mountains. During
1996, Chauvco operated production from three contiguous blocks: Loma
Negra/NI, Dadin and Al Norte de la Dorsal.
Crude oil and natural gas are produced from two separate fields in the
Loma Negra/NI Block in which Chauvco has a 100% working interest.
Chauvco's production during 1996 averaged 63 barrels per day of oil and
3.3 million cubic feet per day of natural gas.
Crude oil and natural gas are produced from the Huincul field in the Dadin
Block in which Chauvco has a 100% working interest. Chauvco's production
during 1996 averaged 183 barrels per day of oil and 2.2 million cubic feet
per day of natural gas.
167
<PAGE> 177
Crude oil and natural gas are produced from three oil fields and one
natural gas field in the Al Norte de la Dorsal Block in which Chauvco has
a 100% working interest. Chauvco's production during 1996 averaged 1,124
barrels per day of oil and 3.1 million cubic feet per day of natural gas.
The most significant reserves accumulation is in the Guanaco field which
accounts for 54% of the crude oil production and 37% of natural gas sales
from the block. Pursuant to the interpretation of a 3-D seismic program
shot in 1995 and appraisal drilling in 1996, a 40 - 60 well program is
currently underway on this block.
Production History
Chauvco's working interest in production of petroleum and natural gas,
before deduction of royalties, for each of the indicated years was as follows:
<TABLE>
<CAPTION>
TO JUNE 30,
---------------------------------------------------
1997 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Crude oil and NGLs
Total production (Mstb)................... 3,558 6,811 7,597 7,575 7,187 6,641
Average daily production (Bbls/d)......... 19,659 18,609 20,815 20,754 19,689 18,144
Natural Gas
Total production (MMcf)................... 21,392 34,094 35,911 31,002 20,093 13,765
Average daily production (MMcf/d)......... 118.2 93.2 98.4 84.9 55.0 37.6
</TABLE>
Producing Properties Average Daily Production
The following table sets out Chauvco's working interest share of average
daily production, before deduction of royalties, by area for the years
indicated, and the percentage of the total production represented by each area.
<TABLE>
<CAPTION>
% OF % OF % OF
CRUDE OIL AND NGLS (BBLS/D) 1996 TOTAL 1995 TOTAL 1994 TOTAL
--------------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Canada
Alberta
Thompson Lake/Alliance........ 3,079 16.6 3,379 16.2 3,727 18.0
David......................... 2,294 12.3 2,289 11.0 2,322 11.2
Spirit River/Rycroft.......... 2,156 11.6 2,194 10.5 1,789 8.6
Choice........................ 1,065 5.7 1,211 5.8 1,658 8.0
Lookout Butte................. 663 3.7 831 4.0 851 4.1
Swalwell...................... 569 3.1 703 3.4 710 3.4
Killam........................ 400 2.1 499 2.4 659 3.2
Cherhill...................... 372 2.0 474 2.3 547 2.6
Other......................... 3,485 18.7 4,163 20.0 4,827 23.3
------ ----- ------ ----- ------ -----
14,083 75.8 15,743 75.6 17,090 82.4
Saskatchewan.................... 659 3.5 789 3.8 799 3.8
British Columbia................ 305 1.6 240 1.2 240 1.2
Manitoba........................ 15 0.1 17 0.1 15 0.1
------ ----- ------ ----- ------ -----
Total Canada.................... 15,062 81.0 16,789 80.7 18,144 87.5
------ ----- ------ ----- ------ -----
Argentina
Tierra del Fuego........... 2,152 11.5 2,252 10.8 2,228 10.7
Neugquen................... 1,395 7.5 1,774 8.5 382 1.8
------ ----- ------ ----- ------ -----
Total Argentina................. 3,547 19.0 4,026 19.3 2,610 12.5
------ ----- ------ ----- ------ -----
Total................. 18,609 100.0 20,815 100.0 20,754 100.0
====== ===== ====== ===== ====== =====
</TABLE>
168
<PAGE> 178
<TABLE>
<CAPTION>
% OF % OF % OF
NATURAL GAS (MMCF/D) 1996 TOTAL 1995 TOTAL 1994 TOTAL
-------------------- ----- ----- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Canada
Alberta
Lookout Butte.................... 4.5 4.8 5.8 5.9 5.3 6.2
Nevis............................ 3.5 3.8 2.7 2.7 2.9 3.4
Cherhill......................... 3.2 3.4 3.1 3.2 2.7 3.2
Other............................ 12.2 13.1 18.1 18.4 18.2 21.5
----- ----- ----- ----- ----- -----
23.4 25.2 29.7 30.2 29.1 34.4
----- ----- ----- ----- ----- -----
British Columbia
Martin Creek..................... 9.6 10.3 3.3 3.4 5.0 5.9
Other............................ 7.2 7.7 7.0 71.0 7.2 8.5
----- ----- ----- ----- ----- -----
16.8 18.0 10.3 10.5 12.2 14.3
----- ----- ----- ----- ----- -----
Saskatchewan....................... 0.2 0.2 0.4 0.4 0.8 0.9
----- ----- ----- ----- ----- -----
Total Canada....................... 40.4 43.4 40.4 41.1 42.1 49.6
----- ----- ----- ----- ----- -----
Argentina
Tierra Del Fuego................. 44.0 47.2 43.1 43.7 40.5 47.7
Neuquen.......................... 8.8 9.4 14.9 15.2 2.3 2.7
----- ----- ----- ----- ----- -----
Total Argentina.................... 52.8 56.6 58.0 58.9 42.8 50.4
----- ----- ----- ----- ----- -----
Total.............................. 93.2 100.0 98.4 100.0 84.9 100.0
===== ===== ===== ===== ===== =====
</TABLE>
Productive Wells
The following table summarizes, as at December 31, 1996, Chauvco's
interests in producing wells and in non-producing gas wells which Chauvco
believes are capable of commercial production of petroleum or natural gas. The
stated interests are subject to landowners' and other royalties, where
applicable, in addition to the usual government royalties or mineral taxes.
<TABLE>
<CAPTION>
PRODUCING OIL PRODUCING GAS NON-PRODUCING
WELLS WELLS WELLS
------------------- ------------------- -------------------
GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2)
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
CANADA(3)
Alberta..................................... 1,052 403 195 78 544 208
Saskatchewan................................ 73 30 3 1 58 20
British Columbia............................ 16 7 48 32 32 17
Manitoba.................................... 44 2 -- -- 16 1
----- --- ----- --- ----- ---
1,185 442 246 111 650 246
----- --- ----- --- ----- ---
UNITED STATES(3)
North Dakota................................ 64 62 -- -- 5 5
----- --- ----- --- ----- ---
64 62 -- -- 5 5
----- --- ----- --- ----- ---
ARGENTINA
Tierra del Fuego............................ 92 32 28 10 273 96
Neuquen..................................... 97 97 27 27 162 157
Santa Cruz.................................. -- -- -- -- 16 16
Rio Negro................................... 1 1 -- -- 1 --
----- --- ----- --- ----- ---
190 130 55 37 452 269
----- --- ----- --- ----- ---
GABON
Remboue..................................... -- -- -- -- 3 3
----- --- ----- --- ----- ---
Total............................. 1,439 634 301 148 1,110 523
===== === ===== === ===== ===
Average working interest.................... 44.1% 49.2% 47.1%
</TABLE>
169
<PAGE> 179
- ---------------
Notes:
(1) "Gross wells" means the number of wells in which Chauvco has a working
interest.
(2) "Net wells" means the aggregate number of wells obtained by multiplying each
gross well by Chauvco's percentage working interest therein.
(3) Includes 67 gross (63 net) producing oil wells, seven gross (three net)
producing gas wells and 15 gross (12 net) non-producing wells acquired
through Tidal effective January 3, 1997.
Land Holdings
The following table sets forth Chauvco's land holdings of petroleum and
natural gas rights as at December 31, 1996.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
------------------- -------------------
GROSS NET GROSS NET
ACRES(1) ACRES(2) ACRES(1) ACRES(2)
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CANADA(3)
Alberta.................................................... 288 121 366 255
Saskatchewan............................................... 1 0 2 0
British Columbia........................................... 72 43 235 154
Manitoba................................................... 13 3 17 12
----- --- ----- -----
374 167 620 421
----- --- ----- -----
UNITED STATES
North Dakota............................................... 5 4 3 2
----- --- ----- -----
ARGENTINA
Tierra del Fuego........................................... 601 210 645 580
Neuquen.................................................... 91 91 201 168
Santa Cruz................................................. -- -- 67 67
Rio Negro.................................................. -- -- 130 130
----- --- ----- -----
692 301 1,043 945
----- --- ----- -----
GABON
Remboue.................................................... 2 2 222 200
Mondah Bay................................................. -- -- 378 189
----- --- ----- -----
2 2 600 389
----- --- ----- -----
Total...................................................... 1,073 474 2,226 1,757
===== === ===== =====
</TABLE>
- ---------------
Notes:
(1) "Gross Acres" represents the total number of acres in which Chauvco has an
interest.
(2) "Net Acres" refers to the total of the acres in which Chauvco has an
interest multiplied by the percentage interest of Chauvco therein.
(3) Includes land holdings acquired through Tidal effective January 3, 1997 of
84.9 thousand gross acres (37.9 net) of which 61.2 thousand acres (22.7 net)
are undeveloped.
170
<PAGE> 180
Drilling Activity
Chauvco drilled, or participated in the drilling of the following wells
during 1995, 1996 and the first six months of 1997.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
TO JUNE 30, 1997 1996 1995
------------------ ------------------ ------------------
GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2)
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
CANADA
Crude oil........................... 14 2.0 53 15.7 40 26.0
Natural gas......................... 21 16.0 8 2.5 13 8.4
Service............................. -- -- 2 1.1 2 1.9
Dry and abandoned................... 8 6.5 22 18.2 12 8.0
----- ---- ----- ---- -- ----
Total Wells......................... 43 24.5 85 37.5 67 44.3
----- ---- ----- ---- -- ----
Success Ratio....................... 73% 51% 82%
ARGENTINA
Crude oil........................... 28 26.1 14 12.2 4 3.0
Natural gas......................... 7 7.0 5 5.0 1 1.0
Dry and abandoned................... 4 4.0 6 4.4 6 5.5
----- ---- ----- ---- -- ----
Total Wells......................... 39 37.1 25 21.6 11 9.5
----- ---- ----- ---- -- ----
Success Ratio....................... 89% 80% 42%
GABON
Crude oil........................... 9 8.1 3 2.7 -- --
Dry and abandoned................... 2 1.9 -- -- -- --
----- ---- ----- ---- -- ----
Total Wells......................... 11 10.0 3 2.7 -- --
----- ---- ----- ---- -- ----
Success Ratio....................... 81% 100%
</TABLE>
- ---------------
Notes:
(1) "Gross wells" means the number of wells in which Chauvco has a working
interest.
(2) "Net wells" means the aggregate number of wells obtained by multiplying each
gross well by Chauvco's percentage working interest therein and are, in some
cases, subject to adjustment after payout.
Marketing of Production
Canadian Marketing -- Crude Oil. Chauvco enjoyed an exceptional pricing
environment in 1996 due to a combination of factors. The WTI monthly price
averaged U.S.$22.01 per barrel for the year, up U.S.$3.61 per barrel from 1995.
The Canadian light sweet price posted WTI differential narrowed to historical
low levels in 1996 averaging U.S.$0.56 per barrel versus U.S.$0.87 per barrel in
1995. Differentials between light and heavy crudes have averaged just around
U.S.$3.00 per barrel in 1996 giving Canadian producers the highest heavy oil
prices in the past decade. In addition, Canadian producers continue to benefit
from a relatively weak Canadian dollar as the exchange rate remained in the
U.S.$/C$0.73 range throughout the year.
Pipeline transportation space apportionment on the Interprovincial Pipe
Line ("IPL") system, the major carrier of crude oil from western Canada to
eastern Canada and the eastern United States, continued in 1996 despite industry
attempts to resolve the problem. Despite these difficulties, Chauvco managed to
avoid shut-in oil and discount markets throughout the year.
Two pipeline expansions are nearing completion. An expansion of the IPL
system, referred to as the IPL SEP I, which accesses eastern Canadian and
midwest U.S. markets, will add 120,000 barrels per day to existing capacity in
early 1997. The Express Pipeline 170,000 barrels per day system from Hardisty to
Casper, Wyoming, was completed in late 1996. Uncertainty remains as to the
relief these expansions will have on IPL volume apportionment.
171
<PAGE> 181
Argentine Marketing -- Crude Oil. In Argentina, Chauvco's crude oil and
condensates are sold in the domestic market on short term contracts based on WTI
prices. Payments for deliveries are made to Chauvco in U.S. dollars. Chauvco
continues to use third party marketers to ensure the best possible contract
terms as well as guaranteed access to the Oldelval pipeline system, which
transports crude oil to the refineries located at Bahia Blanca, 700 kilometers
south of Buenos Aires, and in the Buenos Aires area.
The oil and condensate, transported by ship from Tierra del Fuego,
continues to be sold to a large independent refinery in Buenos Aires.
Chauvco's liquids from natural gas production in Tierra del Fuego continue
to be sold to the state owned oil and gas company of Chile.
Gabon Marketing -- Crude Oil. In Gabon plans are being finalized for crude
oil delivery and sales systems. Crude will be transported on the Remboue River
in barges for delivery to one of several existing marine terminals on the coast.
Most Gabonese crude oil is exported to the United States and is priced with
reference to Brent crude oil which is, on average, discounted at approximately
U.S.$1.50 per barrel below the price of WTI crude.
Canadian Marketing -- Natural Gas. Chauvco marketed an average of 40.4
million cubic feet of gas per day during 1996. The market mix between aggregator
and direct sale volumes changed through the year as 18.0 million cubic feet per
day of direct sale gas was added in June 1996 with the startup of Chauvco's
Martin Creek pipeline in northeastern British Columbia which connects to the
Westcoast system to deliver gas to the United States west coast market through
Sumas, Washington. In addition, aggregator sales decreased with the disposition
of several properties during the year.
Chauvco currently owns approximately 20% in the Alliance Pipeline Project.
Chauvco has committed to deliver natural gas for a 15-year period to the
proposed pipeline which will run from northeastern British Columbia to Chicago.
Applications for approval are now before Canadian and U.S. regulatory
authorities.
In December 1996, Chauvco began deliveries of 8.6 million cubic feet per
day to an electric cogeneration facility in Ontario. The contract will run for
18 years and will price Chauvco's gas within a fixed narrow range that escalates
over the term of the contract. The December 1996 price was C$2.22 per thousand
cubic feet with future prices expected to be approximately C$0.42-C$0.63 per
thousand cubic feet over current one year prices during 1997.
Natural gas prices in North America were stronger in 1996 due to low
storage levels, higher demand and colder weather. Gas demand strengthened in the
western United States (California and the Pacific Northwest) during the latter
part of the year due to low supplies of hydro-generated electricity, slightly
colder weather and pipeline reversals away from California. Chauvco benefited
from the price increases in the western United States due to its ability to
deliver volumes to the west coast market at Sumas in Washington state.
Alberta and British Columbia gas prices spiked at the end of 1996 in part
due to weather, lower storage levels and pipeline volume curtailments. However,
with no major pipeline expansions planned until 1998, Alberta prices are
expected to return to lower levels. British Columbia prices, on the other hand,
may continue at higher levels due to pipeline diversions affecting the
California markets. Sixty-nine percent of Chauvco's gas sales incorporated
market index pricing and 31% were based on fixed prices in 1996.
Argentine Marketing -- Natural Gas. Prices for natural gas in Tierra del
Fuego and the Neuquen basin are expected to increase marginally over 1996
levels. Natural gas, sold to distribution companies in Buenos Aires and Santa
Cruz, is transported in the San Martin pipeline system.
The pipeline for gas deliveries to Chile was completed in 1996. In January
1997 Chauvco and its partners in Tierra del Fuego initiated Argentina's first
natural gas exports. These exports have been sourced from the expanded
processing facility at San Sebastian. The contract of gas exports is to provide
feedstock for a petrochemical plant for 25 years without seasonal throughput
variations.
172
<PAGE> 182
Business and Industry Risks
Risks faced by participants in the oil and gas industry are those beyond
the control of experience, knowledge and evaluation techniques. These risks
include business, exploration, production, marketing, financial, environmental
and safety risks as well as external factors such as fluctuating commodity
prices, interest rates and foreign currency exchange rates. In addition,
government involvement in the oil and gas industry is another external risk
outside the control of Chauvco and other industry participants.
Chauvco's core business activity includes the acquisition, exploration,
development, production and marketing of crude oil and natural gas reserves both
in Canada and internationally. Inherent in this activity is the uncertainty of
finding new reserves which can be produced economically.
External risk factors beyond Chauvco's control include commodity prices,
interest rates and variations in the Canada-United States currency exchange
rate, which in turn responds to economic and political circumstances throughout
the world. Prices received by Chauvco for its Canadian and Argentine crude oil
production are based on world crude oil prices adjusted for quality and
transportation. World crude oil prices are based on global supply and demand
conditions; the supply management practices of OPEC and other producing nations
and the economic conditions of consuming regions.
Natural gas prices respond to factors on a North American continental
basis, including supply/demand fluctuations, transportation capacity, and
contract terms and conditions. Over the last year, natural gas prices have shown
significant increases in response to the combined effects of these price
influences. In Argentina, natural gas prices were deregulated in 1994 but have
remained relatively constant since then.
All of these external factors impact on Chauvco's ability to maintain
financial strength and liquidity. Chauvco's capital requirements are funded
through cash flow, debt and equity, all of which are affected by the external
factors. Therefore, Chauvco manages these risks by applying operational and
financial strategies which maintain strict control over the use of debt and
provide for a flexible capital budgeting process. In addition, Chauvco employs
hedging strategies to reduce the effect on cash flow and earnings from changes
in crude oil and natural gas prices, interest and foreign currency exchange
rates.
The possibility exists that exploration, development and production of oil
and gas may damage the environment and cause personal injury to employees,
contractors and the general public. To minimize the potential costs associated
with these risks, Chauvco maintains safety and environmental protection programs
and a comprehensive liability insurance program. Chauvco strives to continue its
excellent record in conducting all of its operations in accordance with an
environmental Code of Practice and current occupational health and safety
regulations.
GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS
Canadian
The oil and natural gas industry is subject to extensive controls and
regulations imposed by various levels of government. It is not expected that any
of these controls or regulations will affect the operations of Chauvco in a
manner materially different than they would affect other oil and gas companies
of similar size.
Pricing and Marketing -- Oil.
In Canada, producers of oil negotiate sales contracts directly with oil
purchasers, with the result that the market determines the price of oil. The
price depends in part on oil quality, prices of competing fuels, distance to
market and the value of refined products. Oil exports may be made pursuant to
export contracts with terms not exceeding one year in the case of light crude,
and not exceeding two years in the case of heavy crude, provided that an order
approving any such export has been obtained from the National Energy Board
("NEB"). Any oil export to be made pursuant to a contract of longer duration
requires an exporter to obtain an export license from the NEB and the issue of
such a license requires the approval of the Governor in Council.
173
<PAGE> 183
Pricing and Marketing --Natural Gas.
In Canada the price of natural gas sold in interprovincial and
international trade is determined by negotiation between buyers and sellers.
Natural gas exported from Canada is subject to regulation by the NEB and the
Government of Canada. Exporters are free to negotiate prices and other terms
with purchasers, provided that the export contracts must continue to meet
certain criteria prescribed by the NEB and the Government of Canada. As is the
case with oil, natural gas exports for a term of less than two years must be
made pursuant to an NEB order, or, in the case of exports for a longer duration,
pursuant to an NEB license and Governor in Council approval.
The governments of Alberta, British Columbia and Saskatchewan also regulate
the volume of natural gas which may be removed from those provinces for
consumption elsewhere based on such factors as reserve availability,
transportation arrangements and market considerations.
The North American Free Trade Agreement.
On January 1, 1994 the North American Free Trade Agreement ("NAFTA") among
the governments of Canada, the U.S. and Mexico became effective. The NAFTA
carries forward most of the material energy terms contained in the Canada-US
Free Trade Agreement. In the context of energy resources, Canada continues to
remain free to determine whether exports to the U.S. or Mexico will be allowed
provided that any export restrictions do not: (i) reduce the proportion of
energy resource exported relative to domestic use, (ii) impose an export price
higher than the domestic price, and (iii) disrupt normal channels of supply. All
three countries are prohibited from imposing minimum export or import price
requirements.
The NAFTA contemplates the reduction of Mexican restrictive trade practices
in the energy sector and prohibits discriminatory border restrictions and
exports taxes. The agreement also contemplates clearer disciplines on
regulations to ensure fair implementation of any regulatory changes and to
minimize disruption of contractual arrangements, which is important for Canadian
natural gas exports.
Royalties and Incentives.
In addition to federal regulation, each province has legislation and
regulations which govern land tenure, royalties, production rates, environmental
protection and other matters. The royalty regime is a significant factor in the
profitability of oil and natural gas production. Royalties payable on
productions from lands other than Crown lands are determined by negotiations
between the mineral owner and the lessee. Crown royalties are determined by
government regulation and are generally calculated as a percentage of the value
of the gross production, and the rate of royalties payable generally depends in
part on prescribed reference prices, well productivity, geographical location,
field discovery date and the type or quality of the petroleum product produced.
From time to time the governments of Canada, Alberta, British Columbia and
Saskatchewan have established incentive programs which have included royalty
rate reductions, royalty holidays and tax credits for the purpose of encouraging
oil and natural gas exploration or enhanced planning projects.
In Alberta, a producer of oil or natural gas is entitled to a credit
against the royalties payable to the Crown by virtue of the Alberta royalty tax
credit ("ARTC") program. The ARTC program is based on a price-sensitive formula,
and the ARTC rate varies between 75%, at prices for oil below C$15.89 per barrel
and 25%, at prices above C$33.37 per barrel. The ARTC rate is applied to maximum
of C$2,000,000 of Alberta Crown royalties payable for each producer or
associated group of producers. Crown royalties on production from producing
properties acquired from corporations claiming maximum entitlement to ARTC will
generally not be eligible for ARTC. The rate is established quarterly based on
the average "par Price", as determined by Alberta Department of Energy for the
previous quarterly period.
Oil and natural gas royalty holidays and reductions for specific wells
reduce the amount of Crown royalties paid by Chauvco to the provincial
governments. The ARTC program provides a rebate on Crown royalties paid in
respect of eligible producing properties. Both of these incentives increase the
net income of Chauvco.
174
<PAGE> 184
Producers of oil and natural gas in British Columbia are also required to
pay annual rental payments in respect of Crown leases and royalties and freehold
production taxes in respect of oil and gas produced from Crown and freehold
lands respectively. The amount payable as a royalty in respect of oil depends on
the vintage of the oil (whether it was produced from a pool discovered before or
after October 31, 1975), the quantity of oil produced in a month and the value
of the oil. Oil produced from newly discovered pools may be exempt from the
payment of a royalty for the first 36 months of production. The royalty payable
on natural gas is determined by a sliding scale based on a reference price which
is the greater of the amount obtained by the producer and a (15% to 25%)
prescribed minimum price. Gas produced in association with oil has a minimum
royalty of 8% while the royalty in respect of other gas may not be less than
15%.
Canadian Environmental Regulation.
The oil and natural gas industry is currently subject to environmental
regulation pursuant to provincial and federal legislation. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced or utilized in association with certain oil and
gas industry operations. In addition, legislation requires that well and
facility sites be abandoned and reclaimed to the satisfaction of provincial
authorities. A breach of such legislation may result in the imposition of fines
and penalties. In Alberta, environmental compliance has been governed by the
Alberta Environmental Protection and Enhancement Act ("AEPEA") since September
1, 1993. In addition to replacing a variety of older statutes which related to
environmental matters, AEPEA also imposes certain new environmental
responsibilities on oil and natural gas operators in Alberta and in certain
instances also imposes greater penalties for violations. Chauvco is committed to
meeting its responsibilities to protect the environment wherever it operates and
anticipates making increased, although not material, expenditures of both a
capital and expense nature as a result of the increasingly stringent laws
relating to the protection of the environment.
Argentina
The oil and gas industry in Argentina has been deregulated for several
years.
Pricing and Marketing -- Crude Oil.
Producers of crude oil negotiate sales contracts directly with oil refiners
and other purchasers, with the result that the market determines the price of
crude oil. Such price is generally linked to the WTI price and adjusted for oil
quality, prices of competing oil, pipeline and other transportation costs to
market and the value of refined products. Oil producers are entitled to enter
into export contracts without obtaining governmental approval.
Price and Marketing -- Natural Gas.
The price of natural gas sold prior to 1994 had been regulated by the state
with no free market in natural gas. The state natural gas entity, Gas del
Estado, was privatized in late 1992 into two transmission companies ("Transcos")
and eight regional distribution companies ("Distcos"). The privatization was
followed by the deregulation of the wellhead price for natural gas effective
January 1, 1994. The existing regulations are intended to allow free negotiation
of prices between producers and Distcos and major industrial buyers, and for the
staged release of capacity, if desired by the Distcos, on the transmission
systems. Such a framework will allow the natural gas industry in Argentina to
compete on a basis similar to that in North America. Exports of natural gas
require the express approval of the executive power, upon the recommendation of
the Energy Secretariat and ENARGAS, the regulatory agency to oversee the
activities of the Transcos and Distcos. The Energy Secretariat must ensure that
supply to the domestic market is not adversely affected by any export of natural
gas.
175
<PAGE> 185
Provincial Royalties.
Each of the provinces in Argentina is entitled to a royalty, calculated as
a percentage of the value of the gross production and is generally set at 12%.
Certain deductions for transportation and processing are allowed from the gross
revenues before royalty calculations.
Turnover Tax.
All provinces in Argentina have a turnover tax on gross sales with rates
varying from 1% to 6%. During 1995, the Federal government and the provinces
established a flat rate of 2% for oil and gas activities.
Repatriation of Revenues.
As a part of the deregulation of the oil and gas industry in Argentina, the
government has decreed free access to foreign exchange from the sale of
petroleum products produced in Argentina.
Income Taxes and Dividend Withholding.
Basic income taxes are levied at 30% of taxable income. Deductions for
depletion and depreciation are allowed in calculating taxable income. No
withholding taxes are payable on dividend distributions for Argentina. Within
Argentina, Tierra del Fuego is subject to a preferential income tax rate status.
EMPLOYEES
Chauvco has experienced management, professional, technical and support
staff in the exploration, land, production, drilling, engineering, marketing,
financial, information systems and administration areas of responsibility. At
December 31, 1996, Chauvco had 181 full-time employees as follows:
<TABLE>
<CAPTION>
CANADA ARGENTINA TOTAL
------ --------- -----
<S> <C> <C> <C>
Office.................................................... 93 29 122
Field..................................................... 38 21 59
--- -- ---
131 50 181
=== == ===
</TABLE>
176
<PAGE> 186
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Pioneer Common Stock as of September 19, 1997 by (a) each person
who is known by Pioneer to own beneficially more than 5% of the outstanding
shares of Pioneer Common Stock, (b) each director of Pioneer, (c) each executive
officer of Pioneer and (d) all Pioneer directors and executive officers as a
group.
<TABLE>
<CAPTION>
PERCENT
OF CLASS
NAME OF PERSON NUMBER OF PERCENT AFTER
OR IDENTITY OF GROUP SHARES OF CLASS TRANSACTION(1)
-------------------- ---------- -------- --------------
<S> <C> <C> <C>
DNR-Mesa Holdings, L.P.(2).................................. 11,370,165 15.31% 11.75%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
The Prudential Insurance Company of America(3).............. 6,958,961 9.37% 7.19%
751 Broad Street
Newark, New Jersey 07102-3777
I. Jon Brumley(4)........................................... 287,571 * *
Scott D. Sheffield(5)....................................... 542,321 * *
Timothy L. Dove............................................. 90,328 * *
Dennis E. Fagerstone........................................ 108,142 * *
Mel H. Fischer(6)........................................... 51,964 * *
Mark L. Withrow............................................. 97,007 * *
Lon C. Kile................................................. 117,898 * *
M. Garrett Smith............................................ 74,286 * *
R. Hartwell Gardner......................................... 10,298 * *
John S. Herrington.......................................... 5,107 * *
Kenneth A. Hersh............................................ 4,479 * *
James L. Houghton(7)........................................ 12,545 * *
Jerry P. Jones.............................................. 14,457 * *
Boone Pickens(8)............................................ 766,781 1.03% *
Richard E. Rainwater(2)..................................... 11,370,548 15.32% 11.75%
Charles E. Ramsey, Jr. ..................................... 16,141 * *
Arthur L. Smith............................................. 9,132 * *
Philip B. Smith............................................. 479 * *
Robert L. Stillwell(9)...................................... 5,771 * *
Michael D. Wortley.......................................... 6,623 * *
All directors and executive officers as a group (20
persons).................................................. 13,591,879 18.09% 13.92%
</TABLE>
- ---------------
* Does not exceed 1%.
(1) Assumes all Exchangeable Shares have been exchanged for Pioneer Common
Stock.
(2) Mr. Rainwater is the sole shareholder and President of Rainwater, Inc. and
the sole general partner of DNR and, as such, may be deemed to beneficially
own the shares of stock held by DNR.
(3) The Schedule 13G filed with the SEC on September 10, 1997 states that The
Prudential Insurance Company of America ("Prudential") holds 92,800 shares
or 0.1% of Pioneer Common Stock for the benefit of its general account and
that it may have voting and/or investment discretion over 6,866,161 shares
or 9.2% of Pioneer Common Stock held for the benefit of its clients by its
separate accounts, externally managed accounts, registered investment
companies, subsidiaries and/or other affiliates.
177
<PAGE> 187
(4) Mr. Brumley is a general partner of Brumley Partners, a Texas general
partnership and a limited partner of DNR. Mr. Brumley disclaims beneficial
ownership of any of the shares of stock held by DNR.
(5) Includes 100 shares held by a minor child of Mr. Sheffield.
(6) Includes 550 shares held in an IRA account by Mr. Fischer.
(7) Includes 4,004 shares held by Mr. Houghton's wife.
(8) Includes shares of Pioneer Common Stock owned by several trusts for Mr.
Pickens' children of which he is a trustee, and over which shares he has
sole voting and investment power, although he has no economic interest
therein. Excludes shares of Pioneer Common Stock owned by Mrs. Pickens as
her separate property, as to which Mr. Pickens disclaims beneficial
ownership and with respect to which he does not have or share voting or
investment power.
(9) Includes 757 shares held by Mr. Stillwell's wife.
COMPARISON OF STOCKHOLDER RIGHTS
In the event that the Transaction is consummated, Chauvco Shareholders
will, at the Effective Time, have their Chauvco Common Shares transferred to
Pioneer Canada for CRI Shares and either shares of Pioneer Common Stock or
Exchangeable Shares or a combination thereof. Exchangeable Shares are the
economic equivalent of Pioneer Common Stock. Holders of Exchangeable Shares will
have the right to retract the Exchangeable Shares for an equivalent number of
shares of Pioneer Common Stock. Pioneer is a corporation organized under the
DGCL. While the rights and privileges of shareholders of an Alberta corporation
are, in many instances, comparable to those of stockholders of a Delaware
corporation, there are certain differences. These differences arise from
differences between Alberta and Delaware law, between the ABCA and DGCL and
between the Chauvco Articles and Chauvco Bylaws and the Pioneer Restated
Certificate and Pioneer Bylaws. For a description of the respective rights of
the holders of Chauvco Common Shares and Pioneer Common Stock, see respectively,
"Description of Capital Stock -- Chauvco Share Capital" and "-- Pioneer Capital
Stock."
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
Under the ABCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances, and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders, present in person or by proxy, at the meeting. In certain
cases, a special resolution to approve an extraordinary corporate action is also
required to be approved separately by the holders of a class or series of
shares.
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation, except
that, unless required by its certificate of incorporation, (a) no authorizing
stockholder vote is required of a corporation surviving a merger if (i) such
corporation's certificate of incorporation is not amended by the merger, (ii)
each share of stock of such corporation will be an identical share of the
surviving corporation after the merger, and (iii) the number of shares to be
issued in the merger does not exceed 20% of such corporation's outstanding
common stock immediately prior to the effective date of the merger; and (b) no
authorizing stockholder vote is required of a corporation to authorize a merger
with or into a single direct or indirect wholly-owned subsidiary of such
corporation (provided certain other limited circumstances apply). The Pioneer
Restated Certificate provides that certain business combinations (including
mergers and sales of all or substantially all of the assets of Pioneer)
involving a beneficial owner of at least 10% of the outstanding shares of
Pioneer's capital stock (a "Pioneer Related Person") require the affirmative
vote of the holders of at least 80% of the outstanding voting stock of Pioneer
as well as two-thirds of the outstanding shares of capital stock held by
stockholders other than the Pioneer Related Person, unless certain minimum price
or board approval requirements are met. See " -- Anti-Takeover Provisions and
Interested Stockholder Transactions."
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Stockholder approval is also not required under the DGCL for mergers or
consolidations in which a parent corporation merges or consolidates with a
subsidiary of which it owns at least 90% of the outstanding shares of each class
of stock.
Such matters as take-over bids, issuer bids or self tenders, going-private
transactions and transactions with directors, officers, significant shareholders
and other related parties to which Pioneer is a party will be subject to
regulation by Canadian provincial securities legislation and administrative
policies of Canadian securities administrators. Similar matters to which Pioneer
is a party will be subject to regulation under U.S. federal securities laws,
regulations and policies.
AMENDMENT TO GOVERNING DOCUMENTS
Under the ABCA, any amendment to the articles generally requires approval
by special resolution, which is a resolution passed by a majority of not less
than two-thirds of the votes cast by shareholders entitled to vote on the
resolution. The ABCA provides that unless the articles or by-laws otherwise
provide, the directors may, by resolution, make, amend or repeal any by-laws
that regulate the business or affairs of a corporation. Where the directors
make, amend or repeal a by-law, they are required under the ABCA to submit the
by-law, amendment or repeal to the shareholders at the next meeting of
shareholders, and the shareholders may confirm, reject or amend the by-law,
amendment or repeal by an ordinary resolution, which is a resolution passed by a
majority of the votes cast by shareholders entitled to vote on the resolution.
The DGCL requires a vote of the corporation's board of directors followed
by the affirmative vote of a majority of the outstanding stock entitled to vote
for any amendment to the certificate of incorporation, unless a greater level of
approval is required by the certificate of incorporation. The Pioneer Restated
Certificate provides that (i) amendments to certain provisions regarding (A)
election, removal and replacement of directors and provision for a staggered
board, (B) amendment of the Pioneer Bylaws, (C) appointment or removal of
officers and members of committees of the Pioneer Board, and (D) matters
relating to special meetings of stockholders must be approved by the affirmative
vote of at least two-thirds of the outstanding shares of capital stock, (ii)
amendments to certain provisions relating to denial of written consent rights to
stockholders must be approved by the affirmative vote of at least 80% of the
outstanding shares of capital stock, and (iii) amendments to certain provisions
relating to certain business combinations must be approved by the affirmative
vote of at least 80% of the outstanding shares of capital stock and by the
affirmative vote of holders of at least two-thirds of the outstanding shares of
voting stock held by stockholders other than the Pioneer Related Person. The
DGCL also states that the power to adopt, amend or repeal the by-laws of a
corporation shall be in the stockholders entitled to vote, provided that the
corporation in its certificate of incorporation may confer such power on the
corporation's board of directors. The Pioneer Restated Certificate provides that
the Pioneer Board may alter, amend or repeal the Pioneer Bylaws. The Pioneer
Bylaws may also be altered, amended or repealed by the holders of not less than
two-thirds of the outstanding shares of stock then entitled to vote upon an
election of directors at any regular meeting of the stockholders or at any
special meeting of the stockholders if notice of such alteration, amendment,
repeal or adoption of new bylaws is contained in the notice of such special
meeting.
DISSENTERS' RIGHTS
The ABCA provides that shareholders of an Alberta corporation entitled to
vote on certain matters are entitled to exercise dissent rights and to be paid
the fair value of their shares in connection therewith. The ABCA does not
distinguish for this purpose between listed and unlisted shares. Such matters
include: (a) any amalgamation with another corporation (other than with certain
affiliated corporations); (b) an amendment to the corporation's articles to add,
change or remove any provisions restricting or constraining the issue or
transfer of shares; (c) an amendment to the corporation's articles to add,
change or remove any restriction upon the business or businesses that the
corporation may carry on; (d) a continuance under the laws of another
jurisdiction; (e) a sale, lease or exchange of all or substantially all the
property of the corporation other than in the ordinary course of business; (f) a
court order permitting a shareholder to dissent in connection with an
application to the court for an order approving an arrangement proposed by the
corporation; or (g) certain amendments to the articles of a corporation which
require a separate class or series
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vote, provided that a shareholder is not entitled to dissent if an amendment to
the articles is effected by a court order approving a reorganization or by a
court order made in connection with an action for an oppression remedy. Under
the ABCA, a shareholder may, in addition to exercising dissent rights, seek an
oppression remedy for any act or omission of a corporation or any of its
affiliates which is oppressive, unfairly prejudicial to or that unfairly
disregards a shareholder's interest.
Under the DGCL, holders of shares of any class or series have the right, in
certain circumstances, to dissent from a merger or consolidation by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares, as determined by agreement with the corporation or
by an independent appraiser appointed by a court in an action timely brought by
the corporation or the dissenters. The DGCL grants dissenters' appraisal rights
only in the case of mergers or consolidations and not in the case of a sale or
transfer of assets or a purchase of assets for stock regardless of the number of
shares being issued. Further, no appraisal rights are available for shares of
any class or series listed on a national securities exchange or designated as a
national market system security on Nasdaq or held of record by more than 2,000
stockholders, unless the agreement of merger or consolidation converts such
shares into anything other than (a) stock of the surviving corporation, (b)
stock of another corporation which is either listed on a national securities
exchange or designated as a national market system security on Nasdaq or held of
record by more than 2,000 stockholders, (c) cash in lieu of fractional shares,
or (d) some combination of the above.
OPPRESSION REMEDY
The ABCA provides an oppression remedy that enables the court to make any
order, both interim and final, to rectify the matters complained of, if the
court is satisfied upon application by a complainant (as defined below) that:
(i) any act or omission of the corporation or an affiliate effects a result;
(ii) the business or affairs of the corporation or an affiliate are or have been
carried on or conducted in a manner; or (iii) the powers of the directors of the
corporation or of an affiliate are or have been exercised in a manner, that is
oppressive or unfairly prejudicial to or that unfairly disregards the interests
of any security holder, creditor, director or officer. A complainant includes:
(a) a present or former registered holder or beneficial owner of securities of a
corporation or any of its affiliates; (b) a present or former director or
officer of the corporation or any of its affiliates; and (c) any other person
who in the discretion of the court is a proper person to make such application.
Because of the breadth of the conduct which can be complained of and the
scope of the court's remedial powers, the oppression remedy is very flexible and
is sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the ABCA, it
is not necessary to prove that the directors of a corporation acted in bad faith
in order to seek an oppression remedy. Furthermore, the court may order the
corporation to pay the interim expenses of a complainant seeking an oppression
remedy, but the complainant may be held accountable for such interim costs on
final disposition of the complaint. The DGCL does not provide for a similar
remedy.
DERIVATIVE ACTION
Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, the corporation. The DGCL provides that a
stockholder must aver in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains or that
his or her stock thereafter devolved upon him or her by operation of law. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
Under the ABCA, a complainant may apply to the court for leave to bring an
action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such body corporate is a party, for
the purpose of prosecuting, defending or discontinuing the action on behalf of
the body corporate or subsidiary. Under the ABCA, no action may be brought and
no intervention in an action may be made unless the complainant has given
reasonable notice to the directors of the corporation or its subsidiary of
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the complainant's intention to apply to the court and the court is satisfied
that: (a) the directors of the corporation or its subsidiary will not bring,
diligently prosecute or defend or discontinue the action; (b) the complainant is
acting in good faith; and (c) it appears to be in the interests of the
corporation or its subsidiary that the action be brought, prosecuted, defended
or discontinued.
Under the ABCA, the court in a derivative action may make any order it
thinks fit. Additionally, under the ABCA, a court may order a corporation or its
subsidiary to pay the complainant's reasonable legal fees.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted.
The Pioneer Restated Certificate denies action by written consent of holders of
common stock. Under the ABCA, shareholder action without a meeting may only be
taken by written resolution signed by all shareholders who would be entitled to
vote thereon at a meeting.
DIRECTOR QUALIFICATIONS
At least half of the directors of an ABCA corporation generally must be
resident Canadians. The ABCA also requires that a corporation whose securities
are publicly traded must have not fewer than three directors, at least two of
whom are not officers or employees of the corporation or any of its affiliates.
The DGCL does not have comparable requirements.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations governed by the ABCA have fiduciary obligations
to the corporation. Directors of corporations incorporated or organized under
the DGCL have fiduciary obligations to the corporation and its shareholders.
Pursuant to these fiduciary obligations, the directors must act in accordance
with the so-called duties of "due care" and "loyalty". Under the DGCL, the duty
of care requires that the directors act in an informed and deliberative manner
and to inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of loyalty must be summarized
as the duty to act in good faith in a manner which the directors reasonably
believe to be in the best interests of the stockholders. It requires that there
be no conflict between duty and self-interest.
Under the ABCA, the duty of loyalty requires directors of an Alberta
corporation to act honestly and in good faith with a view to the best interests
of the corporation, and the duty of care requires that the directors exercise
the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the ABCA, except in respect of an action by or on behalf of a
corporation or a body corporate to procure a judgment in its favor, a
corporation may indemnify a director or officer, a former director or officer or
a person who acts or acted at the corporation's request as a director or officer
of a body corporate of which the corporation is or was a shareholder or
creditor, and his or her heirs and legal representatives (an "Indemnifiable
Person"), against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to which
he or she is made a party by reason of being or having been a director or
officer of such corporation or such body corporate, if: (a) he or she acted
honestly and in good faith with a view to the best interests of such
corporation; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. An Indemnifiable
Person is entitled to such indemnity from the corporation if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding, fulfilled the conditions set out in (a) and (b), above and is fairly
and reasonably entitled to indemnity. A corporation may, with the
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approval of a court, also indemnify an Indemnifiable Person in respect of an
action by or on behalf of the corporation or body corporate to procure a
judgment in its favor, to which such person is made a party by reason of being
or having been a director or an officer of the corporation or body corporate, if
he or she fulfills the conditions set out in (a) and (b), above. The Chauvco
Bylaws provide for indemnification of directors and officers in accordance with
the provisions of the ABCA.
The DGCL provides that a corporation may indemnify its present and former
directors, officers, employees and agents (each, an "indemnitee") against all
reasonable expenses (including attorneys' fees) and, except in actions initiated
by or in the right of the corporation, against all judgments, fines and amounts
paid in settlement in actions brought against them, if such individual acted in
good faith and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The corporation shall indemnify an indemnitee to the extent that he or she is
successful on the merits or otherwise in the defense of any claim, issue or
matter associated with an action. The Pioneer Restated Certificate provides for
indemnification of directors and officers to the fullest extent authorized by
the DGCL.
The DGCL allows for the advance payment of an indemnitee's expenses prior
to the final disposition of an action, provided that the indemnitee undertakes
to repay any such amount advanced if it is later determined that the indemnitee
is not entitled to indemnification with regard to the action for which the
expenses were advanced. Neither the ABCA nor the Chauvco Bylaws expressly
provides for such advance payment.
Pioneer has entered into Indemnity Agreements with each of its directors
and executive officers.
DIRECTOR LIABILITY
The DGCL provides that the charter of a corporation may include a provision
which limits or eliminates the liability of directors to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided such liability does not arise from certain proscribed conduct,
including acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law. The Pioneer Restated Certificate
contains a provision limiting the liability of its directors to the fullest
extent permitted by the DGCL. The ABCA does not permit any such limitation of a
director's liability.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
Section 203 of the DGCL, in general, prohibits a "business combination"
between a corporation and an "interested stockholder" within three years of the
time such stockholder became an "interested stockholder" unless (i) prior to
such time the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, exclusive of shares owned by
directors who are also officers and by certain employee stock plans, or (iii)
after such time, the business combination is approved by the board of directors
and authorized by the affirmative vote at a stockholders' meeting of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. The term "business combination" is defined to include, among other
transactions between the interested stockholder and the corporation or any
direct or indirect majority-owned subsidiary thereof, a merger or consolidation,
a sale, pledge, transfer or other disposition (including as part of a
dissolution) of assets having an aggregate market value equal to 10% or more of
either the aggregate market value of all assets of the corporation on a
consolidated basis or the aggregate market value of all the outstanding stock of
the corporation; certain transactions that would increase the interested
stockholder's proportionate share ownership of the stock of any class or series
of the corporation or such subsidiary; and any receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges of other
financial benefits provided by or through the corporation or any such
subsidiary. In general, and subject to certain exceptions, an "interested
stockholder" is any person who is the owner of 15% or more of the outstanding
voting stock (or, in the case of a corporation with classes of voting stock with
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disparate voting power, 15% or more of the voting power of the outstanding
voting stock) of the corporation, and the affiliates and associates of such
person. The term "owner" is broadly defined to include any person that
individually or with or through his or its affiliates or associates, among other
things, beneficially owns such stock, or has the right to acquire such stock
(whether such right is exercisable immediately or only after the passage of
time) pursuant to any agreement or understanding or upon the exercise of
warrants or options or otherwise or has the right to vote such stock pursuant to
any agreement or understanding, or has an agreement or understanding with the
beneficial owner of such stock for the purpose of acquiring, holding, voting or
disposing of such stock. The restrictions of Section 203 or the DGCL do not
apply to corporations that have elected, in the manner provided therein, not to
be subject to such section or which do not have a class of voting stock that is
listed on a national securities exchange or authorized for quotation on an
interdealer quotation system of a registered national securities association or
held of record by more than 2,000 stockholders.
The Pioneer Restated Certificate contains a "fair price" provision that
applies to certain business combination transactions involving any Pioneer
Related Person. The "fair price" provision requires the affirmative vote of the
holders of (i) at least 80% of the voting stock of Pioneer and (ii) at least
66 2/3% of the voting stock of Pioneer not beneficially owned by the Pioneer
Related Person, to approve certain transactions between the Pioneer Related
Person and Pioneer or its subsidiaries, including any merger, consolidation or
share exchange, any sale, lease, exchange, pledge or other disposition of assets
of Pioneer or its subsidiaries having a fair market value of at least $10
million, any transfer or issuance of securities of Pioneer or any of its
subsidiaries, any adoption of a plan or proposal by Pioneer of voluntary
liquation or dissolution of Pioneer, certain reclassifications of securities or
recapitalizations of Pioneer or certain other transactions, in each case
involving the Pioneer Related Person. This voting requirement does not apply to
certain transactions, including (a) any transaction in which the consideration
to be received by the holders of each class of capital stock of Pioneer is (x)
the same in form and amount as that paid in a tender offer in which the Pioneer
Related Person acquired at least 50% of the outstanding shares of such class and
which was consummated not more than one year earlier or (y) not less in amount
than the highest per share price paid by the Pioneer Related Person for shares
of such class or (b) any transaction approved by Pioneer's continuing directors
(as defined in the Pioneer Restated Certificate).
As a Delaware corporation, Pioneer is subject to Section 203 of the DGCL as
described above. The Pioneer Restated Certificate does not contain any provision
electing out of the application of Section 203 of the DGCL, and Pioneer has not
taken any of the actions necessary for it to elect out of such provision. As a
result, the provisions of Section 203 will remain applicable to transactions
between Pioneer and any of their respective "interested stockholders."
The ABCA does not contain a comparable provision with respect to business
combinations. However, policies of certain Canadian securities regulatory
authorities, including Policy 9.1 of the Ontario Securities Commission ("Policy
9.1"), contain requirements in connection with related party transactions. A
related party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the case
may be, a related party by any means in any one or any combination of
transactions. "Related party" is defined in Policy 9.1 and includes directors,
senior officers and holders of at least 10% of the voting securities of the
issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent to
security holders in connection with a related party transaction, and, subject to
certain exceptions, the preparation of a formal valuation of the subject matter
of the related party transaction and any non-cash consideration offered therefor
and the inclusion of a summary of the valuation in the proxy material. Policy
9.1 also requires, subject to certain exceptions, that the minority shareholders
of the issuer separately approve the transaction, by either a simple majority or
two-thirds of the votes cast, depending on the circumstances.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Pioneer consists of 500,000,000 shares of
common stock, par value $.01 per share, and 100,000,000 shares of preferred
stock, par value $.01 per share, of which one share has been designated as the
Special Preferred Voting Share.
PIONEER CAPITAL STOCK
Pioneer Common Stock
All shares of Pioneer Common Stock issued in the Transaction will be fully
paid and nonassessable. The holders of Pioneer Common Stock are entitled to one
vote for each share held on all matters submitted to a vote of common
stockholders. The Pioneer Common Stock does not have cumulative voting rights.
Shares of Pioneer Common Stock have no preemptive rights, conversion rights,
redemption rights or sinking fund provisions. Pioneer Common Stock is not
subject to redemption by Pioneer.
Subject to the rights of the holders of any class of capital stock of
Pioneer having any preference or priority over the Pioneer Common Stock, the
holders of Pioneer Common Stock are entitled to dividends in such amounts as may
be declared by the Pioneer Board from time to time out of funds legally
available for such payments and, in the event of liquidation, to share ratably
in any assets of Pioneer remaining after payment in full of all creditors and
provision for any liquidation preferences on any outstanding preferred stock
ranking prior to the Pioneer Common Stock.
Pioneer Preferred Stock
The Pioneer Board, without further stockholder action, is authorized to
issue up to 100,000,000 shares of 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.
Pioneer Special Preferred Voting Stock
The Pioneer Board has designated one (1) of the 100,000,000 authorized
shares of preferred stock as Special Preferred Voting Stock, par value $.01 per
share (the "Voting Share"). The Trustee shall hold such Voting Share as trustee
for and on behalf of, and for the use and benefit of, the holders of
Exchangeable Shares and in accordance with the Voting and Exchange Trust
Agreement. The Certificate of Designations for the Voting Share includes the
following principal terms:
Dividends. No dividend shall be paid to the Trustee, as the holder of the
Voting Share.
Voting Rights. The Trustee, as the holder of record of the Voting Share,
shall be entitled to all of the voting rights attached to the Voting Share,
including the right to consent to or vote in person or by proxy the Voting
Share, on any matter, question or proposition whatsoever that may properly come
before the Pioneer stockholders at a meeting thereof or with respect to any
written consent sought by Pioneer from its stockholders. For each Exchangeable
Share owned of record on the relevant record date, the holder thereof shall be
entitled to instruct the Trustee to cast and exercise, in the manner instructed,
a number of votes (including for purposes of a quorum) equal to the number of
votes to which a holder of one share of Pioneer Common Stock is entitled with
respect to any matter, proposition or question on which the holders of Pioneer
Common Stock are entitled to vote (the "Equivalent Vote Amount"). Except as
otherwise described herein or required by law, the holder of the Voting Share
will vote together with the Pioneer Common Stock as a single class and not as a
separate class or series apart therefrom, including any vote to approve or
adopt:(i) any plan of merger, consolidation or share exchange for which Delaware
law requires a stockholder vote; (ii) any disposition of assets for which
Delaware law requires a stockholder vote; and (iii) any dissolution of Pioneer
for which Delaware law requires a stockholder vote.
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So long as any Exchangeable Shares are outstanding, the number of shares
comprising the Special Preferred Voting Stock will not be increased or decreased
and no other term of the Special Preferred Voting Stock may be amended, except
upon the approval of the holder of the Voting Share.
Conversion. The Voting Share is not convertible into any other class or
series of the capital stock of Pioneer or into cash, property or other rights.
Redemption. The Voting Share may not be redeemed, except at such time as
no Exchangeable Shares shall be outstanding, in which case, the Voting Share
shall be automatically redeemed. The redemption price due and payable upon such
automatic redemption will be equal to a $1.00 liquidation preference. The Voting
Share will be deemed retired and will be cancelled upon any purchase or other
acquisition thereof by Pioneer. After such cancellation, the Voting Share may
not be reissued or otherwise disposed of by Pioneer.
Liquidation. The Voting Share will rank prior to each share of Pioneer
Common Stock with respect to the distribution of assets upon a liquidation,
dissolution or winding-up of Pioneer. In the event of any such liquidation,
dissolution or winding-up, the holder of the Voting Share will be entitled to
receive, before any distribution to the holders of Pioneer Common Stock, but
only after the liquidation preference of any other shares of preferred stock of
Pioneer has been paid in full, a liquidation preference equal to $1.00.
Certain Covenants of Pioneer. For so long as the Voting Share is
outstanding, Pioneer will: (i) fully comply with all terms of the Exchangeable
Shares and with all contractual obligations of Pioneer associated therewith, and
(ii) not amend, alter or repeal the terms and conditions of the Special
Preferred Voting Stock, except with the approval of the holder of the Voting
Share.
For a more detailed description of Pioneer's Special Preferred Voting Stock
and the Voting Share, see the terms and conditions thereof set forth on Annex G
hereto. See also " -- Voting and Exchange Trust Agreement."
Certain Provisions of the Certificate of Incorporation and Bylaws
The Pioneer Board is divided into three classes. The directors of each
class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single class are elected at each annual
meeting of stockholders. Stockholders may remove a director only for cause. In
general, the Pioneer Board, not the stockholders, has the right to appoint
persons to fill vacancies on the Pioneer Board.
The Pioneer Restated Certificate contains a "fair price" provision that
requires the affirmative vote of the holders of least 80% of Pioneer's voting
stock and the affirmative vote of at least 66 2/3% of Pioneer's voting stock not
owned, directly or indirectly, by a Pioneer Related Person to approve any
merger, consolidation, sale or lease of all or substantially all of Pioneer's
assets, or certain other transactions involving a Pioneer Related Person. For
purposes of this fair price provision, a "Pioneer Related Person" is any person
beneficially owning 10% or more of the voting power of the outstanding capital
stock of Pioneer who is a party to the transaction at issue. The voting
requirement is not applicable to certain transactions, including those that are
approved by Pioneer's Continuing Directors (as defined in the Pioneer Restated
Certificate) or that meet certain "fair price" criteria contained in the Pioneer
Restated Certificate. See "Comparison of Stockholder Rights -- Anti-Takeover
Provisions and Interested Stockholder Transactions."
The Pioneer Restated Certificate further provides that stockholders may act
only at annual or special meetings of stockholders and not by written consent,
that special meetings of stockholders may be called only by the Pioneer Board
and that only business proposed by the Pioneer Board may be considered at
special meetings of stockholders.
The Pioneer Restated Certificate also provides that the only business
(including election of directors) that may be considered at an annual meeting of
stockholders, in addition to business proposed (or persons nominated to be
directors) by the directors of Pioneer, is business proposed (or persons
nominated to be directors) by stockholders who comply with the notice and
disclosure requirements set forth in the Pioneer Restated Certificate. In
general, the Pioneer Restated Certificate requires that a stockholder give
Pioneer notice of proposed business or nominations no later than 60 days before
the annual meeting of stockholders
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(meaning the date on which the meeting is first scheduled and not postponements
or adjournments thereof) or (if later) 10 days after the first public notice of
the annual meeting is sent to common stockholders. In general, the notice must
also contain information about the stockholder proposing the business or
nomination, his interest in the business, and (with respect to nominations for
director) information about the nominee of the nature ordinarily required to be
disclosed in public proxy solicitations. The stockholder also must submit a
notarized letter from each of his nominees stating the nominee's acceptance of
the nomination and indicating the nominee's intention to serve as director if
elected.
The Pioneer Restated Certificate also restricts the ability of stockholders
to interfere with the powers of the Board of Directors in certain specified
ways, including the constitution and composition of committees and the election
and removal of officers.
The Pioneer Restated Certificate provides that approval by the holders of
at least 66 2/3% of the outstanding Pioneer voting stock is required to amend
the provisions of the Certificate of Incorporation discussed above and certain
other provisions, except that (a) approval by the holders of at least 80% of the
outstanding Pioneer voting stock, together with approval by the holders of at
least 66 2/3% of the outstanding voting stock not owned, directly or indirectly,
by the Related Person, is required to amend the fair price provisions and (b)
approval of the holders of at least 80% of the outstanding voting stock is
required to amend the provisions prohibiting stockholders from acting by written
consent.
Delaware Anti-Takeover Statute
Pioneer is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of Pioneer's outstanding voting stock)
from engaging in a "business combination" (as defined in Section 203) with
Pioneer for three years following the date that person becomes an interested
stockholder unless (a) before that person became an interested stockholder, the
Pioneer Board 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 Pioneer voting stock outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of Pioneer 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 the
Pioneer Board and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least two-thirds of the outstanding Pioneer 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 or certain extraordinary transactions involving Pioneer 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
Pioneer's directors, if that extraordinary transaction is approved or not
opposed by a majority of the 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.
CHAUVCO SHARE CAPITAL
In the event of the consummation of the Transaction, the share capital of
Chauvco after the Effective Time will consist of one class of common shares,
unlimited in number, and all of such shares which are issued and outstanding
shall be held by Pioneer Canada;
PIONEER CANADA SHARE CAPITAL
In the event of the consummation of the Transaction, the share capital of
Pioneer Canada after the Effective Time will have the rights and preferences
summarized below. Such summary is qualified in its
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entirety by reference to the Plan of Arrangement and the Exchangeable Share
Provisions which are attached as Annexes E and F hereto, respectively.
Pioneer Canada Common Voting Shares. The holders of Pioneer Canada Common
Voting Shares will be entitled to receive notice of and to attend all meetings
of the shareholders of Pioneer Canada and will be entitled to one vote for each
share held of record on all matters submitted to a vote of holders of Pioneer
Canada Common Voting Shares. The holders of Pioneer Canada Common Voting Shares
will be entitled to receive such dividends as may be declared by the Pioneer
Canada board of directors out of funds legally available therefor. Holders of
Pioneer Canada Common Voting Shares will be entitled upon any liquidation,
dissolution or winding-up of Pioneer Canada, subject to the prior rights of the
holders of the Exchangeable Shares and to any other shares ranking senior to the
Pioneer Canada Common Voting Shares, to receive the remaining property and
assets of Pioneer Canada.
Exchangeable Shares of Pioneer Canada
Ranking. The Exchangeable Shares will rank prior to the Pioneer Canada
Common Voting Shares and any other shares ranking junior to the Exchangeable
Shares with respect to the payment of dividends and the distribution of assets
in the event of the liquidation, dissolution or winding-up of Pioneer Canada.
Dividends. Holders of Exchangeable Shares will be entitled to receive
dividends equivalent to dividends paid from time to time by Pioneer on shares of
Pioneer Common Stock. The declaration date, record date and payment date for
dividends on the Exchangeable Shares will be the same as that for the
corresponding dividends on the Pioneer Common Stock.
Certain Restrictions. Without the approval of the holders of the
Exchangeable Shares, Pioneer Canada will not:
(a) pay any dividend on the Pioneer Canada Common Voting Shares, or any
other shares ranking junior to the Exchangeable Shares, other than stock
dividends payable in such other shares ranking junior to the Exchangeable
Shares;
(b) redeem, purchase or make any capital distribution in respect of Pioneer
Canada Common Voting Shares or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of Pioneer Canada ranking equally
with the Exchangeable Shares with respect to the payment of dividends or on any
liquidation distribution;
(d) issue any Exchangeable Shares or any other shares of Pioneer Canada
ranking equally with, or superior to, the Exchangeable Shares other than by
stock dividends to the holders of the Exchangeable Shares or as contemplated in
the Support Agreement; or
(e) amend the articles or bylaws of Pioneer Canada.
The restrictions in (a), (b) and (c) above will not apply at any time when
the dividends on the outstanding Exchangeable Shares corresponding to dividends
declared on the Pioneer Common Stock have been declared and paid in full.
Liquidation. In the event of the liquidation, dissolution or winding-up of
Pioneer Canada a holder of Exchangeable Shares will be entitled to receive for
each Exchangeable Share one share of Pioneer Common Stock, together with a cash
amount equivalent to the full amount of all unpaid dividends on the Exchangeable
Shares. See "-- Voting and Exchange Trust Agreement."
Retraction of Exchangeable Shares by Holders. A holder of Exchangeable
Shares will be entitled at any time to require Pioneer Canada to retract (i.e.,
require Pioneer Canada to redeem) any or all of the Exchangeable Shares held by
such holder for one share of Pioneer Common Stock for each Exchangeable Share
plus an additional amount equivalent to the full amount of all unpaid dividends
thereon, which shall be delivered to the retracting holder on the retraction
date specified by the holder (which shall not be less than three nor more than
ten business days after the date on which Pioneer Canada receives the retraction
request from the holder).
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If, as a result of liquidity or solvency provisions of applicable law,
Pioneer Canada is not permitted to redeem all Exchangeable Shares tendered by a
retracting holder, Pioneer Canada will redeem only those Exchangeable Shares
tendered by the holder (rounded down to a whole number of shares) as would not
be contrary to such provisions of applicable law. The holder of any Exchangeable
Shares not redeemed by Pioneer Canada will be deemed to have required Pioneer to
purchase such unretracted shares in exchange for Pioneer Common Stock, plus an
additional amount equivalent to the full amount of all unpaid dividends thereon,
on the retraction date pursuant to the optional Exchange Rights. See "-- Voting
and Exchange Trust Agreement."
Redemption of Exchangeable Shares. On the Automatic Redemption Date
Pioneer Canada will redeem all but not less than all of the then outstanding
Exchangeable Shares for one share of Pioneer Common Stock for each Exchangeable
Share plus an additional amount equivalent to the full amount of all unpaid
dividends thereon. Pioneer Canada shall, at least 120 days prior to the
Automatic Redemption Date, provide the registered holders of the Exchangeable
Shares with written notice of the proposed redemption of the Exchangeable
Shares.
Voting Rights. Except as required by applicable law, the holders of the
Exchangeable Shares shall not be entitled as such to receive notice of or attend
any meeting of the shareholders of Pioneer Canada or to vote at any such
meeting.
Amendment and Approval. The rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares may be changed only with the
approval of the holders thereof. Any such approval or any other approval or
consent to be given by the holders of the Exchangeable Shares will be
sufficiently given if given in accordance with applicable law and subject to a
minimum requirement that such approval or consent be evidenced by a resolution
passed by not less than two-thirds of the votes cast thereon (other than shares
beneficially owned by Pioneer or entities controlled by Pioneer) at a meeting of
the holders of Exchangeable Shares duly called and held at which holders of at
least 50% of the then outstanding Exchangeable Shares are present or represented
by proxy. In the event that no such quorum is present at such meeting within
one-half hour after the time appointed therefor, then the meeting will be
adjourned to such place and time not less than 10 days later as may be
determined at the original meeting and the holders of Exchangeable Shares
present or represented by proxy at the adjourned meeting may transact the
business for which the meeting was originally called. At the adjourned meeting,
a resolution passed by the affirmative vote of not less than two-thirds of the
votes cast thereon will constitute the approval or consent of the holders of the
Exchangeable Shares.
Actions of Pioneer Canada under Support Agreement. Under the Exchangeable
Share Provisions, Pioneer Canada will agree to take all such actions and do all
such things as are necessary or advisable to perform and comply with its
obligations under, and to ensure the performance and compliance by Pioneer with
its obligations under, the Support Agreement.
SUPPORT AGREEMENT
The following is a summary description of the material provisions of the
Support Agreement and is qualified in its entirety by reference to the full text
of the Support Agreement, which is attached as Annex H hereto.
Under the Support Agreement, Pioneer will agree that: (i) it will not
declare or pay dividends on the Pioneer Common Stock unless Pioneer Canada is
able to and simultaneously pays an equivalent dividend on the Exchangeable
Shares; (ii) it will cause Pioneer Canada to declare and pay an equivalent
dividend on the Exchangeable Shares simultaneously with Pioneer's declaration
and payment of dividends on the Pioneer Common Stock; (iii) it will advise
Pioneer Canada in advance of the declaration of any dividend on the Pioneer
Common Stock and ensure that the declaration date, record date and payment date
for dividends on the Exchangeable Shares are the same as that for the Pioneer
Common Stock; (iv) it will take all actions and do all things necessary to
ensure that Pioneer Canada is able to provide to the holders of the Exchangeable
Shares the equivalent number of shares of Pioneer Common Stock in the event of a
liquidation, dissolution, or winding-up of Pioneer Canada, a retraction request
by a holder of Exchangeable Shares, or a redemption of
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Exchangeable Shares of Pioneer Canada; and (v) it will not vote or otherwise
take any action or omit to take any action causing the liquidation, dissolution
or winding-up of Pioneer Canada.
The Support Agreement also provides that, without the prior approval of
Pioneer Canada and the holders of the Exchangeable Shares, Pioneer will not
distribute additional shares of Pioneer Common Stock or rights to subscribe
therefor or other property or assets to all or substantially all holders of
shares of Pioneer Common Stock, nor change the Pioneer Common Stock nor effect
any tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction affecting the Pioneer Common Stock, unless the same or an equivalent
distribution on or change to the Exchangeable Shares (or in the rights of the
holders thereof) is made simultaneously.
Pioneer has agreed that so long as there remain outstanding any
Exchangeable Shares not owned by Pioneer or any entity controlled by Pioneer,
Pioneer will remain the beneficial owner, directly or indirectly, of all
outstanding shares of Pioneer Canada other than the Exchangeable Shares. In
addition, the Support Agreement obligates Pioneer to nominate Messrs. Baroffio
and Turcotte to the board of directors of Pioneer in accordance with the same
terms as the Combination Agreement.
With the exception of administrative changes for the purpose of adding
covenants for the protection of the holders of the Exchangeable Shares, making
certain necessary amendments or curing ambiguities or clerical errors (in each
case provided that the board of directors of each of Pioneer and Pioneer Canada
is of the opinion that such amendments are not prejudicial to the interests of
the holders of the Exchangeable Shares), the Support Agreement may not be
amended without the approval of the holders of the Exchangeable Shares.
Under the Support Agreement, Pioneer has agreed not to exercise any voting
rights attached to the Exchangeable Shares owned by it or any entity controlled
by it on any matter considered at meetings of holders of Exchangeable Shares
(including any approval sought from such holders in respect of matters arising
under the Support Agreement).
VOTING AND EXCHANGE TRUST AGREEMENT
The following is a summary description of the material provisions of the
Voting and Exchange Trust Agreement and is qualified in its entirety by
reference to the full text of the Voting and Exchange Trust Agreement which is
attached as Annex I hereto. Under the terms of the Voting and Exchange Trust
Agreement, Pioneer will issue and grant to the Trustee the Voting Rights and the
Exchange Rights.
Voting Rights. Under the Voting and Exchange Trust Agreement, Pioneer will
issue the Voting Share to the Trustee for the benefit of the holders (other than
Pioneer and its subsidiaries) of the Exchangeable Shares. The Voting Share will
carry a number of votes, exercisable at any meeting at which Pioneer
Stockholders are entitled to vote, equal to the number of outstanding
Exchangeable Shares (other than shares held by Pioneer and its subsidiaries).
With respect to any written consent sought from the Pioneer Stockholders, each
vote attached to the Voting Share will be exercisable in the same manner as set
forth above.
Each holder of an Exchangeable Share on the record date for any meeting at
which Pioneer Stockholders are entitled to vote will be entitled to instruct the
Trustee to exercise one of the votes attached to the Voting Share for such
Exchangeable Share. The Trustee will exercise each vote attached to the Voting
Share only as directed by the relevant holder and, in the absence of
instructions from a holder as to voting, will not exercise such votes. A holder
may, upon instructing the Trustee, obtain a proxy from the Trustee entitling the
holder to vote directly at the relevant meeting the votes attached to the Voting
Share to which the holder is entitled.
The Trustee will send to the holders of the Exchangeable Shares the notice
of each meeting at which the Pioneer Stockholders are entitled to vote, together
with the related meeting materials and a statement as to the manner in which the
holder may instruct the Trustee to exercise the votes attaching to the Voting
Share, at the same time as Pioneer sends such notice and materials to the
Pioneer Stockholders. The Trustee will also send to the holders copies of all
information statements, interim and annual financial statements, reports and
other materials sent by Pioneer to the Pioneer Stockholders at the same time as
such materials are sent to the
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Pioneer Stockholders. To the extent such materials are provided to the Trustee
by Pioneer, the Trustee will also send to the holders all materials sent by
third parties to Pioneer Stockholders, including dissident proxy circulars and
tender and exchange offer circulars, as soon as possible after such materials
are first sent to Pioneer Stockholders.
All rights of a holder of Exchangeable Shares to exercise votes attached to
the Voting Share will cease upon the exchange of all such holder's Exchangeable
Shares for shares of Pioneer Common Stock.
Exchange Rights. Under the Voting and Exchange Trust Agreement, Pioneer
will grant the Exchange Rights to the Trustee for the benefit of the holders of
the Exchangeable Shares.
Optional Exchange Right. Upon the occurrence and during the continuance of
a Pioneer Canada Insolvency Event, a holder of Exchangeable Shares will be
entitled to instruct the Trustee to exercise the optional Exchange Right with
respect to any or all of the Exchangeable Shares held by such holder, thereby
requiring Pioneer to purchase such Exchangeable Shares from the holder.
Immediately upon the occurrence of a Pioneer Canada Insolvency Event or any
event which may with the passage of time or the giving of notice, become a
Pioneer Canada Insolvency Event, Pioneer Canada and Pioneer will give written
notice thereof to the Trustee. As soon as practicable thereafter, the Trustee
will notify each holder of Exchangeable Shares of such event or potential event
and will advise the holder of its rights with respect to the optional Exchange
Right.
The consideration for each Exchangeable Share to be acquired under the
optional Exchange Right will be one share of Pioneer Common Stock plus an
additional amount equivalent to the full amount of all dividends declared and
unpaid on the Exchangeable Share.
If, as a result of liquidity or solvency provisions of applicable law,
Pioneer Canada is unable to redeem all of the Exchangeable Shares tendered for
retraction by a holder in accordance with the Exchangeable Share Provisions, the
holder will be deemed to have exercised the optional Exchange Right with respect
to the unredeemed Exchangeable Shares and Pioneer will be required to purchase
such shares from the holder in the manner set forth above.
Automatic Exchange Right. In the event of a Pioneer Liquidation Event,
Pioneer will be required to acquire each outstanding Exchangeable Share by
exchanging one share of Pioneer Common Stock for each such Exchangeable Share,
plus an additional amount equivalent to the full amount of all declared and
unpaid dividends on the Exchangeable Shares.
DELIVERY OF PIONEER COMMON STOCK
Pioneer will ensure that all shares of Pioneer Common Stock to be delivered
by it under the Support Agreement or on the exercise of the Exchange Rights
under the Voting and Exchange Trust Agreement are duly registered, qualified or
approved under applicable Canadian and United States securities laws, if
required so that such shares may be freely traded by the holder thereof (other
than any restriction on transfer by reason of a holder being a "control person"
of Pioneer for purposes of Canadian law or an "affiliate" of Pioneer for
purposes of United States law). In addition, Pioneer will take all actions
necessary to cause all such shares of Pioneer Common Stock to be listed or
quoted for trading on all stock exchanges or quotation systems on which
outstanding shares of Pioneer Common Stock are then listed or quoted for
trading.
CALL RIGHTS
The following description of the Call Rights is qualified in its entirety
by reference to the full text of the Plan of Arrangement and the Exchangeable
Share Provisions, which are attached as Annexes E and F hereto, respectively.
In the circumstances described below, Pioneer will have certain overriding
rights to acquire Exchangeable Shares from holders thereof for one share of
Pioneer Common Stock for each Exchangeable Share acquired, plus an amount
equivalent to the full amount of all declared and unpaid dividends on the
Exchangeable Shares. Different Canadian federal income tax consequences to a
holder of Exchangeable Shares may arise
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depending upon whether the Call Rights are exercised by Pioneer or whether the
relevant Exchangeable Shares are redeemed by Pioneer Canada pursuant to the
Exchangeable Share Provisions in the absence of the exercise by Pioneer of the
Call Rights. See "Income Tax Considerations to Chauvco Shareholders."
Retraction Call Right. Pursuant to the Exchangeable Share Provisions, a
holder requesting Pioneer Canada to redeem the Exchangeable Shares will be
deemed to offer such shares to Pioneer, and Pioneer will have an overriding
Retraction Call Right to acquire all but not less than all of the Exchangeable
Shares that the holder has requested Pioneer Canada to redeem in exchange for
one share of Pioneer Common Stock for each Exchangeable Share, plus an
additional amount equivalent to the full amount of all declared and unpaid
dividends thereon.
At the time of a Retraction Request by a holder of Exchangeable Shares,
Pioneer Canada will immediately notify Pioneer. Pioneer must then advise Pioneer
Canada within two business days as to whether Pioneer will exercise the
Retraction Call Right. If Pioneer does not advise Pioneer Canada within such two
business day period, Pioneer Canada will notify the holder as soon as possible
thereafter that Pioneer will not exercise the Retraction Call Right. A holder
may revoke his or her Retraction Request, at any time prior to the close of
business on the business day preceding the Retraction Date, in which case the
holder's Exchangeable Shares will neither be purchased by Pioneer nor redeemed
by Pioneer Canada. If the holder does not revoke his or her Retraction Request,
on the Retraction Date the Exchangeable Shares that the holder has requested
Pioneer Canada to redeem will be acquired by Pioneer (assuming Pioneer exercises
its Retraction Call Right) or redeemed by Pioneer Canada, as the case may be, in
each case for one share of Pioneer Common Stock for each Exchangeable Share plus
an additional amount equivalent to the full amount of all declared and unpaid
dividends on the Exchangeable Shares.
Liquidation Call Right. Pursuant to the Plan of Arrangement, Pioneer will
be granted an overriding Liquidation Call Right, in the event of and
notwithstanding a proposed Pioneer Canada Insolvency Event, to acquire all but
not less than all of the Exchangeable Shares then outstanding in exchange for
Pioneer Common Stock and, upon the exercise by Pioneer of the Liquidation Call
Right, the holders thereof will be obligated to transfer such shares to Pioneer.
The acquisition by Pioneer of all of the outstanding Exchangeable Shares upon
the exercise of the Liquidation Call Right will occur on the effective date of
the voluntary or involuntary liquidation, dissolution or winding-up of Pioneer
Canada.
Redemption Call Right. Pursuant to the Plan of Arrangement, Pioneer will be
granted an overriding Redemption Call Right, notwithstanding the proposed
automatic redemption of the Exchangeable Shares by Pioneer Canada pursuant to
the Exchangeable Share Provisions, to acquire on the Automatic Redemption Date
all but not less than all of the Exchangeable Shares then outstanding in
exchange for Pioneer Common Stock plus an additional amount equivalent to the
full amount of all declared and unpaid dividends on the Exchangeable Shares and,
upon the exercise by Pioneer of the Redemption Call Right, the holders thereof
will be obligated to transfer such shares to Pioneer.
Effect of Call Right Exercise. If Pioneer exercises one or more of its Call
Rights, it will directly issue shares of Pioneer Common Stock to holders of
Exchangeable Shares and will become the holder of such Exchangeable Shares.
Pioneer will not be entitled to exercise any voting rights attached to the
Exchangeable Shares it so acquires. If Pioneer declines to exercise its Call
Rights when applicable, it will be required, pursuant to the Support Agreement,
to issue shares of Pioneer Common Stock to Pioneer Canada which will, in turn,
transfer such stock to the holders of Exchangeable Shares in consideration for
the return and cancellation of such Exchangeable Shares. The tax consequences
resulting from Pioneer's exercise of one or more of the Call Rights are
discussed in "Income Tax Considerations to Chauvco Shareholders and Chauvco
Optionholders -- Canadian Federal Income Tax Considerations to Chauvco
Shareholders and Chauvco Optionholders," which includes a discussion on deemed
dividends and Part VI.1 tax.
DISSENTING SHAREHOLDERS' RIGHTS
Under the DGCL, Pioneer Stockholders will not have appraisal or dissenter's
rights relating to the Transaction.
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The following description of the rights of dissenting Chauvco Shareholders
is not a comprehensive statement of the procedures to be followed by a
dissenting shareholder who seeks payment of the fair value of its Chauvco Common
Shares and is qualified in its entirety by the reference to the full text of the
Interim Order and Section 184 of the ABCA which are attached to this Joint Proxy
Statement as Annexes D and M, respectively. A shareholder who intends to
exercise his right of dissent and appraisal should carefully consider and comply
with the provisions of that section, as modified by the Interim Order and should
seek his own legal advice. Failure to comply with the provisions of that
section, as modified by the Interim Order and to adhere to the procedures
established therein may result in the loss of all rights thereunder.
The Court hearing the application for the Final Order has the discretion to
alter the rights of dissent described herein based on the evidence presented at
such hearing.
Under the Interim Order, a shareholder is entitled, in addition to any
other right he may have, to dissent and to be paid by Chauvco the fair value of
the Chauvco Common Shares held by him in respect of which he dissents,
determined as of the close of business on the last business day before the day
on which the resolution from which he dissents was adopted. A shareholder may
dissent only with respect to all of the shares held by him or on behalf of any
one beneficial owner and registered in the dissenting shareholder's name. The
demand for appraisal must be executed by or for the holder of record, fully and
correctly, as such holder's name appears on the holder's share certificates. If
the shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, the demand should be made in that capacity, and if the
shares are owned of record by more than one person, as in a joint tenancy or a
tenancy in common, the demand should be made by or for all owners of record. An
authorized agent, including one or more joint owners, may execute the demand for
appraisal for a holder of record; however, such agent must identify the record
owner or owners and expressly identify the record owner or owners, and expressly
disclose in such demand that the agent is acting as agent for the record owner
or owners.
PERSONS WHO ARE BENEFICIAL OWNERS OF CHAUVCO COMMON SHARES REGISTERED IN
THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO
DISSENT, SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS
ENTITLED TO DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS CHAUVCO
COMMON SHARES AS NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DEMAND
APPRAISAL, MUST EXERCISE DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH
RESPECT TO THE SHARES HELD FOR SUCH BENEFICIAL OWNERS. IN SUCH CASE, THE DEMAND
FOR APPRAISAL SHOULD SET FORTH THE NUMBER OF CHAUVCO COMMON SHARES COVERED BY
IT.
A dissenting shareholder must send to Chauvco a written objection to the
Arrangement Resolution, which written objection must be received by the
Secretary of Chauvco in care of Corporate Shareholder Services Inc., Suite 1485,
550 6th Avenue S.W., Calgary, Alberta T2B OS2, or the Chairman of the Chauvco
Meeting at or before the Chauvco Meeting. An application may be made to the
Court to fix the fair value of the dissenting shareholder's Chauvco Common
Shares after the Effective Date. If an application to the Court is made by
either Chauvco or a dissenting shareholder, Chauvco must, unless the Court
otherwise orders, send to each dissenting shareholder a written offer to pay him
an amount considered by the board of directors to be the fair value of the
Chauvco Common Shares. The offer, unless the Court otherwise orders, will be
sent to each dissenting shareholder at least 10 days before the date on which
the application is returnable; if Chauvco is the applicant, or within 10 days
after Chauvco is served with notice of the application, if a shareholder is the
applicant. The offer will be made on the same terms to each dissenting
shareholder and will be accompanied by a statement showing how the fair value
was determined.
A dissenting shareholder may make an agreement with Chauvco for the
purchase of his Chauvco Common Shares in the amount of Chauvco's offer (or
otherwise) at any time before the Court pronounces an order fixing the fair
value of the Chauvco Common Shares. A dissenting shareholder is not required to
give security for costs in respect of an application and, except in special
circumstances, will not be required to pay the costs of the application or
appraisal. On the application, the Court will make an order fixing the fair
value of the Chauvco Common Shares of all dissenting shareholders who are
parties to the application, giving judgment in that amount against Chauvco and
in favour of each of those dissenting shareholders and fixing the time within
which Chauvco must pay that amount payable to the dissenting shareholders. The
Court may in its discretion allow a reasonable rate of interest on the amount
payable to each dissenting shareholder
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calculated from the date on which the shareholder ceases to have any rights as a
shareholder until the date of payment.
On the Arrangement becoming effective, or upon the making of an agreement
between Chauvco and the dissenting shareholder as to the payment to be made by
Chauvco to the dissenting shareholder, or upon the pronouncement of a Court
order, whichever first occurs, the dissenting shareholder will cease to have any
rights as a shareholder other than the right to be paid the fair value of the
Chauvco Common Shares in the amount agreed to between Chauvco and the dissenting
shareholder or in the amount of the judgment, as the case may be. Until one of
these events occurs, the shareholder may withdraw his dissent, or Chauvco may
rescind the Arrangement Resolution and in either event, the dissent and
appraisal proceedings in respect of that shareholder will be discontinued.
The Combination Agreement provides that the obligations with respect to
payments to dissenting shareholders shall be apportioned between Chauvco and CRI
in accordance with the respective values of such entities, all as set forth in
the Plan of Arrangement.
The Combination Agreement provides that it is a condition to the
obligations of Pioneer to complete the Arrangement that holders of not more than
5% of the issued and outstanding Chauvco Common Shares exercise their right of
dissent as described above.
LEGAL MATTERS
Certain legal matters in connection with the Transaction will be passed
upon by Bennett Jones Verchere, Calgary, Alberta, on behalf of Chauvco, and by
Vinson & Elkins L.L.P., Dallas, Texas, on behalf of Pioneer. Certain tax matters
will be passed upon by Felesky Flynn and Baker & Botts, L.L.P. on behalf of
Chauvco. Michael D. Wortley, a partner in the law firm of Vinson & Elkins
L.L.P., is a director of Pioneer and beneficially owns 6,623 shares of Pioneer
Common Stock.
EXPERTS
The Consolidated Financial Statements of Pioneer (successor to Parker &
Parsley Petroleum Company and subsidiaries) have been included in this Joint
Proxy Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers
to a change in the method of accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of in 1995 and a change in the method
of accounting for income taxes in 1993.
The Consolidated Financial Statements of Mesa included in this Joint Proxy
Statement 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 Consolidated Financial Statements of Chauvco included in this Joint
Proxy Statement have been audited by Price Waterhouse, chartered 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 Consolidated Financial Statements of CRI included in this Joint Proxy
Statement have been audited by Price Waterhouse, chartered 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 Pioneer's proved reserves as of December 31, 1996 set
forth in this Joint Proxy Statement are based upon a reserve report prepared by
Pioneer and audited by Netherland, Sewell & Associates, 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.
The estimates of Mesa's proved reserves as of December 31, 1996 set forth
in this Joint Proxy Statement with respect to its Hugoton and West Panhandle
field properties are based upon a reserve report prepared by
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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.
The estimates of Chauvco's proved reserves as of December 31, 1996 set
forth in this Joint Proxy Statement are based upon reserve reports prepared by
Gilbert Laustsen Jung Associates Ltd. and Martin Petroleum and Associates,
independent petroleum consultants, and are included herein upon the authority of
such firm as experts with respect to such matters covered by such report.
AVAILABLE INFORMATION FOR PIONEER
Pioneer is subject to the informational requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the SEC. The reports, proxy statements and other information
filed by Pioneer with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports, proxy
statements and other information filed with the SEC are also available at the
SEC's site on the World Wide Web located at http://www.sec.gov. Copies of such
material also can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, material filed by Pioneer can be inspected at the offices of
the New York Stock Exchange, Eleven Wall Street, York, New York 10005.
STOCKHOLDER PROPOSALS
Any Pioneer Stockholder who wishes to submit a proposal for action to be
included in the proxy statement and form of proxy relating to Pioneer's 1998
annual meeting of stockholders is required to submit such proposal to Pioneer on
or before December 31, 1997.
APPROVAL OF PROXY STATEMENT BY
CHAUVCO BOARD OF DIRECTORS
The contents of this joint management information circular and proxy
statement and the sending thereof to the shareholders of Chauvco have been
approved by the Chauvco board of directors.
The foregoing contains no untrue statement of a material fact and does not
omit to state a material fact that is required to be stated or that is necessary
to make a statement not misleading in the light of the circumstances in which it
was made.
Guy J. Turcotte
Chairman and Chief Executive Officer
James K. Wilson
Senior Vice President
Finance & Administration and
Chief Financial Officer
November , 1997
Calgary, Alberta
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GLOSSARY OF TERMS
Unless the context otherwise requires, the following terms shall have the
meanings set forth below when used in this Joint Proxy Statement. These defined
terms are not used in the financial statements attached hereto.
"ABCA" means the Business Corporations Act (Alberta).
"Arrangement" means the proposed arrangement of Chauvco under Section 186
of the ABCA pursuant to the Plan of Arrangement.
"Arrangement Resolution" means the special resolution of Chauvco
Shareholders concerning the Arrangement in the form set out in Annex B to this
Joint Proxy Statement.
"Automatic Exchange Rights" means the rights granted to the Trustee for the
benefit of the holders of the Exchangeable Shares pursuant to the Voting and
Exchange Trust Agreement to automatically exchange the Exchangeable Shares for
shares of Pioneer Common Stock upon a Pioneer Liquidation Event.
"Automatic Redemption Date" means the fifth anniversary of the date of the
first issuance of Exchangeable Shares unless (a) such date shall be extended at
any time or from time to time to a specified later date by the Pioneer Board but
not later than December 31, 2005 or (b) such date shall be accelerated at any
time to a specified earlier date (but no earlier than the third anniversary of
the first issuance of Exchangeable Shares) by the Pioneer Board if at such time
there are issued and outstanding less than 5% of the number of Exchangeable
Shares initially issued and outstanding pursuant to the Plan of Arrangement
(other than Exchangeable Shares held by Pioneer and its subsidiaries) and as
such number of shares may be adjusted as deemed appropriate by the Pioneer Board
to give effect to any subdivision or consolidation of or stock dividend on the
Exchangeable Shares, any issuance or distribution of rights to acquire
Exchangeable Shares or securities exchangeable for or convertible into
Exchangeable Shares, any issue or distribution of other securities or rights or
evidences of indebtedness or assets, or any other capital reorganization or
other transaction affecting the Exchangeable Shares, in which case the Automatic
Redemption Date shall be such later or earlier date; provided, however, that the
accidental failure or omission to give any such notice of extension or
acceleration, as the case may be, to less than 10% of such holders of
Exchangeable Shares shall not affect the validity of such extension or
acceleration.
"Bbl" means a barrel of oil and condensate or natural gas liquids.
"BCCA" means the Company Act (British Columbia).
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion cubic feet of natural gas equivalents.
"BOE" means one barrel of oil equivalent with gas reserves converted to a
Bbl of oil equivalent on the basis of 6 Mcf gas to 1 Bbl of oil; provided that
"BOE (10:1)" converts such gas reserves on the basis of 10 Mcf of gas to 1 Bbl
of oil.
"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"Call Rights" means the Liquidation Call Right, the Redemption Call Right
and the Retraction Call Right, collectively.
"Canadian dollar equivalent" means the product obtained by multiplying the
U.S. dollar amount by the Currency Exchange Rate.
"Canadian dollars" or "C$" means Canadian dollars.
"Canadian GAAP" means generally accepted accounting principles in Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), as amended.
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<PAGE> 205
"Cash Payment" means the cash payment, if any, which a Chauvco Shareholder
or Chauvco Optionholder is entitled to receive in accordance with Section 2.2 of
the Arrangement.
"Chauvco" means Chauvco Resources Ltd., an Alberta corporation.
"Chauvco Affiliate" means each affiliate (as such term is defined pursuant
to Rule 145 under the Securities Act) of Chauvco.
"Chauvco Affiliates Agreements" means the affiliate agreements executed by
each Chauvco Affiliate and agreed to and accepted by Pioneer and Chauvco.
"Chauvco Articles" means the Chauvco articles of amalgamation.
"Chauvco Board" means the Board of Directors of Chauvco.
"Chauvco Bylaws" means Chauvco's bylaws, as amended from time to time.
"Chauvco Common Shares" means the common shares of Chauvco.
"Chauvco Meeting" means the special meeting of Chauvco Shareholders to be
held with respect to, among other things, the approval by Chauvco Shareholders
of the Arrangement.
"Chauvco Option Plan" means Chauvco's stock option plan as amended and
restated on November 10, 1995.
"Chauvco Options" means all outstanding options to purchase Chauvco Common
Shares, including all outstanding options granted under the Chauvco Option Plan.
"Chauvco Optionholders" means the holders of Chauvco Options.
"Chauvco Record Date" means , 1997.
"Chauvco Shareholders" means the holders of Chauvco Common Shares.
"Closing" means the execution and delivery of the documents required to
effectuate the transactions contemplated by the Combination Agreement and the
closing of the transactions contemplated by the Combination Agreement.
"Closing Date" means December , 1997, or such other date as may be
determined by Pioneer and Chauvco.
"Combination Agreement" means the Combination Agreement by and between
Pioneer and Chauvco dated as of September 3, 1997, a copy of which is attached
hereto as Annex C.
"Competition Act" means the Competition Act (Canada).
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Court" means the Court of Queen's Bench of Alberta.
"CR" means CR International Limited, a wholly owned subsidiary of Chauvco.
"CRI" means Chauvco Resources International Ltd., a wholly-owned subsidiary
of Chauvco.
"CRI Shares" means all of the issued and outstanding common shares of CRI.
"Currency Exchange Rate" has the meaning ascribed to such term in the Plan
of Arrangement.
"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"DGCL" means the Delaware General Corporation Law, as amended.
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<PAGE> 206
"Dissent Notice" means a written objection to the Arrangement sent by a
Chauvco Shareholder or Chauvco Optionholder to Chauvco in accordance with
applicable law. See, "Dissenting Shareholders' and Optionholders' Rights."
"Effective Date" means the date shown on the certificate of amendment
issued by the Registrar under the ABCA giving effect to the Arrangement.
"Effective Time" means 12:01 a.m. (Calgary time) on the Effective Date.
"Election Deadline" has the meaning ascribed to such term in the Plan of
Arrangement.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Ratio" has the meaning set forth in Section 2.2 of the Plan of
Arrangement.
"Exchange Rights" means the Automatic Exchange Rights and the optional
exchange right granted to the Trustee for the use and benefit of the holders of
the Exchangeable Shares pursuant to the Voting and Exchange Trust Agreement to
require Pioneer to purchase Exchangeable Shares from the holders thereof in
exchange for shares of Pioneer Common Stock upon the occurrence of a Pioneer
Canada Insolvency Event.
"Exchangeable Share Provisions" means the rights, privileges, restrictions
and conditions attaching to the Exchangeable Shares, which are attached hereto
as Annex F.
"Exchangeable Shares" means the exchangeable shares of Pioneer Canada
having the rights, privileges, restrictions and conditions set forth in the
Exchangeable Share Provisions.
"Final Order" means the final order of the Court approving the Arrangement.
"FTC" means the Federal Trade Commission and all successors thereto.
"Gabon Securities" means (i) all of the issued and outstanding securities
of Chauvco Resources (Gabon) S.A., Chauvco Resources (Gabon-Ngalo) S.A., Chauvco
Resources (Gabon-Maga) S.A., Chauvco Resources (Gabon-Avomo) S.A. and CR Trading
Co. Ltd. (collectively, the "Gabon Subsidiaries"), (ii) 75% of the issued and
outstanding securities of Westoil Marine & Transport Co. Ltd. ("Westoil") and
(iii) all of its rights under a loan in the amount of U.S.$909,421.60 made by CR
to Olympic Marine Services International, Inc. (which owns the remaining 25% of
the issued and outstanding securities of Westoil), any and all advances made by
CR to Westoil, and any and all advances made by Chauvco (all of which shall have
first been assigned by Chauvco to CR) to the Gabon Subsidiaries and Westoil.
"Gabon Subsidiaries" has the meaning set forth in the definition of Gabon
Securities.
"Goldman Sachs" means Goldman, Sachs & Co., financial advisor to Pioneer.
"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which Pioneer or Chauvco, as the case may be, has a working
interest.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Infill Drilling" means drilling of an additional well or additional wells
in order to more adequately drain a reservoir.
"Interim Order" means the interim order of the Court dated ,
1997, a copy of which is attached hereto as Annex D.
"Joint Proxy Statement" means this joint management information circular
and proxy statement relating to the Chauvco Meeting and the Pioneer Meeting.
"Letter of Transmittal and Election Form" means the letter delivered to
holders of Chauvco Common Shares which, when duly completed and returned with a
certificate for Chauvco Common Shares, will enable
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<PAGE> 207
such shareholder to exchange such certificate for CRI Shares, Pioneer Common
Stock, Exchangeable Shares or a combination thereof.
"Liquidation Call Right" means the right of Pioneer, in the event of a
proposed liquidation, dissolution or winding-up of Pioneer Canada, to purchase
all of the outstanding Exchangeable Shares from the holders thereof on the
effective date of any such liquidation, dissolution or winding-up in exchange
for shares of Pioneer Common Stock pursuant to the Plan of Arrangement.
"liquids" or "NGL" or "NGLs" means natural gas liquids and refer to their
constituent hydrocarbons such as ethane, propane, butane, isobutane and natural
gasolines.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means thousand cubic feet of natural gas equivalents.
"MMBbls" means millions of barrels of oil.
"MMBOE" means millions of barrels of oil equivalents.
"MMBtu" means one million British Thermal Units.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet of natural gas equivalents.
"Mstb" means thousand stock tank barrels.
"Natural gas equivalents" means a volume, expressed in Mcf's of natural
gas, that includes not only natural gas but also oil and natural gas liquids
converted to an equivalent quantity of natural gas on an energy equivalent
basis. Equivalent gas reserves are based on a conversion factor of 6 Mcf of gas
per barrel of liquids.
"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
Pioneer or Chauvco, as the case may be.
"Net production" means production that is owned by Pioneer or Chauvco, as
the case may be, less royalties and production due others.
"NYSE" means the New York Stock Exchange.
"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.
"Option Letter of Transmittal and Election Form" has the meaning ascribed
to such term in the Plan of Arrangement.
"Option Payment" means the payment by each Chauvco Optionholder to Pioneer
Canada of the exercise price such holder's Chauvco Options.
"Parker/Mesa Merger" means the mergers of Mesa and Parker & Parsley on
August 7, 1997, which transaction resulted in the creation of Pioneer Natural
Resources Company.
"Pioneer" means Pioneer Natural Resources Company, a Delaware corporation,
and its predecessors.
"Pioneer Affiliate" means each affiliate (as such term is defined pursuant
to Rule 145 under the Securities Act) of Pioneer.
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"Pioneer Affiliates Agreements" means the affiliate agreements executed by
each Pioneer Affiliate and agreed to and accepted by Pioneer and Chauvco.
"Pioneer Board" means the Board of Directors of Pioneer.
"Pioneer Bylaws" means the amended and restated bylaws of Pioneer.
"Pioneer Canada" means Pioneer Natural Resources (Canada) Ltd., an
indirectly owned subsidiary of Pioneer.
"Pioneer Canada Insolvency Event" means any insolvency or bankruptcy
proceeding instituted by or against Pioneer Canada, including any such
proceeding under the Companies' Creditors Arrangement Act (Canada) and the
Bankruptcy and Insolvency Act (Canada) and the admission in writing by Pioneer
Canada of its inability to pay its debts generally as they become due and the
inability of Pioneer Canada, as a result of solvency requirements of applicable
law, to redeem any Exchangeable Shares tendered for retraction.
"Pioneer Common Stock" means the common stock, par value $0.01 per share,
of Pioneer, authorized and outstanding prior to the Closing.
"Pioneer Liquidation Event" means (i) any determination by Pioneer's board
of directors to institute voluntary liquidation, dissolution, or winding-up
proceedings with respect to Pioneer or to effect any other distribution of
assets of Pioneer among its stockholders for the purpose of winding up its
affairs; or (ii) immediately upon the earlier of (A) receipt by Pioneer of
notice of, and (B) Pioneer becoming aware of any threatened or instituted claim,
suit, petition or other proceedings with respect to the involuntary liquidation,
dissolution or winding-up of Pioneer or to effect any other distribution of
assets of Pioneer among its stockholders for the purpose of winding-up its
affairs.
"Pioneer Meeting" means the special meeting of Pioneer Stockholders to be
held with respect to, among other things, approval by the Pioneer Stockholders
of the Combination Agreement and the transactions contemplated thereby.
"Pioneer Record Date" means November , 1997.
"Pioneer Restated Certificate" means the amended and restated certificate
of incorporation of Pioneer.
"Pioneer Stock Price" means the average closing sales price per share of
Pioneer Common Stock over the 10 consecutive trading days ending the third day
next preceding the date of the Chauvco Meeting.
"Pioneer Stockholders" means the holders of Pioneer Common Stock.
"Plan of Arrangement" means the plan of arrangement proposed under Section
186 of the ABCA substantially in the form attached hereto as Annex E, as
amended, modified or supplemented from time to time in accordance with its
terms.
"Proved developed reserves" means, with respect to Pioneer, 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, with respect to Pioneer, 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 estimate is made). Prices
include consideration of changes in existing prices provided only 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
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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 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, with respect to Pioneer, reserves that
are expected to be recovered from new wells on undrilled coverage, 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.
"RBC DS" means RBC Dominion Securities Inc., financial advisor to Chauvco.
Record Date" has the meaning ascribed to it in the Plan of Arrangement,
attached hereto as Annex E.
"Redemption Call Right" means the right of Pioneer to purchase all of the
outstanding Exchangeable Shares from the holders thereof on the Automatic
Redemption Date in exchange for shares of Pioneer Common Stock pursuant to the
Plan of Arrangement.
"Reserves"means, with respect to Pioneer, proved reserves, and, with
respect to Chauvco, means proved reserves and probable reserves.
"Retraction Call Right" means the overriding right of Pioneer, in the event
of a proposed retraction of Exchangeable Shares by a holder thereof, to purchase
from such holder on the Retraction Date the Exchangeable Shares tendered for
retraction in exchange for shares of Pioneer Common Stock pursuant to the
Exchangeable Share Provisions.
"Retraction Date" means a date, determined by a holder of Exchangeable
Shares, on which such holder can effect a retraction of such Exchangeable Shares
as further set out in the Exchangeable Share Provisions and described in "The
Transaction -- Transaction Mechanics and Description of Exchangeable Shares --
Exchange and Call Right."
"Retraction Request" means a duly executed statement prepared by a holder
of Exchangeable Shares in the form of Exhibit A to the Exchangeable Share
Provisions, or in such other form as may be acceptable to Pioneer Canada.
"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.
"Salomon Brothers" means Salomon Brothers Inc, financial advisor to
Chauvco.
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"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"SEC PV10" means the present value of estimated future revenues to be
generated from the production of proved reserves calculated in accordance with
SEC 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%.
"Support Agreement" means the Support Agreement to be entered into between
Pioneer and Pioneer Canada, substantially in the form of Annex H hereto.
"Tcf" means trillion cubic feet of natural gas.
"Tcfe" means trillion cubic feet of natural gas equivalents.
"Transaction" means the transactions contemplated by the Combination
Agreement and the Plan of Arrangement.
"Trustee" means Montreal Trust Company of Canada, or any successor thereto,
pursuant to the Voting and Exchange Trust Agreement.
"TSE" means The Toronto Stock Exchange.
"Unitized" means the joint operation of all or some portion of a producing
reservoir. Unitization is important where there is separate ownership of
portions of the rights in a common reservoir in order that it may be made
economically feasible to engage in cycling, pressure maintenance or secondary
recovery operations. In a field that has been unitized, injection and production
wells may be located in accordance with the best engineering practices and
without regard to lease or property lines.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. dollars" or "$" means United States dollars.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
"Voting and Exchange Trust Agreement" means the voting and exchange trust
agreement to be entered into among Pioneer, Pioneer Canada and the Trustee,
substantially in the form of Annex I hereto.
"Voting Rights" means the rights of the holders of Exchangeable Shares to
direct the voting of the Pioneer Voting Share in accordance with the Voting and
Exchange Trust Agreement.
"Voting Share" means the one share of Pioneer Special Voting Stock, par
value $.01 per share, to be issued by Pioneer and deposited with the Trustee
pursuant to the Voting and Exchange Trust Agreement.
"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 FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
<TABLE>
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PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS:
Preliminary Statement..................................... F-3
Unaudited Pro Forma Combined Financial Statements of
Pioneer Natural Resources Company:
Unaudited Pro Forma Combined Balance Sheet of Pioneer
Natural Resources Company as of June 30, 1997......... F-5
</TABLE>
Unaudited Pro Forma Combined Balance Sheet of Pioneer
Natural Resources Company as of December 31, 1996..... F-6
Unaudited Pro Forma Combined Statement of Operations of
Pioneer Natural Resources Company for the six months
ended June 30, 1997................................... F-7
Unaudited Pro Forma Combined Statement of Operations of
Pioneer Natural Resources Company for the year ended
December 31, 1996..................................... F-8
Unaudited Pro Forma Financial Statements of Pioneer
Natural Resources Company:
Unaudited Pro Forma Balance Sheet of Pioneer Natural
Resources Company as of June 30, 1997................. F-9
Unaudited Pro Forma Balance Sheet of Pioneer Natural
Resources Company as of December 31, 1996............. F-10
Unaudited Pro Forma Statement of Operations of Pioneer
Natural Resources Company for the six months ended
June 30, 1997......................................... F-11
Unaudited Pro Forma Statement of Operations of Pioneer
Natural Resources Company for the year ended December
31, 1996.............................................. F-12
Unaudited Pro Forma Adjusted Statement of Operations of
Pioneer Natural Resources Company for the year ended
December 31, 1996..................................... F-13
Unaudited Pro Forma Statement of Operations of Mesa
Inc. for the year ended December 31, 1996............. F-14
Unaudited Pro Forma Financial Statements of Chauvco
Resources, Ltd.:
Unaudited Pro Forma Balance Sheet of Chauvco Resources,
Ltd. as of June 30, 1997.............................. F-15
Unaudited Pro Forma Balance Sheet of Chauvco Resources,
Ltd. as of December 31, 1996.......................... F-16
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-17
PIONEER NATURAL RESOURCES COMPANY AND SUBSIDIARIES:
Independent Auditors' Report.............................. F-28
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 and 1995............................. F-29
Consolidated Statements of Operations for the six months
ended June 30, 1997 and 1996 and the years ended
December 31, 1996, 1995, 1994, 1993 and 1992........... F-30
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 1997 and the years ended
December 31, 1996, 1995, 1994, 1993 and 1992........... F-31
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 and the years ended
December 31, 1996, 1995, 1994, 1993 and 1992........... F-32
Notes to Consolidated Financial Statements................ F-33
Unaudited Supplementary Information....................... F-62
MESA INC., AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-69
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 and 1995............................. F-70
Consolidated Statements of Operations for the six months
ended June 30, 1997 and 1996 and the years ended
December 31, 1996, 1995, 1994, 1993 and 1992........... F-71
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 1997 and the years ended
December 31, 1996, 1995, 1994, 1993 and 1992........... F-72
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 and the years ended
December 31, 1996, 1995, 1994, 1993 and 1992........... F-73
F-1
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Notes to Consolidated Financial Statements................ F-74
Unaudited Supplementary Information....................... F-95
CHAUVCO RESOURCES LTD. AND SUBSIDIARIES:
Auditors' Report.......................................... F-101
Consolidated Statement of Financial Position as at June
30, 1997, December 31, 1996
and 1995............................................... F-102
Consolidated Statement of Earnings and Retained Earnings
for the six months ended June 30, 1997 and 1996 and for
the years ended December 31, 1996, 1995 and 1994....... F-103
Consolidated Statement of Changes in Cash Position for the
six months ended June 30, 1997 and 1996 and for the
years ended December 31, 1996.......................... F-104
Notes to Consolidated Financial Statements................ F-105
</TABLE>
F-2
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
PIONEER NATURAL RESOURCES COMPANY
In accordance with the Combination Agreement, holders of Chauvco Common
Shares will receive for each Chauvco Common Share held (i) one CRI Share and
(ii) in certain cases, at the election of a Chauvco Shareholder, either the
number of shares of Pioneer Common Stock or Exchangeable Shares, or a
combination of both, determined by multiplying each Chauvco Common Share held by
the Exchange Ratio. The Exchange Ratio is dependent upon the Pioneer Stock
Price, which will be the average closing sales price per share of Pioneer Common
Stock over the ten consecutive trading days ending the third trading day next
preceding the date of the Chauvco Meeting. The Exchangeable Shares entitle the
holders to dividend and other rights economically equivalent to those of Pioneer
Common Stock and, through a voting trust, the right to vote at meetings of
Pioneer Stockholders. The range of possible Exchange Ratios to be utilized to
determine the numbers of shares of Pioneer Common Stock or Exchangeable Shares,
or a combination of both, to be exchanged for one Chauvco Common Share is
described below:
A. If the Pioneer Stock Price is less than $33.50 the Exchange Ratio is
.493827.
B. If the Pioneer Stock Price is at least $33.50 but less than $39.01
the Exchange Ratio is the product of the following computation:
Exchange Ratio = (.493827 - (((Pioneer Stock
Price - 33.50)/5.51) X .042360)).
C. If the Pioneer Stock Price is equal to or greater than $39.01 the
Exchange Ratio is .451467.
In lieu of fractional shares of Pioneer Common Stock or Exchangeable
Shares, each holder of a Chauvco Common Share who otherwise would be entitled to
receive such fractional share will receive an amount of cash, without interest,
equal to the product of such fractional interest multiplied by the Pioneer Stock
Price converted to Canadian dollars using the noon spot rate of exchange of U.S.
dollars to Canadian dollars announced by the Bank of Canada on the day preceding
the date of calculation.
The Combination Agreement also provides that, if the Exchange Ratio is
above .465116, Pioneer may elect to deliver, in lieu of Pioneer Common Stock or
Exchangeable Shares, a number of shares of Pioneer Common Stock or Exchangeable
Shares for each Chauvco Common Share equal to the Exchange Ratio of .465115 and
an amount of cash per Chauvco Common Share equal to the product of (i) the
Pioneer Stock Price multiplied by the noon spot rate of exchange of U.S. dollars
and Canadian dollars announced by the Bank of Canada on the day preceding the
date of calculation for the exchange and (ii) the Exchange Ratio as calculated
above in A. or B. less .465116.
The value of Pioneer Common Stock for use in determining the aggregate
purchase consideration allocated to the acquired assets and liabilities of
Chauvco ("Consideration") will be either (i) the average trading price of
Pioneer Common Stock during the seven days surrounding the announcement of the
Transaction (the "Seven Day Average") or (ii) the market price of Pioneer common
stock on the date of the Chauvco Meeting. If the Pioneer Stock Price is equal to
or greater than $39.01, the Consideration will be based upon the Seven Day
Average of $42.17. However, if the Pioneer Stock Price is below $39.01, the
value for use in determining the Consideration will be the market price of
Pioneer Common Stock on the date of the Chauvco Meeting. The unaudited pro forma
combined financial statements have been prepared under the assumption that the
Consideration will be based on the Seven Day Average of $42.17. See Note 5 for a
sensitivity analysis should a decline in the Pioneer Stock Price occur.
In August 1997, the stockholders of Pioneer's predecessor entities, Parker
& Parsley and Mesa, approved an Amended and Restated Agreement and Plan of
Merger ("Merger Agreement") that resulted in the formation of Pioneer. In
accordance with the provisions of Accounting Principles Board No. 16, "Business
Combinations," ("APB 16"), the merger was treated as an acquisition of Mesa by
Parker & Parsley. As a result, the historical financial statements of Pioneer
are those of Parker & Parsley and will present the addition of Mesa's assets and
liabilities as an acquisition by Pioneer in August 1997 and all references to
Pioneer contained herein are references to Parker & Parsley for dates prior to
the Parker/Mesa Merger.
F-3
<PAGE> 214
The unaudited pro forma combined balance sheets and statements of
operations have been prepared to give effect to certain transactions as
described below.
The unaudited pro forma combined balance sheets of Pioneer as of June
30, 1997 and December 31, 1996 have been prepared to give effect to (i) the
Transaction as if such transaction had occurred on the dates presented,
(ii) the Parker/Mesa Merger as if such transaction had occurred on the
dates presented and (iii) the conversion of Pioneer's 6 1/4% Cumulative
Monthly Income Convertible Preferred Shares ("Preferred Shares") to Pioneer
Common Stock as if such transaction had occurred on the dates presented. In
accordance with the provisions of APB 16 the Transaction has been accounted
for as a purchase of Chauvco by Pioneer and the Parker/Mesa Merger have
been accounted for as a purchase of Mesa by Pioneer.
The unaudited pro forma combined statements of operations of Pioneer
for the six months ended June 30, 1997 and for the year ended December 31,
1996 have been prepared to give effect to the Transaction, Parker/Mesa
Merger and certain events described below for Pioneer, Chauvco and Mesa as
if the Transaction, Parker/Mesa Merger and such events had occurred on
January 1, 1996.
Pro Forma Pioneer has been prepared to give effect to the acquisition
of Pro Forma Mesa by Adjusted Pioneer, both as defined below.
Pro Forma Chauvco has been prepared to give effect to the distribution
of CRI Shares and the rights to the Alliance pipeline to Chauvco's
Shareholders.
Adjusted Pioneer has been prepared to give effect to (i) the sale of
certain wholly-owned Australian subsidiaries in March 1996 and the sale of
Bridge Oil Timor Sea, Inc. in June 1996 (collectively, the "Australasian
Assets Sold"), (ii) the aggregate effect of the sale of certain
nonstrategic domestic oil and gas properties, gas plants, contract rights
and related assets sold during the period from January 2, 1996 to December
31, 1996 (collectively, the "1996 Assets Sold") and (iii) the exchange of
Pioneer's Preferred Shares for Pioneer Common Stock in August 1997.
Pro Forma Mesa has been prepared to give effect to the
Recapitalization (see Note 2 of Mesa's Notes to Consolidated Financial
Statements included herein), which entailed issuing $265 million in new
preferred equity and repaying and refinancing substantially all of Mesa's
$1.2 billion of then existing long-term debt, and the Greenhill
Acquisition, including additional borrowings to finance such acquisition.
The historical consolidated financial statements for Chauvco and CRI were
prepared under Canadian GAAP and in Canadian dollars. For these unaudited pro
forma combined financial statements, the historical financial information of
Chauvco, CRI and the Alliance pipeline project have been converted to U.S.
dollars using the period end exchange rate for the balance sheets and the
average exchange rate for the statements of operations for the respective
periods. These unaudited pro forma combined financial statements also contain
certain adjustments to conform the historical Chauvco financial statements to
U.S. GAAP and successful efforts method of accounting as used by Pioneer after
eliminating the balances or activity associated with CRI and the Alliance
pipeline. In addition, certain reclassifications have been made to Chauvco's
historical consolidated financial statements to conform to Pioneer's financial
statement presentation.
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 (i) the Consolidated Financial Statements (and the
related notes) of both Pioneer and Mesa included elsewhere herein for the six
months ended June 30, 1997 and for the five-year period ended December 31, 1996
and (ii) the Consolidated Financial Statements (and the related notes) of
Chauvco for the six months ended June 30, 1997 and for the three-year period
ended December 31, 1996.
F-4
<PAGE> 215
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA COMBINED PRO FORMA
PIONEER CHAUVCO ADJUSTMENTS COMBINED
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 10,594 $ -- $ 10,594
Restricted cash........................... 1,723 -- 1,723
Accounts receivable....................... 116,087 30,028 146,115
Inventories............................... 8,711 1,875 10,586
Deferred income taxes..................... 9,300 -- 9,300
Other current assets...................... 3,829 781 4,610
---------- --------- ----------
Total current assets.............. 150,244 32,684 182,928
---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties...................... 3,842,288 756,223 (91,699)(a) 4,506,812
Unproved properties.................... 85,071 34,530 809,988(a) 929,589
Natural gas processing facilities......... 50,770 -- 50,770
Accumulated depletion, depreciation and
amortization........................... (489,143) (298,028) 298,028(a) (489,143)
---------- --------- ----------
3,488,986 492,725 4,998,028
---------- --------- ----------
Other property and equipment, net........... 39,838 5,515 45,353
Other assets, net........................... 57,691 19,906 77,597
---------- --------- ----------
$3,736,759 $ 550,830 $5,303,906
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 11,369 $ 5,863 $ 17,232
Undistributed unit purchases.............. 1,723 -- 1,723
Accounts payable.......................... 94,825 20,652 115,477
Domestic and foreign income taxes......... 2,038 (215) 1,823
Other current liabilities................. 38,173 -- 38,173
---------- --------- ----------
Total current liabilities......... 148,128 26,300 174,428
---------- --------- ----------
Long-term debt, less current maturities..... 1,535,995 207,039.. 20,000(a) 1,763,034
Other noncurrent liabilities................ 122,368 5,769 128,137
Deferred income taxes....................... 212,870 51,972 306,256(a) 571,098
Stockholders' equity:
Common stock.............................. 736 114,028 (113,803)(a) 961
Additional paid-in capital................ 1,592,895 -- 949,586(a) 2,542,481
Unearned compensation..................... (712) -- (712)
Retained earnings......................... 124,479 145,722 (145,722)(a) 124,479
---------- --------- ----------
Total stockholders' equity........ 1,717,398 259,750 2,667,209
---------- --------- ----------
Commitments and contingencies...............
---------- --------- ----------
$3,736,759 $ 550,830 $5,303,906
========== ========= ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE> 216
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA COMBINED PRO FORMA
PIONEER CHAUVCO ADJUSTMENTS COMBINED
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 16,296 $ 644 $ 16,940
Restricted cash........................... 1,749 -- 1,749
Accounts receivable....................... 154,285 26,175 180,460
Inventories............................... 6,378 1,683 8,061
Deferred income taxes..................... 7,400 -- 7,400
Other current assets...................... 4,972 1,225 6,197
---------- --------- ----------
Total current assets.............. 191,080 29,727 220,807
---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties...................... 3,689,764 648,414 16,110(a) 4,354,288
Unproved properties.................... 51,331 32,373 653,307(a) 737,011
Natural gas processing facilities......... 59,276 -- 59,276
Accumulated depletion, depreciation and
amortization........................... (445,238) (274,945) 274,945(a) (445,238)
---------- --------- ----------
3,355,133 405,842 4,705,337
---------- --------- ----------
Other property and equipment, net........... 41,743 5,618 47,361
Other assets, net........................... 73,844 13,581 87,425
---------- --------- ----------
$3,661,800 $ 454,768 $5,060,930
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...... $ 10,976 $ 2,003 $ 12,979
Undistributed unit purchases.............. 1,749 -- 1,749
Accounts payable.......................... 109,147 21,655 130,802
Domestic and foreign income taxes......... 1,743 2,919 4,662
Other current liabilities................. 46,980 -- 46,980
---------- --------- ----------
Total current liabilities......... 170,595 26,577 197,172
---------- --------- ----------
Long-term debt, less current maturities..... 1,485,446 92,874 20,000(a) 1,598,320
Other noncurrent liabilities................ 99,207 4,291 103,498
Deferred income taxes....................... 213,878 43,793 261,784(a) 519,455
Stockholders' equity:
Common stock.............................. 736 154,305 (154,080)(a) 961
Additional paid-in capital................ 1,593,356 -- 949,586(a) 2,542,942
Unearned compensation..................... (1,625) -- (1,625)
Retained earnings......................... 100,207 132,928 (132,928)(a) 100,207
---------- --------- ----------
Total stockholders' equity........ 1,692,674 287,233 2,642,485
---------- --------- ----------
Commitments and contingencies...............
---------- --------- ----------
$3,661,800 $ 454,768 $5,060,930
========== ========= ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE> 217
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED PRO FORMA
PIONEER CHAUVCO ADJUSTMENTS COMBINED
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas.................................. $384,192 $73,312 $457,504
Natural gas processing....................... 11,819 -- 11,819
Interest and other........................... 4,812 744 5,556
Gain on disposition of assets, net........... 2,655 -- 2,655
-------- ------- --------
403,478 74,056 477,534
-------- ------- --------
Cost and expenses:
Oil and gas production....................... 106,490 19,192 125,682
Natural gas processing....................... 6,098 -- 6,098
Depletion, depreciation and amortization..... 162,587 27,522 4,980(b) 195,089
Impairment of long-lived assets.............. 2,907 -- 2,907
Exploration and abandonments................. 30,134 -- 4,834(c) 34,968
General and administrative................... 37,992 4,305 5,450(d) 47,747
Interest..................................... 65,346 4,442 565(e) 70,353
Other........................................ 3,301 -- 3,301
-------- ------- --------
414,855 55,461 486,145
-------- ------- --------
Income (loss) from continuing operations before
income taxes................................. (11,377) 18,595 (8,611)
Income tax benefit (provision)................. 4,200 (4,656) 3,856(f) 3,400
-------- ------- --------
Income (loss) from continuing operations....... $ (7,177) $13,939 $ (5,211)
======== ======= ========
Income (loss) per share........................ $ (.10) $ .29 $ (.05)
======== ======= ========
Weighted average shares outstanding............ 73,945 48,401 (25,878)(g) 96,468
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-7
<PAGE> 218
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED PRO FORMA
PIONEER CHAUVCO ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas.............................. $751,806 $129,833 $881,639
Natural gas processing................... 23,184 -- 23,184
Interest and other....................... 42,038 381 42,419
Gain on disposition of assets, net....... 11,966 -- 11,966
-------- -------- --------
828,994 130,214 959,208
-------- -------- --------
Cost and expenses:
Oil and gas production................... 196,014 34,145 230,159
Natural gas processing................... 11,949 -- 11,949
Depletion, depreciation and
amortization.......................... 317,991 48,657 12,200(b) 378,848
Exploration and abandonments............. 32,128 -- 5,427(c) 37,555
General and administrative............... 68,478 7,469 8,008(d) 83,955
Interest................................. 128,401 8,313 1,244(e) 137,958
Other.................................... 4,791 -- 4,791
-------- -------- --------
759,752 98,584 885,215
-------- -------- --------
Income from continuing operations before
income taxes............................. 69,242 31,630 73,993
Income tax provision....................... (25,600) (6,612) 5,212(f) (27,000)
-------- -------- --------
Income from continuing operations.......... $ 43,642 $ 25,018 $ 46,993
======== ======== ========
Income per share........................... $ .59 $ .52 $ .49
======== ======== ========
Weighted average shares outstanding........ 74,246 48,300 (25,777)(g) 96,769
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-8
<PAGE> 219
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PIONEER MESA ADJUSTMENTS PIONEER
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 9,843 $ 20,751 (20,000)(h) $ 10,594
Restricted cash.............................. 1,723 -- 1,723
Accounts receivable.......................... 71,010 45,077 116,087
Inventories.................................. 5,581 3,130 8,711
Deferred income taxes........................ 9,300 -- 9,300
Other current assets......................... 1,955 1,874 3,829
---------- ---------- ----------
Total current assets.................. 99,412 70,832 150,244
---------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties.......................... 1,536,665 2,293,133 12,490(h) 3,842,288
Unproved properties........................ 41,071 44,000 85,071
Natural gas processing facilities............ 50,770 -- 50,770
Accumulated depletion, depreciation and
amortization............................... (489,143) (996,687) 996,687(h) (489,143)
---------- ---------- ----------
1,139,363 1,340,446 3,488,986
---------- ---------- ----------
Other property and equipment, net.............. 28,552 11,286 39,838
Other assets, net.............................. 16,175 82,894 (35,516)(h) 57,691
(5,862)(i)
---------- ---------- ----------
$1,283,502 $1,505,458 $3,736,759
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 6,064 $ 5,305 $ 11,369
Undistributed unit purchases................. 1,723 -- 1,723
Accounts payable............................. 64,616 30,209 94,825
Domestic and foreign income taxes............ 2,038 -- 2,038
Other current liabilities.................... 14,737 23,436 38,173
---------- ---------- ----------
Total current liabilities............. 89,178 58,950 148,128
---------- ---------- ----------
Long-term debt, less current maturities........ 349,457 1,102,999 83,539(h) 1,535,995
Other noncurrent liabilities................... 27,336 80,032 15,000(h) 122,368
Deferred income taxes.......................... 73,800 -- 139,070(h) 212,870
Preferred stock of subsidiary.................. 188,820 -- (188,820)(i) --
Stockholders' equity:
Preferred stock.............................. -- 1,266 (1,266)(h) --
Common stock................................. 370 643 (344)(h) 736
67(i)
Additional paid-in capital................... 465,234 667,860 276,910(h) 1,592,895
182,891(i)
Treasury stock, at cost...................... (34,460) -- 34,460(h) --
Unearned compensation........................ (712) -- (712)
Retained earnings (deficit).................. 124,479 (406,292) 406,292(h) 124,479
---------- ---------- ----------
Total stockholders' equity............ 554,911 263,477 1,717,398
---------- ---------- ----------
Commitments and contingencies
---------- ---------- ----------
$1,283,502 $1,505,458 $3,736,759
========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-9
<PAGE> 220
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PIONEER MESA GREENHILL ADJUSTMENTS PIONEER
---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 18,711 $ 16,681 $ 8,904 (20,000)(h) $ 16,296
(8,000)(j)
Restricted cash........................ 1,749 -- -- 1,749
Accounts receivable.................... 82,968 63,410 7,907 154,285
Inventories............................ 3,644 2,159 575 6,378
Deferred income taxes.................. 7,400 -- -- 7,400
Other current assets................... 2,567 2,027 378 4,972
---------- ---------- -------- -----------
Total current assets............ 117,039 84,277 17,764 191,080
---------- ---------- -------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................... 1,419,051 1,975,684 346,329 71,645(h) 3,689,764
(122,945)(j)
Unproved properties.................. 7,331 -- -- 44,000(j) 51,331
Natural gas processing facilities...... 59,276 -- -- 59,276
Accumulated depletion, depreciation and
amortization......................... (445,238) (941,266) (182,977) 941,266(h) (445,238)
182,977(j)
---------- ---------- -------- -----------
1,040,420 1,034,418 163,352 3,355,133
---------- ---------- -------- -----------
Other property and equipment, net........ 27,779 11,966 1,998 41,743
Other assets, net........................ 14,627 83,218 2 (18,032)(h) 73,844
(5,971)(i)
---------- ---------- -------- -----------
$1,199,865 $1,213,879 $183,116 $ 3,661,800
========== ========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt... $ 5,381 $ 5,305 $ 290 $ 10,976
Undistributed unit purchases........... 1,749 -- -- 1,749
Accounts payable....................... 64,241 43,045 1,861 109,147
Domestic and foreign income taxes...... 1,743 -- -- 1,743
Other current liabilities.............. 17,856 21,150 7,974 46,980
---------- ---------- -------- -----------
Total current liabilities....... 90,970 69,500 10,125 170,595
---------- ---------- -------- -----------
Long-term debt, less current
maturities............................. 320,908 802,772 -- 92,766(h) 1,485,446
269,000(j)
Other noncurrent liabilities............. 8,071 76,113 23 15,000(h) 99,207
Deferred income taxes.................... 60,800 -- -- 153,078(h) 213,878
Preferred stock of subsidiary............ 188,820 -- -- (188,820)(i) --
Stockholders' equity:
Preferred stock........................ -- 1,216 -- (1,216)(h) --
Common stock........................... 369 643 2 (344)(h) 735
(2)(j)
67(i)
Additional paid-in capital............. 462,873 656,805 206,000 290,897(h) 1,593,357
(206,000)(j)
182,782(i)
Treasury stock, at cost................ (31,528) -- -- 31,528(h) --
Unearned compensation.................. (1,625) -- -- (1,625)
Retained earnings (deficit)............ 100,207 (393,170) (33,034) 393,170(h) 100,207
33,034(j)
---------- ---------- -------- -----------
Total stockholders' equity...... 530,296 265,494 172,968 1,692,674
---------- ---------- -------- -----------
Commitments and contingencies............
---------- ---------- -------- -----------
$1,199,865 $1,213,879 $183,116 $ 3,661,800
========== ========== ======== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-10
<PAGE> 221
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PIONEER MESA GREENHILL ADJUSTMENTS PIONEER
-------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas.......................... $198,626 $168,197 $ 17,369 $384,192
Natural gas processing............... 11,819 -- -- 11,819
Interest and other................... 2,833 1,832 147 4,812
Gain (loss) on disposition of assets,
net............................... 2,637 (23) 41 2,655
-------- -------- -------- --------
215,915 170,006 17,557 403,478
-------- -------- -------- --------
Cost and expenses:
Oil and gas production............... 55,392 44,457 6,641 106,490
Natural gas processing............... 6,098 -- -- 6,098
Depletion, depreciation and
amortization...................... 59,509 56,510 7,725 38,843(b) 162,587
Impairment of long-lived assets...... -- 2,907 -- 2,907
Exploration and abandonments......... 18,415 8,067 4,059 (407)(k) 30,134
General and administrative........... 14,990 9,277 13,318 407(k) 37,992
Interest............................. 20,154 48,335 -- (6,010)(i) 65,346
(2,562)(l)
5,429(m)
Other................................ 831 2,470 -- 3,301
-------- -------- -------- --------
175,389 172,023 31,743 414,855
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes....... 40,526 (2,017) (14,186) (11,377)
Income tax benefit (provision)......... (14,500) -- -- 18,700(f) 4,200
-------- -------- -------- --------
Income (loss) from continuing
operations........................... 26,026 (2,017) (14,186) (7,177)
Dividends on preferred stock........... -- (11,105) -- 11,105(n) --
-------- -------- -------- --------
Income (loss) from continuing
operations attributable to common
stock................................ $ 26,026 $(13,122) $(14,186) $ (7,177)
======== ======== ======== ========
Income (loss) per common share......... $ .74 $ (.20) $ (.10)
======== ======== ========
Weighted average shares outstanding.... 35,364 65,499 (33,632)(o) 73,945
6,714(i)
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-11
<PAGE> 222
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTED PRO FORMA PRO FORMA PRO FORMA
PIONEER MESA ADJUSTMENTS PIONEER
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas..................................... $374,560 $377,246 $751,806
Natural gas processing.......................... 23,184 -- 23,184
Interest and other.............................. 17,328 24,710 42,038
Gain on disposition of assets, net.............. -- 11,966 11,966
-------- -------- --------
415,072 413,922 828,994
-------- -------- --------
Cost and expenses:
Oil and gas production.......................... 101,545 94,469 196,014
Natural gas processing.......................... 11,949 -- 11,949
Depletion, depreciation and amortization........ 104,629 135,289 78,073(b) 317,991
Exploration and abandonments.................... 20,187 12,772 (831)(k) 32,128
General and administrative...................... 26,631 41,016 831(k) 68,478
Interest........................................ 28,700 105,266 (5,565)(l) 128,401
Other........................................... 2,451 2,340 4,791
-------- -------- --------
296,092 391,152 759,752
-------- -------- --------
Income from continuing operations before
income taxes.................................... 118,980 22,770 69,242
Income tax provision.............................. (41,600) -- 16,000(f) (25,600)
-------- -------- --------
Income from continuing operations................. 77,380 22,770 43,642
Dividends on preferred stock...................... -- (21,880) 21,880(n) --
-------- -------- --------
Income from continuing operations attributable to
common stock.................................... $ 77,380 $ 890 $ 43,642
======== ======== ========
Income per common share........................... $ 1.82 $ .01 $ .59
======== ======== ========
Weighted average shares outstanding............... 42,448 64,164 (32,366)(o) 74,246
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-12
<PAGE> 223
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED PRO FORMA ADJUSTED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUSTRALASIAN 1996
ASSETS ASSETS PRO FORMA ADJUSTED
PIONEER SOLD SOLD ADJUSTMENTS PIONEER
-------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas......................... $396,931 $(10,591) $(11,780) $374,560
Natural gas processing.............. 23,814 -- (630) 23,184
Interest and other.................. 17,458 (130) -- 17,328
Gain on disposition of assets,
net.............................. 97,140 (83,260) (13,880) --
-------- -------- -------- --------
535,343 (93,981) (26,290) 415,072
-------- -------- -------- --------
Cost and expenses:
Oil and gas production.............. 110,334 (3,300) (5,489) 101,545
Natural gas processing.............. 12,528 -- (579) 11,949
Depletion, depreciation and
amortization..................... 112,134 (4,217) (3,288) 104,629
Exploration and abandonments........ 23,030 (1,435) (1,408) 20,187
General and administrative.......... 28,363 (1,732) -- 26,631
Interest............................ 46,155 (1,100) -- (12,020)(i) 28,700
(4,335)(p)
Other............................... 2,451 -- -- 2,451
-------- -------- -------- --------
334,995 (11,784) (10,764) 296,092
-------- -------- -------- --------
Income from continuing operations
before income taxes................. 200,348 (82,197) (15,526) 118,980
Income tax provision.................. (60,100) 16,000 5,400 (2,900)(f) (41,600)
-------- -------- -------- --------
Income from continuing operations..... $140,248 $(66,197) $(10,126) $ 77,380
======== ======== ======== ========
Income per share...................... $ 3.92 $ 1.82
======== ========
Weighted average shares outstanding... 35,734 6,714(i) 42,448
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-13
<PAGE> 224
MESA INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MESA RECAPITALIZATION GREENHILL ADJUSTMENTS MESA
-------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas...................... $306,302 $ -- $70,944 $377,246
Natural gas processing........... -- -- -- --
Interest and other............... 24,710 -- -- 24,710
Gain on disposition of assets,
net........................... 11,966 -- -- 11,966
-------- -------- ------- --------
342,978 -- 70,944 413,922
-------- -------- ------- --------
Cost and expenses:
Oil and gas production........... 71,370 -- 23,099 94,469
Natural gas processing........... -- -- -- --
Depletion, depreciation and
amortization.................. 103,301 -- 29,355 2,633(b) 135,289
Exploration and abandonments..... 5,431 -- 7,341 12,772
General and administrative....... 31,473 -- 9,543 41,016
Interest......................... 121,135 (34,530)(q) (729) 19,390(m) 105,266
Other............................ 1,929 -- 411 2,340
-------- -------- ------- --------
334,639 (34,530) 69,020 391,152
-------- -------- ------- --------
Income from continuing operations
before income taxes.............. 8,339 34,530 1,924 22,770
Income tax provision............... -- -- -- --
-------- -------- ------- --------
Income from continuing
operations....................... 8,339 34,530 1,924 22,770
Dividends on preferred stock....... (9,522) (12,358)(r) -- (21,880)
-------- -------- ------- --------
Income (loss) from continuing
operations attributable to common
stock............................ $ (1,183) $ 22,172 $ 1,924 $ 890
======== ======== ======= ========
Income (loss) per common share..... $ (.02) $ .01
======== ========
Weighted average shares
outstanding...................... 64,164 64,164
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-14
<PAGE> 225
CHAUVCO RESOURCES LTD.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CHAUVCO CRI ALLIANCE ADJUSTMENTS CHAUVCO
--------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 4,110 $ (5,096) $ -- 986(s) $ --
Accounts receivable................. 24,155 (1,277) 7,150 30,028
Inventories......................... 1,875 -- -- 1,875
Other current assets................ 1,737 (956) -- 781
--------- -------- ------- --------
Total current assets........ 31,877 (7,329) 7,150 32,684
--------- -------- ------- --------
Oil and gas properties, using the full
cost method of accounting........... 834,664 (43,911) -- 790,753
Accumulated depletion, depreciation
and amortization.................... (298,028) -- -- (298,028)
--------- -------- ------- --------
536,636 (43,911) -- 492,725
--------- -------- ------- --------
Other property and equipment, net..... 5,791 (276) -- 5,515
Other assets, net..................... 27,056 -- (7,150) 19,906
--------- -------- ------- --------
$ 601,360 $(51,516) $ -- $550,830
========= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt............................. $ 5,863 $ -- $ $ 5,863
Accounts payable.................... 27,186 (7,520) -- 986(s) 20,652
Domestic and foreign income taxes... (215) -- -- (215)
--------- -------- ------- --------
Total current liabilities... 32,834 (7,520) -- 26,300
--------- -------- ------- --------
Long-term debt, less current
maturities.......................... 207,039 -- -- 207,039
Other noncurrent liabilities.......... 6,909 (1,140) -- 5,769
Deferred income taxes................. 51,972 -- -- 51,972
Stockholders' equity:
Common stock........................ 156,884 (42,856) -- 114,028
Retained earnings................... 145,722 -- -- 145,722
--------- -------- ------- --------
Total stockholders'
equity.................... 302,606 (42,856) -- 259,750
--------- -------- ------- --------
Commitments and contingencies.........
--------- -------- ------- --------
$ 601,360 $(51,516) $ -- $550,830
========= ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-15
<PAGE> 226
CHAUVCO RESOURCES LTD.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CHAUVCO CRI ALLIANCE ADJUSTMENTS CHAUVCO
--------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 708 $(39,755) $ -- 39,691(s) $ 644
Accounts receivable................. 25,516 (909) 1,568 26,175
Inventories......................... 1,683 -- -- 1,683
Other current assets................ 1,240 (15) -- 1,225
--------- -------- ------- ---------
Total current assets........ 29,147 (40,679) 1,568 29,727
--------- -------- ------- ---------
Oil and gas properties, using the full
cost method of accounting........... 690,341 (9,554) -- 680,787
Accumulated depletion, depreciation
and amortization.................... (274,945) -- -- (274,945)
--------- -------- ------- ---------
415,396 (9,554) -- 405,842
--------- -------- ------- ---------
Other property and equipment, net..... 5,700 (82) -- 5,618
Other assets, net..................... 15,149 -- (1,568) 13,581
--------- -------- ------- ---------
$ 465,392 $(50,315) $ -- $ 454,768
========= ======== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
debt............................. $ 2,003 $ -- $ -- $ 2,003
Accounts payable.................... 27,974 (6,319) -- 21,655
Domestic and foreign income taxes... 2,919 -- -- 2,919
--------- -------- ------- ---------
Total current liabilities... 32,896 (6,319) -- 26,577
--------- -------- ------- ---------
Long-term debt, less current
maturities.......................... 92,874 -- -- 92,874
Other noncurrent liabilities.......... 5,431 (1,140) -- 4,291
Deferred income taxes................. 43,793 -- -- 43,793
Stockholders' equity:
Common stock........................ 157,470 (42,856) -- 39,691(s) 154,305
Retained earnings................... 132,928 -- -- 132,928
--------- -------- ------- ---------
Total stockholders'
equity.................... 290,398 (42,856) -- 287,233
--------- -------- ------- ---------
Commitments and contingencies.........
--------- -------- ------- ---------
$ 465,392 $(50,315) $ -- $ 454,768
========= ======== ======= =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-16
<PAGE> 227
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997 AND DECEMBER 31, 1996
NOTE 1. BASIS OF PRESENTATION
Acquisition of Chauvco. In accordance with the Combination Agreement,
holders of Chauvco Common Shares will receive for each Chauvco Common Share held
(i) one CRI Share and (ii) in certain cases, at the election of a Chauvco
Shareholder, either the number of shares of Pioneer Common Stock or Exchangeable
Shares, or a combination of both, determined by multiplying each Chauvco Common
Share held by the Exchange Ratio. The Exchange Ratio is dependent upon the
Pioneer Stock Price, which will be the average closing sales price per share of
Pioneer Common Stock over the ten consecutive trading days ending the third
trading day next preceding the date of the Chauvco Meeting. The Exchangeable
Shares entitle the holders to dividend and other rights economically equivalent
to those of Pioneer Common Stock and, through a voting trust, the right to vote
at meetings of Pioneer Stockholders. The range of possible Exchange Ratios to be
utilized to determine the numbers of shares of Pioneer Common Stock or
Exchangeable Shares, or a combination of both, to be exchanged for one Chauvco
Common Share is described below:
A. If the Pioneer Stock Price is less than $33.50 the Exchange Ratio is
.493827.
B. If the Pioneer Stock Price is at least $33.50 but less than $39.01
the Exchange Ratio is the product of the following computation:
Exchange Ratio = (.493827 - (((Pioneer Stock
Price - 33.50)/5.51) X .042360)).
C. If the Pioneer Stock Price is equal to or greater than $39.01 the
Exchange Ratio is .451467.
In lieu of fractional shares of Pioneer Common Stock or Exchangeable
Shares, each holder of a Chauvco Common Share who otherwise would be entitled to
receive such fractional share will receive an amount of cash, without interest,
equal to the product of such fractional interest multiplied by the Pioneer Stock
Price converted to Canadian dollars using the noon spot rate of exchange of U.S.
dollars to Canadian dollars announced by the Bank of Canada on the day preceding
the date of calculation.
The Combination Agreement also provides that, if the Exchange Ratio is
above .465116, Pioneer may elect to deliver, in lieu of Pioneer Common Stock or
Exchangeable Shares, a number of shares of Pioneer Common Stock or Exchangeable
Shares for each Chauvco Common Share equal to the Exchange Ratio of .465115 and
an amount of cash per Chauvco Common Share equal to the product of (i) the
Pioneer Stock Price multiplied by the noon spot rate of exchange of U.S. dollars
and Canadian dollars announced by the Bank of Canada on the day preceding the
date of calculation for the exchange and (ii) the Exchange Ratio as calculated
above in A. or B. less .465116.
The value of Pioneer Common Stock for use in determining the aggregate
purchase consideration allocated to the acquired assets and liabilities of
Chauvco ("Consideration") will be either (i) the average trading price of
Pioneer Common Stock during the seven days surrounding the announcement of the
Transaction (the "Seven Day Average") or (ii) the market price of Pioneer common
stock on the date of the Chauvco Meeting. If the Pioneer Stock Price is equal to
or greater than $39.01, the Consideration will be based upon the Seven Day
Average of $42.17. However, if the Pioneer Stock Price is below $39.01, the
value for use in determining the Consideration will be the market price of
Pioneer Common Stock on the date of the Chauvco Meeting. The unaudited pro forma
combined financial statements have been prepared under the assumption that the
Consideration will be based on the Seven Day Average of $42.17. See Note 5 for a
sensitivity analysis should a decline in the Pioneer Stock Price occur.
The historical consolidated financial statements for Chauvco and CRI were
prepared under Canadian GAAP and in Canadian dollars. For these unaudited pro
forma financial statements, the historical financial information of Chauvco, CRI
and the Alliance pipeline project have been converted to U.S. dollars using the
period end exchange rate for the balance sheet and the average exchange rate for
the statement of operations. These unaudited pro forma financial statements also
contain certain adjustments to conform the historical
F-17
<PAGE> 228
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Chauvco financial statements to U.S. GAAP after eliminating the balances or
activity associated with CRI and the Alliance pipeline. In addition, certain
reclassifications have been made to Chauvco's historical consolidated financial
statements to conform to Pioneer's financial statement presentation.
Acquisition of Mesa. In accordance with the Merger Agreement, (i) holders
of Parker & Parsley common stock received one share of Pioneer common stock for
each share held; (ii) holders of Mesa common stock received one share of Pioneer
common stock for every seven shares held; and (iii) holders of Mesa Series A
Preferred Stock and Mesa Series B Preferred Stock received 1.25 shares of
Pioneer common stock for every seven shares held. No fractional shares were
issued and all treasury shares were canceled.
Description of Pro Forma Financial Statements. The unaudited pro forma
combined balance sheets of Pioneer as of June 30, 1997 and December 31, 1996
have been prepared to give effect to the Transaction, the Parker/Mesa Merger and
the exchange of Pioneer's Preferred Shares to Pioneer Common Stock as if such
transactions had occurred on the balance sheet dates presented. In accordance
with the provisions of APB No. 16, "Business Combinations", the Transaction has
been accounted for as a purchase of Chauvco by Pioneer and the Parker/Mesa
Merger have been accounted for as a purchase of Mesa by Pioneer.
The unaudited pro forma combined statements of operations of Pioneer for
the six months ended June 30, 1997 and for the year ended December 31, 1996 have
been prepared to give effect to the Transaction and the Parker/Mesa Merger and
certain events described below for Pioneer, Chauvco and Mesa as if the
Transaction, the Parker/Mesa Merger and such events had occurred on January 1,
1996.
Pro Forma Pioneer has been prepared to give effect to the acquisition of
Pro Forma Mesa by Adjusted Pioneer, both as defined below.
Pro Forma Chauvco has been prepared to give effect to the distribution of
CRI Shares and the rights to the Alliance pipeline to the Chauvco Shareholders.
Adjusted Pioneer has been prepared to give effect to the sale of the
Australasian Assets Sold, the 1996 Assets Sold and the exchange of Pioneer's
Preferred Shares to Pioneer Common Stock.
Pro Forma Mesa has been prepared to give effect to the Recapitalization and
the Greenhill Acquisition, including additional borrowings to finance such
acquisition.
The following is a description of the individual columns included in these
unaudited pro forma combined financial statements:
Pioneer -- Represents the consolidated balance sheets of Pioneer as of
June 30, 1997 and December 31, 1996 and the consolidated statements of
operations of Pioneer for the six months ended June 30, 1997 and for the
year ended December 31, 1996.
Australasian Assets Sold -- Reflects the results of operations for the
year ended December 31, 1996 from certain wholly-owned subsidiaries prior
to their sale in 1996. On March 28, 1996, Pioneer completed the sale of
certain wholly-owned subsidiaries to Santos Ltd., and on June 20, 1996,
Pioneer completed the sale of another wholly-owned subsidiary, Bridge Oil
Timor Sea, Inc., to Phillips Petroleum International Investment Company.
During the year ended December 31, 1996, Pioneer received aggregate
consideration of $237.5 million for these combined sales. The assets sold
to Santos Ltd. consisted primarily of properties located in the Cooper
Basin in Central Australia, the Surat Basin in Northeast Australia, the
Carnarvon Basin on the Northwest Shelf off the coast of Western Australia,
the Otway Basin off the coast of Southeast Australia and the Central
Sumatra Basin in Indonesia. At December 31, 1995, Pioneer's interests in
these properties contained 32.1 million BOE of proved reserves (consisting
of 12.4 million Bbls of oil and 118.3 Bcf of gas), representing $133.8
million of SEC PV 10 value. Prior to their sale in 1996, these properties
produced 249,500 Bbls of oil and 1,927,000 Mcf of gas. Pioneer received an
average price of $19.55 per Bbl of oil and $1.95 per Mcf of gas from such
production and incurred
F-18
<PAGE> 229
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
production costs per BOE of $4.92 and depletion expense per BOE of $5.84
related to these properties. The wholly-owned subsidiary sold to Phillips
Petroleum International Investment Company, Bridge Oil Timor Sea, Inc., has
a wholly owned subsidiary, Bridge Oil Timor Sea Pty Ltd., which owns a
22.5% interest in the ZOCA 91-13 permit in the offshore Bonapart Basin in
the Zone of Cooperation between Australia and Indonesia.
1996 Assets Sold -- Reflects the results of operations for the year
ended December 31, 1996 from certain oil and gas properties, gas plants,
contract rights and related assets prior to their sale in 1996. During the
year ended December 31, 1996, Pioneer sold certain domestic nonstrategic
oil and gas properties, gas plants and other related assets for aggregate
proceeds of approximately $58.4 million. Prior to their sale in 1996, these
oil and gas properties produced 274,314 Bbls of oil and 3,196,093 Mcf of
gas. Pioneer received an average price of $19.30 per Bbl of oil and $2.03
per Mcf of gas from such production and incurred production costs per BOE
of $6.80 and depletion expense per BOE of $4.04 related to these
properties.
Mesa -- Represents the consolidated balance sheets of Mesa as of June
30, 1997 and December 31, 1996 and the consolidated statements of
operations of Mesa for the six months ended June 30, 1997 and for the year
ended December 31, 1996.
Recapitalization -- Represents the effects on Mesa's unaudited pro
forma combined statement of operations from the Recapitalization as if it
had occurred on January 1, 1996. In August 1996, Mesa completed a
recapitalization of its balance sheet by issuing new equity and repaying
and refinancing substantially all of its then existing long-term debt. The
Recapitalization was undertaken by Mesa in an effort to deleverage and
recapitalize Mesa through the issuance of additional equity and through the
refinancing of substantially all of Mesa's $1.2 billion debt existing prior
to the Recapitalization. The Recapitalization provided Mesa with an
improved financial condition due to (i) a significant reduction in total
debt outstanding, (ii) a reduction in annual cash interest expense of
approximately $75 million, (iii) cost savings programs which reduced
general and administrative and other overhead expenses by approximately $10
million annually, and (iv) the extension of maturities on Mesa's long-term
debt, which eliminated Mesa's then existing liquidity concerns. The
Recapitalization included (i) the private placement of shares of a new
class of Mesa Series B Preferred Stock for $133 million to DNR -- Mesa
Holdings, Inc. ("DNR"), whose sole general partner is Rainwater Inc., a
Texas corporation owned by Richard E. Rainwater, (ii) the sale of $132
million of a new class of Mesa Series A Preferred Stock to Mesa's then
existing stockholders through a rights offering, (iii) the establishment of
a new bank credit facility and (iv) the issuance of two new series of
senior subordinated notes.
Greenhill -- Represents the unaudited balance sheet of Greenhill as of
December 31, 1996 and the unaudited statements of operations of Greenhill
prior to its acquisition by Mesa on April 15, 1997 and for the year ended
December 31, 1996.
Chauvco -- Represents the consolidated balance sheets of Chauvco as of
June 30, 1997 and December 31, 1996 and the consolidated statements of
operations of Chauvco for the six months ended June 30, 1997 and for the
year ended December 31, 1996. The historical consolidated financial
statements for Chauvco were prepared under Canadian GAAP and converted to
U.S. dollars utilizing the exchange rates of Canadian dollars to U.S.
dollars as listed below, which are based upon the noon buying rate in New
York City for cable transfers in Canadian dollars, as certified for
customer purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Balance Sheets............................. .7241 .7301
Statements of Operations................... .7269 .7330
</TABLE>
F-19
<PAGE> 230
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CRI -- Represents the consolidated balance sheets of CRI as of July
31, 1997 and December 31, 1996, which were prepared under Canadian GAAP and
in U.S. dollars. CRI was incorporated on July 29, 1997 as a wholly owned
subsidiary of Chauvco. See Pro Forma Consolidated Statements of Financial
Position of CRI included in Annex A attached hereto.
Alliance -- Reflects the investment in the Alliance pipeline project
as of June 30, 1997 and December 31, 1996 which were prepared under
Canadian GAAP and converted to U.S. dollars utilizing the Noon Buying Rate
of .7241 and .7301, respectively.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1996 presented herein does not reflect the results of operations
from Mesa's acquisition from MAPCO Inc. of approximately 11 MMBOE in February
1997 for approximately $66 million. The purchase was funded by additional
borrowings under Mesa's credit facility. In addition, the unaudited pro form
combined statement of operations for the year ended December 31, 1996 presented
herein does not reflect the results of operations from Chauvco's acquisition of
Tidal Resources Inc. on January 3, 1997 for approximately $55 million. The
purchase was funded by additional borrowings under Chauvco's credit facility.
The acquisitions are not presented since they are not considered significant
under Rule 3-05 of Regulation S-X.
NOTE 2. ACQUISITION OF CHAUVCO
The aggregate Pioneer Common Stock purchase consideration, including
nonrecurring transaction costs, is computed below in accordance with the
Exchange Ratio agreed to in the Combination Agreement at the Seven-Day Average.
See Note 5 below for a sensitivity analysis on the aggregate Pioneer
consideration assuming a remeasurement date occurs due to a decline of Pioneer's
Stock Price below $39.01.
<TABLE>
<CAPTION>
CHAUVCO
COMMON CHAUVCO
SHARES OPTIONS TOTAL
------------ ----------- ------------
<S> <C> <C> <C>
Shares/options outstanding................ 48,606,582 2,725,850
Exchange ratio............................ .451467 .451467
21,944,268 1,230,631
Less: Option Exercise shares (a).......... -- (651,508)
------------ -----------
21,944,268 579,123 22,523,391
Pioneer shares/Exchangeable Shares to be
issued Value of Pioneer common stock
(b)..................................... $ 42.17 $ 42.17 $ 42.17
------------ ----------- ------------
Pioneer common stock consideration........ $925,389,782 $24,421,617 $949,811,399
------------ -----------
Transaction costs......................... 20,000,000
------------
Aggregate purchase consideration.......... $969,811,399
============
</TABLE>
- ---------------
(a) For Chauvco Optionholders it is assumed that they will elect to reduce the
number of shares of Pioneer Common Stock they would otherwise be eligible to
receive by the number of shares of Pioneer Common Stock equal to the
exercise strike price of their options rather than pay, in cash, their
exercise price. The aggregate average exercise strike price for the Chauvco
Option is C$13.92.
(b) Pioneer Common Stock is valued at $42.17 per share which represents Pioneer
Seven-Day Average.
F-20
<PAGE> 231
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents the preliminary allocation of the total
purchase price of Chauvco to the acquired assets and liabilities of Chauvco. 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
financial statements.
<TABLE>
<CAPTION>
ALLOCATION OF AGGREGATE
PURCHASE CONSIDERATION
---------------------------------
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net working capital...................................... $ 6,384 $ 3,150
Property, plant and equipment............................ 1,509,042 1,350,204
Other assets............................................. 25,421 19,199
Long-term debt........................................... (207,039) (92,874)
Other non-current liabilities, including deferred
taxes.................................................. (363,997) (309,868)
---------- ----------
$ 969,811 $ 969,811
========== ==========
Pioneer Common Stock consideration....................... $ 949,811 $ 949,811
Transaction costs........................................ 20,000 20,000
---------- ----------
Aggregate purchase consideration......................... $ 969,811 $ 969,811
========== ==========
</TABLE>
The following table illustrates the number of shares of Pioneer Common
Stock that are estimated to be issued and outstanding upon the consummation of
the Transaction:
<TABLE>
<CAPTION>
SHARES/OPTIONS
OUTSTANDING AT EXCHANGE PIONEER SHARES/
SEPTEMBER 19, 1997 RATIO EXCHANGEABLE SHARES
------------------ -------- -------------------
<S> <C> <C> <C>
Pioneer Common Stock....................... 74,409,380 N/A 74,409,380
Chauvco Common Shares...................... 48,606,582 .451467 21,944,268
Chauvco Options............................ 2,725,850 (a) 579,123
----------
96,932,771
==========
</TABLE>
- ---------------
(a) For Chauvco Optionholders it is assumed that they will elect to reduce the
number of shares of Pioneer Common Stock they would otherwise be eligible to
receive by the number of shares of Pioneer Common Stock equal to the
exercise strike price of their options rather than pay, in cash, their
exercise price.
NOTE 3. ACQUISITION OF MESA
The aggregate Pioneer Common Stock purchase consideration, including
nonrecurring transaction costs, is computed in accordance with the Exchange
Ratios agreed to in the Merger Agreement as follows:
<TABLE>
<CAPTION>
MESA MESA SERIES MESA SERIES
COMMON A PREFERRED B PREFERRED
STOCK STOCK STOCK TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding.............. 64,279,568 62,884,094 63,672,925
Exchange ratio for Mesa
shares........................ 1.00 1.25 1.25
------------ ------------ ------------
64,279,568 78,605,118 79,591,156 222,475,842
Exchange ratio to Pioneer Common
Stock......................... 7.00 7.00 7.00 7.00
------------ ------------ ------------ ------------
Pioneer shares.................. 9,182,795 11,229,303 11,370,165 31,782,263
Value of Pioneer Common
Stock(a)...................... $ 30.82 $ 30.82 $ 30.82 $ 30.82
------------ ------------ ------------ ------------
Pioneer Common Stock
consideration................. $283,013,742 $346,087,118 $350,428,485 979,529,345
============ ============ ============
Transaction costs............... 20,000,000
------------
Aggregate purchase
consideration................. $999,529,345
============
</TABLE>
- ---------------
(a) Pioneer Common Stock is valued at $30.82 per share which represents
Pioneer's seven-day average trading price surrounding the announcement of
the Parker/Mesa Merger on April 7, 1997.
F-21
<PAGE> 232
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents the preliminary allocation of the total
purchase price of Mesa, including its Greenhill Acquisition, to the acquired
assets and liabilities of Mesa. 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.
<TABLE>
<CAPTION>
ALLOCATION OF AGGREGATE
PURCHASE CONSIDERATION
---------------------------------
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net working capital...................................... $ 11,882 $ 14,416
Property, plant and equipment............................ 2,349,623 2,314,713
Other assets............................................. 58,664 79,152
Long-term debt........................................... (1,186,538) (1,164,538)
Other noncurrent liabilities, including deferred taxes... (234,102) (244,214)
----------- -----------
$ 999,529 $ 999,529
=========== ===========
Pioneer Common Stock consideration....................... $ 979,529 $ 979,529
Cash paid for nonrecurring transaction costs............. 20,000 20,000
----------- -----------
Aggregate purchase consideration......................... $ 999,529 $ 999,529
=========== ===========
</TABLE>
The following table illustrates the number of shares of Pioneer Common
Stock that were issued in accordance with the exchange ratios agreed to in the
Merger Agreement.
<TABLE>
<CAPTION>
SHARES
OUTSTANDING PIONEER COMMON
EXISTING SECURITY TYPE AT AUGUST 7, 1997 STOCK
---------------------- ----------------- --------------
<S> <C> <C>
Parker & Parsley Common Stock..................... 41,773,238 41,773,238
Mesa Common Stock................................. 64,279,568 9,182,795
Mesa Series A Preferred Stock..................... 62,884,094 11,229,303
Mesa Series B Preferred Stock..................... 63,672,925 11,370,165
--------------
73,555,501
==============
</TABLE>
NOTE 4. PRO FORMA ENTRIES
(a) To record the acquisition of Chauvco using the purchase method of
accounting. The allocation of the purchase price to the acquired assets and
liabilities is preliminary and, therefore, subject to change. Any future
adjustments to the allocation of the purchase price are not anticipated to
be material to Pioneer's financial statements. (See Note 2 above).
(b) 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 method of accounting.
(c) To reclassify amounts which were capitalized by Chauvco as oil and gas
properties in accordance with the full cost method of accounting but that
are treated as exploratory dry hole, geological and geophysical and delay
rental expenses in accordance with the successful efforts method of
accounting.
(d) To reclassify amounts which were capitalized by Chauvco as oil and gas
properties in accordance with the full cost method of accounting but that
are treated as general and administrative expenses in accordance with the
successful efforts method of accounting.
(e) To record interest expense on the borrowings of $20 million which will be
utilized to pay for nonrecurring Transaction costs. The interest rate used
to determine such interest expense of 5.65% and 6.22%
F-22
<PAGE> 233
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
represents Pioneer's average borrowing rate on outstanding bank indebtedness
for the six months ended June 30, 1997 and the year ended December 31, 1996,
respectively.
(f) To adjust income tax expense for each tax jurisdiction.
(g) To adjust the weighted average shares outstanding for the acquisition of
Chauvco. This adjustment also assumes the conversion of the Chauvco options
into Pioneer Common Stock for purposes of computing weighted average shares
outstanding.
(h) To record the acquisition of Mesa using the purchase method of accounting.
The allocation of the purchase price to the acquired assets and liabilities
is preliminary and, therefore, subject to change. Any future adjustments to
the allocation of the purchase price are not anticipated to be material to
Pioneer's financial statements. (See Note 3 above).
(i) To (i) reclassify the Preferred Shares and related capitalized issuance fees
to common stock and additional paid-in capital as a result of Pioneer's
mandatory exchange of such Preferred Shares for shares of Pioneer Common
Stock on July 28, 1997 and (ii) eliminate the interest expense associated
with such Preferred Shares and amortization of capitalized issuance fees. On
July 28, 1997, Pioneer exercised its right to require each holder of the
3,776,400 Preferred Shares to mandatorily exchange all Preferred Shares for
shares of common stock of Pioneer at a rate of 1.7778 shares of Pioneer
Common Stock for each Preferred Share. As a result of the exchange, Pioneer
will no longer incur interest expense of approximately $12 million per year
associated with the Preferred Shares.
(j) To record the acquisition by Mesa of 100% of the outstanding common stock of
Greenhill for a total purchase price of $277 million. The purchase was
funded primarily by additional borrowings under Mesa's credit facility
including a performance deposit made in February 1997 of $15.8 million.
Additionally, $8 million of the cash acquired from Greenhill on April 15,
1997 (the date of closing) was applied to Mesa's borrowings under its credit
facility. The acquisition of Greenhill was accounted for using the purchase
method of accounting.
The following table represents the allocation of the total purchase price
of Greenhill to the acquired assets and liabilities. The allocation
represents the fair value assigned to each of the significant assets
acquired and liabilities assumed.
<TABLE>
<CAPTION>
GREENHILL
----------------------------------
APRIL 15, 1997 DECEMBER 31, 1996
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net working capital...................................... $ 10,339 $ 7,639
Property, plant and equipment............................ 264,805 267,384
Other assets............................................. 1,879 2,000
Other noncurrent liabilities............................. (23) (23)
-------- --------
$277,000 $277,000
======== ========
Debt reduction resulting from application of cash
acquired............................................... $ 8,000 $ 8,000
Borrowings to finance acquisition, including a
performance deposit of $15,795......................... 269,000 269,000
-------- --------
Aggregate purchase consideration......................... $277,000 $277,000
======== ========
</TABLE>
(k) To reclassify certain amounts to conform with the financial statement
presentation of Pioneer.
(l) To reduce interest expense for (i) the amortization of the premiums
(utilizing the effective interest rate method) recorded as part of purchase
accounting for Mesa's 10 5/8% Senior Subordinated Notes and 11 5/8% Senior
Subordinated Discount Notes and (ii) the application of Pioneer's excess
cash in 1996 to
F-23
<PAGE> 234
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the reduction of Mesa's outstanding bank indebtedness at Mesa's 1996 pro
forma incremental borrowing interest rate of 7% (see pro forma entry (m)
below).
(m) To adjust interest expense resulting from the borrowing of the funds
necessary for Mesa's acquisition of Greenhill. Mesa's 1997 and 1996 pro
forma incremental borrowing interest rate of 7% was utilized to determine
the additional pro forma interest expense.
(n) To eliminate the preferred stock dividends associated with Mesa's Series A
and Series B Preferred Stock.
(o) To adjust the weighted average shares outstanding for the acquisition of
Mesa. This adjustment also assumes the conversion of Mesa's outstanding
employee stock options into Pioneer employee stock options for purposes of
computing weighted average shares outstanding.
(p) To adjust interest expense resulting from the application of that portion of
the sales proceeds from the Australasian Assets Sold and the 1996 Assets
Sold necessary to retire Pioneer's outstanding bank indebtedness. The
proceeds applied to retire Pioneer's outstanding bank indebtedness of $225
million resulted in a reduction in interest expense of $4.3 million. The
reduction in interest expense was calculated utilizing Pioneer's weighted
average rate on its bank indebtedness of 6.22% for the period during 1996 in
which Pioneer had outstanding bank indebtedness.
(q) To reduce interest expense as a result of the Recapitalization. Interest
expense adjustments include the following for the year ended December 31,
1996:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA ADJUSTMENT
---------- --------- ----------
<S> <C> <C> <C>
Interest expense on former debt repaid in the
Recapitalization:
Secured Notes.................................... $ 26,231 $ -- $(26,231)
Former Credit Agreement.......................... 2,472 -- (2,472)
12 3/4% secured discount notes................... 43,979 -- (43,979)
13 1/2% subordinated notes....................... 654 -- (654)
Interest expense on former debt repaid prior to the
Recapitalization:
12 3/4% unsecured discount notes................. 2,595 2,595 --
Interest expense on new debt issued in the
Recapitalization:
10 5/8% Senior Subordinated Notes................ 17,613 35,418 17,805
11 5/8% Senior Discount Notes.................... 8,893 18,661 9,768
New Credit Facility.............................. 15,094 26,327 11,233
Other interest expense............................. 3,604 3,604 --
-------- ------- --------
$121,135 $86,605 $(34,530)
======== ======= ========
</TABLE>
Other interest expense is primarily the interest portion of the
administrative fee charged by Colorado Interstate Gas Company in connection
with Mesa's West Panhandle field operations. The interest rate on the New
Credit Facility is approximately 7.75% on the first $250 million due to an
interest rate swap with the balance at a floating rate that during the
period outstanding was approximately 7%.
(r) To record the pro forma adjustment for an 8% annual dividend on the Mesa
Series A and Series B Preferred Stock payable quarterly in additional shares
of Mesa Series A and Series B Preferred Stock for at least the first four
years after issuance as if the Mesa Series A and Series B Preferred Stock
had been issued on January 1, 1996.
(s) To adjust the unaudited pro forma balance sheets of CRI to U.S. GAAP.
F-24
<PAGE> 235
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. FLOATING EXCHANGE RATIO FOR CHAUVCO ACQUISITION
As described in Note 1 above, the Exchange Ratio fluctuates within a range
of Pioneer Stock Prices (between $33.50 and $39.01) and each Exchange Ratio
within the range results in a different number of shares of Pioneer Common
Shares or Exchangeable Shares being issued. Based upon the Seven-Day Average of
$42.17, the Exchange Ratio assumed in these unaudited pro forma financial
statements is .451467. The table below provides a sensitivity analysis of the
effects on the unaudited pro forma financial statements if the Pioneer Stock
Price were to decline to $36.25 or $33.50 as of June 30, 1997 and December 31,
1996 and for the periods ending June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
PIONEER STOCK PRICE
-------------------------------------------------
JUNE 30, 1997 DECEMBER 31, 1996
----------------------- -----------------------
$36.25 $33.49 $36.25 $33.49
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Income from continuing operations.... $ (5,211) $ (5,211) $ 46,993 $ 46,993
========== ========== ========== ==========
Primary income per share............. $ (.05) $ (.05) $ .49 $ .49
========== ========== ========== ==========
Allocation to unproved property...... $ 698,247 $ 548,695 $ 539,408 $ 493,708
========== ========== ========== ==========
Stockholders equity.................. $2,569,424 $2,538,872 $2,544,700 $2,514,148
========== ========== ========== ==========
Aggregate purchase consideration..... $ 872,026 $ 841,474 $ 872,026 $ 841,474
========== ========== ========== ==========
Pioneer Common Stock outstanding..... 97,913,533 98,938,314 97,913,533 98,938,314
========== ========== ========== ==========
</TABLE>
The calculations in the foregoing table assumes that no Cash Payments will
be paid.
NOTE 6. INCOME TAXES
Pioneer will account for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." In accordance with SFAS 109, Pioneer will prepare separate tax
calculations for each tax jurisdiction in which Pioneer will be subject to
income taxes.
NOTE 7. INCOME FROM CONTINUING OPERATIONS PER SHARE
Income from continuing operations per share is computed based on the
weighted average number of shares of common stock and common stock equivalents,
if more than 3% dilutive, outstanding during the period. Fully diluted income
from continuing operations per share is not presented since dilution is less
than 3% on a pro forma combined basis. Income from continuing operations per
share reflects the exchange of Chauvco Common Shares for Pioneer Common Stock or
Exchangeable Shares, the exchange of Pioneer's Preferred Shares and the
conversion of Mesa's Series A Preferred Stock and Mesa's Series B Preferred
Stock to Pioneer common stock.
NOTE 8. GENERAL AND ADMINISTRATIVE EXPENSE REDUCTIONS
Mesa's general and administrative expenses for the year ended December 31,
1996 includes $9.4 million associated with the elimination of 86 positions from
the total of 385 at December 31, 1995, and a significant downsizing of Mesa's
natural gas vehicle equipment business in conjunction with the Recapitalization.
Given the first quarter 1997 general and administrative expenses of $3.8
million, Mesa's continuing costs are estimated at approximately $15 million per
year ($3.8 million multiplied by four quarters). In addition, Greenhill's
general and administrative expenses prior to its sale to Mesa on April 15, 1997
of $13.3 million included severance costs paid to Greenhill employees of
approximately $11 million as few of Greenhill's administrative personnel were
retained. As a result, Mesa considers a continuing annual expense associated
F-25
<PAGE> 236
PIONEER NATURAL RESOURCES COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
with Greenhill properties of approximately $5 million to be reasonable. Given
the above, Mesa expects total general and administrative expenses to approximate
$20 million per year. The accompanying Pro Forma Combined Statements of
Operations for Pioneer do not include any adjustments related to the expected
level of ongoing general and administrative expense.
NOTE 9. PIONEER'S THIRD QUARTER OF 1997 CHARGES
Pioneer's Unaudited Pro Forma Combined Balance Sheet as of June 30, 1997
includes certain unamortized amounts which will be recognized as noncash charges
during the third quarter of 1997 as a result of the Parker/Mesa Merger. These
amounts include $2.5 million (pre-tax) of capitalized issuance fees associated
with Parker & Parsley's existing bank credit facility which was replaced by a
new $1.4 billion bank credit facility for Pioneer and $544 thousand (pre-tax) of
unearned compensation resulting from certain change of control provisions
included in Parker & Parsley's existing Long-term Incentive Plan whereby the
vesting requirements of outstanding restricted stock awards were accelerated.
NOTE 10. OIL AND GAS RESERVE DATA
The following unaudited pro forma supplemental information regarding the
oil and gas activities of Pioneer is presented pursuant to the disclosure
requirements promulgated by the SEC and Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing Activities." The pro
forma reserve information is presented as if the sale of the Australasian Assets
and 1996 Assets Sold and the acquisition of Chauvco, Mesa and Greenhill had
occurred on January 1, 1996.
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, 1996.
<TABLE>
<CAPTION>
OIL, NGL'S AND CONDENSATE (MBBLS) GAS (MMCF)
-------------------------------------- -------------------------------------------
USA ARGENTINA CANADA TOTAL USA ARGENTINA CANADA TOTAL
------- --------- ------ ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996...... 267,108 15,933 21,895 304,936 1,984,726 322,000 136,264 2,442,990
Revisions of previous
estimates................. 31,475 (722) 249 31,002 42,246 (10,860) (5,180) 26,206
Purchase of
minerals-in-place......... 300 -- -- 300 11,494 -- 11,494
New discoveries and
extensions................ 2,794 1,608 650 5,052 30,151 4,588 3,320 38,059
Production.................. (20,497) (1,183) (4,330) (26,010) (160,729) (16,820) (12,500) (190,049)
------- ------ ------ ------- --------- ------- ------- ---------
Balance, December 31, 1996.... 281,180 15,636 18,464 315,280 1,907,888 298,908 121,904 2,328,700
======= ====== ====== ======= ========= ======= ======= =========
</TABLE>
F-26
<PAGE> 237
PIONEER NATURAL RESOURCES COMPANY
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
flow 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
USA ARGENTINA CANADA TOTAL
----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Oil and gas producing activities:
Future cash inflows.................. $13,987,546 $ 599,243 $ 680,112 $15,266,901
Future production costs.............. (3,970,522) (144,714) (173,033) (4,288,269)
Future development costs............. (389,701) (24,084) (10,632) (424,417)
Future income tax expense............ (2,679,214) (721) (156,606) (2,836,541)
----------- --------- --------- -----------
6,948,109 429,724 339,841 7,717,674
10% annual discount factor........... (3,240,886) (214,813) (114,840) (3,570,539)
----------- --------- --------- -----------
Standardized measure of discounted
future net cash flows............. $ 3,707,223 $ 214,911 $ 225,001 $ 4,147,135
=========== ========= ========= ===========
</TABLE>
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, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
Oil and gas sales, net of production costs.................. $ (651,480)
Net changes in prices and production costs.................. 2,220,041
Extensions and discoveries.................................. 131,526
Purchases of minerals-in-place.............................. 20,606
Revisions of estimated future development costs............. (71,763)
Revisions of previous quantity estimates.................... 327,004
Accretion of discount....................................... 290,618
Changes in production rates, timing and other............... (150,096)
----------
Change in present value of future net revenues.............. 2,116,456
Net change in present value of future income taxes.......... (628,589)
----------
1,487,867
Balance, beginning of year.................................. 2,659,268
----------
Balance, end of year........................................ $4,147,135
==========
</TABLE>
F-27
<PAGE> 238
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Pioneer Natural Resources Company:
We have audited the consolidated financial statements of Pioneer Natural
Resources Company and subsidiaries (successor to Parker & Parsley Petroleum
Company and subsidiaries) as of December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the five-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 financial position of Pioneer
Natural Resources Company and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the five-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Notes B and T to the consolidated financial statements, the
Company changed its method of accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of in 1995 to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." As discussed in Notes B and U to the
consolidated financial statements, the Company changed its method of accounting
for income taxes in 1993 to adopt the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
/s/ KPMG Peat Marwick LLP
Midland, Texas
January 29, 1997 (except as to Note A
which is as of August 7, 1997)
F-28
<PAGE> 239
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,843 $ 18,711 $ 19,940
Restricted cash........................................... 1,723 1,749 15,572
Accounts receivable:
Trade, net.............................................. 37,147 34,075 49,257
Affiliates.............................................. 789 434 2,369
Oil and gas sales....................................... 33,074 48,459 37,358
Assets held for resale.................................... -- -- 3,677
Inventories............................................... 5,581 3,644 9,880
Deferred income taxes..................................... 9,300 7,400 1,600
Other current assets...................................... 1,955 2,567 2,757
---------- ---------- ----------
Total current assets................................ 99,412 117,039 142,410
---------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties....................................... 1,536,665 1,419,051 1,450,290
Unproved properties..................................... 41,071 7,331 14,574
Natural gas processing facilities......................... 50,770 59,276 63,395
Accumulated depletion, depreciation and amortization...... (489,143) (445,238) (406,513)
---------- ---------- ----------
1,139,363 1,040,420 1,121,746
---------- ---------- ----------
Restricted investments...................................... -- -- 5,345
Other property and equipment, net........................... 28,552 27,779 31,755
Other assets, net........................................... 16,175 14,627 17,973
---------- ---------- ----------
$1,283,502 $1,199,865 $1,319,229
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 6,064 $ 5,381 $ 2,608
Distributable litigation settlement....................... -- -- 13,633
Undistributed unit purchases.............................. 1,723 1,749 1,939
Accounts payable:
Trade................................................... 63,779 56,713 58,263
Affiliates.............................................. 837 7,528 574
Domestic and foreign income taxes......................... 2,038 1,743 2,875
Other current liabilities................................. 14,737 17,856 31,017
---------- ---------- ----------
Total current liabilities........................... 89,178 90,970 110,909
---------- ---------- ----------
Long-term debt, less current maturities..................... 349,457 320,908 586,549
Other noncurrent liabilities................................ 27,336 8,071 16,656
Deferred income taxes....................................... 73,800 60,800 5,300
Preferred stock of subsidiary............................... 188,820 188,820 188,820
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued and outstanding................. -- -- --
Common stock, $.01 par value; 180,000,000 shares
authorized; 36,983,324, 36,899,618 and 36,387,960 shares
issued at June 30, 1997 and December 31, 1996 and 1995,
respectively............................................ 370 369 364
Additional paid-in capital................................ 465,234 462,873 452,718
Treasury stock, at cost; 1,929,503, 1,833,383 and
1,004,684 shares at June 30, 1997 and December 31, 1996
and 1995, respectively.................................. (34,460) (31,528) (6,844)
Unearned compensation..................................... (712) (1,625) (2,055)
Retained earnings (deficit)............................... 124,479 100,207 (36,491)
Cumulative translation adjustment......................... -- -- 3,303
---------- ---------- ----------
Total stockholders' equity.......................... 554,911 530,296 410,995
Commitments and contingencies (Note K)......................
---------- ---------- ----------
$1,283,502 $1,199,865 $1,319,229
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 240
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
) (UNAUDITED
REVENUES:
Oil and gas................. $ 198,626 $ 192,014 $ 396,931 $ 375,720 $ 337,602 $ 207,208 $ 135,071
Natural gas processing...... 11,819 11,104 23,814 33,258 39,149 77,428 54,593
Gas marketing............... -- -- -- 76,784 102,982 43,831 12,143
Interest and other.......... 2,833 2,423 17,458 11,364 6,918 4,388 4,223
Gain on disposition of
assets, net............... 2,637 95,249 97,140 16,620 9,512 23,220 4,169
----------- ----------- ----------- ----------- ----------- ----------- -----------
215,915 300,790 535,343 513,746 496,163 356,075 210,199
----------- ----------- ----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Oil and gas production...... 55,392 57,404 110,334 130,905 127,118 78,310 51,774
Natural gas processing...... 6,098 6,035 12,528 25,865 33,626 51,582 38,551
Gas marketing............... -- -- -- 75,664 101,499 42,836 11,001
Depletion, depreciation and
amortization.............. 59,509 59,638 112,134 159,058 145,374 80,391 45,634
Impairment of oil and gas
properties and natural gas
processing facilities..... -- -- -- 130,494 -- -- --
Exploration and
abandonments.............. 18,415 10,761 23,030 27,552 25,239 3,601 4,519
General and
administrative............ 14,990 12,990 28,363 37,409 28,948 23,753 11,592
Interest.................... 20,154 26,052 46,155 65,449 50,552 23,338 14,708
Other....................... 831 1,344 2,451 11,357 4,298 3,861 2,274
----------- ----------- ----------- ----------- ----------- ----------- -----------
175,389 174,224 334,995 663,753 516,654 307,672 180,053
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes, extraordinary item
and cumulative effect of
accounting change........... 40,526 126,566 200,348 (150,007) (20,491) 48,403 30,146
Income tax benefit
(provision)................. (14,500) (31,700) (60,100) 45,900 6,500 (17,000) (3,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change........... 26,026 94,866 140,248 (104,107) (13,991) 31,403 27,146
Extraordinary item-gain (loss)
on early extinguishment of
debt, net of tax............ -- -- -- 4,338 (628) -- --
Cumulative effect of
accounting change......... -- -- 17,100 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 26,026 $ 94,866 $ 140,248 $ (99,769) $ (14,619) $ 48,503 $ 27,146
=========== =========== =========== =========== =========== =========== ===========
Income (loss) per share:
Primary:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change....... $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05
Extraordinary item........ -- -- -- .12 (.02) -- --
Cumulative effect of
accounting change....... -- -- -- -- -- .61 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)......... $ .74 $ 2.66 $ 3.92 $ (2.83) $ (.49) $ 1.74 $ 1.05
=========== =========== =========== =========== =========== =========== ===========
Fully diluted:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change....... $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05
Extraordinary item........ -- -- -- .12 (.02) -- --
Cumulative effect of
accounting change....... -- -- -- -- -- .61 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)......... $ .71 $ 2.32 $ 3.47 $ (2.83) $ (.49) $ 1.74 $ 1.05
=========== =========== =========== =========== =========== =========== ===========
Dividends declared per
share....................... $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10
=========== =========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding................. 35,364,261 35,699,560 35,733,991 35,274,214 30,063,435 27,945,490 25,825,038
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 241
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED CUMULATIVE TOTAL
COMMON PAID-IN TREASURY COMPEN- RETAINED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL STOCK SATION EARNINGS ADJUSTMENT EQUITY
------ ---------- -------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991................. $232 $196,561 $(13,006) $ (501) $13,800 $ -- $197,086
Common stock issued.......................... 59 69,887 -- -- -- -- 69,946
Exercise of long-term incentive plan stock
options.................................... -- 993 1,601 -- -- -- 2,594
Restricted shares awarded.................... -- 372 188 (443) -- -- 117
Tax benefits related to stock options........ -- -- -- -- -- -- --
Purchase of treasury stock................... -- -- (38) -- -- -- (38)
Amortization of unearned compensation........ -- -- -- 566 -- -- 566
Net income................................... -- -- -- -- 27,146 -- 27,146
Dividends ($.10 per share)................... -- -- -- -- (2,404) -- (2,404)
Currency translation adjustment.............. -- -- -- -- -- -- --
---- -------- -------- ------- -------- ------ --------
Balance at December 31, 1992 ................ 291 267,813 (11,255) (378) 38,542 295,013
---- -------- -------- ------- -------- ------ --------
Common stock issued.......................... -- -- -- -- -- -- --
Exercise of long-term incentive plan stock
options...................................... -- 1,574 2,141 -- -- -- 3,715
Restricted shares awarded.................... -- 7,334 2,511 (9,075) -- -- 770
Tax benefits related stock options........... -- 1,800 -- -- -- -- 1,800
Purchase of treasury stock................... -- -- (806) -- -- -- (806)
Amortization of unearned compensation........ -- -- -- 2,507 -- -- 2,507
Net income................................... -- -- -- -- 48,503 -- 48,503
Dividends ($.10 per share)................... -- -- -- -- (2,732) -- (2,732)
Currency translation adjustment.............. -- -- -- -- -- -- --
---- -------- -------- ------- -------- ------ --------
Balance at December 31, 1993................. 291 278,521 (7,409) (6,946) 84,313 -- 348,770
---- -------- -------- ------- -------- ------ --------
Common stock issued.......................... 68 164,546 -- -- -- -- 164,614
Exercise of long-term incentive plan stock
options.................................... -- 462 480 -- -- -- 942
Restricted shares awarded.................... -- 1,492 514 (832) -- -- 1,174
Tax benefits related to stock options........ -- 300 -- -- -- -- 300
Purchase of treasury stock................... -- -- (373) -- -- -- (373)
Amortization of unearned compensation........ -- -- -- 2,052 -- -- 2,052
Net loss..................................... -- -- -- -- (14,619) -- (14,619)
Dividends ($.10 per share)................... -- -- -- -- (2,915) -- (2,915)
Currency translation adjustment.............. -- -- -- -- -- 9,639 9,639
---- -------- -------- ------- -------- ------ --------
Balance at December 31, 1994................. 359 445,321 (6,788) (5,726) 66,779 9,639 509,584
---- -------- -------- ------- -------- ------ --------
Common stock issued.......................... 2 3,963 -- -- -- -- 3,965
Exercise of long-term incentive plan stock
options.................................... 2 2,065 223 (365) -- -- 1,925
Restricted shares awarded.................... 1 769 -- (1,387) -- -- (617)
Tax benefits related to stock options........ -- 600 -- -- -- -- 600
Purchase of treasury stock................... -- -- (279) -- -- -- (279)
Amortization of unearned compensation........ -- -- -- 5,423 -- -- 5,423
Net loss..................................... -- -- -- -- (99,769) -- (99,769)
Dividends ($.10 per share)................... -- -- -- -- (3,501) -- (3,501)
Currency translation adjustment.............. -- -- -- -- -- (6,336) (6,336)
---- -------- -------- ------- -------- ------ --------
Balance at December 31, 1995................. 364 452,718 (6,844) (2,055) (36,491) 3,303 410,995
---- -------- -------- ------- -------- ------ --------
Exercise of long-term incentive plan stock
options.................................... 5 6,899 -- -- -- -- 6,904
Restricted shares awarded.................... -- 1,091 -- (1,199) -- -- (108)
Restricted shares forfeited.................. -- (35) (13) 48 -- -- --
Tax benefits related to stock options........ -- 2,200 -- -- -- -- 2,200
Purchase of treasury stock................... -- -- (24,671) -- -- -- (24,671)
Amortization of unearned compensation........ -- -- -- 1,581 -- -- 1,581
Net income................................... -- -- -- -- 140,248 -- 140,248
Dividends ($.10 per share)................... -- -- -- -- (3,550) -- (3,550)
Currency translation adjustment.............. -- -- -- -- -- (3,303) (3,303)
---- -------- -------- ------- -------- ------ --------
Balance at December 31, 1996................. 369 462,873 (31,528) (1,625) 100,207 -- 530,296
---- -------- -------- ------- -------- ------ --------
Exercise of long-term incentive plan stock
options (unaudited)........................ 1 1,162 -- -- -- -- 1,163
Restricted shares awarded (unaudited)........ -- 899 -- -- -- -- 899
Tax benefits related to stock options
(unaudited)................................ -- 300 -- -- -- -- 300
Purchase of treasury stock (unaudited)....... -- -- (2,932) -- -- -- (2,932)
Amortization of unearned compensation
(unaudited)................................ -- -- -- 913 -- -- 913
Net income (unaudited)....................... -- -- -- -- 26,026 -- 26,026
Dividends ($.10 per share) (unaudited)....... -- -- -- -- (1,754) -- (1,754)
---- -------- -------- ------- -------- ------ --------
Balance at June 30, 1997 (unaudited)......... $370 $465,234 $(34,460) $ (712) $124,479 $ -- $554,911
==== ======== ======== ======= ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 242
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 26,026 $ 94,866 $ 140,248 $ (99,769) $ (14,619) $ 48,503 $ 27,146
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depletion, depreciation and
amortization....................... 59,509 59,638 112,134 159,058 145,374 80,391 45,634
Impairment of oil and gas properties
and natural gas processing
facilities......................... -- -- -- 130,494 -- -- --
Exploration expenses, including dry
holes.............................. 14,191 8,247 17,262 23,500 22,852 1,935 3,429
Deferred income taxes................ 11,400 31,700 57,400 (42,600) (7,150) 10,600 --
Gain on disposition of assets, net... (2,637) (95,249) (97,140) (16,620) (9,512) (23,220) (4,169)
Other noncash items.................. 2,180 1,677 (1,360) 10,132 5,453 6,930 2,917
Cumulative effect of accounting
change............................. -- -- -- -- -- (17,100) --
Change in operating assets and
liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable.................. 12,024 19,378 (2,674) 4,870 11,870 8,832 (4,622)
Inventory............................ (1,851) (554) 1,842 682 -- -- --
Other current assets................. 680 154 (32) 1,146 (2,018) (688) 436
Accounts payable..................... 3,099 (3,012) (656) (15,712) (5,137) 16,657 (3,573)
Accrued income taxes and other
current liabilities................ (28) 3,726 3,082 2,758 (17,363) (14,538) 1,105
Net deferred income.................. -- -- -- -- -- (8,669) 8,900
Other.................................. -- -- -- (683) -- 2,519 --
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by operating
activities......................... 124,593 120,571 230,106 157,256 129,750 112,152 77,203
--------- --------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Payment for acquisitions, net of cash
acquired............................. -- -- -- (700) (269,584) (454,651) (100)
Proceeds from disposition of
wholly-owned subsidiaries, net of
cash disposed........................ -- 178,737 183,181 -- -- -- --
Proceeds from disposition of assets.... 12,278 45,877 58,370 175,085 108,984 185,257 17,848
Additions to oil and gas properties.... (169,500) (73,945) (219,394) (215,731) (247,124) (116,953) (91,313)
Other, net............................. (750) (2,970) (8,428) (11,954) (38,226) (11,858) (38,262)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities............... (157,972) 147,699 13,729 (53,300) (445,950) (398,205) (111,827)
--------- --------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under long-term debt........ 41,543 782 782 334,458 452,071 461,932 12,180
Principal payments on long-term debt... (12,802) (229,283) (222,157) (434,681) (451,176) (169,667) (18,962)
Payment of noncurrent liabilities...... (707) (389) (2,534) (1,588) (10,260) (6,109) (7,103)
Issuance of common stock, net.......... -- -- -- (23) 164,614 -- 48,394
Issuance of preferred stock of
subsidiary........................... -- -- -- -- 188,820 -- --
Deferred loan fees/issuance costs...... -- -- (20) (4,121) (10,354) (7,443) --
Dividends.............................. (1,754) (1,770) (3,550) (3,501) (2,915) (2,732) (2,284)
Purchase of treasury stock............. (2,932) (182) (24,671) (279) (373) (806) (38)
Exercise of long-term incentive plan
stock options........................ 1,163 2,559 6,904 1,925 942 3,715 1,923
Other.................................. -- (151) (108) (114) -- -- (354)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............... 24,511 (228,434) (245,354) (107,924) 331,369 278,890 33,756
--------- --------- --------- --------- --------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents................... -- 290 290 (299) 671 -- --
Net increase (decrease) in cash and cash
equivalents............................ (8,868) 39,836 (1,519) (3,968) 15,169 (7,163) (868)
Cash and cash equivalents, beginning of
year................................... 18,711 19,940 19,940 24,207 8,367 15,530 16,398
--------- --------- --------- --------- --------- --------- ---------
Cash and cash equivalents, end of year... $ 9,843 $ 60,066 $ 18,711 $ 19,940 $ 24,207 $ 8,367 $ 15,530
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 243
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, 1994, 1993 AND 1992
AND JUNE 30, 1997 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
NOTE A. ORGANIZATION AND NATURE OF OPERATIONS
Pioneer Natural Resources Company ("Pioneer") is a Delaware Corporation
whose common stock is listed and traded on the New York Stock Exchange. Pioneer
was formed in order to complete the merger proposed by and between Parker &
Parsley Petroleum Company ("Parker & Parsley") and Mesa Inc. ("Mesa"). Pioneer
was originally created as a wholly-owned subsidiary of Mesa, a Texas
corporation, the purpose of which was to allow Mesa to reincorporate into a
Delaware corporation and to accomplish the merger with Parker & Parsley. Both
Parker & Parsley and Mesa are oil and gas exploration and production concerns
with ownership interests in oil and gas properties located principally in the
MidContinent, Southwestern and onshore and offshore Gulf Coast regions of the
United States, and with limited international interests. During the six months
ended June 30, 1997, the transactions of Pioneer consisted solely of the single
stock issuance related to the capitalization of Pioneer.
Subsequent to June 30, 1997, Pioneer's predecessor entities, Parker &
Parsley and Mesa, approved an Amended and Restated Agreement and Plan of Merger
that resulted in the formation of Pioneer. In accordance with the provisions of
Accounting Principles Board No. 16, "Business Combinations", the merger was
treated as an acquisition of Mesa by Parker & Parsley. As a result, the
historical financial statements of Pioneer are those of Parker & Parsley and
will present the addition of Mesa's assets and liabilities as an acquisition by
Pioneer in August 1997 and all references to Pioneer contained herein are
references to Parker & Parsley for dates prior to the merger. Consequently, the
results included herein do not give effect to the addition of Mesa's assets and
liabilities and Mesa's results of operations and are not indicative of future
results of Pioneer (see "Note X. Subsequent Events -- Merger with Mesa" below).
The unaudited consolidated financial statements as of and for the periods
ended June 30, 1997 and 1996 have been prepared on a basis consistent with the
audited Consolidated Financial Statements and, in the opinion of management,
include all adjustments, consisting of normal recurring accrual adjustments,
which are necessary for a fair presentation of the result for the interim
periods.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Pioneer and its majority-owned subsidiaries since their
acquisition or formation and Pioneer's interest in the affiliated oil and gas
partnerships for which it serves as general partner through certain of its
wholly-owned subsidiaries. Investments in less-than-majority-owned subsidiaries
where Pioneer has the ability to exercise significant influence over the
investee's operations are accounted for by the equity method; otherwise, they
are accounted for at cost. Pioneer proportionately consolidates
less-than-100%-owned oil and gas partnerships in accordance with industry
practice. Pioneer owns less than a 20% interest in the oil and gas partnerships
that it proportionally consolidates. All material intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. Preparation of
the accompanying consolidated 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 EQUIVALENTS. For purposes of the Consolidated Statements of Cash
Flows, cash and cash equivalents include cash on hand and depository accounts
held by banks.
F-33
<PAGE> 244
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Restricted cash at June 30, 1997 and December 31, 1996 represents Pioneer's
remaining obligation to redeem for cash the unconverted limited partner units in
the acquired Prudential-Bache Energy limited partnerships. Restricted cash at
December 31, 1995 includes (a) $13.6 million representing the undistributed
balance of proceeds received in settlement of certain litigation brought by
Pioneer on behalf of limited partners in various limited partnerships sponsored
by Pioneer from 1981 through 1987 and (b) $1.9 million representing Pioneer's
remaining obligation to redeem for cash the unconverted limited partner units in
the acquired Prudential-Bache Energy limited partnerships. See Note D.
INVENTORIES. Inventories consist of lease and well equipment, natural gas
processing plant products and oil in tanks. Lease and well equipment is carried
at the lower of cost (first-in, first-out) or market. Natural gas processing
plant products and oil in tanks are carried at market.
IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), Pioneer
reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. An impairment loss is indicated if the sum of the
expected future cash flows is less than the carrying amount of the assets. In
this circumstance, Pioneer recognizes an impairment loss for the amount by which
the carrying amount of the asset exceeds the fair value of the asset.
Pioneer accounts for long-lived assets to be disposed of at the lower of
their carrying amount or fair value less cost to sell once management has
committed to a plan to dispose of the assets.
Prior to the adoption of SFAS 121 on April 1, 1995, Pioneer's aggregate oil
and gas properties were carried at cost, not in excess of total estimated future
net revenues net of related income tax effects calculated on a worldwide basis.
OIL AND GAS PROPERTIES. Pioneer utilizes the successful efforts method of
accounting for its oil and gas properties as promulgated by Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies". Under this method, all costs associated with
productive wells and nonproductive development wells are capitalized while
nonproductive exploration costs are expensed. Capitalized costs relating to
proved properties are depleted using the unit-of-production method based on
proved reserves expressed as net equivalent barrels ("BOE") as audited by
independent petroleum engineers with respect to Pioneer's major properties and
as prepared by Pioneer's engineers with respect to all other properties.
Capitalized costs of individual properties abandoned or retired are charged
to accumulated depletion, depreciation and amortization. Proceeds from sales of
individual properties are credited to property costs. No gain or loss is
recognized until the entire amortization base is sold or abandoned.
Costs of significant nonproducing properties, wells in the process of being
drilled and development projects are excluded from depletion until such time as
the related project is developed and proved reserves are established or
impairment is determined. Pioneer capitalizes interest on expenditures for
significant development projects until such time as significant operations
commence.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment. A loss is recognized at the time of
impairment by providing an impairment allowance. The remaining unproved oil and
gas properties are aggregated and an overall impairment allowance is provided
based on Pioneer's historical experience.
NATURAL GAS PROCESSING FACILITIES. Pioneer depreciates its gas processing,
gathering and transmission facilities and equipment on a straight-line basis
over the estimated useful lives of the assets, which range from
F-34
<PAGE> 245
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
14 to 21 years. Capitalized costs relating to gas contracts, representing the
right to extract liquids and gas, are amortized on a plant-by-plant basis using
the unit-of-production method over the lives of gas reserves expected to be
processed through the facility, as prepared by Pioneer's engineers. Upon
disposition of a natural gas processing facility, the cost and related
accumulated depreciation and amortization are eliminated from the accounts and
any gain or loss is included in operations.
TREASURY STOCK. Treasury stock purchases are recorded at cost. Upon
reissuance, the cost of treasury shares held is reduced by the average purchase
price per share of the aggregate treasury shares held.
INCOME TAXES. Pioneer adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") as of January 1, 1993. Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date.
The cumulative effect of the change in accounting for income taxes of $17.1
million was determined as of January 1, 1993 and is reported separately in the
consolidated statement of operations for the year ended December 31, 1993. In
1992, Pioneer used the asset and liability method under Statement of Financial
Accounting Standards No. 96.
Pioneer and its eligible subsidiaries file a consolidated U.S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U.S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.
INCOME (LOSS) PER SHARE. Primary net income (loss) per share is computed
based on the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. The computation of fully diluted net
income per share for the six months ended June 30, 1997 and 1996 and the year
ended December 31, 1996 assumes conversion of Pioneer's 6- 1/4% Cumulative
Guaranteed Monthly Income Convertible Preferred Shares which increased the
weighted average number of shares outstanding to 42.1 million, 42.5 million and
42.6 million, respectively. For 1995 and 1994, the computation of fully diluted
net income (loss) per share was antidilutive; therefore, the amounts reported
for primary and fully diluted net income (loss) per share were the same. For
1993 and 1992, the computation of fully diluted net income (loss) per share
resulted in a less than 3% dilution; therefore, the amounts reported for primary
and fully diluted net income (loss) per share were the same.
ENVIRONMENTAL. Pioneer is subject to extensive federal, state, local and
foreign environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require Pioneer to remove or mitigate the environmental effects of the disposal
or release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable and the costs can be reasonably
estimated.
REVENUE RECOGNITION. Pioneer uses the sales method of accounting for crude
oil revenues. To the extent that crude oil is produced but not sold, the oil in
tanks, if material, is recorded as inventory in the accompanying consolidated
financial statements.
F-35
<PAGE> 246
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Revenues from natural gas production are generally recorded using the
entitlements method. Sales proceeds in excess of Pioneer's entitlement are
included in Other liabilities and Pioneer's share of sales taken by others is
included in Other assets in the accompanying Consolidated Balance Sheets.
Pioneer did not have a material amount recorded in Other assets or Other
liabilities associated with gas balancing at December 31, 1996 or 1995 or at
June 30, 1997.
STOCK-BASED COMPENSATION. Pioneer accounts for employee stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Accordingly, Pioneer has only adopted the disclosure provisions of
Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). See Note H for the pro forma disclosures of
compensation expense determined under the fair-value provisions of SFAS 123.
HEDGING. The financial instruments that Pioneer accounts for as hedging
contracts must meet the following criteria: the underlying asset or liability
must expose Pioneer to price or interest rate risk that is not offset in another
asset or liability, the hedging contract must reduce that price or interest rate
risk, and the instrument must be designated as a hedge at the inception of the
contract and throughout the hedge period. In order to qualify as a hedge, there
must be clear correlation between changes in the fair value of the financial
instrument and the fair value of the underlying asset or liability such that
changes in the market value of the financial instrument will be offset by the
effect of price or interest rate changes on the exposed items. The following is
a description of the specific types of hedging transactions in which Pioneer
participates:
Commodity hedging. Pioneer periodically enters into commodity
derivative contracts (swaps, futures and options) in order to (i) reduce
the effect of the volatility of price changes on the commodities Pioneer
produces and sells, (ii) support Pioneer's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related
to certain capital projects. Gains and losses on contracts that are
designed to hedge commodities are included in income recognized from the
sale of those commodities. Other commodity futures contracts are valued at
market.
Interest rate hedging. Pioneer enters into interest rate swap
transactions and forward rate lock transactions to hedge its interest rate
exposure. Interest rate swap agreements, in general, involve the exchange
of fixed and floating interest payment obligations with no exchange of the
underlying principal amounts. The interest rate differential to be received
or paid is recognized over the lives of the agreements as an adjustment to
interest expense. Forward rate lock transactions involve selling certain
U.S. Treasury securities at a date certain in the future. Pioneer uses
these transactions to hedge the interest rates on issuances of obligations
in the public bond market since the obligations' interest rates are
determined based on the rate of the certain U.S. Treasury security at time
of issuance of the obligation. The interest rate differential to be
received or paid is recognized in interest expense over the life of the
obligation under the effective interest rate method.
FOREIGN CURRENCY TRANSLATION. The financial statements of non-U.S. entities
are translated to U.S. dollars as follows: all assets and liabilities at
year-end exchange rates; revenues, costs and expenses at average exchange rates.
Gains and losses from translating non-U.S. balances are recorded directly in
stockholders' equity. Foreign currency transaction gains and losses are included
in net income (loss).
F-36
<PAGE> 247
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
A summary of the exchange rates used in the preparation of these
consolidated financial statements appear below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
U.S. DOLLAR FROM AUSTRALIAN DOLLAR JUNE 30, 1996 1996 1995 1994
---------------------------------- ------------- ----- ----- -----
<S> <C> <C> <C> <C>
Balance sheet.................................. N/A N/A .7452 .7766
Statement of operations........................ .7562 .7562 .7431 .7508
</TABLE>
RECLASSIFICATIONS. Certain reclassifications have been made to the 1996,
1995, 1994, 1993 and 1992 amounts to conform to the 1997 presentation.
NOTE C. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of Pioneer's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash, cash equivalents and restricted
cash............................... $ 20,460 $ 20,460 $ 35,512 $ 35,512
Restricted investments................ -- -- 5,345 5,706
Financial liabilities:
Long-term debt:
Practicable to estimate fair value:
Line of credit and GRUF.......... 9,000 9,000 267,000 267,000
8 7/8% senior notes due 2005..... 150,000 165,945 150,000 167,316
8 1/4% senior notes due 2007..... 149,277 160,965 149,209 161,995
Not practicable to estimate fair
value:
Other long-term debt............. 18,012 -- 22,948 --
Off-balance sheet financial instruments
(see Note O):
Interest rate swaps................... -- 1,782 -- --
Commodity price hedges................ -- (35,560) -- (2,500)
</TABLE>
CASH AND CASH EQUIVALENTS, RESTRICTED CASH, ACCOUNTS RECEIVABLE, OTHER
CURRENT ASSETS, ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES. The carrying
amounts approximate fair value due to the short maturity of these instruments.
RESTRICTED INVESTMENTS. The fair value of noncurrent investments is based
on quoted market prices.
LONG-TERM DEBT. The carrying amount of borrowings outstanding under
Pioneer's Line of Credit and GRUF (see Note F for definition and description of
each) approximates fair value because these instruments bear interest at rates
tied to current market rates. The fair values of the 8 7/8% senior notes due
2005 and the 8 1/4% senior notes due 2007 were both based on quoted market
prices for these issues.
It was not practicable to estimate the fair value of certain of the
long-term debt obligations because quoted market prices are not available and
Pioneer does not have a current borrowing rate which could be used as a
comparable rate for the stated maturities of the obligations.
F-37
<PAGE> 248
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
INTEREST RATE SWAP AGREEMENTS. At December 31, 1996, Pioneer had five
interest rate swap agreements outstanding with an aggregate notional amount of
$150 million. These are more fully described in Note O. The fair values of each
of the open interest rate swap agreements were obtained from bank quotes and
represent the estimated amount Pioneer would receive upon termination of the
agreements at December 31, 1996, taking into consideration interest rates at
that time.
COMMODITY PRICE HEDGES. The fair values of commodity price hedges
outstanding at December 31, 1996 and 1995 were obtained from quotes provided by
the individual counterparties for each agreement and represent the amount which
Pioneer would be required to pay as of December 31 of each of the respective
years, based upon the differential between a fixed and a variable commodity
price as specified in the hedge contracts. As of March 3, 1997, the fair value
of Pioneer's obligation for commodity price hedges outstanding at December 31,
1996 was $13.1 million. This fair value consists of the following two
components: (i) payments made for swap contracts related to oil and gas
production for the months of January and February 1997 and (ii) the amount
Pioneer is obligated to pay for swap contracts related to oil and gas production
for the period from March 1997 through April 1999 based upon the differentials
as described above using quotes in effect at March 3, 1997.
NOTE D. ACQUISITIONS
ACQUISITION OF BRIDGE OIL LIMITED. During 1994, Pioneer completed an
acquisition of the issued and outstanding shares of Bridge Oil Limited. The
acquisition was the result of an unsolicited tender offer that commenced in May
and was completed in September with Bridge Oil Limited becoming a wholly-owned
subsidiary of Pioneer. The total consideration paid for all outstanding shares
in Bridge Oil Limited and related transaction costs was approximately $290.6
million.
The acquisition of Bridge Oil Limited, accounted for using the purchase
method, resulted in the following noncash investing activities (in thousands):
<TABLE>
<S> <C>
Recorded amounts of assets acquired, including cash acquired
of $20,797................................................ $ 579,190
Liabilities assumed, including $61,267 of deferred income
taxes..................................................... (288,555)
---------
Cash paid................................................... $ 290,635
=========
</TABLE>
The liabilities assumed include amounts recorded for litigation and certain
other preacquisition contingencies of Bridge Oil Limited.
Certain of the wholly-owned subsidiaries acquired as part of the Bridge Oil
Limited acquisition were sold in 1996. See Note R for a description of the
subsidiaries sold.
PROPERTY ACQUISITION FROM PG&E RESOURCES COMPANY. On August 1, 1994,
Pioneer completed the acquisition of certain oil and gas properties and related
assets from PG&E Resources Company, a subsidiary of Pacific Gas and Electric
Company, for $115.7 million after preliminary purchase price adjustments.
Pioneer funded the acquisition under the bank credit facility described in Note
F.
ACQUISITION OF PRUDENTIAL-BACHE ENERGY LIMITED PARTNERSHIPS. During 1993,
Pioneer completed an acquisition of 35 limited partnerships sponsored by
Prudential-Bache Energy Production Inc. ("Prudential Partnerships"). The
acquisition was structured as a cash tender offer for the units of limited
partner interest in the partnerships (which was successfully completed in July),
followed by the merger of each of the partnerships (along with its related
production partnership) into Pioneer (which was successfully completed in
November). The total consideration paid by Pioneer to complete the acquisition
was $387 million (after taking into consideration the net proceeds received of
approximately $139 million from the concurrent disposition of certain of the
acquired properties).
F-38
<PAGE> 249
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
The acquisition of the Prudential-Bache Energy limited partnerships,
accounted for using the purchase method, resulted in the following noncash
investing activities (in thousands):
<TABLE>
<S> <C>
Recorded amounts of assets acquired, including cash acquired
of $71,121................................................ $588,628
Liabilities assumed......................................... (62,410)
Liability for unconverted limited partner units............. (1,939)
--------
Cash paid................................................... $524,279
========
</TABLE>
The liabilities assumed include amounts recorded for litigation and certain
other preacquisition contingencies of the acquired partnerships.
DOC ACQUISITION. On March 31, 1992, Pioneer acquired substantially all the
oil and gas properties of Damson Oil Corporation ("DOC"), including DOC's
interest in natural gas processing plants, in exchange for $100,000 in cash and
1,430,495 shares of Pioneer's common stock valued at $21.5 million. The cash and
shares of common stock delivered to DOC were distributed to creditors of DOC
pursuant to DOC's plan of reorganization.
PRO FORMA RESULTS OF OPERATIONS. The following table reflects the pro forma
results of operations as though the acquisition of Bridge Oil Limited, the
acquisition of the properties from PG&E Resources Company and the acquisition of
the Prudential Partnerships occurred on January 1, 1993 and as though the
acquisition of the Prudential Partnerships and the acquisition from DOC occurred
on January 1, 1992. In addition, the pro forma results of operations have been
adjusted for the effects of the sale of certain natural gas processing
facilities in 1993 as if such sales had occurred on January 1, 1993 (see Note
S).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................. $576,060 $525,270 $340,558
Income (loss) before extraordinary item
and cumulative effect of accounting
change.................................. $(25,026) $ 23,114 $ 37,735
Income (loss) per share before
extraordinary item and cumulative effect
of accounting change.................... $ (.72) $ .66 $ 1.45
</TABLE>
NOTE E. OTHER NONCURRENT LIABILITIES
At June 30, 1997, other noncurrent liabilities also include a note payable
to Union Pacific Resources Company of $15.8 million related to the purchase of a
35% interest in approximately 375,000 acres within the Cotton Valley Pinnacle
Reef Trend for a total of $26.9 million, the remainder of which was paid in
cash.
During 1982, the Department of Energy ("DOE") issued a Proposed Remedial
Order on Dorchester Gas Corporation ("Dorchester"), to which Dorchester Master
Limited Partnership ("DMLP") is the successor by merger and purchase of assets,
alleging that Dorchester had violated certain of the Mandatory Price and
Allocation Regulations. The matter was settled pursuant to a Consent Order
between the DOE, DMLP and Damson Oil Corporation ("DOC"), effective May 18,
1988, that was published in the Federal Register on April 18, 1988 (the "DOE
Order"). Under the DOE Order, DMLP and DOC agreed to pay the DOE (a) a minimum
of $11 million over a period of seven years, of which $1.4 million remains
currently payable at June 30, 1997 and December 31, 1996 and $2.8 million
remains payable at December 31, 1995 and is classified as other noncurrent
liabilities, and (b) a participation payment based on DMLP's annual "adjusted
net income" (as defined in the DOE Order) in excess of $4 million in any year
through 1994, adjusted for
F-39
<PAGE> 250
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
certain loss carryovers. DMLP did not have any participation payment liability
for 1994 or 1993. For the year ended December 31, 1992, DMLP had a participation
payment liability of approximately $90,000.
Pioneer must pay interest annually on the date of the respective minimum
payments (July 1 of every year). Approximately $115,000, $58,000 and $115,000 of
interest was currently payable as of June 30, 1997, December 31, 1996 and
December 31, 1995, respectively, based on a rate of 8.25% per annum on the
unpaid balance of the minimum payments. There is no interest charged on the
participation payments, if any.
NOTE F. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Line of credit.............................................. $ 9,000 $225,000
8 7/8% senior notes due 2005................................ 150,000 150,000
8 1/4% senior notes due 2007 (net of discount).............. 149,277 149,209
Project finance facility.................................... -- 42,000
Fixed rate building loan.................................... 10,121 11,168
Other....................................................... 7,891 11,780
-------- --------
326,289 589,157
Less current maturities..................................... 5,381 2,608
-------- --------
$320,908 $586,549
======== ========
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
1997........................................................ $ 5,381
1998........................................................ 1,558
1999........................................................ 1,315
2000........................................................ 3,172
2001........................................................ 1,109
Thereafter.................................................. 313,754
</TABLE>
LINE OF CREDIT. At December 31, 1996, Pioneer is party to a Credit Facility
Agreement (as amended and restated, the "Credit Agreement") with a syndicate of
banks (the "Banks"). The Credit Agreement provides for a $350 million senior
unsecured revolving line of credit (the "Line of Credit"), comprised of one
facility subject to a borrowing base. On May 15, 1998, the facility converts to
a four-year reducing revolving line of credit, at which time each Bank's
commitment as of that date is automatically and permanently reduced by 1/16 on
each August 15, November 15, February 15 and May 15 beginning on August 15, 1998
and continuing until the earlier of May 15, 2002 or termination by Pioneer
pursuant to the Credit Agreement.
As of December 31, 1996, Pioneer's Line of Credit has a current borrowing
base of $350 million. The borrowing base is determined by the Banks in their
sole discretion and is redetermined at least annually as of each April utilizing
oil and gas reserve information as of the immediately preceding December 31. In
addition, Pioneer or a 66 2/3% majority of the Banks can request one additional
redetermination at any time during the year and Pioneer can request additional
redeterminations upon the payment to the Banks of specified fees.
Advances under the Line of Credit bear interest, at Pioneer's option, based
on (a) the prime rate of NationsBank of Texas, N.A. ("Prime Rate") (8.25% at
December 31, 1996), (b) a Eurodollar rate (substantially equal to the London
Interbank Offered Rate), adjusted for the reserve requirement as
F-40
<PAGE> 251
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
determined by the Board of Governors of the Federal Reserve System with respect
to transactions in Eurocurrency liabilities ("LIBOR Rate"), or (c) quoted rates
from participating banks under a competitive bid option. Advances that are based
on LIBOR Rate have periodic maturities, at Pioneer's option, of one, two, three,
six, nine or twelve months. Maturities of greater than three months are subject
to availability of such deposits in the relevant markets. Advances on the
competitive bid have periodic maturities, at Pioneer's option, of not less than
seven days nor more than 180 days. The interest rates on the LIBOR Rate advances
vary, with the interest rate margin ranging from 25 to 70 basis points depending
on Pioneer's senior unsecured long-term public debt rating.
The Credit Agreement contains various restrictive covenants and compliance
requirements, which include (a) limiting to $5 million per annum the sum of
annual dividends Pioneer may declare and pay and the amount of Pioneer's capital
stock Pioneer may redeem or purchase; (b) limiting the incurrence of additional
indebtedness; and (c) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the Banks' consent.
SENIOR NOTES. At December 31, 1996, the following two issuances of senior
indebtedness are outstanding.
8 7/8% senior notes due 2005. $150 million aggregate principal amount
8 7/8% senior notes dated April 12, 1995, due April 15, 2005. Interest on
the 8 7/8% senior notes is payable semi-annually on April 15 and October 15
of each year, commencing October 15, 1995.
8 1/4% senior notes due 2007. $150 million aggregate principal amount
8 1/4% senior notes dated August 22, 1995, due August 15, 2007. These
8 1/4% senior notes were sold at a discount aggregating $816,000. Interest
on the 8 1/4% senior notes is payable semi-annually on February 15 and
August 15 of each year, commencing February 15, 1996.
Both senior note issuances are governed by an Indenture between Pioneer and
The Chase Manhattan Bank (National Association) dated April 12, 1995. Both
senior note issuances are general unsecured obligations of Pioneer ranking
equally in right of payment with all other senior unsecured indebtedness of
Pioneer and are senior in right of payment to all existing and future
subordinated indebtedness of Pioneer. In addition, Pioneer is a holding company
that conducts all its operations through subsidiaries, and the senior notes
issuances are structurally subordinated to all obligations of its subsidiaries.
PROJECT FINANCE FACILITY. The Global Revolving Underwriting Facility (the
"GRUF"), as amended, was originally entered into by Bridge Oil International
Finance Limited as borrower and a syndicate of banks on December 19, 1986. The
GRUF was outstanding at December 31, 1995 and, at that time, had a scheduled
maturity date of June 30, 1997. As part of the sale of certain wholly-owned
Australian subsidiaries on March 28, 1996, the buyer of such subsidiaries
assumed the GRUF obligations. See Note R.
FIXED RATE BUILDING LOAN. In March 1994, Pioneer entered into a 12-year,
$13 million fixed rate loan to finance the acquisitions of two office buildings
in Midland, Texas. One of the office buildings was acquired from an affiliated
partnership of which Pioneer was a 42.5% limited partner. This building is also
Pioneer's headquarters. The loan is payable in monthly principal payments of
$87,250 plus interest at the rate of 7.9% beginning April 7, 1994 and continuing
until the final maturity of August 4, 2006. Security for the loan consists of
first lien deeds of trust on the two buildings, collateral assignments of all
rents and leases related to the two buildings and security interests in all
contracts and fixed assets of the borrower that are related to the buildings.
EXTRAORDINARY ITEM. In October 1995, Pioneer transferred cash and certain
oil and gas properties with an aggregate estimated value of $1.1 million in full
satisfaction of a non-recourse note secured by the properties, the balance of
which was approximately $7.7 million. As a result, Pioneer recognized an
extraordinary gain on the early extinguishment of debt of $4.3 million (net of
related tax expense of $2.3 million).
F-41
<PAGE> 252
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
In 1994, Pioneer acquired Bridge Oil Limited and as a result of this
acquisition, Pioneer assumed the obligations of certain indentures issued by
that company. Upon a change in control of Bridge Oil Limited, those indentures
were redeemable for cash at the option of the holder at a one percent premium.
The majority of the holders chose to exercise their call option which resulted
in the recognition of an after-tax loss on early extinguishment of debt of $628
thousand.
INTEREST EXPENSE. The following amounts have been charged to interest
expense for the years ended December 31, 1996, 1995, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash payments for interest............... $44,405 $59,767 $41,933 $20,780 $13,362
Cash payments for commitment and agency
fees................................... 804 1,650 1,265 159 668
Accretion of discounts on loans.......... 261 617 402 313 725
Amortization of capitalized loan fees.... 1,286 2,022 2,308 1,093 386
Net change in accruals................... (601) 1,393 4,644 993 300
Capitalized interest..................... -- -- -- -- (733)
------- ------- ------- ------- -------
$46,155 $65,449 $50,552 $23,338 $14,708
======= ======= ======= ======= =======
</TABLE>
The above amounts include $12 million in 1996, $12 million in 1995 and $9.1
million in 1994 associated with the 6 1/4% Cumulative Guaranteed Monthly Income
Convertible Preferred Shares of Pioneer's wholly-owned finance subsidiary (see
Note L).
NOTE G. RELATED PARTY TRANSACTIONS
ACTIVITIES WITH AFFILIATED PARTNERSHIPS. Pioneer, through its wholly-owned
subsidiaries, has in the past sponsored certain affiliated partnerships,
including thirty-five public and nine private drilling partnerships and three
public income partnerships, all of which were formed primarily for the purpose
of drilling and completing wells or acquiring producing properties. In
accordance with the terms of the partnership agreements and the related tax
partnership agreements of the affiliated partnerships, Pioneer participated in
the activities of the sponsored partnerships on a promoted basis. In 1992,
Pioneer discontinued sponsoring public and private oil and gas development
drilling and income partnerships.
During each of 1994, 1993 and 1992, Pioneer formed a Direct Investment
Partnership for the purpose of permitting selected key employees to invest
directly, on an unpromoted basis, in wells that Pioneer drills. The partners in
the Direct Investment Partnerships formed in 1994, 1993 and 1992 pay and receive
approximately .337%, 1.5375% and 1.865%, respectively, of the costs and revenues
attributable to Pioneer's interest in the wells in which such Direct Investment
Partnership participates. Pioneer discontinued the formation of Direct
Investment Partnerships in 1995.
Pioneer, through certain wholly-owned subsidiaries, serves as operator of
properties in which it and its affiliated partnerships have an interest.
Accordingly, Pioneer receives producing well overhead, drilling well overhead
and other fees related to the operation of the properties. The affiliated
partnerships also reimburse Pioneer for their allocated share of general and
administrative charges.
F-42
<PAGE> 253
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
The activities with affiliated partnerships are summarized for the
following related party transactions for the years ended December 31, 1996,
1995, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Receipt of lease operating and
supervision charges in accordance
with standard industry operating
agreements......................... $8,484 $8,458 $8,556 $8,668 $8,879
Reimbursement of leasehold costs..... -- -- -- 2,785 3,716
Reimbursement of general and
administrative expenses............ 1,246 1,153 1,143 1,386 1,830
</TABLE>
NOTE H. LONG-TERM INCENTIVE PLAN
During 1991, Pioneer's stockholders approved a long-term incentive plan
(the "Long-term Incentive Plan"), which provides for the granting of incentive
awards in the form of stock options, stock appreciation rights, performance
units, restricted stock and cash to certain directors, officers and key
employees of Pioneer. The Long-term Incentive Plan provides for the issuance of
a maximum number of shares of common stock equal to 10% of the total shares
outstanding.
The following table summarizes the cumulative stock and option awards
granted by Pioneer and the shares or options available for future grant under
Pioneer's Long-term Incentive Plan at the end of 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Cumulative shares/options granted, beginning of year........ 2,766,069 2,234,616
Shares/options granted...................................... 672,380 548,117
Shares/options forfeited.................................... (36,980) (16,664)
--------- ---------
Cumulative shares/options granted, end of year.............. 3,401,469 2,766,069
--------- ---------
Maximum shares/options allowed under Long-term Incentive
Plan...................................................... 3,506,624 3,538,328
--------- ---------
Shares/options available for future grant at end of year.... 105,155 772,259
========= =========
</TABLE>
DIRECTORS
Under Pioneer's Long-term Incentive Plan, each non-employee director, upon
commencement of service as a director, is eligible to receive $125,000 of
Company common stock. The price used to calculate the number of shares to be
awarded is generally equal to the average trading price of Pioneer's common
stock during the 60 days immediately preceding the award. The shares awarded are
subject to vesting and transfer restrictions that lapse with respect to
one-third of the shares six months after the award, another one-third of the
shares one year after the award and the remaining one-third of the shares two
years after the award. The vesting of ownership and lapse of the transfer
restrictions may be accelerated in the event of the death, disability or
retirement of the director or a change in control of Pioneer. The Long-term
Incentive Plan requires each non-employee director to make an election under the
Internal Revenue Code to include the value of the stock in his income in the
year of grant and provides for a cash award to the non-employee director in an
amount sufficient to pay the federal income taxes due with respect to the award
and such cash payment. During 1995, there were two new directors elected to the
Board of Directors each of whom received a grant of 6,528 shares of restricted
stock. During 1992, there was a grant of 9,970 restricted shares of common stock
to a new director elected to the Board of Directors. No such awards were made
during 1996, 1994 or
F-43
<PAGE> 254
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
1993. As a result of the Parker/Mesa Merger, a new Long-term Incentive Plan has
been approved by Pioneer shareholders and the existing plan has been
discontinued.
OFFICERS AND KEY EMPLOYEES
RESTRICTED STOCK AWARDS. Pioneer's policy is to pay any annual bonuses
awarded to selected officers and key employees partially in cash and partially
in the form of restricted stock awards under the Long-term Incentive Plan. Prior
to 1996, annual bonuses, if awarded, were paid one-half in cash and one-half in
the form of restricted stock awards. In 1996, target bonus levels were
established for each officer and key employee. Based upon Company and individual
performance during the year, each officer or key employee has the potential to
earn more or less than their target bonus level. Beginning in 1996, the bonus
awards are determined in the quarter following Pioneer's December 31 year-end.
Any restricted stock awarded pursuant to this program will be limited to
one-half of each officer's or key employee's target bonus level, and the
remainder of the officer's or key employee's annual bonus will be paid in cash.
The number of shares of restricted stock that are awarded pursuant to the annual
bonus program is based on the closing sales price of Pioneer's common stock on
the day immediately preceding the date of the award. Ownership of the restricted
stock awarded vests six months after the date it is issued but is subject to
transfer restrictions that lapse on one-third of the shares on each of the
first, second and third anniversaries of the date of grant. Each recipient of
restricted stock also receives an amount of cash equal to the estimated federal
income taxes payable as a result of the receipt of such award. On February 13,
1997, Pioneer awarded an aggregate of 29,872 shares of restricted stock at a
price of $30.125 pursuant to the 1996 annual bonus program. Pioneer did not
award any restricted stock under the annual bonus program in 1995. In 1994, 1993
and 1992, Pioneer awarded an aggregate of 46,776 shares, 29,181 shares and
37,265 shares, respectively, of restricted stock pursuant to this annual bonus
program.
In 1992, the Compensation Committee approved a "Performance Unit" program,
as a part of the Long-term Incentive Plan, pursuant to which certain officers of
Pioneer and its subsidiaries can earn restricted stock awards based on the
achievement of certain stock price targets. On December 31, 1994 and 1993,
Pioneer awarded 2,065 and 366,671 shares, respectively, under the Performance
Unit program.
During 1996, 1995 and 1994, Pioneer has made other incentive awards of
35,080 shares, 20,778 shares and 29,418 shares of restricted stock,
respectively, to certain officers and key employees. The shares awarded are
subject to a vesting period and transfer restrictions.
The following table reflects the outstanding restricted stock awards and
activity related thereto for 1996, 1995, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------- ------------------- ------------------ ------------------ -------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restricted stock
awards:
Restricted shares
outstanding at
beginning of
year.............. 225,244 $23.90 476,034 $24.46 424,018 $24.15 63,536 $12.95 51,259 $10.57
Shares granted.... 35,080 $26.54 33,834 $19.21 78,259 $24.19 395,852 $24.87 47,235 $13.89
Shares
forfeited....... (1,980) $25.13 -- -- -- -- -- -- -- --
Lapse of
restrictions.... (178,525) $24.65 (284,624) $24.28 (26,243) $18.58 (35,370) $12.07 (34,958) $10.73
-------- ------ -------- ------ ------- ------ ------- ------ -------- ------
Restricted shares
outstanding at end
of year........... 79,819 $23.35 225,244 $23.90 476,034 $24.46 424,018 $24.15 63,536 $12.95
======== ====== ======== ====== ======= ====== ======= ====== ======== ======
</TABLE>
F-44
<PAGE> 255
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
STOCK OPTIONS AWARDS. Pioneer also has an annual stock option award program
for selected key employees and officers. This program provides for annual awards
at an exercise price based on the closing sales price of Pioneer's common stock
on the date of grant, a three-year vesting schedule and a five-year exercise
period.
Pioneer applies APB 25 and related Interpretations in accounting for its
stock option awards. Accordingly, no compensation expense has been recognized
for its stock option awards. If compensation expense for the stock option awards
had been determined consistent with SFAS 123, Pioneer's net income (loss) and
net income (loss) per share would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income (loss)........................................... $139,301 $(99,891)
Primary net income (loss) per share......................... 3.90 (2.83)
Fully diluted net income (loss) per share................... 3.43 (2.83)
</TABLE>
The pro forma net income (loss) and pro forma net income (loss) per share
amounts noted above are not likely to be representative of the pro forma amounts
to be reported in future years. The pro forma amounts for 1996 and 1995 reflect
the initial phase-in of SFAS 123 and as a result do not reflect any compensation
expense for options granted prior to 1995. Pro forma adjustments in future years
will include compensation expense associated with the options granted in 1995
and 1996 plus compensation expense associated with any options awarded in future
years. As a result, such proforma compensation expense is likely to be higher
than the levels experienced in 1995 and 1996.
Under SFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Risk-free interest rate..................................... 6.18% 6.06%
Expected life............................................... 4 years 4 years
Expected volatility......................................... 32% 35%
Expected dividend yield..................................... .34% .52%
</TABLE>
F-45
<PAGE> 256
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
A summary of Pioneer's stock option plan as of December 31, 1996, 1995,
1994, 1993 and 1992, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------- ------------------- ------------------ -------------------- -------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- ------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............... 1,230,411 $17.51 924,075 $15.39 859,627 $13.68 1,133,489 $11.34 1,282,239 $10.02
Options granted.... 637,300 $29.52 514,283 $19.23 144,000 $24.33 90,500 $26.56 153,000 $13.90
Options
forfeited........ (35,000) $23.81 (16,664) $26.18 (4,833) $19.99 (16,500) $12.33 -- --
Options
exercised........ (470,082) $14.55 (191,283) $10.97 (74,719) $12.42 (347,862) $ 9.46 (301,750) $ 7.05
-------- -------- ------- --------- --------
Outstanding at end of
year............... 1,362,629 $24.04 1,230,411 $17.51 924,075 $15.39 859,627 $13.68 1,133,489 $11.34
======== ======== ======= ========= ========
Exercisable at end of
year............... 358,177 $18.79 616,591 $14.89 665,676 $12.65 476,738 $11.52 560,673 $ 9.49
======== ======== ======= ========= ========
Weighted average fair
value of options
granted during the
year............... $ 10.03 $ 6.71
======== ========
</TABLE>
The following table summarizes information about Pioneer's stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE NUMBER EXERCISABLE AVERAGE
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE AT DECEMBER 31, 1996 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- -------------------- --------------
<C> <C> <C> <C> <C> <C>
$ 6 -- 15 138,390 4.0 years $13.16 138,390 $13.16
$19 -- 27 605,239 4.6 years $20.68 215,287 $22.17
$29 -- 31 619,000 5.0 years $29.75 4,500 $30.17
--------- -------
1,362,629 358,177
========= =======
</TABLE>
LOANS. During 1995, the Compensation Committee approved loans aggregating
$870,000 to certain officers of Pioneer and its subsidiaries to fund option
exercises for and open market purchases of Company common stock. Each loan
provides that one-third of the principal and all accrued interest will be deemed
paid on each of the first three anniversaries of the loan if the officer has
continued as an employee of Pioneer through that date.
RETIREMENT PLAN. Effective January 1, 1996, the Compensation Committee
approved a deferred compensation retirement plan for the officers of Pioneer.
Each officer is allowed to contribute up to 25% of their base salary. Pioneer
will then provide a matching contribution of 100% of the officer's contribution
limited to the first 10% of the officer's base salary. Pioneer's matching
contribution vests immediately. A trust fund has been established by Pioneer to
accumulate the contributions made under this retirement plan. Pioneer does not
have a defined benefit retirement plan.
Pioneer recognized $1.9 million, $7.7 million and $4.1 million in
compensation expense related to its Long-term Incentive Plan during 1996, 1995
and 1994, respectively.
F-46
<PAGE> 257
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
NOTE I. NON-EMPLOYEE DIRECTOR EQUITY COMPENSATION PLAN
During 1994, Pioneer authorized and adopted a Non-Employee Director Equity
Compensation Plan (the "Director Plan"), which was approved by Pioneer's
stockholders. Pursuant to the Director Plan, on the last business day of the
month in which the annual meeting of the stockholders of Pioneer is held, each
non-employee director will automatically receive an award of Common Stock equal
to 50% of the then current annual retainer fee (which was $40,000 for 1996, 1995
and 1994). This award is made in lieu of an amount of cash equal to 50% of the
annual retainer fee. The number of shares included in each such award is
determined by dividing 50% of the annual retainer fee by the closing sales price
of Pioneer's common stock on the business day immediately preceding the date of
the award. On May 31, 1996, each nonemployee director received an award of 812
shares of common stock (which number was calculated by dividing $20,000 by
$24.625, the closing sales price of the common stock on May 30, 1996). On June
30, 1995, each non-employee director received an award of 1,025 shares of common
stock (which number was calculated by dividing $20,000 by $19.50, the closing
sales price of the common stock on June 29, 1995). On May 31, 1994, each
nonemployee director received an award of 816 shares of common stock (which
number was calculated by dividing $20,000 by $24.50, the closing sales price of
the common stock on May 27, 1994).
When issued, the shares of common stock awarded pursuant to the Director
Plan are subject to transfer restrictions that lapse on the first anniversary of
the date of the award. In addition, if a non-employee director's services as a
director of Pioneer are terminated for any reason before the next annual meeting
of Pioneer's stockholders, a portion of the shares are forfeited, with the
number of forfeited shares being based on the number of regularly scheduled
meetings of the Board of Directors remaining to be held before the next annual
meeting of Pioneer's stockholders.
NOTE J. RIGHTS AGREEMENT
During 1991, Pioneer distributed a dividend of one common share purchase
right ("Right") for each share of common stock then outstanding. A Right was or
will be distributed for each share of common stock that was or will be issued
subsequent to February 19, 1991 until the occurrence of the earlier of the
Distribution Date (herein defined), the redemption of the Rights or the
expiration of the Rights on February 19, 2001. Initially, each Right entitles
the registered holder to purchase from Pioneer one share of common stock at a
price per share of $52.50, subject to adjustment. The Rights are attached to all
certificates representing shares of common stock outstanding, and no separate
certificates representing the Rights will be distributed to stockholders until
the earlier of (a) 10 days following a public announcement that (1) a person or
group acquires 20% or more of the outstanding shares of common stock or (2) a
person or group holding 10% of the common stock is determined to have intentions
and actions adverse to the best interest of Pioneer (an "Adverse Person")
(persons in (1) or (2), an "Acquiring Person") or (b) 10 business days following
the commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning 20% or more of the outstanding shares of
common stock (the "Distribution Date"). The Rights are not exercisable until the
Distribution Date and will expire on February 19, 2001, unless earlier redeemed
by Pioneer. If at any time following the Rights Distribution Date (a) Pioneer is
a surviving corporation in a merger or combination with an Acquiring Person and
the shares of common stock remain outstanding and are not changed or exchanged,
(b) a person becomes the beneficial owner of 20% or more of the then outstanding
shares of common stock, (c) an Acquiring Person engages in one or more
"selfdealing" transactions as set forth in the rights agreement governing the
Rights or (d) a person is determined to be an Adverse Person, each holder of a
Right then will have the right to receive, upon exercise, common stock (or, in
certain circumstances, cash, property or other securities of Pioneer or an
acquiring company) having a value equal to two times the exercise price of the
Right. Thereafter, in general, all Rights that are beneficially owned by an
Acquiring Person will be void. In the event that, at any time following the date
that a person has become an Acquiring Person, (i) Pioneer is acquired in a
merger or other combination transaction in which Pioneer is not
F-47
<PAGE> 258
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
the surviving entity, (ii) Pioneer consolidates with or merges with or into any
other person pursuant to which Pioneer is the surviving entity but all or a part
of the shares of common stock are changed into or exchanged for stock of another
person or cash or other property or (iii) 50% or more of Pioneer's assets or
earning power is sold or transferred, each holder of a Right (except Rights that
previously have been voided as described above) shall thereafter have the right
to receive, upon exercise, common stock or other securities of the acquiring
company having a value equal to two times the exercise price of the Right.
Pioneer may redeem the Rights in certain circumstances. Until a Right is
exercised, the holder of the Right, as such, will have no rights as a
stockholder of Pioneer, including the right to vote or to receive dividends.
NOTE K. COMMITMENTS AND CONTINGENCIES
SEVERANCE AGREEMENTS. On January 1, 1996, Pioneer entered into severance
agreements with its officers to replace their employment agreements that expired
at the end of 1995. Salaries and bonuses for Pioneer's officers are set by the
Compensation Committee of Pioneer's Board of Directors (the "Committee")
independent of this severance agreement, and the Committee can grant increases
or reductions to base salary at its discretion. The current annual salaries for
the officers covered under such severance agreements total approximately $3.5
million.
Either Pioneer or the officer may terminate the officer's employment under
the severance agreement at any time. Pioneer must pay the officer an amount
equal to one year's base salary if employment is terminated because of death,
disability, or normal retirement. Pioneer must pay the officer an amount equal
to one year's base salary and continue health insurance for the officer and his
immediate family for one year if Pioneer terminates employment without cause or
if the officer terminates employment with good reason, which occurs when
reductions in the officer's base annual salary exceed specified limits or when
the officer's responsibilities have been significantly reduced. If within one
year after a change of control of Pioneer, Pioneer terminates the officer
without cause or if the officer terminates employment with good reason, Pioneer
must pay the officer an amount equal to 2.99 times the sum of the officer's base
salary plus target bonus for the year and continue health insurance for the
officer and his immediate family for one year. If the officer terminates
employment with Pioneer without good reason between six months and one year
after a change in control, or at any time within one year after a change in
control if the officer is required to move, then Pioneer must pay the officer
one year's base salary and continue health insurance for the officer and his
immediate family for one year. Officers are also entitled to additional payments
for certain tax liabilities that may apply to severance payments following a
change of control.
INDEMNIFICATIONS. Pioneer has indemnified its directors and certain of its
officers, employees and agents with respect to claims and damages arising from
acts or omissions taken in such capacity, as well as with respect to certain
litigation.
LEGAL ACTIONS. Pioneer is party to various legal actions incidental to its
business. These lawsuits primarily involve claims for damages arising from oil
and gas leases and ownership interest disputes. Pioneer believes that the
ultimate disposition of these legal actions will not have a material adverse
effect on Pioneer's consolidated financial position, liquidity, capital
resources or future results of operations. Pioneer will continue to evaluate its
litigation matters on a quarter-by-quarter basis and will adjust the litigation
reserve as appropriate to reflect the then current status of its litigation.
F-48
<PAGE> 259
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
LEASE AGREEMENTS. Pioneer leases equipment and office facilities under
noncancellable operating leases on which rental expense for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 was approximately $2.9 million,
$3.6 million, $1.5 million, $1.7 million and $1.1 million, respectively. Future
minimum lease commitments under noncancellable operating leases at December 31,
1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $3,304
1998........................................................ 2,419
1999........................................................ 1,432
2000........................................................ 835
2001........................................................ 458
Thereafter.................................................. 1,132
</TABLE>
CRUDE OIL PURCHASE AGREEMENTS. On September 23, 1996, Pioneer and Basis
Petroleum, Inc. (formerly Phibro Energy, Inc.) entered into an agreement that
supersedes the prior crude oil purchase agreement and memorandum of agreement
between the parties. On November 25, 1996, Pioneer consented to the assignment
of the agreement to Genesis Crude Oil, L.P. ("Genesis"), a limited partnership
formed by Basis Petroleum, Inc. and Howell Corporation. The price to be paid by
Genesis for oil purchased under the agreement ("Genesis Agreement") is to be
competitive with prices paid by other substantial purchasers in the same areas
who are significant competitors of Genesis. The price to be paid for oil
purchased under the Genesis Agreement includes a market-related bonus that may
vary from month to month based upon spot oil prices at various commodity trade
points. The term of the Genesis Agreement is through June 30, 1998, and it may
continue thereafter subject to termination rights afforded each party. Salomon,
Inc., the parent company of Basis Petroleum, Inc. and a subordinated limited
partner in Genesis, secures the payment obligations under the Genesis Agreement
with a $25 million payment guarantee.
Certain properties acquired from Mobil Oil Corporation ("Mobil") are
subject to a call on crude oil production (the "Mobil Call Option"). The Mobil
Call Option provides a continuing option, but no obligation, for Mobil to
purchase all crude oil produced from those properties. The purchase price that
Mobil must pay for production purchased pursuant to the Mobil Call Option is the
average of the daily prices as posted by specified crude oil purchasers,
including Mobil, during the month of delivery without reduction for
transportation fees or other penalties. Regardless of these pricing provisions,
if Pioneer has a bona fide purchase offer from a third party under a contract
with at least a six-month term that Pioneer desires to accept, the price Mobil
must pay is the price under that offer for that term. If Mobil elects not to
match the third-party price for the term, Pioneer may sell the production to the
third party for that term.
NOTE L. PREFERRED STOCK OF SUBSIDIARY
On March 29, 1994, Parker & Parsley Capital LLC ("P&P Capital"), a limited
life company organized under the laws of the Turks and Caicos Islands and a
wholly-owned finance subsidiary of Pioneer, issued 3,776,400 shares of 6 1/4%
Cumulative Guaranteed Monthly Income Convertible Preferred Shares (the
"Preferred Shares") with a liquidation preference of $50 per share. The
proceeds, net of issuance costs, from the sale of the Preferred Shares was
approximately $182.2 million. During 1996, 1995 and 1994, Pioneer recorded $12
million, $12 million and $9.1 million, respectively, of interest expense
associated with the Preferred Shares.
Dividends on the Preferred Shares are payable in United States dollars at
an annual rate of 6 1/4% of the liquidation preference and are payable monthly
in arrears on the last day of each calendar month. Each Preferred Share is
convertible at the option of the holder at any time, unless previously redeemed
or exchanged, into Pioneer's common stock at the rate of 1.7778 shares of common
stock for each Preferred Share, subject to adjustment in certain circumstances.
On or after April 1, 1997, the Preferred Shares are
F-49
<PAGE> 260
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
subject to exchange in whole or in part at Pioneer's option, for the number of
shares of common stock into which the Preferred Shares are convertible, so long
as the closing price for the common stock equals or exceeds 125% of the then
applicable conversion price during certain periods and certain other conditions
are satisfied. The Preferred Shares are redeemable, at the option of P&P
Capital, in whole or in part, from time to time on or after April 1, 1997, at an
initial redemption price of $52.1875 per share and declining ratably thereafter
to $50 per share on and after April 1, 2004, plus, in each case, accumulated and
unpaid dividends to the date fixed for redemption, but only if certain
conditions are satisfied. The Preferred Shares are subject to mandatory
redemption on the 30th anniversary of the date of original issuance. The
Preferred Shares are also subject to exchange, in whole but not in part, on a
share-for-share basis, into Series A Convertible Preferred Stock of Pioneer (the
"Pioneer Preferred Stock") at the option of the holders of a majority of all
outstanding Preferred Shares upon the occurrence of certain events. Pioneer
Preferred Stock will have dividend, optional conversion, liquidation preference
and optional redemption features substantially identical to the Preferred Shares
but will not be subject to mandatory redemption.
Subsequent to June 30, 1997, Pioneer exercised its right to require each
holder of the Preferred Shares to exchange such shares to common stock of
Pioneer. See Note X for a more complete description of this subsequent event.
NOTE M. ODD-LOT REPURCHASE PROGRAM
In October 1996, Pioneer announced an odd-lot repurchase program for
shareholders who, as of October 7, 1996, individually owned 99 or fewer shares
of Parker & Parsley Petroleum Company Common Stock. Pioneer purchased a total of
772,986 shares, associated with approximately 25,000 shareholder accounts, and
such shares were added to Pioneer's shares held in treasury. The shares were
purchased at an average price of $30.17 per share which represented the average
of the five highest closing market prices as reported by the New York Stock
Exchange from October 8, 1996 through November 22, 1996, less a processing fee
of seventy-five cents per share. The accompanying Consolidated Statements of
Cash Flows for the year ended December 31, 1996, includes $23.3 million of
treasury stock repurchases related to this program.
NOTE N. EQUITY OFFERINGS
On November 7, 1994 and June 30, 1994, Pioneer completed public offerings
of 4.5 million and 2.36 million shares of common stock, respectively, at a price
of $25.00 per share and $25.25 per share, respectively. Aggregate net proceeds
of the offerings were $164.6 million.
NOTE O. DERIVATIVE FINANCIAL INSTRUMENTS
Pioneer has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate and commodity price risks. Pioneer is exposed to credit losses in
the event of nonperformance by the counterparties to its interest rate swap
agreements and its commodity hedges. Pioneer anticipates, however, that such
counterparties will be able to fully satisfy their obligations under the
contracts. Pioneer does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
the counterparties.
INTEREST RATE SWAPS. During the second quarter of 1996, Pioneer entered
into a series of interest rate swap agreements for an aggregate amount of $150
million with four counterparties. These agreements, which have a term of three
years, effectively convert a portion of Pioneer's fixed-rate borrowings into
floating-rate obligations. The weighted average fixed rate being received by
Pioneer over the term of these agreements is 6.62% while the weighted average
variable rate paid by Pioneer for the year ended December 31, 1996 was 5.56% and
for the six months ended June 30, 1997 and 1996 was 5.65% and 5.64%,
respectively. The variable
F-50
<PAGE> 261
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
rate will be redetermined approximately every six months based upon the London
interbank offered rate at that point in time. The accompanying Consolidated
Statements of Operations for the year ended December 31, 1996 and for the six
months ended June 30, 1997 and 1996 include a reduction in interest expense of
$787 thousand, $700 thousand and $110 thousand, respectively, to account for the
settlement of these interest rate swap agreements.
COMMODITY HEDGES. Pioneer utilizes various swap and option contracts to (i)
reduce the effect of the volatility of price changes on the commodities Pioneer
produces and sells, (ii) support Pioneer's annual capital budgeting and
expenditure plans and (iii) lock in prices to protect the economics related to
certain capital projects.
Crude Oil. All material purchase contracts governing Pioneer's oil
production are tied directly or indirectly to NYMEX prices. The following table
sets forth Pioneer's outstanding oil swap contracts as of August 1, 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Oil production:
1997 -- Swap Contracts
Volume (MMBbl)................... -- -- 1.2 .7 1.9
Price per Bbl.................... $ -- $ -- $19.28 $18.56 $19.02
1998 -- Swap Contracts
Volume (MMBbl)................... .2 .2 .3 .2 .9
Price per Bbl.................... $18.53 $18.53 $18.53 $18.53 $18.53
</TABLE>
Pioneer reports average oil prices per Bbl including the effects of oil
quality, gathering and transportation costs and the net effect of the oil
hedges. The following table sets forth Pioneer's oil prices, both realized and
received, and net effects of settlements of commodity hedges to revenue:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Average price reported per
Bbl........................ $19.20 $19.30 $19.96 $16.96 $15.40 $16.36 $18.76
Average price realized per
Bbl........................ $20.24 $19.84 $21.33 $17.02 $15.48 $16.26 $18.95
Addition /(reduction) to
revenue (in millions)...... $ (6.0) $ (3.1) $(15.4) $ (.8) $ (.9) $ .8 $ (.9)
</TABLE>
For a point of reference, the comparable average NYMEX prompt month closing per
Bbl for the six months periods ending June 30, 1997 and June 30, 1996 and for
the year ending December 31 1996 was $21.36, $20.60 and $22.03, respectively.
F-51
<PAGE> 262
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Natural Gas. Pioneer employs a policy of hedging gas production based on
the index price upon which the gas is actually sold in order to mitigate the
basis risk between NYMEX prices and actual index prices. The following table
sets forth Pioneer's outstanding gas swap and collar option contracts as of
August 1, 1997. Prices included herein represent Pioneer's weighted average
index price per MMBtu for the swap contracts and the weighted average index
price range for the collar option contracts and, as an additional point of
reference, the weighted average NYMEX price.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Gas production:
1997 -- Swap Contracts
Volume (Bcf)...................... -- -- 2.9 2.6 5.5
Index price per MMBtu............. $ -- $ -- $ 1.89 $ 1.86 $ 1.87
NYMEX price per MMBtu............. $ -- $ -- $ 2.15 $ 2.03 $ 2.10
1997 -- Collar Options
Volume (Bcf)...................... -- -- 6.1 4.3 10.4
Index price per MMBtu............. $ -- $ -- $1.96-2.31 $1.95-2.31 $1.96-2.31
1998 -- Swap Contracts
Volume (Bcf)...................... 2.5 1.8 1.4 1.4 7.1
Index price per MMBtu............. $1.86 $1.86 $ 1.86 $ 1.86 $ 1.86
NYMEX price per MMBtu............. $2.03 $2.03 $ 2.03 $ 2.03 $ 2.03
1999 -- Swap Contracts
Volume (Bcf)...................... 1.4 .4 -- -- 1.8
Index price per MMBtu............. $1.86 $1.86 $ -- $ -- $ 1.86
NYMEX price per MMBtu............. $2.03 $2.03 $ -- $ -- $ 2.03
</TABLE>
Pioneer reports average gas prices per Mcf including the effects of Btu
content, gathering and transportation costs, gas processing and shrinkage and
the net effect of the gas hedges. The following table sets forth Pioneer's gas
prices, both realized and received, and net effects of settlements of commodity
hedges to revenue:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Average price reported per Mcf........ $2.26 $2.14 $2.27 $1.84 $1.89 $2.07 $1.85
Average price realized per Mcf........ $2.42 $2.22 $2.39 $1.70 $1.84 $2.07 $1.85
Addition/(reduction) to revenue (in
millions)........................... $(6.1) $(3.1) $(9.0) $12.1 $ 3.7 $ (.3) $ --
</TABLE>
For a point of reference, the comparable average NYMEX prompt month closing per
Mcf for the six months periods ending June 30, 1997 and June 30, 1996 and for
the year ending December 31, 1996 was $2.25, $2.40 and $2.50, respectively.
F-52
<PAGE> 263
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
NOTE P. SALES TO MAJOR CUSTOMERS
Pioneer's share of oil and gas production is sold to various purchasers.
Pioneer is of the opinion that the loss of any one purchaser would not have an
adverse effect on the ability of Pioneer to sell its oil and gas production.
The following customers individually accounted for more than 10% of the
consolidated oil and gas revenues of Pioneer:
<TABLE>
<CAPTION>
PERCENTAGE OF CONSOLIDATED
OIL AND GAS REVENUES
------------------------------------
CUSTOMER 1996 1995 1994 1993 1992
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Genesis Crude Oil, L.P.......................... 28% 19% 17% 16% 18%
Mobil Oil Corporation........................... 22% 17% 16% 27% 29%
</TABLE>
At December 31, 1996, the amounts receivable from Genesis and Mobil were
$12.7 million and $9.4 million, respectively, which are included in the caption
"Accounts receivable -- oil and gas sales" in the accompanying Consolidated
Balance Sheet.
NOTE Q. GAS MARKETING
Effective January 1, 1996, Pioneer, along with Apache Corporation and Oryx
Energy Company, formed Producers Energy Marketing, LLC ("ProEnergy"), a natural
gas marketing company organized to create a direct link between gas producers
and purchasers. The venture is structured to flow through the benefits arising
out of the expanded services and the economies of scale from the aggregation of
substantial volumes of gas. Pioneer is obligated to sell to ProEnergy all gas
production (subject to certain exclusions relative to immaterial volumes) for a
period of five years that is owned or controlled by Pioneer, or any affiliate,
in North America (onshore and offshore), which is not subject to a binding and
enforceable gas sales contract in effect on July 1, 1996. Pioneer currently owns
approximately 9.59% of ProEnergy which markets approximately 1.8 MMBtu per day.
As a result, as of January 1, 1996, Pioneer no longer reports revenues or
expenses associated with third party gas marketing activities.
On August 29, 1997, Pioneer announced its plans to withdraw as a member of
ProEnergy effective January 1, 1998, as a result of the merger between Parker &
Parsley and Mesa. After January 1, 1998, Pioneer plans to market its own equity
gas.
NOTE R. DISPOSITION OF AUSTRALASIAN ASSETS
On March 28, 1996, Pioneer completed the sale of certain wholly-owned
Australian subsidiaries to Santos Ltd., and on June 20, 1996, Pioneer completed
the sale of another wholly-owned subsidiary, Bridge Oil Timor Sea, Inc., to
Phillips Petroleum International Investment Company. During the year ended
December 31, 1996, Pioneer received aggregate consideration of $237.5 million
for these combined sales which consisted of $186.6 million of proceeds for the
equity of such entities, $21.8 million for reimbursement of certain intercompany
cash advances, and the assumption of such subsidiaries' net liabilities,
exclusive of oil and gas properties, of $29.1 million. The accompanying
Consolidated Statements of Operations for the year ended December 31, 1996
includes a pre-tax gain of $83.3 million from the disposition of these
subsidiaries (net of transaction expenses of $8.7 million) and an income tax
provision of $16 million. The income tax provision includes $6.4 million related
to the write-off of certain net operating loss carryforwards which, with the
sale of the income producing assets in the Australian tax jurisdiction, will not
be utilized in the future.
The assets sold to Santos Ltd. consisted primarily of properties located in
the Cooper Basin in Central Australia, the Surat Basin in Northeast Australia,
the Carnarvon Basin on the Northwest Shelf off the coast of
F-53
<PAGE> 264
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Western Australia, the Otway Basin off the coast of Southeast Australia and the
Central Sumatra Basin in Indonesia. At December 31, 1995, Pioneer's interests in
these properties contained 32.1 million BOE of proved reserves (consisting of
12.4 million Bbls of oil and 118.3 Bcf of gas), representing $133.8 million of
SEC 10 value. The accompanying Consolidated Statements of Operations for the
year ended December 31, 1996 includes the results of operations from these
properties prior to their sale on March 28, 1996. During 1996, these properties
produced 349,500 Bbls of oil and 1,927,000 Mcf of gas. Pioneer received an
average price of $19.55 per Bbl and $1.95 per Mcf from such production or $10.6
million in total revenues. Total production costs associated with these
properties were $3.3 million ($4.92 per equivalent Bbl) and depletion expense
was $3.9 million ($5.84 per equivalent Bbl).
The wholly-owned subsidiary sold to Phillips Petroleum International
Investment Company, Bridge Oil Timor Sea, Inc. has a wholly owned subsidiary,
Bridge Oil Timor Sea Pty Ltd., which owns a 22.5% interest in the ZOCA 91-13
permit in the offshore Bonaparte Basin in the Zone of Cooperation between
Australia and Indonesia.
NOTE S. SALE OF NATURAL GAS PROCESSING FACILITIES
On September 7, 1993, Pioneer sold all of its interest in the contract
rights associated with the Breckenridge gas processing plant and the physical
assets of certain related gas distribution and pipeline facilities. These assets
were sold for $15.3 million in cash and ownership interests in other plants
(including contract rights associated therewith). Pioneer recognized a gain of
$13.2 million on the sale.
On June 30, 1993, Pioneer sold to Union Pacific Resources Company ("Union
Pacific") all of its interest in the Carthage gas processing plant and in
certain related gas distribution and pipeline facilities for approximately $42.5
million, $14.2 million of which was received in cash with the remaining $28.3
million evidenced by a seven-year unsecured note. Pioneer recognized a gain of
$7.3 million on the sale. Additionally, Pioneer recognized natural gas
processing revenues, processing costs and depreciation and amortization
attributable to its interest in the Carthage plant of $14 million, $5.1 million
and $3.4 million, respectively. These amounts had been deferred during the year
ended December 31, 1992 pending the settlement of a lawsuit entitled Union
Pacific Resources Company v. Dorchester Master Limited Partnership and Damson
Oil Corporation, et al. and related litigation then pending in the District
Court for Tarrant County, Texas. The litigation was instituted in January 1991
by the operator and other co-owners of the Carthage plant, alleging that the
transaction in which Pioneer acquired control of DMLP, a co-owner of the
Carthage plant, triggered a preferential right to purchase DMLP's interest in
favor of the operator and other co-owners. In March 1992, the court issued a
ruling to the effect that the transaction did trigger the preferential right to
purchase. The court held that the plaintiffs could pay the purchase price in
cash but did not specify what that price should be. Pioneer could not predict
what amount of cash would be paid for its interest in the plant because the
parties to the transaction described above did not allocate a specific purchase
price for the plant. Consequently, the financial and tax reporting effects were
not determinable until the plant was actually sold. Based on advise from its
legal counsel, Pioneer was aware that the final purchase price might be adjusted
in several ways, including a downward adjustment for revenues, less expenses,
that DMLP received from the operations of the Carthage plant from June 29, 1990
(the date the preferential right was triggered) to the date of sale. Because
Pioneer believed, particularly after the March 1992 ruling, that it might be
required to in effect repay the net revenues received from the operations of the
Carthage plant, Pioneer determined that it was appropriate to defer the revenues
and expenses associated with those operations in 1992 and subsequent periods
until the litigation was resolved.
The litigation was settled by the parties in June 1993 when DMLP sold its
interest in the Carthage plant to Union Pacific. Under the settlement agreement,
Pioneer was not required to repay any net revenues
F-54
<PAGE> 265
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
attributable to the operations of the Carthage plant prior to the date of sale.
Consequently, Pioneer recognized the deferred net revenues in the second quarter
of 1993.
The variable rate note received from Union Pacific was subject to a
conversion agreement whereby Pioneer may designate assets to be purchased for
Pioneer by Union Pacific. Contemporaneously with the payment by Union Pacific of
the purchase price for such designated assets, the amount of principal and
interest outstanding under the note was credited in an amount equal to the
purchase price paid, with such credit first being applied to accrued and unpaid
interest and the remainder being applied to outstanding principal in the inverse
order of maturity. During 1994, Pioneer utilized the remaining note balance of
approximately $8 million to finance the purchase of certain assets.
NOTE T. IMPAIRMENT OF LONG-LIVED ASSETS
Pioneer adopted SFAS 121 in 1995. Pioneer undertook to review its oil and
gas properties for impairment earlier than required by SFAS 121 (adoption was
required for fiscal years beginning after December 15, 1995) as a result of the
continuation of depressed commodity prices and to eliminate any uncertainty
associated with the magnitude of the noncash charge for impairment of its oil
and gas properties under SFAS 121. In order to determine whether an impairment
had occurred, Pioneer estimated the expected future cash flows of its oil and
gas properties and compared such future cash flows to the carrying amount of the
oil and gas properties to determine if the carrying amount was recoverable. For
those oil and gas properties for which the carrying amount exceeded the
estimated future cash flows, an impairment was determined to exist; therefore,
Pioneer adjusted the carrying amount of those oil and gas properties to their
fair value as determined by discounting their expected future cash flows at a
discount rate commensurate with the risks involved in the industry. As a result
of this process and an evaluation of unproven oil and gas properties, Pioneer
recognized noncash pre-tax charges of $129.7 million ($84.3 million after tax)
related to its oil and gas properties during 1995. Pioneer also recognized a
noncash pre-tax charge of $748,000 ($486,000 after tax) related to a natural gas
processing facility in 1995.
NOTE U. INCOME TAXES
As discussed in Note B, Pioneer adopted the provisions of FAS 109 effective
January 1, 1993 and changed its method of accounting for income taxes, reporting
a $17.1 million cumulative effect of the accounting change in the consolidated
statement of operations for 1993. The 1992 consolidated financial statements
have not been restated to apply the provisions of FAS 109.
Income tax provision (benefit) and amounts separately allocated were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- -------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item............................... $60,100 $(45,900) $(6,500) $17,000 $3,000
Extraordinary gain (loss)............ -- 2,300 (350) -- --
Benefit arising from exercise of
stock options...................... (2,200) (600) (300) (1,800) --
Change in cumulative translation
adjustment......................... -- (550) 500 -- --
------- -------- ------- ------- ------
$57,900 $(44,750) $(6,650) $15,200 $3,000
======= ======== ======= ======= ======
</TABLE>
F-55
<PAGE> 266
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
Income tax provision (benefit) attributable to income (loss) before
extraordinary item consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current:
U.S. federal...................... $ 300 $ (1,000) $ 150 $ 5,900 $2,999
State and local................... -- -- 150 500 1
------- -------- -------- ------- ------
300 (1,000) 300 6,400 3,000
------- -------- -------- ------- ------
Deferred:
U.S. federal...................... 51,700 (35,500) (1,650) 10,600 --
Foreign (primarily Australia)..... 8,100 (9,400) (5,150) -- --
------- -------- -------- ------- ------
59,800 (44,900) (6,800) 10,600 --
------- -------- -------- ------- ------
Total..................... $60,100 $(45,900) $ (6,500) $17,000 $3,000
======= ======== ======== ======= ======
</TABLE>
Income (loss) before income taxes, extraordinary item consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) before income
taxes, extraordinary item and
cumulative effect of
accounting change:
U.S. federal............... $121,680 $(118,871) $ (3,664) $48,403 $30,146
Foreign (primarily
Australia)............... 78,668 (31,136) (16,827) -- --
-------- --------- --------- ------- -------
$200,348 $(150,007) $ (20,491) $48,403 $30,146
======== ========= ========= ======= =======
</TABLE>
Reconciliations of the U.S. federal statutory rate to Pioneer's effective
rate for income (loss) before extraordinary item are as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. federal statutory tax
rate.......................... 35.0% (35.0%) (35.0%) 35.0% 34.0%
Excess of tax basis over book
basis......................... -- -- -- -- (34.9%)
Alternative minimum tax......... -- -- -- -- 10.0%
Disposition of foreign
subsidiaries.................. (6.9%) -- -- -- --
Amortization of foreign
permanent differences......... -- 3.1% 1.8% -- --
Rate differential on foreign
operations.................... .4% (.1%) 1.3% -- --
Other........................... 1.5% 1.4% .2% .1% .9%
-------- --------- --------- ------- -------
Consolidated effective tax
rate.......................... 30.0% (30.6%) (31.7%) 35.1% 10.0%
======== ========= ========= ======= =======
</TABLE>
F-56
<PAGE> 267
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryfowards........................... $ 23,704 $70,882
Alternative minimum tax credit carryforwards.............. 4,005 6,760
Other accrued liabilities................................. 3,306 7,485
Compensation, principally due to accrual for financial
reporting purposes..................................... 2,579 --
Other, net................................................ 1,831 1,051
-------- -------
Total gross deferred tax assets................... 35,425 86,178
-------- -------
Deferred tax liabilities:
Oil and gas properties, principally due to differences in
basis and depletion and the deduction of intangible
drilling costs for tax purposes........................ 88,790 86,530
Long-term debt, principally due to early extinguishment
for book purposes...................................... -- 2,313
Other, net................................................ 35 1,035
-------- -------
Total gross deferred tax liabilities.............. 88,825 89,878
-------- -------
Net deferred tax liability........................ $(53,400) $(3,700)
======== =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future and the availability of certain tax planning strategies that
would generate taxable income to realize the net tax benefits, if implemented,
management has determined that taxable income of Pioneer will more likely than
not be sufficient to fully utilize available carryforwards prior to their
ultimate expiration.
At December 31, 1996, Pioneer had net operating loss carryforwards ("NOLs")
for U.S. federal income tax purposes of $67.7 million, which are available to
offset future regular taxable income, if any. Additionally, Pioneer has
alternative minimum tax net operating loss carryforwards ("AMT NOLs") of $15.2
million, which are available to reduce future alternative minimum taxable
income, if any. These carryforwards expire as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE NOLS AMT NOLS
--------------- ------- --------
(IN THOUSANDS)
<S> <C> <C>
December 21, 2006........................................... $22,798 $ 4,195
December 31, 2009........................................... 28,558 9,667
December 31, 2010........................................... 16,368 1,364
------- -------
$67,724 $15,226
======= =======
</TABLE>
As discussed in Note B, certain subsidiaries that are consolidated for
financial reporting purposes are not eligible to be included in Pioneer's
consolidated U.S. federal income tax return, and separate provisions for income
taxes have been determined for these entities or groups of entities. As a
result, approximately $35 million of the NOLs and all of the AMT NOLs are
limited in use to specific entities or groups of entities. In addition, $22.9
million and $4.2 million of the NOLs and AMT NOLs, respectively, are further
subject to
F-57
<PAGE> 268
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
limitations under Section 382 of the Internal Revenue Code. Pioneer believes the
utilization of its NOLs and AMT NOLs subject to the Section 382 limitations is
limited in each taxable year to approximately $11.4 million.
The tax returns and the amount of taxable income or loss are subject to
examination by U.S. federal, state and foreign taxing authorities. Current and
estimated tax payments of $970,000, $93,000, $5 million, $330,000 and $2.7
million were made in 1996, 1995, 1994, 1993 and 1992, respectively.
NOTE V. OPERATIONS BY GEOGRAPHIC AREA
Pioneer operates in one industry segment. During 1997, 1996, 1993 and 1992
Pioneer did not have significant operations in geographic areas other than the
United States. Information about Pioneer's operations for the years ended
December 31, 1995 and 1994 by different geographic areas is shown below. During
these years, Pioneer did not have any significant operations or separately
identifiable assets other than those from the United States and Australia.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1994
----------------------------------- -----------------------------------
AUSTRALIA AUSTRALIA
UNITED AND OTHER UNITED AND OTHER
STATES FOREIGN TOTAL STATES FOREIGN TOTAL
---------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue.... $ 439,957 $ 45,805 $ 485,762 $ 455,895 $ 23,838 $ 479,733
Loss before income
taxes and
extraordinary
item............... $ (118,871) $(31,136) $ (150,007) $ (3,664) $(16,827) $ (20,491)
Identifiable
assets............. $1,120,738 $198,491 $1,319,229 $1,395,253 $209,651 $1,604,904
</TABLE>
NOTE W. PRO FORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128")
which simplifies the existing standards for computing earnings per share ("EPS")
and makes them comparable to international standards. Pioneer is required to
adopt SFAS 128 in its year ended December 31, 1997 financial statements and all
prior period EPS information (including interim EPS) is required to be restated
at that time. Early implementation is not permitted. Under SFAS 128, primary EPS
is replaced by "basic" EPS, which excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. "Diluted" EPS, which is computed similarly to
fully-diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
F-58
<PAGE> 269
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
If Pioneer had adopted SFAS 128 on January 1 of each period presented, the
following basic and diluted EPS amounts would have been reported:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------ --------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income (loss) before extraordinary item
and cumulative effect of accounting
change............................... $.74 $2.68 $3.95 $(2.96) $(.47) $1.15 $1.06
Extraordinary item..................... -- -- -- .12 (.02) -- --
Cumulative effect of accounting
change............................... -- -- -- -- -- .62 --
---- ----- ----- ------ ----- ----- -----
Net income (loss)...................... $.74 $2.68 $3.95 $(2.84) $(.49) $1.77 $1.06
==== ===== ===== ====== ===== ===== =====
Diluted EPS
Income (loss) before extraordinary item
and cumulative effect of accounting
change............................... $.71 $2.32 $3.46 $(2.96) $(.47) $1.11 $1.05
Extraordinary item..................... -- -- -- .12 (.02) -- --
Cumulative effect of accounting
change............................... -- -- -- -- -- .61 --
---- ----- ----- ------ ----- ----- -----
Net income (loss)...................... $.71 $2.32 $3.46 $(2.84) $(.49) $1.72 $1.05
==== ===== ===== ====== ===== ===== =====
</TABLE>
NOTE X. SUBSEQUENT EVENTS
MERGER WITH MESA INC. On April 6, 1997, Parker & Parsley and Mesa entered
into an Agreement and Plan of Merger (the "Merger Agreement") which was approved
by the stockholders of both companies on August 7, 1997 by a majority vote of
76% by Parker & Parsley stockholders and 71%, 58%, and 100% by holders of Mesa
common stock, Mesa Series A Preferred Stock and Mesa Series B Preferred Stock,
respectively. Mesa is a publicly traded independent oil and gas company based in
Irving, Texas with substantial producing properties and operations in the
MidContinent region of the United States. The Merger Agreement provided for (i)
the merger of Mesa with and into Pioneer, a wholly-owned subsidiary of Mesa, as
a result of which Mesa, which is a Texas corporation, reincorporated into
Delaware and (ii) the merger of Parker & Parsley with and into Mesa Operating
Co. ("MOC"), a wholly-owned subsidiary of Mesa, as a result of which Parker &
Parsley became a wholly-owned subsidiary of Pioneer (items (i) and (ii)
collectively the "Parker/Mesa Merger"). In accordance with the Merger Agreement,
(i) holders of Parker & Parsley common stock received one share of Pioneer
common stock for each share held; (ii) holders of Mesa common stock received one
share of Pioneer common stock for every seven shares held; and (iii) holders of
Mesa Series A 8% Cumulative Convertible Preferred Stock and Mesa Series B 8%
Cumulative Convertible Preferred Stock received 1.25 shares of Pioneer common
stock for every seven shares held. No fractional shares were issued.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", the Parker/Mesa Merger has been accounted for as a
purchase of Mesa by Parker & Parsley. As a result, historical financial
statements for Pioneer will be those of Parker & Parsley, and Pioneer's
financial statements will present the addition of Mesa's assets and liabilities
as an acquisition by Parker & Parsley. The aggregate Pioneer purchase
consideration related to the assets and liabilities of Mesa, including estimated
nonrecurring merger transaction costs, is $999.5 million. The following table
represents the preliminary allocation of the total purchase price of Mesa to the
acquired assets and liabilities based upon the fair values assigned to each of
F-59
<PAGE> 270
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
the significant assets acquired and liabilities assumed. Any future adjustments
to the allocation of the purchase price are not anticipated to be material to
Pioneer's financial statements.
<TABLE>
<CAPTION>
ALLOCATION OF AGGREGATE
PURCHASE
CONSIDERATION
-----------------------
(IN THOUSANDS)
<S> <C>
Net working capital...................................... $ 11,882
Property, plant and equipment............................ 2,334,573
Other assets............................................. 58,664
Long-term debt........................................... (1,186,538)
Other non-current liabilities, including deferred
taxes.................................................. (219,052)
----------
$ 999,529
==========
Pioneer common stock consideration....................... $ 979,529
Cash paid for nonrecurring transaction costs............. 20,000
----------
Aggregate purchase consideration......................... $ 999,529
==========
</TABLE>
The accompanying Consolidated Balance Sheet as of June 30, 1997 includes
certain unamortized amounts which Pioneer will recognize as noncash charges
during the third quarter of 1997 as a result of the Parker/Mesa Merger. These
amounts include $2.5 million (pre-tax) of capitalized issuance fees associated
with Parker & Parsley's existing bank credit facility which will be replaced by
a new $1.4 billion bank credit facility and $544 thousand (pre-tax) of unearned
compensation resulting from certain change of control provisions included in
Parker & Parsley's existing Long-term Incentive Plan whereby the vesting
requirements of outstanding restricted stock awards are accelerated.
CREDIT FACILITY AGREEMENTS. On August 7, 1997, the successor to Parker &
Parsley and MOC, Pioneer Natural Resources USA, Inc. (the "Borrower"), entered
into two Credit Facility Agreements ("Credit Facility Agreements") with a
syndicate of banks (the "Banks") that refinanced the credit facilities of Parker
& Parsley and Mesa as of the date of merger of the two companies. One Credit
Facility Agreement (the "Primary Facility") provides for a $1.1 billion credit
facility. The maturity date for the Primary Facility is August 7, 2002. The
second Credit Facility Agreement (the "364-day Facility") provides for a $300
million credit facility with a maturity date of August 5, 1998. The Borrower has
the option to renew the 364-day Facility for another period of 364 days by
notifying the Banks in writing of such election not more than 60 days and not
less than 45 days prior to the maturity date. The prior credit agreements of
Parker & Parsley and Mesa were paid in full following the Parker/Mesa Merger
utilizing proceeds from initial borrowings against the new Primary Facility of
$675 million.
Advances on both Credit Facility Agreements bear interest, at the
Borrower's option, based on (a) the prime rate of NationsBank of Texas, N.A.,
(b) a Eurodollar rate (substantially equal to the London Interbank Offered Rate
("LIBOR")), adjusted for the reserve requirement as determined by the Board of
Governors of the Federal Reserve System with respect to transactions in
Eurocurrency liabilities ("LIBOR Rate"), or (c) a competitive bid rate as quoted
by the Banks electing to participate pursuant to a request by the Borrower.
Advances that are LIBOR Rate have periodic maturities, at the Borrower's option,
of one, two, three, six, nine or twelve months. Maturities of greater than six
months are subject to availability of such deposits in the relevant markets.
Advances that are competitive bid rate have periodic maturities, at the
Borrower's option, of not less than 15 days nor more than 360 days. The interest
rates on LIBOR Rate advances vary with interest rate margins ranging from 18
basis points to 45 basis points. The interest rate margin is determined by a
grid based upon Pioneer's senior unsecured long-term public debt rating.
F-60
<PAGE> 271
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
The obligations of the Borrower under the Credit Facility Agreements are
guaranteed by Pioneer and certain of its subsidiaries unless and to the extent
any such subsidiary has been designated as an "Unrestricted Subsidiary" by the
Borrower pursuant to the Credit Facility Agreements. Certain subsidiaries of the
Borrower which have not been designated as Unrestricted Subsidiaries have not
provided guaranties because either (a) such guaranty would result in adverse tax
consequences pursuant to Section 956 of the Internal Revenue Code of 1986, as
amended, or (b) such subsidiary is prohibited from executing a guaranty pursuant
to contractual restrictions. In these cases, the Borrower and certain of its
subsidiaries have pledged a portion of the issued and outstanding capital stock
of such subsidiaries as security for the obligations of the Borrower under the
Credit Facility Agreements.
The Credit Facility Agreements contain various restrictive covenants and
compliance requirements, which include (a) minimum financial requirements; (b)
limits on the incurrence of additional indebtedness; and (c) limitations on
mergers.
After the consummation of the Parker/Mesa Merger, Pioneer will have four
outstanding debt issuances in addition to the new credit facilities described
above. Such debt issuances consist of (i) $150 million aggregate principal
amount of 8 7/8% senior notes issued by Parker & Parsley in 1995 and due in
2005, (ii) $150 million aggregate principal amount of 8 1/4% senior notes issued
by Parker & Parsley in 1995 and due in 2007, (iii) $325 million aggregate
principal amount of 10 5/8% Senior Subordinated Notes issued by Mesa in 1996 and
due 2006 and (iv) $264 million aggregate principal amount of 11 5/8% Senior
Subordinated Discount Notes issued by Mesa in 1996 and due 2006. These four
issuances are or will be guaranteed by Pioneer (the parent of Pioneer Natural
Resources USA, Inc.) subsequent to the Parker/Mesa Merger.
EXCHANGE OF SUBSIDIARY PREFERRED SHARES TO COMMON STOCK. On July 28, 1997,
Pioneer exercised its right to require each holder of the Preferred Shares to
mandatorily exchange all Preferred Shares for shares of common stock of Pioneer
in accordance with the terms of the original issue (see Note L). Subsequent to
April 1, 1997, 125% of the applicable conversion price equaled $35.16. The
closing price of Pioneer's common stock for the period from June 27, 1997 to
July 25, 1997 ranged from $35.38 to $39.50, meeting the terms of the original
issue.
As a result of the exchange, the $188.8 million reflected in the caption
"Preferred stock of subsidiary" in the accompanying Consolidated Balance Sheet
as of June 30, 1997, will be reclassified into stockholders' equity with the
issuance of approximately 6.7 million shares of common stock in exchange for the
3,776,400 Preferred Shares outstanding. In addition, Pioneer will no longer
incur interest expense associated with the Preferred Shares of approximately $12
million per year.
F-61
<PAGE> 272
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION
YEARS ENDED DECEMBER 31, 1996, 1995, 1994, 1993 AND 1992
CAPITALIZED COSTS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Oil and Gas Properties:
Proved oil and gas properties............................. $1,419,051 $1,450,290
Unproved property......................................... 7,331 14,574
---------- ----------
1,426,382 1,464,864
Less accumulated depletion................................ (424,594) (383,825)
Net capitalized costs for oil and gas properties.......... $1,001,788 $1,081,039
========== ==========
</TABLE>
COSTS INCURRED FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
PROPERTY
ACQUISITION COSTS TOTAL
-------------------- EXPLORATION DEVELOPMENT COSTS
PROVED UNPROVED COSTS COSTS INCURRED
-------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
United States.......................... $ 15,699 $ 5,255 $31,568 $168,553 $221,075
Foreign(a)............................. 18 -- 7,240 4,659 11,917
-------- ------- ------- -------- --------
Total costs incurred................ $ 15,717 $ 5,255 $38,808 $173,212 $232,992
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1995:
United States.......................... $ 46,796 $ -- $ 8,062 $130,461 $185,319
Australia and Other Foreign............ 1,698 -- 21,129 10,877 33,704
-------- ------- ------- -------- --------
Total costs incurred................ $ 48,494 $ -- $29,191 $141,338 $219,023
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1994:
United States.......................... $401,826(b) $30,308 $ 8,370 $ 93,175 $533,679
Australia and Other Foreign............ 141,785 10,000 11,098 1,391 164,274
-------- ------- ------- -------- --------
Total costs incurred................ $543,611(b) $40,308 $19,468 $ 94,566 $697,953
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1993(C):
United States.......................... $317,928(d) $ -- $ 5,896 $ 91,663 $415,487
YEAR ENDED DECEMBER 31, 1992(C):
United States.......................... $ 43,502 $ -- $ 1,057 $ 61,926 $106,485
</TABLE>
- ---------------
(a) Includes $7.4 million of expenditures related to Pioneer's Australian
properties prior to their sale in 1996. The remainder relates to Pioneer's
interests in Argentine properties.
(b) Excludes approximately $1.9 million associated with properties held by
Bridge Oil Limited and $12.8 million associated with properties acquired
from PG&E Resources Company that were classified as assets held for resale.
(c) Pioneer did not incur any significant costs outside the United States in
1993 or 1992.
(d) Excludes approximately $197.8 million associated with properties acquired
from the Prudential-Bache Energy limited partnerships that were classified
as assets held for resale.
F-62
<PAGE> 273
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION -- (CONTINUED)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
UNITED STATES:
Oil and gas revenues..................... $ 385,198 $ 329,915 $ 313,764 $207,208 $135,071
Production costs......................... (106,898) (118,487) (120,687) (78,310) (51,774)
Exploration and abandonments............. (9,222) (6,795) (8,774) (2,220) (3,412)
Geological and geophysical............... (7,042) (2,302) (3,834) (1,164) (1,107)
Depletion................................ (98,655) (125,165) (120,520) (62,854) (37,402)
Impairment of oil and gas properties..... -- (129,745) -- -- --
--------- --------- --------- -------- --------
163,381 (52,579) 59,949 62,660 41,376
Income tax benefit (provision)(a)........ (57,183) 18,403 (20,982) (22,225) (14,191)
--------- --------- --------- -------- --------
Results of operations for oil and gas
producing activities................... $ 106,198 $ (34,176) $ 38,967 $ 40,435 $ 27,185
========= ========= ========= ======== ========
AUSTRALIA:
Oil and gas revenues..................... $ 10,591 $ 45,805 $ 23,838 $ -- $ --
Production costs......................... (3,300) (12,418) (6,431) -- --
Exploration and costs.................... (15) (6,779) (3,401) -- --
Geological and geophysical............... (1,420) (6,874) (3,332) -- --
Depletion................................ (3,917) (20,303) (11,182) -- --
--------- --------- --------- -------- --------
1,939 (569) (508)
Income tax benefit (provision)(a)........ (698) 205 168 -- --
--------- --------- --------- -------- --------
Results of operations for oil and gas
producing activities................... $ 1,241 $ (364) $ (340) $ -- $ --
========= ========= ========= ======== ========
ARGENTINA:
Oil and gas revenues..................... $ 1,142 $ -- $ -- $ -- $ --
Production costs......................... (136) -- -- -- --
Exploration and abandonments............. (3,416) (2,857) (170) -- --
Geological and geophysical............... (592) (1,945) (1,236) -- --
Depletion................................ (231) -- -- -- --
--------- --------- --------- -------- --------
(3,233) (4,802) (1,406)
Income tax benefit(a).................... 1,164 1,729 464 -- --
--------- --------- --------- -------- --------
Results of operations for oil and gas
producing activities................... $ (2,069) $ (3,073) $ (942) $ -- $ --
========= ========= ========= ======== ========
TOTAL:
Oil and gas revenues..................... $ 396,931 $ 375,720 $ 337,602 $207,208 $135,071
Production costs......................... (110,334) (130,905) (127,118) (78,310) (51,774)
Exploration and abandonments............. (12,653) (16,431) (12,345) (2,220) (3,412)
Geological and geophysical............... (9,054) (11,121) (8,402) (1,164) (1,107)
Depletion................................ (102,803) (145,468) (131,702) (62,854) (37,402)
Impairment of oil and gas properties..... -- (129,745) -- -- --
--------- --------- --------- -------- --------
162,087 (57,950) 58,035 62,660 41,376
Income tax benefit (provision)(a)........ (56,717) 20,337 (20,350) (22,225) (14,191)
--------- --------- --------- -------- --------
Results of operations for oil and gas
producing activities................... $ 105,370 $ (37,613) $ 37,685 $ 40,435 $ 27,185
========= ========= ========= ======== ========
</TABLE>
- ---------------
(a) The income tax benefit (provision) is calculated using the current statutory
tax rate for each jurisdiction.
F-63
<PAGE> 274
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION -- (CONTINUED)
RESERVE QUANTITY INFORMATION
The estimates of Pioneer's proved oil and gas reserves, which are located
principally in the United States, are based on evaluations audited by
independent petroleum engineers with respect to Pioneer's major properties and
prepared by Pioneer's engineers with respect to all other properties. Reserves
were estimated in accordance with guidelines established by the U.S. Securities
and Exchange Commission and the Financial Accounting Standards Board, which
require that reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations except by
contractual arrangements. The United States reserve estimates for 1996 utilize
an oil price of $24.55 per Bbl (reflecting adjustments for oil quality and
gathering and transportation costs) and a gas price of $3.97 per Mcf (reflecting
adjustments for BTU content, gathering and transportation costs and gas
processing and shrinkage).
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. Pioneer emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL (BBLS) NATURAL GAS (MCF)
----------------------------------------- ------------------------------------------
UNITED UNITED TOTAL
STATES AUSTRALIA ARGENTINA TOTAL STATES AUSTRALIA ARGENTINA TOTAL BOE'S
------- --------- --------- ------- ------- --------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oil and Gas Producing
Activities:
Total Proved Reserves:
Balance, January 1, 1992....... 67,018 -- -- 67,018 232,165 -- -- 232,165 105,712
Revisions:
Revisions of previous
estimates.................. 8,597 -- -- 8,597 37,366 -- -- 37,366 14,825
Reserves added by developing
drilling................... 1,628 -- -- 1,628 31,650 -- -- 31,650 6,903
Purchases of
minerals-in-place.......... 14,019 -- -- 14,019 35,878 -- -- 35,878 19,999
New discoveries and
extensions................. -- -- -- -- -- -- -- -- --
Production................... (4,732) -- -- (4,732) (24,636) -- -- (24,636) (8,838)
Sales of minerals-in-place... (2,330) -- -- (2,330) (8,751) -- -- (8,751) (3,789)
------- ------- ----- ------- ------- -------- ----- -------- -------
Balance, January 1, 1993....... 84,200 -- -- 84,200 303,672 -- -- 303,672 134,812
Revisions:
Revisions of previous
estimates.................. (20,645) -- -- (20,645) 965 -- -- 965 (20,484)
Reserves added by development
drilling................... 7,454 -- -- 7,454 21,905 -- -- 21,905 11,105
Purchases of
minerals-in-place.......... 30,681 -- -- 30,681 248,256 -- -- 248,256 72,057
New discoveries and
extensions................. 101 -- -- 101 711 -- -- 711 219
Production................... (7,549) -- -- (7,549) (40,659) -- -- (40,659) (14,325)
Sales of minerals-in-place... (238) -- -- (238) (7,098) -- -- (7,098) (1,421)
------- ------- ----- ------- ------- -------- ----- -------- -------
Balance, December 31, 1993..... 94,004 -- -- 94,004 527,752 -- -- 527,752 181,963
Continued on next page
</TABLE>
F-64
<PAGE> 275
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
OIL (BBLS) NATURAL GAS (MCF)
----------------------------------------- ------------------------------------------
UNITED UNITED TOTAL
STATES AUSTRALIA ARGENTINA TOTAL STATES AUSTRALIA ARGENTINA TOTAL BOE'S
------- --------- --------- ------- ------- --------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994....... 94,004 -- -- 94,004 527,752 -- -- 527,752 181,963
Revisions:
Revisions of previous
estimates.................. 15,141 (199) -- 14,942 10,318 184 -- 10,502 16,692
Reserves added by development
drilling................... 11,935 -- -- 11,935 55,617 -- -- 55,617 21,205
Purchases of
minerals-in-place.......... 25,822 13,884 -- 39,706 243,719 108,880 -- 352,599 98,472
New discoveries and
extensions................. 135 -- -- 135 452 -- -- 452 210
Production................... (11,267) (880) -- (12,147) (75,040) (4,634) -- (79,674) (25,426)
Sales of minerals-in-place... (4,034) -- -- (4,034) (39,740) -- -- (39,740) (10,657)
------- ------- ----- ------- ------- -------- ----- -------- -------
Balance, December 31, 1994..... 131,736 12,805 -- 144,541 723,078 104,430 -- 827,508 282,459
Revisions:
Revisions of previous
estimates.................. 9,211 1,212 -- 10,423 80,571 22,493 -- 103,064 27,600
Reserves added by development
drilling................... 18,486 -- -- 18,486 61,945 -- -- 61,945 28,810
Purchases of
minerals-in-place.......... 4,309 -- -- 4,309 82,713 -- -- 82,713 18,094
New discoveries and
extensions................. 761 -- -- 761 6,015 -- -- 6,015 1,764
Production................... (11,328) (1,574) -- (12,902) (76,669) (8,626) -- (85,295) (27,118)
Sales of minerals-in-place... (18,284) -- -- (18,284) (99,044) -- -- (99,044) (34,791)
------- ------- ----- ------- ------- -------- ----- -------- -------
Balance, December 31, 1995..... 134,891 12,443 -- 147,334 778,609 118,297 -- 896,906 296,818
Revisions:
Revisions of previous
estimates.................. 3,652 -- -- 3,652 (11,790) -- -- (11,790) 1,687
Reserves added by development
drilling................... 38,962 -- -- 38,962 162,885 -- -- 162,885 66,110
Purchases of
minerals-in-place.......... 300 -- -- 300 11,494 -- -- 11,494 2,216
New discoveries and
extensions................. 760 -- 1,159 1,919 17,607 -- 1,108 18,715 5,038
Production................... (10,872) (349) (54) (11,275) (73,924) (1,927) -- (75,851) (23,916)
Sales of minerals-in-place... (4,857) (12,094) -- (16,951) (56,613) (116,370) -- (172,983) (45,782)
------- ------- ----- ------- ------- -------- ----- -------- -------
Balance, December 31, 1996..... 162,836 -- 1,105 163,941 828,268 -- 1,108 829,376 302,171
======= ======= ===== ======= ======= ======== ===== ======== =======
Proved Developed Reserves:
January 1, 1992.............. 40,644 -- -- 40,644 168,672 -- -- 168,672 68,756
======= ======= ===== ======= ======= ======== ===== ======== =======
December 31, 1992............ 52,736 -- -- 52,736 245,505 -- -- 245,505 93,654
======= ======= ===== ======= ======= ======== ===== ======== =======
December 31, 1993............ 74,217 -- -- 74,217 442,270 -- -- 442,270 147,929
======= ======= ===== ======= ======= ======== ===== ======== =======
December 31, 1994............ 99,520 7,548 -- 107,068 591,472 31,303 -- 622,775 210,864
======= ======= ===== ======= ======= ======== ===== ======== =======
December 31, 1995............ 101,310 7,610 -- 108,920 615,328 30,738 -- 646,066 216,598
======= ======= ===== ======= ======= ======== ===== ======== =======
December 31, 1996............ 126,163 -- 207 126,370 660,174 -- -- 660,174 236,399
======= ======= ===== ======= ======= ======== ===== ======== =======
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The 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 proved 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 rates to the
difference.
F-65
<PAGE> 276
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION -- (CONTINUED)
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
1996 1995 1994 1993(A) 1992(A)
----------- ----------- ----------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS
UNITED STATES
Oil and gas producing activities:
Future cash inflows............. $ 7,280,710 $ 4,134,327 $ 3,447,519 $ 2,414,157 $ 2,195,429
Future production costs......... (2,325,274) (1,618,191) (1,513,188) (1,023,897) (884,139)
Future development costs........ (196,410) (164,794) (133,580) (72,205) (98,409)
Future income tax expense....... (1,385,399) (523,755) (276,118) (197,312) (269,562)
----------- ----------- ----------- ----------- -----------
3,373,627 1,827,587 1,524,633 1,120,743 943,319
10% annual discount factor...... (1,574,103) (727,743) (547,893) (389,159) (394,866)
----------- ----------- ----------- ----------- -----------
Standardized measure of
discounted future net cash
flows......................... $ 1,799,524 $ 1,099,844 $ 976,740 $ 731,584 $ 548,453
=========== =========== =========== =========== ===========
AUSTRALIA
Oil and gas producing activities:
Future cash inflows............. $ -- $ 428,191 $ 358,903 $ -- $ --
Future production costs......... -- (136,681) (88,630) -- --
Future development costs........ -- (47,085) (48,251) -- --
Future income tax expense....... -- (69,649) (58,393) -- --
----------- ----------- ----------- ----------- -----------
-- 174,776 163,629 -- --
10% annual discount factor...... -- (70,831) (68,712) -- --
----------- ----------- ----------- ----------- -----------
Standardized measure of
discounted future net cash
flows......................... $ -- $ 103,945 $ 94,917 $ -- $ --
=========== =========== =========== =========== ===========
ARGENTINA
Oil and gas producing activities:
Future cash inflows............. $ 28,211 $ -- $ -- $ -- $ --
Future production costs......... (8,099) -- -- -- --
Future development costs........ (4,456) -- -- -- --
Future income tax expense....... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
15,656 -- -- -- --
10% annual discount factor...... (7,615) -- -- -- --
----------- ----------- ----------- ----------- -----------
Standardized measure of
discounted future net cash
flows......................... $ 8,041 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
TOTAL
Oil and gas producing activities:
Future cash inflows............. $ 7,308,921 $ 4,562,518 $ 3,806,422 $ 2,414,157 $ 2,195,429
Future production costs......... (2,333,373) (1,754,872) (1,601,818) (1,023,897) (884,139)
Future development costs........ (200,866) (211,879) (181,831) (72,205) (98,409)
Future income tax expense....... (1,385,399) (593,404) (334,511) (197,312) (269,562)
----------- ----------- ----------- ----------- -----------
3,389,283 2,002,363 1,688,262 1,120,743 943,319
10% annual discount factor...... (1,581,718) (798,574) (616,605) (389,159) (394,866)
----------- ----------- ----------- ----------- -----------
Standardized measure of
discounted future net cash
flows......................... $ 1,807,565 $ 1,203,789 $ 1,071,657 $ 731,584 $ 548,453
=========== =========== =========== =========== ===========
</TABLE>
F-66
<PAGE> 277
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Oil and gas producing activities:
Oil and gas sales, net of
production costs.............. $ (286,597) $ (244,815) $ (210,484) $(128,898) $(83,297)
Net changes in prices and
production costs.............. 866,196 221,581 (25,789) (182,757) 25,898
Extensions and discoveries....... 53,314 12,321 1,781 1,557 --
Sales of minerals-in-place....... (185,859) (139,250) (63,581) (6,294) (13,661)
Purchases of minerals-in-place... 20,606 53,628 451,127 383,249 79,535
Revisions of estimated future
development costs............. (73,587) (47,459) (20,383) 7,899 (4,734)
Revisions of previous quantity
estimates and reserves added
by development drilling....... 569,529 288,445 159,210 (32,316) 103,492
Accretion of discount............ 123,174 105,891 90,190 61,460 42,865
Changes in production rates,
timing and other.............. (106,896) (3,496) 1,504 16,569 35,659
---------- ---------- ---------- --------- --------
Change in present value of future
net revenues.................. 979,880 246,846 383,575 120,469 185,757
Net change in present value of
future income taxes........... (376,104) (114,714) (43,502) 62,662 (49,985)
---------- ---------- ---------- --------- --------
603,776 132,132 340,073 183,131 135,772
Balance, beginning of year....... 1,203,789 1,071,657 731,584 548,453 412,681
---------- ---------- ---------- --------- --------
Balance, end of year............. $1,807,565 $1,203,789 $1,071,657 $ 731,584 $548,453
========== ========== ========== ========= ========
</TABLE>
SELECTED QUARTERLY FINANCIAL RESULTS
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------
FIRST SECOND(A) THIRD FOURTH(A)
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Operating revenues............................... $103,444 $ 99,674 $ 97,019 $120,608
Total revenues................................... 118,282 182,508 111,230 123,323
Costs and expenses............................... 91,272 82,952 74,765 86,006
Net income....................................... 14,710 80,156 20,965 24,417
Net income per share............................. .41 2.24 .58 .68
1995
Operating revenues............................... $123,580 $126,760 $113,347 $122,075
Total revenues................................... 122,341 152,449 115,329 123,627
Costs and expenses............................... 143,919 244,453 124,836 150,545
Loss before extraordinary item................... (14,778) (62,403) (6,908) (20,018)
Loss before extraordinary item per share......... (.42) (1.77) (.20) (.56)
Net loss......................................... (14,778) (62,403) (6,908) (15,680)
Net loss per share............................... (.42) (1.77) (.20) (.44)
</TABLE>
F-67
<PAGE> 278
PIONEER NATURAL RESOURCES COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------
FIRST SECOND(A) THIRD FOURTH(A)
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994
Operating revenues............................... $ 98,143 $100,305 $141,297 $139,988
Total revenues................................... 102,953 100,895 146,267 146,048
Costs and expenses............................... 102,060 95,111 157,606 161,877
Income (loss) before extraordinary item.......... 393 3,484 (8,289) (9,579)
Income (loss) before extraordinary item per
share......................................... .01 .12 (.29) (.28)
Net income (loss)................................ 393 3,484 (8,968) (9,528)
Net income (loss) per share...................... .01 .12 (.29) (.28)
1993
Operating revenues............................... $ 56,087 $ 84,751 $ 92,476 $ 95,153
Total revenues................................... 57,534 95,090 106,691 96,760
Costs and expenses............................... 48,314 69,329 95,022 95,007
Income before cumulative effect of accounting
change........................................ 6,020 16,961 7,369 1,053
Income before cumulative effect of accounting
change per share.............................. .22 .61 .26 .04
Net income....................................... 23,120 16,961 7,369 1,053
Net income per share............................. .84 .61 .26 .04
1992
Operating revenues............................... $ 43,090 $ 46,900 $ 52,640 $ 58,397
Costs and expenses............................... 41,223 43,240 45,008 49,802
Net income....................................... 3,557 4,497 8,968 10,124
Net income per share............................. .17 .17 .33 .37
</TABLE>
- ---------------
(a) The second and fourth quarters of 1995 include a SFAS 121 impairment charge
of $101.3 million and $29.2 million, respectively. See Note T of the Notes
to the Consolidated Financial Statements above.
F-68
<PAGE> 279
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc.
(a Texas corporation) and subsidiaries as of December 31, 1996, 1995, 1994,
1993, and 1992, and the related consolidated statements of operations, cash
flows and changes in stockholders' equity for each of the five years in the
period ended December 31, 1996. These financial statements are the
responsibility of MESA'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 financial position of MESA Inc.
and subsidiaries as of December 31, 1996, 1995, 1994, 1993, and 1992, and the
results of their operations and cash flows for each of the five years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
February 27, 1997
(except with respect to the
Kansas Ad Valorem Tax
matter discussed in Note 10,
as to which the date is
September 30, 1997)
F-69
<PAGE> 280
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1997 1996 1995
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash investments.............................. $ 20,751 $16,681.... $ 149,143
Investments............................................ -- -- 38,280
Accounts and notes receivable.......................... 45,077 63,410 44,734
Other.................................................. 5,004 4,186 4,590
---------- ---------- ----------
Total current assets........................... 70,832 84,277 236,747
---------- ---------- ----------
Property, plant and equipment:
Oil and gas properties, wells and equipment, using the
successful efforts method of accounting............. 2,337,133 1,975,684 1,930,879
Office and other....................................... 39,954 36,740 41,603
Accumulated depreciation, depletion and amortization... (1,025,355) (966,040) (867,665)
---------- ---------- ----------
1,351,732 1,046,384 1,104,817
---------- ---------- ----------
Other assets:
Restricted cash of subsidiary Partnership.............. -- -- 57,731
Gas balancing receivable............................... 42,978 61,204 56,020
Other.................................................. 39,916 22,014 31,509
---------- ---------- ----------
82,894 83,218 145,260
---------- ---------- ----------
$1,505,458 $1,213,879 $1,486,824
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities on long-term debt................... $ 5,305 $ 5,305 $ 101,413
Accounts payable....................................... 2,423 10,085 2,996
Interest payable....................................... 23,436 21,150 60,465
Other accrued liabilities.............................. 27,786 32,960 28,072
---------- ---------- ----------
Total current liabilities...................... 58,950 69,500 192,946
---------- ---------- ----------
Long-term debt........................................... 1,102,999 802,772 1,135,330
Deferred revenue......................................... 14,793 14,977 17,578
Other liabilities........................................ 65,239 61,136 73,966
Contingencies
Stockholders' Equity:
8% cumulative convertible preferred stock, $.01 par
value, authorized 500,000,000 shares; outstanding
126,557,019, 121,643,686, and no shares,
respectively........................................ 1,266 1,216 --
Common stock, $.01 par value, authorized 600,000,000
shares; outstanding 64,279,568, 64,279,568 and
64,050,009 shares, respectively..................... 643 643 640
Additional paid-in capital............................. 667,860 656,805 398,965
Accumulated deficit.................................... (406,292) (393,170) (332,601)
---------- ---------- ----------
263,477 265,494 67,004
---------- ---------- ----------
$1,505,458 $1,213,879 $1,486,824
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-70
<PAGE> 281
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Natural gas................. $ 88,810 $ 94,810 $ 184,595 $ 129,534 $ 139,580 $ 141,798 $ 157,672
Natural gas liquids......... 50,439 43,115 97,561 75,321 72,771 61,427 59,669
Oil and condensate.......... 26,087 8,847 18,180 19,594 7,877 12,428 18,701
Other....................... 6,801 5,193 11,075 10,510 8,509 6,551 1,070
-------- -------- --------- --------- --------- --------- ---------
172,137 151,965 311,411 234,959 228,737 222,204 237,112
-------- -------- --------- --------- --------- --------- ---------
Costs and expenses:
Lease operating............. 35,281 25,039 54,447 49,447 51,218 49,000 42,322
Production and other
taxes..................... 12,048 10,299 20,071 18,403 21,306 20,332 18,631
Exploration charges......... 8,067 2,814 5,431 6,604 5,157 2,705 10,008
General and
administrative............ 9,277 14,538 31,473 26,749 28,649 25,237 24,460
Depreciation, depletion and
amortization.............. 56,510 46,064 96,473 85,791 93,724 102,918 115,470
Impairment of long-lived
assets.................... 2,907 6,828 6,828 -- -- -- --
-------- -------- --------- --------- --------- --------- ---------
124,090 105,582 214,723 186,994 200,054 200,192 210,891
-------- -------- --------- --------- --------- --------- ---------
Operating income.............. 48,047 46,383 96,688 47,965 28,683 22,012 26,221
-------- -------- --------- --------- --------- --------- ---------
Other income (expense):
Interest income............. 764 6,964 7,749 15,922 13,457 10,704 13,504
Interest expense............ (48,335) (73,913) (121,135) (148,630) (144,757) (142,002) (143,392)
Gains from investments...... -- 9,349 9,418 18,420 6,698 3,954 7,808
Gains from collections from
Bicoastal Corporation..... -- -- 2,548 6,352 16,577 18,450 --
Gains on dispositions of oil
and gas properties........ -- -- -- -- -- 9,600 12,250
Litigation settlement....... -- -- -- -- -- (42,750) --
Gain from adjustment of
contingency reserve....... -- 15,000 15,000 -- -- 24,000 --
Other....................... (2,493) 1,821 (1,929) 2,403 (4,011) (6,416) (5,623)
-------- -------- --------- --------- --------- --------- ---------
(50,064) (40,779) (88,349) (105,533) (112,036) (124,460) (115,453)
-------- -------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item.......... (2,017) 5,604 8,339 (57,568) (83,353) (102,448) (89,232)
Extraordinary loss on debt
extinguishment.............. -- -- (59,386) -- -- -- --
-------- -------- --------- --------- --------- --------- ---------
Net income (loss)........... $ (2,017) $ 5,604 $ (51,047) $ (57,568) $ (83,353) $(102,448) $ (89,232)
======== ======== ========= ========= ========= ========= =========
Dividends on preferred
stock....................... (11,105) -- (9,522) -- -- -- --
-------- -------- --------- --------- --------- --------- ---------
Net income (loss) applicable
to Common
Stock....................... $(13,122) $ 5,604 $ (60,569) $ (57,568) $ (83,353) $(102,448) $ (89,232)
======== ======== ========= ========= ========= ========= =========
Income (loss) per common share
before extraordinary item... $ (.20) $ .09 $ (.02) $ (.90) $ (1.42) $ 2.61 $ (2.31)
Loss per common share on
extraordinary item.......... -- -- (.92) -- -- -- --
-------- -------- --------- --------- --------- --------- ---------
Net Income (loss) per common
share....................... $ (.20) $ .09 $ (.94) $ (.90) $ (1.42) $ (2.61) $ (2.31)
======== ======== ========= ========= ========= ========= =========
Weighted average common shares
outstanding................. 64,280 64,053 64,164 64,050 58,860 39,272 38,571
======== ======== ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-71
<PAGE> 282
MESA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
8% CUMULATIVE 8% CUMULATIVE
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL
--------------- --------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ------ ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992...... 38,571 $386 -- $ -- -- $ -- $273,198 $ --
Net loss.................... -- -- -- -- -- -- -- (89,232)
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1992.... 38,571 386 -- -- -- -- 273,198 (89,232)
Net loss.................... -- -- -- -- -- -- -- (102,448)
Common stock issued for 0%
convertible notes......... 7,523 75 -- -- -- -- 29,239 --
Common stock issues for the
partial conversion of
General Partner minority
interest.................. 417 4 -- -- -- -- 907 --
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1993.... 46,511 465 -- -- -- -- 303,344 (191,680)
Net loss.................... -- -- -- -- -- -- -- (83,353)
Common stock issues for the
conversion of the
remaining General Partner
minority interest......... 1,251 13 -- -- -- -- 2,716 --
Common stock issued in
secondary public
offering.................. 16,288 162 -- -- -- -- 92,905 --
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1994.... 64,050 640 -- -- -- -- 398,965 (275,033)
Net loss.................... -- -- -- -- -- -- -- (57,568)
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1995.... 64,050 640 -- -- -- -- 398,965 (332,601)
Net loss.................... -- -- -- -- -- -- -- (51,047)
Stock options exercised..... 211 3 -- -- -- -- 1,103 --
8% Cumulative Convertible
Preferred Stock issued.... -- -- 58,599 586 58,850 588 247,257 --
8% Cumulative Convertible
Preferred Stock
dividends................. -- -- 1,863 18 2,351 24 9,480 (9,522)
8% Cumulative Convertible
Preferred Stock converted
to Common Stock........... 19 -- (19) -- -- -- -- --
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1996.... 64,280 643 60,443 604 61,201 612 656,805 (393,170)
Net loss.................... (2,017)
Dividends................... -- -- 2,441 25 2,472 25 11,055 (11,105)
------ ---- ------ ---- ------ ---- -------- ---------
Balance, June 30, 1997........ 64,280 $643 62,884 $629 63,673 $637 $667,860 $(406,292)
====== ==== ====== ==== ====== ==== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-72
<PAGE> 283
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- -------- ----------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ (2,017) $ 5,604 $ (51,047) $(57,568) $ (83,353) $(102,448) $ (89,232)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and
amortization....................... 56,510 46,064 96,473 85,791 93,724 102,918 115,470
Impairment of long-term assets....... 2,907 6,828 6,828 -- -- -- --
Gains on dispositions of oil and gas
properties......................... -- -- -- -- -- (9,600) (12,250)
Accreted interest on discount
notes.............................. 9,227 (215) 7,603 38,957 79,352 49,160 --
Accrued interest exchanged for
discount notes..................... -- -- -- -- -- 15,395 --
Gain from adjustment of contingency
reserves........................... -- -- (15,000) -- -- (24,000) --
Decrease in deferred natural gas
revenue............................ -- -- (2,686) (4,219) (785) (3,370) (10,287)
Natural gas hedging activities....... -- -- (9,715) 9,715 324 (8,357)
Sales of investments................. -- 47,625 47,698 48,555 18,771 39,283 126,217
Purchases of investments............. (405) -- -- (49,003) (19,866) (34,711) (102,161)
Gains from investments............... -- (9,349) (9,418) (18,420) (6,698) (3,954) (7,808)
Debt prepayment premium.............. -- -- 51,612 -- -- -- --
(Increase) decrease in accounts
receivables........................ 11,554 (20,053) (18,209) (12,047) 5,934 1,986 (585)
Decrease (increase) in gas balancing
receivables........................ -- -- (5,086) 1,516 (7,840) (4,942) (17,772)
Increase (decrease) in payables and
accrued liabilities................ -- -- (26,103) 45,243 (3,142) (15,887) (7,814)
Settlement of prior year tax
claims............................. -- -- -- -- -- (12,931) --
Litigation settlement................ -- -- -- -- (42,750) 42,750 --
Other................................ 9,986 2,069 18,648 151 5,535 (7,481) 10,196
--------- -------- ----------- -------- --------- --------- ---------
Net cash provided by (used in)
operating activities........... 87,762 78,573 101,313 69,241 48,597 32,492 (4,383)
--------- -------- ----------- -------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures................... (371,960) (19,664) (50,223) (42,297) (32,590) (29,636) (69,201)
Proceeds from disposition of oil and
gas properties....................... -- -- -- -- -- 26,118 11,424
Collection of notes receivable......... -- -- -- -- -- 47,501 28,181
Other.................................. 280 (90) 5,188 860 (7,660) (6,461) (11,494)
--------- -------- ----------- -------- --------- --------- ---------
Net cash provided by (used in)
investing activities........... (371,680) (19,754) (45,035) (41,437) (40,250) 37,522 (41,090)
--------- -------- ----------- -------- --------- --------- ---------
Cash flows from financing activities:
Issuance of stock...................... -- -- 248,431 -- 93,067 -- --
Repayments of long-term debt........... (58,000) (34,865) (1,406,366) (25,507) (175,107) (80,102) (24,550)
Long-term borrowings................... 349,000 -- 970,097 -- 77,754 -- --
Debt issuance costs.................... -- -- (19,109) -- -- (9,651) --
Debt prepayment premium................ -- -- (51,612) -- -- -- --
Restricted cash of subsidiary
partnership.......................... -- -- 57,731 -- -- -- --
Other.................................. (3,012) 1,294 12,088 3,424 652 1,251 (4,935)
--------- -------- ----------- -------- --------- --------- ---------
Net cash provided by (used in)
financing activities........... 287,988 (33,571) (188,740) (22,083) (3,634) (88,502) (29,485)
--------- -------- ----------- -------- --------- --------- ---------
Net increase (decrease) in cash and cash
investments............................ 4,070 25,248 (132,462) 5,721 4,713 (18,488) (74,958)
Cash and cash investments at beginning of
year................................... 16,681 149,143 149,143 143,422 138,709 157,197 232,155
--------- -------- ----------- -------- --------- --------- ---------
Cash and cash investments at end of
year................................... $ 20,751 $174,391 $ 16,681 $149,143 $ 143,422 $ 138,709 $ 157,197
--------- -------- ----------- -------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE> 284
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mesa Inc., a Texas corporation, was formed in 1991 to reorganize the
business of Mesa Limited Partnership. Unless the context otherwise requires, as
used herein the term "Mesa" refers to Mesa Inc. and its subsidiaries taken as a
whole and includes its predecessor.
Mesa is primarily in the business of acquiring, exploring for, developing,
producing, processing and selling natural gas and oil in the United States. Over
65% of Mesa's annual equivalent production is natural gas and the balance is
principally natural gas liquids. Mesa's primary producing areas are the Hugoton
field of southwest Kansas, the West Panhandle field of Texas and the Gulf of
Mexico offshore Texas and Louisiana. Production from Mesa's properties has
access to a substantial portion of the major metropolitan markets in the United
States, primarily in the midwest and northeast, through numerous pipelines and
other purchasers.
Subsequent to June 30, 1997, the stockholders of Parker & Parsley Petroleum
Company ("Parker & Parsley") and Mesa approved an Amended and Restated Agreement
and Plan of Merger that resulted in the formation of Pioneer Natural Resources
Company. In accordance with the provisions of Accounting Principles Board No.
16, "Business Combinations", the merger was treated as an acquisition of Mesa by
Parker & Parsley. As a result, the historical financial statements of Pioneer
are those of Parker & Parsley and will present the addition of Mesa's assets and
liabilities as an acquisition by Pioneer in August 1997. The results discussed
below relate to the activity of Mesa prior to the merger and are not indicative
of future results of Pioneer.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the consolidated
accounts of Mesa and its subsidiaries after elimination of intercompany
transactions. Certain reclassifications have been made to amounts reported in
previous years to conform to 1997 presentation. Amounts as of June 30, 1997 and
1996 or for the six months periods then ended are unaudited.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, Mesa classifies all highly
liquid investments with original maturities of three months or less as cash and
cash investments.
OIL AND GAS PROPERTIES
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method
whereby the ratio of quarterly production to beginning of period proved oil and
gas reserves is applied to the remaining net book value of such properties. Oil
and gas reserve quantities represent estimates only and there are numerous
uncertainties inherent in the estimation process. Actual future production may
be materially different from amounts estimated and such differences could
materially affect future amortization of proved properties. Geological and
geophysical costs and delay rentals are expensed as incurred.
In 1996 Mesa adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," ("SFAS No. 121") which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill.
SFAS No. 121 requires a review for impairment whenever circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, Mesa estimates future
F-74
<PAGE> 285
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash flows (undiscounted and without interest charges) expected to result from
use of an asset and its eventual disposition. Impairment is recognized only if
the carrying amount of an asset is greater than the expected future cash flows.
The amount of impairment is based on the fair value of the asset. Under SFAS No.
121, each property is individually evaluated for impairment. Impairment of
long-lived assets in the accompanying Consolidated Statement of Operations
includes $6.8 million for the six months ended June 30, 1996 and the year ended
December 31, 1996 and includes $2.9 million for the six months ended June 30,
1997 resulting from impairment of long-term assets in accordance with SFAS No.
121. The 1996 impairment relates primarily to a Gulf of Mexico oil and gas
property, and the 1997 impairment relates to assets held for resale at June 30,
1997.
INCOME (LOSS) PER COMMON SHARE
The computations of loss per common share are based on the weighted average
number of common shares outstanding during each period after deducting amounts
attributable to dividends on preferred stock.
INVESTMENTS
On January 1, 1994, Mesa adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses the accounting and reporting for investment
in equity securities that have readily determinable fair values and for all
investments in debt securities. Mesa's portfolio of securities is classified as
"trading securities" under the provisions of SFAS No. 115 and is reported at
fair value, with unrealized gains and losses included in net income (loss) for
the current period. The cost of securities sold is determined on the first-in,
first-out basis. Prior to January 1, 1994, investments in marketable securities
were stated at the lower of cost or market. The adoption of SFAS No. 115 did not
have a material effect on the financial position or results of operations of
Mesa.
Mesa enters into various futures contracts which are not intended to be
hedges of future natural gas or crude oil production. Investments in such
contracts are periodically adjusted to market prices and gains and losses are
included in gains from futures and securities investments in the statements of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, marketable securities, notes receivable,
short-term trade receivables and payables, and restricted cash approximate fair
value. The carrying values of the commodity price and interest rate swaps,
futures and options represent their required cash deposits, if any, plus or
minus unrealized gains and losses, if acquired for trading purposes. The fair
value of commodity price and interest rate swaps, futures and options is
estimated based on the market value of the underlying instruments (see Note 3).
The fair value of long-term debt is estimated based on the market prices for
Mesa's publicly traded debt and on current rates available for similar debt with
similar maturities and security for Mesa's remaining debt (see Note 4).
REVENUES
Mesa recognizes its ownership interest in oil and condensate, natural gas
liquids and natural gas production as revenue. Actual natural gas production
quantities sold may be different from Mesa's ownership share of production in a
given period. Mesa records these differences as gas balancing receivables or as
deferred revenue. Net gas balancing underproduction represented approximately 3%
of total equivalent production for the year ended December 31, 1996, compared
with 2% during the same period in 1995, 5% in 1994, 3% in 1993 and 12% in 1992.
The gas balancing receivable or deferred revenue component of natural gas and
natural gas liquids revenues in future periods is dependent on future rates of
production, field allowables and the amount of production taken by Mesa or by
its joint interest partners.
F-75
<PAGE> 286
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mesa periodically utilizes financial and physical energy markets as a hedge
against natural gas price fluctuations. Gains or losses on hedges are deferred
and recognized as natural gas revenue when the hedged production occurs. Mesa
recognized net losses of $1.8 million and $324,000 in 1996 and 1993,
respectively, and net gains of $12.7 million, $895,000 and $5.6 million in 1995,
1994 and 1992, respectively, related to hedging activities. During the six
months ended June 30, 1997, Mesa recognized net gains from hedging activities of
$1.1 million. Mesa did not hedge production during the first six months of 1996.
TAXES
Mesa provides for income taxes using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
(2) RECAPITALIZATION
In August of 1996, Mesa completed a recapitalization of its balance sheet
that entailed issuing $265 million in new preferred equity and repaying and
refinancing substantially all of its $1.2 billion of then existing long-term
debt (the "Recapitalization"). The structure and effects of the Recapitalization
are described below.
SERIES A & B PREFERRED EQUITY SALES
On April 26, 1996, Mesa entered into a stock purchase agreement with
DNR-Mesa Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The sale of shares to DNR and certain other matters were approved by Mesa's
stockholders at a special meeting on June 25, 1996. On July 2, 1996, DNR
purchased, in a private placement, approximately 58.8 million shares of a new
class of Series B 8% Cumulative Convertible Preferred Stock ("Series B
Preferred"). On July 5, 1996, Mesa commenced a rights offering for approximately
58.6 million shares of a new class of Series A 8% Cumulative Convertible
Preferred Stock ("Series A Preferred") to its existing stockholders (the "Rights
Offering"). Stockholders received .912 rights in respect of each share of common
stock held. Each full right was exercisable for one share of Series A Preferred
at an exercise price of $2.26 per share, the same per share price at which DNR
purchased shares of Series B Preferred. The Rights Offering was substantially
oversubscribed and on August 8, 1996, Mesa issued approximately 58.6 million
shares of Series A Preferred to rights holders who exercised their rights.
As a result of the stock issuances and the subsequent pay-in-kind quarterly
dividends on the Series A and Series B Preferred, at December 31, 1996, DNR
owned approximately 32.92% of Mesa's fully diluted common shares (excluding
outstanding stock options). (See Note 6 for a more detailed description of the
preferred shares.)
F-76
<PAGE> 287
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW DEBT
In conjunction with the issuance of Series A and B Preferred, Mesa entered
into a new seven-year $525 million secured revolving credit facility ("the
Credit Facility") with a group of banks. Mesa also issued and sold $475 million
of senior subordinated notes consisting of $325 million of 10 5/8% senior
subordinated notes due in 2006 (the "Senior Subordinated Notes") and $150
million of 11 5/8% senior subordinated discount notes due in 2006 (the "Senior
Discount Notes"). (See Note 4 for a more detailed description of the new debt.)
USE OF PROCEEDS
The total proceeds from the issuance of the new equity and new long-term
debt, together with certain cash and investments on hand, were used to repay and
refinance then existing long-term debt and pay transaction costs.
The fees associated with the Series A and B Preferred stock have been
offset against the proceeds of the issuance of the shares and reflected in
additional paid-in capital on the consolidated balance sheet. The fees relating
to the issuance of new debt have been capitalized and are being amortized over
the term of the associated debt.
An extraordinary loss totaling approximately $59.4 million on the
extinguishment of long-term debt was recognized in the third quarter of 1996.
The loss consists primarily of the $51.6 million prepayment premium on the $616
million of secured notes (the "Secured Notes") issued in 1991 by a former
subsidiary in a private placement with a group of institutional lenders and
approximately $11.2 million of unamortized debt issuance costs and premiums
associated with the debt that was repaid and refinanced, partially offset by
$3.4 million in gains from cash deposits associated with the Secured Notes.
EFFECT OF THE RECAPITALIZATION
The Recapitalization enhances Mesa's ability to compete in the oil and gas
industry by substantially increasing its cash flow available for investment and
improving its ability to attract capital. The ability to redirect cash flow to
reinvestment rather than debt service allows Mesa to pursue an aggressive growth
strategy. Specifically, Mesa's financial condition improved significantly as a
result of the Recapitalization due to (i) a significant reduction in total debt
outstanding, (ii) a reduction in annual cash interest expense through lower debt
balances and lower interest rates, and (iii) the extension of maturities on its
long-term debt.
In conjunction with the recapitalization of Mesa on July 2, 1996, all of
Mesa's principal subsidiaries were merged into Mesa Operating Co. ("MOC"). As a
result, MOC now owns substantially all of Mesa's assets and liabilities,
including all of Mesa's oil and gas properties and all of its long-term debt.
F-77
<PAGE> 288
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Equity securities:
Cost...................................................... $ -- $10,719
Unrealized loss........................................... -- (162)
NYMEX Futures Contracts:
Margin Cash............................................... -- 17,498
Unrealized gain in trading contracts...................... -- 7,558
Commodity Price Swaps:
Margin Cash............................................... -- 2,434
Unrealized loss in price swaps............................ -- (811)
Natural Gas Options:
Premiums.................................................. -- 66
Unrealized gain in trading options........................ -- 978
------- -------
Total market value................................ $ -- $38,280
======= =======
</TABLE>
In 1996 Mesa recognized net gains of approximately $9.4 million from its
investments compared with net gains of $18.4 million, $6.7 million, $4.0 million
and $7.8 million in 1995, 1994, 1993 and 1992, respectively. For the six months
ended June 30, 1996, Mesa recognized net gains of approximately $9.3 million
from its investments. These gains do not include gains or losses from natural
gas futures contracts accounted for as a hedge of natural gas production. Hedge
gains or losses are included in natural gas revenue in the period in which the
hedged production occurs (see Note 1).
The following table sets forth the fair value of the financial instruments
accounted for as hedges (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest rate swaps.................... $(167) $(1,200) $ -- $ --
Commodity price swaps.................. -- 87 -- --
</TABLE>
The net investment gains and losses recognized during a period include both
realized and unrealized gains and losses. Mesa realized net gains from
investments of $16.9 million in 1996, $12.3 million in 1995, $4.7 million in
1994, $2.3 million in 1993 and $10.0 million in 1992. Mesa realized net gains
from investments of $16.9 million for the six months ended June 30, 1996. At
December 31, 1995 Mesa had recognized but not realized approximately $7.6
million of gains associated primarily with natural gas futures. In 1996 Mesa
realized $3.8 million in gains on these investments, $3.4 million of which was
realized during the six months ended June 30, 1996. There were no unrealized
gains on investments at December 31, 1996. At June 30, 1997 and 1996, Mesa had
no open futures contracts and no unrealized gain or loss on investments.
Since April 10, 1996, Mesa has made no speculative investments in commodity
futures contracts. Speculative investments are expected to be limited in the
future.
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- ----------
<S> <C> <C>
Equity securities:
10 5/8% Senior Subordinated Notes......................... $325,000 $ --
11 5/8% Senior Discount Notes............................. 158,772 --
Credit Facility........................................... 319,000 --
Secured Notes............................................. -- 504,674
Former Credit Agreement..................................... -- 61,131
12 3/4% secured discount notes............................ -- 618,518
12 3/4% unsecured discount notes.......................... -- 39,725
13 1/2% subordinated...................................... -- 7,390
Other..................................................... 5,305 5,305
-------- ----------
808,077 1,236,743
Current maturities.......................................... (5,305) (101,413)
-------- ----------
Long-term debt.............................................. $802,772 $1,135,330
======== ==========
</TABLE>
CREDIT FACILITY
In conjunction with the Recapitalization, Mesa entered into a seven-year
$525 million secured revolving credit facility ("the Credit Facility"). Mesa
Operating Co.("MOC"), a wholly owned subsidiary of Mesa, is the borrower under
the Credit Facility and all borrowings are fully and unconditionally guaranteed
by Mesa. The Credit Facility, which is secured by liens on substantially all of
Mesa's assets, matures on June 30, 2003. The borrowing base for the Credit
Facility is determined from the value of Mesa's proved oil and gas reserves. In
order to accommodate the additional debt incurred in the Greenhill Acquisition
(see Note 14), the Credit Facility was amended to increase the borrowing base to
$650 million. As of June 30, 1997, the Credit Facility supported Letters of
Credit totaling $29.7 million and Mesa had $10.3 million of unused borrowing
capacity. Borrowings bear interest, at Mesa's option, at Interbank Eurodollar
rates plus 1 1/2%, CD rates plus 1 1/2%, Fed Funds rates plus 1% or the prime
rate plus 1/2% at the current amount borrowed under the Credit Facility. The
rates drop in 1/4% increments at borrowings under 75% and 50% of the borrowing
base. The rates on Eurodollar loans drop another 1/4% at borrowings under 25%
of the borrowing base. Mesa has entered into an interest rate swap for two years
that fixes the interest rate on $250 million of borrowings at 7.75%, which
resulted in payments of $918 thousand and $446 thousand for the six months ended
June 30, 1997 and the year ended December 31, 1996, respectively, reflected as
increases to interest expense in the Consolidated Statement of Operations.
The Credit Facility restricts, among other things, Mesa's ability to incur
additional indebtedness, create liens, pay dividends, acquire stock or make
investments, loans or advances.
SENIOR NOTES
The 10 5/8% Senior Subordinated Notes are unsecured and mature in 2006. MOC
is the issuer of such notes and such notes are fully and unconditionally
guaranteed by Mesa. Interest is payable semiannually in cash.
The 11 5/8% Senior Discount Notes are unsecured and mature in 2006. MOC is
the issuer of such notes and such notes are fully and unconditionally guaranteed
by Mesa. Through June 30, 2001, interest will not
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrue; however, the accreted value, as defined, of such notes will increase at
a rate of 11 5/8% per year, compounded semiannually. Thereafter, through
maturity, interest will be payable semiannually in cash.
The indentures governing the Senior Subordinated Notes and the Senior
Discount Notes contain certain covenants that, among other things, limit the
ability of Mesa and its restricted subsidiaries to incur additional indebtedness
and issue redeemable stock, pay dividends, make investments, make certain other
restricted payments, enter into certain transactions with affiliates, dispose of
assets, incur liens and engage in mergers and consolidations.
REFINANCED DEBT
As part of the Recapitalization described in Note 2, substantially all of
Mesa's then existing debt was repaid. Such debt included (i) the Secured Notes;
(ii) the $82.5 million bank credit facility, as amended (the "Former Credit
Agreement"); (iii) the 12-3/4% secured discount notes due June 30, 1998 and the
12-3/4% unsecured discount notes due June 30, 1996 (together, the "Discount
Notes"), and (iv) the 13 1/2% subordinated notes due in 1999.
INTEREST AND MATURITIES
The aggregate interest payments, net of amounts capitalized, made during
the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were $149.7
million, $63.8 million, $62.1 million, $89.4 million and $142.7 million,
respectively. The interest payments in the year ended December 31, 1996,
included a $42 million interest payment made on January 2, 1996, paid pursuant
to the terms of the 12-3/4% Discount Notes, in respect of the regular December
31, 1995 interest payment. Payment of approximately $8.5 million, $39.0 million,
$70.6 million and $64.6 million of interest expense incurred during 1996, 1995,
1994 and 1993, respectively, was deferred under the terms of the Discount Notes
until the repayment dates of the Discount Notes. Such interest is included in
interest expense in the 1996, 1995, 1994 and 1993 consolidated statements of
operations.
The aggregate interest payments, net of amounts capitalized, made during
the six months ended June 30, 1997 and 1996, were $35.9 million and $72.6
million, respectively. The interest payments in the six months ended June 30,
1996, included a $42 million interest payment made on January 2, 1996, paid
pursuant to the terms of a series of debt repaid in the Recapitalization, in
respect of the regular December 31, 1995, interest payment. In addition, on July
1, 1996, Mesa made a $41.9 million interest payment related to the regular June
30, 1996, interest payment on the same series of debt. Payment of approximately
$9.2 million of interest expense incurred during the six months ended June 30,
1997, was deferred under the terms of the Senior Discount Notes until the
repayment dates of the Senior Discount Notes. Such interest is included in
interest expense in the consolidated statements of operations for the six months
ended June 30, 1997.
There are no scheduled principal payments under the terms of the Credit
Facility, the Senior Subordinated Notes or the Senior Discount Notes in the next
five years. However, Mesa may have to pay the $5.3 million of other long-term
debt within the next five years and therefore classifies such debt in current
maturities.
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF LONG-TERM DEBT
The following is a summary of estimated fair value of Mesa's long-term debt
as of the years ended (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
10-5/8% Senior Subordinated Note............ $325,000 $354,250 $ -- $ --
11-5/8% Senior Discount Notes............... 158,772 183,480 -- --
Credit Facility............................. 319,000 319,000 -- --
Secured Notes............................... -- -- 504,674 568,641
Former Credit Agreement..................... -- -- 61,131 61,131
12-3/4% secured discount notes.............. -- -- 618,518 541,905
12-3/4% unsecured discount notes............ -- -- 39,725 35,262
13-1/2% subordinated notes.................. -- -- 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices
for Mesa's publicly traded debt and on current rates available for similar debt
with similar maturities and security for Mesa's remaining debt.
(5) INCOME TAXES
Mesa provides for income taxes using the asset and liability method under
which deferred tax assets and liabilities are recognized by applying the enacted
statutory tax rates applicable to future years to temporary differences between
the financial statement and tax bases of existing assets and liabilities. The
tax basis of Mesa's consolidated net assets is greater than the financial basis
of those net assets; therefore a net deferred tax asset has been recorded.
However, due to Mesa's history of net operating losses, a valuation allowance
has been recorded which offsets the entire net deferred tax asset. A summary of
Mesa's net deferred tax asset is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
----- -----
<S> <C> <C>
Deferred tax asset.......................................... $ 285 $ 261
Deferred tax liability...................................... (12) --
Valuation allowance......................................... (273) (261)
----- -----
Net deferred tax asset.................................... $ -- $ --
===== =====
</TABLE>
The principal components of Mesa's net deferred tax asset (utilizing a
combined federal and state income tax rate of 38% and 39% as of December 31,
1996 and 1995, respectively) and the valuation allowance are as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
----- -----
<S> <C> <C>
Tax basis of oil and gas properties in excess of financial
basis..................................................... $ 71 $ 75
Regular tax net operating loss carryforward................. 214 184
Other, net.................................................. (12) 2
----- -----
Total............................................. 273 261
Valuation allowance......................................... (273) (261)
----- -----
Net deferred tax asset.................................... $ -- $ --
===== =====
</TABLE>
F-81
<PAGE> 292
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, Mesa had a regular tax net operating loss
carryforward of approximately $560 million. Additionally, Mesa had an
alternative minimum tax loss carryforward available to offset future alternative
minimum taxable income of approximately $535 million. If not used, these
carryforwards will expire between 2007 and 2011.
The Internal Revenue Code of 1986 (the "Code") contains numerous provisions
which restrict or limit the use of corporate tax attributes in conjunction with
corporate acquisitions, dispositions, and reorganizations. Included among these
restrictive provisions is Code Section 382 which, in general, limits the
utilization of net operating loss ("NOL") carryforwards subsequent to a
substantial change (generally more than 50%) in corporate stock ownership. The
Section 382 ownership change (as defined for tax purposes) is considered on a
cumulative basis over a specified time period, normally three years.
The issuance of Series B Preferred stock in the Recapitalization (see Note
2) has caused the NOL carryforward limitations of Section 382 to apply to Mesa.
As a result, Mesa's ability to carry forward its NOLs existing at the time of
the Recapitalization ("Pre-change NOLs") to offset future taxable income and
gain will be limited to the sum of (i) an annual allowance ("Annual NOL
Allowance") determined, in part, by reference to Mesa's "value" immediately
prior to the issuance of the Series B Preferred stock ("Valuation Date") and
(ii) the amount of any net unrealized gain inherent in Mesa's assets as of the
Valuation Date ("Built In Gain") recognized over a five year period. The
imposition of the above restrictions on Mesa's Pre-change NOLs could result in a
portion of those NOLs expiring before Mesa is able to utilize them. Any unused
Annual NOL Allowance amounts as well as any tax operating losses generated
subsequent to the Change Date will carryforward for use in future years without
regard to the Section 382 limitations described above.
During 1993, the Internal Revenue Service (the "IRS") completed two field
examinations of the tax returns filed by Mesa for the tax years 1984 through
1987. In December 1993, Mesa made a payment to the IRS of approximately $13
million, which payment includes interest, in full settlement of all claims for
these years.
(6) STOCKHOLDERS' EQUITY
COMMON STOCK
At December 31, 1996, Mesa had outstanding 64,279,568 shares of common
stock. In late 1993 and 1994 Mesa issued a total of approximately 1.7 million
shares of common stock in exchange for the General Partner's 4.14% interest in
the subsidiary partnerships of Mesa. In 1994 Mesa completed an equity offering
which resulted in the issuance of an additional 16.3 million shares of common
stock. Proceeds from the Equity Offering increased stockholders' equity by
approximately $93 million and were used to reduce long-term debt.
PREFERRED STOCK
At December 31, 1996, Mesa had authorized 600,000,000 shares of preferred
stock. The preferred stock issues outstanding at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
SHARES ISSUED
AND OUTSTANDING
---------------
<S> <C>
Series A 8% Cumulative Convertible Preferred................ 60,443,259
Series B 8% Cumulative Convertible Preferred................ 61,200,427
-----------
121,643,686
===========
</TABLE>
The preferred stock was issued pursuant to the Recapitalization. (See Note
2.)
F-82
<PAGE> 293
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each share of Series A and B Preferred is convertible into one share of
Mesa common stock at any time prior to mandatory redemption in 2008. After 2006,
at the option of Mesa's non-series B directors, Mesa has the right to redeem any
outstanding Series A and Series B Preferred shares for common stock or cash
unless such shares were previously converted to common stock. Similarly, at
mandatory redemption in 2008, the remaining Series A and B Preferred shares will
be converted into common stock or cash at the option of Mesa's non-series B
directors. An annual 8% pay-in-kind dividend will be paid quarterly on the
shares during the first four years following issuance.
Thereafter, the 8% dividend may, at the option of Mesa, be paid in cash or
additional preferred shares, depending on whether certain financial tests are
met and subject to any limitations in Mesa's debt agreements.
The Series A and B Preferred represented 64.6% of the fully diluted common
shares at the time of issuance and will represent 71.5% of such shares after the
mandatory four-year pay-in-kind period, excluding stock options and assuming no
other stock issuance by Mesa. The Series A and B Preferred have a liquidation
preference per share equal to $2.26 plus accrued and unpaid dividends. The terms
of the Series A and Series B Preferred are substantially identical except for
certain voting rights and certain provisions relating to transferability. The
Series A and B Preferred will vote with the common stock as a single class on
all matters, except as otherwise required by law and except for (i) the right of
the holders of the Series B Preferred to nominate and elect a majority of Mesa's
Board of Directors for so long as DNR and its affiliates meet certain minimum
stock ownership requirements, and (ii) the right of the holders of the Series A
Preferred to elect two directors in the event of certain dividend arrearages.
(7) NOTES RECEIVABLE
Prior to 1992, Mesa had notes receivable totaling $68 million, exclusive of
interest, from Bicoastal Corporation ("Bicoastal") which was in bankruptcy.
Because of the uncertainty of collection, Mesa did not record interest on these
notes. A plan of reorganization for Bicoastal was approved by the Bankruptcy
Court in September 1992. During 1992 and 1993, Mesa collected approximately $28
million and $46 million, respectively, from Bicoastal, representing all of
Mesa's principal amount of allowed claims in the bankruptcy reorganization plan,
plus an additional amount representing a portion of its interest claims. As a
result, Mesa recorded gains of $18.5 million in 1993 relating to collections in
excess of the recorded receivable. In 1996, 1995 and 1994, Mesa recorded gains
of $2.5 million, $6.4 million and $16.6 million, respectively, from additional
interest claims collected from Bicoastal. As of year end 1996, Mesa had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims.
(8) OTHER INCOME
In the mid-to-late 1980's, as a result of regulatory changes, Mesa settled
a number of natural gas purchase contracts. At that time, Mesa established a
reserve for amounts possibly payable to third parties as a result of the
settlements. In the second quarter of 1996, as a result of reaching tentative
agreement in negotiation with certain of the parties, Mesa determined that $15
million of the amount previously reserved was no longer required.
(9) RELATED PARTY TRANSACTION
General and administrative expenses for the six months ended June 30, 1997
include $4.9 million in severance costs paid to Mesa's former chief executive
officer.
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<PAGE> 294
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) CONTINGENCIES
KANSAS AD VALOREM TAX
The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance, production
or similar" tax to be included as an add-on, over and above the maximum lawful
price for natural gas. Based on the Federal Energy Regulatory Commission
("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa collected the
Kansas ad valorem tax in addition to the otherwise maximum lawful price. The
FERC's ruling was appealed to the United States Court of Appeals for the
District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC
failed to provide a reasoned basis for its findings and remanded the case to the
FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals of the FERC's action in the D.C.
Circuit. Various natural gas producers challenged the FERC's orders on two
grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify
for reimbursement under the NGPA; and (2) the FERC's ruling should, in any
event, have been applied prospectively. Other parties challenged the FERC's
orders on the grounds that the FERC's ruling should have been applied
retroactively to December 1, 1978, the date of the enactment of the NGPA and
producers should have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem taxes collected with
respect to production since October 4, 1983 as opposed to June 28, 1988.
Petitions for rehearing were denied November 6, 1996. Various natural gas
producers subsequently filed a petition for writ of certiori with the United
States Supreme Court seeking to limit the scope of the potential refunds to tax
bills rendered on or after June 28, 1988 (the effective date originally selected
by the FERC). Williams Natural Gas Company filed a cross-petition for certiori
seeking to impose refund liability back to December 1, 1978. Both petitions were
denied on May 12, 1997.
Mesa filed a petition for adjustment with the FERC on June 24, 1997. Mesa
is unable at this time to predict the final outcome of this matter or the
amount, if any, that will ultimately be refunded. No provision for liability has
been made to the accompanying financial statements. Mesa is seeking waiver or
set-off with respect to that portion of the refund associated with (i)
non-recoupable royalties, (ii) non-recoupable Kansas property taxes based, in
part, upon the higher prices collected, and (iii) interest for all periods.
MASTERSON
In February 1992, the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under
the Gas Lease. Under the agreements with CIG, Mesa has an entitlement to gas
produced from the Gas Lease. In August 1992, CIG filed a third-party complaint
against Mesa for any such royalty underpayments which may be allocable to Mesa.
Plaintiffs alleged that the underpayment was the result of CIG's use of an
improper gas sales price upon which to calculate royalties and that the proper
price should have been determined pursuant to a "favored-nations" clause in a
July 1, 1967, amendment to the Gas Lease (the "Gas Lease Amendment"). The
plaintiffs also sought a declaration by the court as to the proper price to be
used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to
F-84
<PAGE> 295
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
October 1, 1989), but which also reduced a number of Mesa's defenses. Mesa and
CIG filed stipulations with the court whereby Mesa would have been liable for
between 50% and 60%, depending on the time period covered, of an adverse
judgment against CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned
its verdict. Among its findings, the jury determined that CIG had underpaid
royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison. In
light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs
recover no monetary damages. The plaintiffs filed a motion for new trial on June
22, 1995. The court, on July 18, 1997, denied plaintiff's motion. The plaintiffs
are expected to appeal to the Fifth Circuit, but Mesa cannot predict whether
they will do so.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and Mesa
in state court in Amarillo, Texas, similarly claiming underpayment of royalties
under the "favored-nations" clause, but based upon the above-described
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The
plaintiffs also claim underpayment of royalties since June 7, 1995, under the
"favored-nations" clause based upon either the pricing-scheme to pricing-scheme
method or their previously alleged higher price method. Mesa believes it has
several defenses to this action and intends to contest it vigorously. Mesa is
not currently able to determine the range of reasonably possible losses, if any,
that would be payable if such action was determined adversely to Mesa.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the second suit pending a decision by the court on
plaintiffs' motion for new trial in the first suit.
However, based on the jury verdict and final judgment, Mesa does not expect
the ultimate resolution of these lawsuits to have a material adverse effect on
its financial position or results of operations.
LEASE TERMINATION
In 1991 Mesa sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994, two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull had
terminated due to cessation in production and/or lack of production in paying
quantities occurring at various times from first production through 1994. In the
third quarter of 1995, Seagull filed third-party complaints against Mesa
claiming breach of warranty and false representation in connection with the sale
of such properties to Seagull. Seagull filed a similar third-party complaint
June 29, 1995, against Mesa covering a different lease in the 69th District
Court in Moore County, Texas. The plaintiffs in the cases against Seagull sought
to terminate the leases. Seagull, in its complaint against Mesa, sought
unspecified damages relating to any leases which were terminated. In February
1997, Mesa entered a settlement whereby, for an immaterial contribution, Seagull
released Mesa from all its claims associated with the litigation and agreed to
provide similar releases from the land and royalty owners. Mesa received such
releases in the second quarter of 1997.
SHAREHOLDER LITIGATION
On July 3, 1995, Robert Strougo filed a class action and derivative action
in the District Court of Dallas County, Texas, 160th Judicial District, against
T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales H.
Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and J. R. Walsh, Jr. (the
"Director Defendants"), each of whom is a present or former director of Mesa.
The class action is purportedly brought
F-85
<PAGE> 296
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on behalf of a class of Mesa shareholders and alleges, inter alia, that the
Board infringed upon the suffrage rights of the class and impaired the ability
of the class to receive tender offers by adoption of a shareholder rights plan.
The lawsuit is also brought derivatively on behalf of Mesa and alleges, inter
alia, that the Board breached fiduciary duties to Mesa by adopting a shareholder
rights plan and by failing to consider the sale of Mesa. The lawsuit seeks
unspecified damages, attorneys' fees, and injunctive and other relief. Two other
lawsuits filed by Herman Krangel, Lilian Krangel, Jacquelyn A. Cady, and William
A. Montagne, Jr., in the District Court of Dallas County have been consolidated
into this lawsuit. A third lawsuit filed by Deborah M. Eigen and Adele Brody as
a derivative lawsuit in the U.S. District Court for the Northern District of
Texas, Dallas Division, intervened in this lawsuit.
On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed pending
a Special Litigation Committee investigation by Mesa to decide whether the case
should be dismissed. Members of the Special Litigation Committee are Philip B.
Smith and I. Jon Brumley. The Special Litigation Committee is delegated the
authority to conduct, or cause to be conducted, such impartial review, analysis
and further investigation as the Special Litigation Committee may deem necessary
with respect to the lawsuits filed in July of 1995 against certain current and
former members of Mesa's Board of Directors (the "Litigation"). The Special
Litigation Committee's authority extends to the Litigation and to any other
matters based in whole or in part upon a common nucleus of operative facts with
the Litigation and the Special Litigation Committee's findings and
determinations, with respect to such matters, are final and binding upon Mesa.
Mesa is not currently able to determine the range of reasonably possible losses,
if any, that would be payable if such action was determined adversely to Mesa.
UNOCAL
Mesa was subject to a lawsuit relating to a 1985 investment in Unocal which
asserted that certain profits allegedly realized by Mesa and other defendants
upon the disposition of Unocal common stock in 1985 were recoverable by Unocal
pursuant to Section 16(b) of the Securities Exchange Act of 1934. On January 11,
1994, Mesa and the other defendants entered into a settlement agreement (the
"Settlement Agreement") whereby they agreed to pay Unocal an aggregate of $47.5
million, of which $42.75 million was to be paid by Mesa and $4.75 million by the
other defendants. The Settlement Agreement was approved by the court on February
28, 1994. Mesa funded its share of the settlement amount with proceeds from
issuance of additional long-term debt. As a result of the settlement, Mesa
recognized a $42.8 million loss in the fourth quarter of 1993.
OTHER
Mesa is also a defendant in other lawsuits and has assumed liabilities
relating to its predecessors. Mesa does not expect the resolution of any of
these matters to have a material adverse effect on its financial position or
results of operations.
(11) EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
Mesa maintains two defined contribution retirement plans for the benefit of
its employees. Mesa expensed $1.8 million in 1996, $.8 million in 1995, $3.3
million in 1994, $3.2 million in 1993 and $3.3 million in 1992 in connection
with these plans.
F-86
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MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTION PLANS
In December 1991 the stockholders of Mesa approved the 1991 Stock Option
Plan of Mesa (the "Option Plan"), which authorized the grant of options to
purchase up to two million shares of common stock to officers and key employees.
In May 1994 the stockholders of Mesa approved an amendment to the Option Plan
which increased the number of shares of common stock authorized to four million
from two million. The exercise price for each share of common stock placed under
option cannot be less than 100% of the fair market value of the common stock on
the date the option is granted. Upon exercise, the grantee may elect to receive
either shares of common stock or, at the discretion of the Option Committee of
the Board of Directors, cash or certain combinations of stock and cash in an
amount equal to the excess of the fair market value of the common stock at the
time of exercise over the exercise price. At December 31, 1996, the following
stock options were outstanding under this plan:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
----------
<S> <C>
Outstanding at December 31, 1995............................ 2,932,390
Granted..................................................... 1,000,000
Exercised................................................... (1,000,000)
Forfeited................................................... (3,040)
----------
Outstanding at December 31, 1996............................ 2,929,350
==========
</TABLE>
The outstanding options under this plan at December 31, 1996, are detailed
as follows:
<TABLE>
<CAPTION>
NUMBER OF DATE OF EXERCISE PRICE
OPTIONS GRANT PER SHARE EXERCISABLE
- --------- -------- -------------- -----------
<C> <C> <C> <C>
1,126,000 01/10/92 $ 6.8125 1,126,000
132,500 10/02/92 $11.6875 132,500
100,850 05/18/93 $ 5.8125 100,850
475,000 11/10/93 $ 7.3750 475,000
75,000 06/06/94 $ 6.1875 75,000
20,000 05/12/95 $ 5.6875 20,000
1,000,000 08/21/96 $ 3.2500 --
- --------- ----------
2,929,350 1,929,350
========= ==========
</TABLE>
On June 26, 1996, all existing options granted under this plan on this date
were 100% vested by Mesa's board of directors. The options issued on August 21,
1996, are exercisable as follows: after six months, 30%; after one year, 55%;
after two years, 80%; and after three years, 100%. At December 31, 1996, options
for 7,930 shares were available for grant under this plan.
In August 1996, the 1996 Incentive Plan of Mesa (the "Incentive Plan") was
created. This plan was approved by Mesa's stockholders at Mesa's 1997
stockholders' meeting in the summer of 1997. The Incentive Plan authorizes
grants of options to purchase up to 9 million shares of common stock to officers
and key employees. The exercise price for each share of common stock placed
under option will be determined by the type of option granted. Upon exercise,
the grantee may elect to receive either shares of common stock or, at the
discretion of the Option Committee of the Board of Directors, cash or certain
combinations of stock and
F-87
<PAGE> 298
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash in an amount equal to the excess of the fair market value of the common
stock at the time of exercise over the exercise price. The following options are
included in the outstanding options of this plan:
<TABLE>
<CAPTION>
NUMBER OF DATE OF EXERCISE PRICE
OPTIONS GRANT PER SHARE EXERCISABLE
- ----------- -------- -------------- -----------
<C> <C> <C> <C>
1,000,000 08/21/96 $3.2500 --
2,150,000 09/30/96 4.0625 --
- ----------- ----------
3,150,000 --
=========== ==========
</TABLE>
These options are exercisable as follows: after six months, 30%; after one
year, 55%, and after two years, 100%. In connection with the Pioneer
transaction, all outstanding options of Mesa became fully vested on August 7,
1997.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which is effective for Mesa's
fiscal year beginning January 1, 1996. SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee compensation plans.
It defines a fair value based method of accounting for an employee stock option
or similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans and include the
cost in the income statement as compensation expense. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Mesa
accounts for compensation cost for stock option plans in accordance with APB
Opinion No. 25.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if Mesa had accounted for
its employee stock options under the fair value method as provided therein. The
fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.58% and 6.80%; a volatility factor of the expected market price of
Mesa's common stock of .6816 and .6326; no expected dividends; and
weighted-average expected option lives of five years. If the fair value based
method of accounting in SFAS 123 had been applied, Mesa's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net loss -- as reported..................................... $(60,569) $(57,568)
Net loss -- pro forma....................................... (63,572) (57,600)
Net loss per Common Share -- as reported.................... (.94) (.90)
Net loss per Common Share -- pro forma...................... (.99) (.90)
</TABLE>
The fair value of stock options included in the pro forma amounts for the
years 1996 and 1995 is not necessarily indicative of future effects on net
income and earnings per share.
F-88
<PAGE> 299
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of Mesa's stock options as of December 31, 1996,
1995, 1994, 1993 and 1992, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------------------- -------------------- -------------------- -------------------- ---------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE SHARES
- --------------------- ---------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............... 2,932,390 $6.20 2,926,460 $6.21 1,933,050 $7.26 1,352,000 $7.36 --
Granted.............. 4,150,000 3.80 20,000 5.69 1,075,000 4.39 605,950 7.06 1,362,000
Exercised............ (1,000,000) 4.25 -- -- (41,720) 6.26 (11,000) 6.81 (10,000)
Forfeited............ (3,040) 9.68 (14,070) 8.39 (39,870) 8.00 (13,900) 7.73 --
---------- ----- --------- ----- --------- ----- --------- ----- ---------
Outstanding at end of
year............... 6,079,350 $4.88 2,932,390 $6.20 2,926,460 $6.21 1,933,050 $7.26 1,352,000
========== ========= ========= ========= =========
Options exercisable
at year-end........ 1,929,350 $7.20 2,319,262 $6.53 1,357,928 $7.28 766,665 $7.28 358,800
========== ========= ========= ========= =========
Weighted-average fair
value of options
granted during the
year............... $2.30 $3.42 N/A N/A
<CAPTION>
1992
--------
WEIGHTED
AVERAGE
EXERCISE
FIXED OPTIONS PRICE
- --------------------- --------
<S> <C>
Outstanding at
beginning of
year............... $ --
Granted.............. 7.35
Exercised............ 6.81
Forfeited............ --
-----
Outstanding at end of
year............... $7.36
Options exercisable
at year-end........ $6.82
Weighted-average fair
value of options
granted during the
year............... N/A
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE WEIGHTED NUMBER WEIGHTED
OPTIONS REMAINING AVERAGE EXERCISABLE AVERAGE
OUTSTANDING EXERCISE CONTRACTUAL EXERCISE AT EXERCISE
AT 12/31/96 PRICE LIFE PRICE 12/31/96 PRICE
- ----------- -------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
1,126,000 $ 6.8125 5.0 years.. $ 6.8125 1,126,000 $ 6.8125
132,500 11.6875 5.8 years.. 11.6875 132,500 11.6875
100,850 5.8125 6.4 years.. 5.8125 100,850 5.8125
475,000 7.3750 6.9 years.. 7.3750 475,000 7.3750
75,000 6.1875 7.4 years.. 6.1875 75,000 6.1875
20,000 5.6875 8.4 years.. 5.6875 20,000 5.6875
1,000,000 3.2500 9.6 years.. 3.2500 -- --
1,000,000 3.2500 9.6 years.. 3.2500 -- --
2,150,000 4.0625 9.8 years.. 4.0625 -- --
--------- ---------
6,079,350 $ 4.8800 8.4 years.. $ 4.8800 1,929,350 $ 7.2000
========= =========
</TABLE>
POSTRETIREMENT BENEFITS
Effective January 1, 1993, Mesa adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires that
the costs of such benefits be recorded over the periods of employee service to
which they relate. For Mesa, this standard primarily applies to postretirement
medical benefits for retired and current employees. The liability for benefits
existing at the date of adoption (the "Transition Obligation") will be amortized
over the remaining life of the retirees or 20 years, whichever is shorter.
Mesa maintains two separate plans for providing postretirement medical
benefits. One plan covers Mesa's retirees and current employees (the "Mesa
Plan"). The other plan, which relates to the retirees of Pioneer Corporation,
acquired by Mesa in 1986 (the "Pioneer Corporation Plan"). Under the Mesa Plan,
employees who retire from Mesa and who have had at least ten years of service
with Mesa after attaining age 45 are eligible for postretirement health care
benefits. These benefits may be subject to deductibles, copayment
F-89
<PAGE> 300
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions, retiree contributions and other limitations, and Mesa has reserved
the right to change the provisions of the plan. The Pioneer Corporation Plan is
maintained for Pioneer Corporation retirees and dependents only and is subject
to deductibles, copayment provisions and certain maximum payment provisions.
Mesa does not have the right to change the Pioneer Corporation Plan or to
require retiree contributions. Both plans are self-insured indemnity plans and
both coordinate benefits with Medicare as the primary payer. Neither plan is
funded.
The following table reconciles the status of the two plans with the amount
included under other liabilities in the consolidated balance sheet at December
31, 1996, (in thousands):
<TABLE>
<CAPTION>
PIONEER
MESA CORPORATION
PLAN PLAN(A) TOTAL
------- ----------- -------
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation
("APBO"):
Retirees and dependents............................. $ 1,449 $ 9,647 $11,096
Actives -- fully eligible........................... 599 -- 599
Other actives....................................... 637 -- 637
------- ------- -------
Total APBO.................................. 2,685 9,647 12,332
Unrecognized Transition Obligation.................... (1,337) (2,117) (3,454)
Unrecognized Net Gain (Loss).......................... (291) 1,732 1,441
------- ------- -------
Accrued Postretirement Benefit Obligation............. $ 1,057 $ 9,262 $10,319
======= ======= =======
</TABLE>
- ---------------
(a) Mesa established an accrued liability associated with the Pioneer
Corporation Plan in conjunction with its acquisition of Pioneer Corporation
in 1986.
For measurement purposes, the 1996 annual rate of increase in per capita
cost of covered health care benefits was assumed to be 10% for those
participants under age 65 and 9% for those participants over age 65. The rates
were assumed to decrease gradually to 5.0% by the year 2000 and to remain at
that level thereafter. The health care cost trend rate assumption affects the
amount of the Transition Obligation and periodic cost reported. An increase in
the assumed health care cost trend rates by 1% in each year would increase the
APBO as of December 31, 1996, by approximately $1,018,000 and the net periodic
postretirement benefit cost for the year ended December 31, 1996, by
approximately $117,000. The net periodic postretirement benefit cost for the
year ended December 31, 1996, was approximately $1.5 million based on the
assumptions used.
The discount rate used in determining the APBO as of December 31, 1996, was
7.5%.
F-90
<PAGE> 301
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents Mesa's cost of postretirement benefits other
than pensions for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net periodic postretirement benefit
cost:
Service cost........................ $ 142 $ 124 $ 110 $ 96 $ --
Interest cost....................... 1,040 1,005 988 988 --
Amortization of Transaction
Obligation....................... 276 276 276 276 --
------ ------ ------ ------ ------
$1,458 $1,405 $1,374 $1,360 $ --(a)
====== ====== ====== ====== ======
Actual costs of providing benefits:
Mesa Plan(b)........................ $ 78 $ 4 $ 120 $ 123 $ 205
Pioneer Corporation Plan(c)......... 784 918 666 909 1,356
------ ------ ------ ------ ------
$ 862 $ 922 $ 786 $1,032 $1,561
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) SFAS No. 106 was adopted effective January 1, 1993.
(b) Actual costs of providing benefits in 1992 under the Mesa Plan were recorded
to expense in the consolidated statements of operations. Actual costs of
providing benefits in 1993 and 1994 under the Mesa Plan were applied as
incurred against the accrued postretirement benefit obligation.
(c) Actual costs of providing benefits in 1992 under the Pioneer Corporation
Plan were applied as incurred against the previously accrued liability.
Actual costs of providing benefits in 1993 and 1994 under the Pioneer
Corporation Plan were applied as incurred against the accrued postretirement
benefit obligation.
DEFERRED COMPENSATION
Mesa had agreements with two officers to provide postretirement deferred
compensation at a rate of one-half of the participant's final rate of
compensation (subject to minimum amounts specified in the agreements) for a
period of ten years following the date of retirement or death. In 1992, in order
to terminate the deferred compensation agreements, Mesa established life
insurance plans, executed agreements with the two officers and purchased
insurance policies at an aggregate cost of $4.9 million. At the time they were
terminated, approximately $3.9 million had been accrued under the deferred
compensation agreements. Mesa fully funded the life insurance policies and has
no future obligations under such policies or under the deferred compensation
agreements.
(12) MAJOR CUSTOMERS
In 1996 revenues include sales to MAPCO Natural Gas Liquids, Inc. ("MAPCO")
of $95.1 million (30.8%) and Western Resources, Inc. ("WRI") of $48.5 million
(15.7%). In 1995 revenues included sales to MAPCO of $75.0 million (34.4%), and
WRI of $21.9 million (10.0%). In 1994 revenues included sales to MAPCO of $70.9
million (31.4%), WRI of $37.4 million (16.6%) and Energas Company of $22.8
million (10.1%). In 1993, revenues included sales to MAPCO of $60.2 million
(27.5%), WRI of $51.8 million (23.6%) and Natural Gas Clearinghouse of $23.1
million (10.5%). In 1992, revenues included sales to MAPCO of $45.7 million
(19.4%), WRI of $39.7 million (16.8%) and Energas at $23.7 million (10.0%) (on
February 6, 1997, Mesa acquired MAPCO, see Note 14). Mesa does not anticipate
that the loss of any of these customers would result in a material adverse
effect because the volumes could be sold to other customers.
F-91
<PAGE> 302
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) CONCENTRATIONS OF CREDIT RISK
Substantially all of Mesa's accounts receivable at December 31, 1996,
result from oil and gas sales and joint interest billings to third party
companies in the oil and gas industry. This concentration of customers and joint
interest owners may impact Mesa's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by changes in
economic or other conditions. In determining whether or not to require
collateral from a customer or joint interest owner, Mesa analyzes the entity's
net worth, cash flows, earnings, and credit ratings. Receivables are generally
not collateralized. Historical credit losses incurred by Mesa on receivables
have not been significant.
(14) ACQUISITION OF GREENHILL AND MAPCO
On February 7, 1997, Mesa entered into a Stock Purchase Agreement to
purchase 100% of the outstanding capital stock of Greenhill for a total purchase
price of $270 million. As of December 31, 1996, Greenhill's properties had
estimated proved reserves of approximately 23.4 MMBbls (unaudited) of oil, and
41.9 Bcf (unaudited) of gas, or an aggregate of approximately 30.4 MMBOE
(unaudited). The Greenhill Acquisition closed on April 15, 1997. The Greenhill
Acquisition was accounted for under the purchase method of accounting. The
purchase agreement provided for an effective date of January 1, 1997.
On February 6, 1997, Mesa purchased all of MAPCO's natural gas liquids and
condensate production in the West Panhandle field for $66 million, effective as
of January 1, 1997. The NGL Acquisition has been accounted for under the
purchase method of accounting.
(15) SUBSEQUENT EVENTS (UNAUDITED)
MERGER WITH PARKER & PARSLEY. On April 6, 1997, Parker & Parsley and Mesa
entered into an Agreement and Plan of Merger (the "Merger Agreement") which was
approved by the stockholders of both companies on August 7, 1997 by a majority
vote of 76% by Parker & Parsley stockholders and 71%, 58%, and 100% by holders
of Mesa common stock, Mesa Series A Preferred Stock and Mesa Series B Preferred
Stock, respectively. Mesa is a publicly traded independent oil and gas company
based in Irving, Texas with substantial producing properties and operations in
the MidContinent region of the United States. The Merger Agreement provided for
(i) the merger of Mesa with and into Pioneer, a wholly-owned subsidiary of Mesa,
as a result of which Mesa, which is a Texas corporation, reincorporated into
Delaware and (ii) the merger of Parker & Parsley with and into Mesa Operating
Co., a wholly-owned subsidiary of Mesa, as a result of which Parker & Parsley
became a wholly-owned subsidiary of Pioneer (items (i) and (ii) collectively the
"Parker/ Mesa Merger"). In accordance with the Merger Agreement, (i) holders of
Parker & Parsley common stock received one share of Pioneer common stock for
each share held; (ii) holders of Mesa common stock received one share of Pioneer
common stock for every seven shares held; and (iii) holders of Mesa Series A 8%
Cumulative Convertible Preferred Stock and Mesa Series B 8% Cumulative
Convertible Preferred Stock received 1.25 shares of Pioneer common stock for
every seven shares held. No fractional shares were issued.
F-92
<PAGE> 303
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", the merger has been accounted for as a purchase of Mesa
by Parker & Parsley. As a result, historical financial statements for Pioneer
will be those of Parker & Parsley, and Pioneer's financial statements will
present the addition of Mesa's assets and liabilities as an acquisition by
Parker & Parsley. The aggregate Pioneer purchase consideration related to the
assets and liabilities of Mesa, including estimated nonrecurring merger
transaction costs, is $999.5 million. The following table represents the
preliminary allocation of the total purchase price of Mesa to the acquired
assets and liabilities based upon 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
Pioneer's financial statements.
<TABLE>
<CAPTION>
ALLOCATION OF AGGREGATE
PURCHASE CONSIDERATION
-----------------------
(IN THOUSANDS)
<S> <C>
Net working capital...................................... $ 11,882
Property, plant and equipment............................ 2,334,573
Other assets............................................. 58,664
Long-term debt........................................... (1,186,538)
Other non-current liabilities, including deferred
taxes.................................................. (219,052)
-----------
$ 999,529
===========
Pioneer common stock consideration....................... $ 979,529
Cash paid for nonrecurring transaction costs............. 20,000
-----------
Aggregate purchase consideration......................... $ 999,529
===========
</TABLE>
CREDIT FACILITY AGREEMENTS. On August 7, 1997, the successor to Parker &
Parsley and MOC, Pioneer Natural Resources USA, Inc. (the "Borrower"), entered
into two Credit Facility Agreements ("Credit Facility Agreements") with a
syndicate of banks (the "Banks") that refinanced the credit facilities of Parker
& Parsley and Mesa as of the date of merger of the two companies. One Credit
Facility Agreement (the "Primary Facility") provides for a $1.1 billion credit
facility. The maturity date for the Primary Facility is August 7, 2002. The
second Credit Facility Agreement (the "364-day Facility") provides for a $300
million credit facility with a maturity date of August 5, 1998. The Borrower has
the option to renew the 364-day Facility for another period of 364 days by
notifying the Banks in writing of such election not more than 60 days and not
less than 45 days prior to the maturity date. The prior credit agreements of
Parker & Parsley and Mesa were paid in full following the Mergers utilizing
proceeds from initial borrowings against the new Primary Facility of $675
million.
Advances on both Credit Facility Agreements bear interest, at the
Borrower's option, based on (a) the prime rate of NationsBank of Texas, N.A.,
(b) a Eurodollar rate (substantially equal to the London Interbank Offered Rate
("LIBOR")), adjusted for the reserve requirement as determined by the Board of
Governors of the Federal Reserve System with respect to transactions in
Eurocurrency liabilities ("LIBOR Rate"), or (c) a competitive bid rate as quoted
by the Banks electing to participate pursuant to a request by the Borrower.
Advances that are LIBOR Rate have periodic maturities, at the Borrower's option,
of one, two, three, six, nine or twelve months. Maturities of greater than six
months are subject to availability of such deposits in the relevant markets.
Advances that are competitive bid rate have periodic maturities, at the
Borrower's option, of not less than 15 days nor more than 360 days. The interest
rates on LIBOR Rate advances vary with interest rate margins ranging from 18
basis points to 45 basis points. The interest rate margin is determined by a
grid based upon Pioneer's senior unsecured long-term public debt rating.
The obligations of the Borrower under the Credit Facility Agreements are
guaranteed by Pioneer and certain of its subsidiaries unless and to the extent
any such subsidiary has been designated as an "Unrestricted Subsidiary" by the
Borrower pursuant to the Credit Facility Agreements. Certain subsidiaries of the
Borrower
F-93
<PAGE> 304
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which have not been designated as Unrestricted Subsidiaries have not provided
guaranties because either (a) such guaranty would result in adverse tax
consequences pursuant to Section 956 of the Internal Revenue Code of 1986, as
amended, or (b) such subsidiary is prohibited from executing a guaranty pursuant
to contractual restrictions. In these cases, the Borrower and certain of its
subsidiaries have pledged a portion of the issued and outstanding capital stock
of such subsidiaries as security for the obligations of the Borrower under the
Credit Facility Agreements.
The Credit Facility Agreements contain various restrictive covenants and
compliance requirements, which include (a) minimum financial requirements; (b)
limits on the incurrence of additional indebtedness; and (c) limitations on
mergers.
After the consummation of the Parker/Mesa Merger, Pioneer will have four
outstanding debt issuances in addition to the new credit facilities described
above. Such debt issuances consist of (i) $150 million aggregate principal
amount of 8 7/8% senior notes issued by Parker & Parsley in 1995 and due in
2005, (ii) $150 million aggregate principal amount of 8 1/4% senior notes issued
by Parker & Parsley in 1995 and due in 2007, (iii) $325 million aggregate
principal amount of 10 5/8% Senior Subordinated Notes issued by Mesa in 1996 and
due 2006 and (iv) $264 million aggregate principal amount of 11 5/8% Senior
Subordinated Discount Notes issued by Mesa in 1996 and due 2006. These four
issuances are or will be guaranteed by Pioneer (the parent of Pioneer Natural
Resources USA, Inc.) subsequent to the Mergers.
F-94
<PAGE> 305
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
OIL AND GAS RESERVES AND COST INFORMATION (UNAUDITED)
Net proved oil and gas reserves as of December 31, 1996, 1993 and 1992
associated with Mesa's two most significant natural gas producing fields were
estimated by independent petroleum engineering consultants. These two fields,
the Hugoton and West Panhandle fields, represented over 95% of Mesa's net proved
equivalent natural gas reserves as of the date estimated by the independent
petroleum engineers. Net proved oil and gas reserves as of December 31, 1995 and
1994, were estimated by Mesa engineers. All of Mesa's reserves at December 31,
1996, 1995, 1994, 1993 and 1992 were in the United States. In accordance with
regulations established by the Commission, the reserve estimates were based on
economic and operating conditions existing at the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices received as of each year end were used for future sales of oil,
condensate and natural gas liquids. Future operating costs, production and ad
valorem taxes and capital costs were based on current costs as of each year end,
with no escalation.
Approximately 65% of Mesa's equivalent proved reserves (based on a factor
of six thousand cubic feet of gas per barrel of liquids) at December 31, 1996,
were natural gas. The natural gas prices in effect at December 31, 1996 (having
a weighted average of $3.37 per Mcf), were used in accordance with Commission
regulations but may not be the most appropriate or representative prices to use
for estimating reserves since such prices were influenced by the seasonal demand
for natural gas and contractual arrangements at that date. The average price
received by Mesa for sales of natural gas in 1996 was $2.21 per Mcf. At December
31, 1996, Mesa's standardized measure of future net cash flows from proved
reserves (the "Standardized Measure") and the pretax Standardized Measure were
greater than the net book value of oil and gas properties by approximately $359
million and $801 million, respectively.
Oil and gas reserve quantities estimated as of December 31, 1996, reflect a
net decrease over 1995, after production, of approximately 279 Bcfe of natural
gas. The proved reserves as of December 31, 1996, were prepared by Mesa's
engineers and Williamson Petroleum Consultants, Mesa's independent petroleum
engineering firm ("Williamson"). Williamson engineers determined reserve
quantities for the Hugoton and West Panhandle areas which represent
approximately 95% of Mesa's net reserves. Reserves for the Gulf Coast and other
areas were determined by Mesa engineers.
Reserve quantities for the Hugoton properties as determined by Williamson
engineers as of December 31, 1996, are approximately 8% lower than reserves
estimated by Mesa engineers at December 31, 1995 after giving effect to 1996
production. Substantially all of the reduction was attributable to proved
reserve estimate differences in the Hugoton field of Kansas.
In the West Panhandle field, reserves were revised upward to reflect the
development drilling results over the past year and the restructuring of its
contractual arrangements in the field. In the Gulf of Mexico, reserve additions
resulted from exploratory and development drilling in 1996, 1995 and 1994.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Estimates prepared by other engineers might be
materially different from those set forth herein. Moreover, the Standardized
Measure should not be construed as the current market value of the proved oil
and gas reserves or the costs that would be incurred to obtain equivalent
reserves. A market value determination would include many additional factors
including (i) anticipated future changes in oil and gas prices, and production
and development costs; (ii) an allowance for return on investment; (iii) the
value of additional reserves, not considered proved at present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.
F-95
<PAGE> 306
MESA INC.
SUPPLEMENTAL FINANCIAL DATA -- (CONTINUED)
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
Capitalized costs relating to oil and gas producing activities at December
31, 1996, 1995, 1994, 1993 and 1992 and the costs incurred during the years then
ended are set forth below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Capitalized costs:
Proved properties.............. $1,971,026 $1,897,168 $1,865,004 $1,845,483 $1,850,793
Unproved properties............ 4,658 2,995 2,838 754 762
Accumulated depreciation,
depletion and
amortization................ (941,266) (834,304) (753,827) (670,706) (589,720)
---------- ---------- ---------- ---------- ----------
Net.................... $1,034,418 $1,065,859 $1,114,015 $1,175,531 $1,261,835
========== ========== ========== ========== ==========
Costs incurred:
Exploration and development:
Proved properties........... $ 11 $ 269 $ 523 $ 73 $ 64
Unproved properties......... 1,863 157 2,425 17 63
Exploration costs........... 11,996 8,167 5,157 2,705 15,157
Development costs........... 27,624 14,572 14,043 2,381 6,911
---------- ---------- ---------- ---------- ----------
Total exploration and
development.......... 41,494 23,165 22,148 5,176 22,195
---------- ---------- ---------- ---------- ----------
Plants and facilities:
Processing plants.............. 4,400 1,850 3,248 17,501 44,716
Field compression facilities... 2,975 10,561 3,129 4,387 1,509
Other.......................... 1,367 3,354 5,168 2,257 3,301
---------- ---------- ---------- ---------- ----------
Total plants and
facilities........... 8,742 15,765 11,545 24,145 49,526
---------- ---------- ---------- ---------- ----------
Total costs incurred... $ 50,236 $ 38,930 $ 33,693 $ 29,321 $ 71,721
========== ========== ========== ========== ==========
Depreciation, depletion and
amortization................... $ 98,382 $ 80,513 $ 89,413 $ 96,774 $ 110,340
========== ========== ========== ========== ==========
</TABLE>
F-96
<PAGE> 307
MESA INC.
SUPPLEMENTAL FINANCIAL DATA -- (CONTINUED)
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Natural Gas (MMcf)
Proved Reserves:
Beginning of year.................. 1,218,029 1,303,187 1,202,444 1,276,049 1,367,968
Extensions and discoveries...... 12,543 29,728 6,211 5,132 37,100
Purchases of producing
properties.................... -- 1,000 822 166 583
Revisions of previous
estimates..................... (108,902) (38,574) 176,049 7,284 (24,462)
Improved recovery............... 53 -- -- -- --
Sales of producing properties... -- -- -- (6,367) (15,613)
Production...................... (84,001) (77,312) (82,339) (79,820) (89,527)
--------- --------- --------- --------- ---------
End of year........................ 1,037,722 1,218,029 1,303,187 1,202,444 1,276,049
========= ========= ========= ========= =========
Proved Developed Reserves:
Beginning of year.................. 1,160,751 1,257,883 1,159,453 1,223,672 1,338,856
========= ========= ========= ========= =========
End of year........................ 992,523 1,160,751 1,257,883 1,159,453 1,223,672
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Natural Gas Liquids, Oil and Condensate (MBbls)
Proved Reserves:
Beginning of year............................. 111,418 89,428 82,446 87,392 83,225
Extensions and discoveries................. 2,034 3,121 491 778 7,591
Purchases of producing properties.......... -- 5 1 -- 9
Revisions of previous estimates............ (11,510) 26,630 13,947 3,083 3,028
Improved recovery.......................... 371 -- -- -- --
Sales of producing properties.............. -- -- -- (3,019) (637)
Production................................. (7,399) (7,766) (7,457) (5,788) (5,824)
------- ------ ------ ------ ------
End of year................................... 94,914 111,418 89,428 82,446 87,392
======= ====== ====== ====== ======
Proved Developed Reserves:
Beginning of year............................. 105,197 85,656 79,294 82,439 82,406
======= ====== ====== ====== ======
End of year................................... 89,499 105,197 85,656 79,294 82,439
======= ====== ====== ====== ======
</TABLE>
- ---------------
* Proved natural gas liquids, oil and condensate reserve quantities include oil
and condensate reserves at December 31 of the respective years as follows:
1996, 6,863 MBbls; 1995, 9,521 MBbls; 1994, 5,031 MBbls; 1993, 3,296 MBbls;
and 1992, 7,268 MBbls
* In addition to the proved reserves disclosed above, Mesa owned proved helium
reserves at December 31 of the respective years as follows: 1996, 4,771 MMcf;
1995, 3,670 MMcf; 1994, 4,457 MMcf; 1993, 5,198 MMcf; and 1992, 5,634 MMcf.
F-97
<PAGE> 308
MESA INC.
SUPPLEMENTAL FINANCIAL DATA -- (CONTINUED)
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Natural Gas (MMcf)
Future cash inflows............. $ 5,957,298 $ 3,804,371 $ 3,513,282 $ 3,723,760 $ 3,802,614
Future production and
development costs:
Operating costs and production
taxes...................... (1,390,897) (1,257,957) (1,192,005) (1,337,224) (1,271,799)
Development and abandonment
costs...................... (139,015) (96,594) (95,441) (80,310) (122,860)
Future income taxes........... (1,095,353) (296,987) (211,076) (240,017) (302,492)
----------- ----------- ----------- ----------- -----------
Future net cash flows......... 3,332,033 2,152,833 2,014,760 2,066,209 2,105,463
Discount at 10% per annum..... (1,938,318) (1,186,644) (1,080,578) (1,079,278) (1,068,282)
----------- ----------- ----------- ----------- -----------
Standardized Measure.......... $ 1,393,715 $ 966,189 $ 934,182 $ 986,931 $ 1,037,181
=========== =========== =========== =========== ===========
Future net cash flows before
income taxes............... $ 4,427,386 $ 2,449,820 $ 2,225,836 $ 2,306,226 $ 2,407,955
=========== =========== =========== =========== ===========
Standardized Measure before
income taxes............... $ 1,835,608 $ 1,040,413 $ 988,325 $ 1,068,740 $ 1,167,694
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
* The estimate of future income taxes is based on the future net cash flow from
proved reserves adjusted for the tax basis of the oil and gas properties but
without consideration of general and administrative and interest expenses.
F-98
<PAGE> 309
MESA INC.
SUPPLEMENTAL FINANCIAL DATA -- (CONTINUED)
CHANGES IN STANDARDIZED MEASURE (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Natural Gas (MMcf)
Standardized Measure at beginning of
year................................ $ 966,189 $ 934,182 $ 986,931 $1,037,181 $ 995,214
Revisions of reserves proved in prior
years:
Changes in prices and production
costs............................ 1,132,709 52,724 (121,300) 6,178 (77,527)
Changes in quantity estimates....... (215,046) 71,673 151,538 17,616 (3,995)
Changes in estimates of future
development and abandonment
costs............................ (54,334) (18,424) (27,343) 8,054 (2,468)
Net change in income taxes.......... (367,669) (20,081) 27,666 48,703 55,287
Accretion of discount............... 104,041 98,833 106,874 116,769 118,101
Other, primarily timing of
production....................... (32,784) (94,511) (80,650) (108,371) 12,687
---------- --------- --------- ---------- ----------
Total revisions............. 566,917 90,214 56,785 88,949 102,085
Extensions, discoveries and other
additions, net of future production
and development costs............... 41,622 61,259 8,075 4,456 65,737
Purchases of proved properties...... -- 1,692 463 138 457
Sales of oil and gas produced, net of
production costs.................... (225,818) (154,231) (146,267) (143,502) (173,552)
Sales of producing properties....... -- -- -- (26,907) (14,473)
Previously estimated development and
abandonment costs incurred during
the period.......................... 44,805 33,073 28,195 26,616 61,713
---------- --------- --------- ---------- ----------
Net changes in Standardized Measure... 427,526 32,007 (52,749) (50,250) 41,967
---------- --------- --------- ---------- ----------
Standardized Measure at end of year... $1,393,715 $ 966,189 $ 934,182 $ 986,931 $1,037,181
========== ========= ========= ========== ==========
</TABLE>
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996:
Revenues..................................... $ 80,643 $ 71,322 $ 66,752 $ 92,694
======== ======== ======== ========
Gross profit(1).............................. $ 31,451 $ 32,284 $ 26,173 $ 43,684
======== ======== ======== ========
Net income (loss)(2)......................... $ 1,057 $ 4,547 $(72,912) $ 16,261
======== ======== ======== ========
Net income (loss) per common share and common
share equivalent.......................... $ .02 $ .07 $ (1.20) $ .17
======== ======== ======== ========
Net income (loss) per common share assuming
full dilution............................. $ .02 $ .07 $ (1.20) $ .09
======== ======== ======== ========
1995:
Revenues..................................... $ 62,247 $ 59,174 $ 48,967 $ 64,571
======== ======== ======== ========
Gross profit(1).............................. $ 23,922 $ 23,776 $ 10,253 $ 23,367
======== ======== ======== ========
Net loss(3).................................. $ (7,894) $(13,953) $(32,473) $ (3,248)
======== ======== ======== ========
Net loss per common share.................... $ (.12) $ (.22) $ (.51) $ (.05)
======== ======== ======== ========
</TABLE>
F-99
<PAGE> 310
MESA INC.
SUPPLEMENTAL FINANCIAL DATA -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994:
Revenues..................................... $ 61,084 $ 53,361 $ 45,725 $ 68,567
======== ======== ======== ========
Gross profit(1).............................. $ 42,214 $ 34,462 $ 28,713 $ 49,387
======== ======== ======== ========
Net loss..................................... $(17,766) $(25,338) $(25,907) $(14,342)
======== ======== ======== ========
Net loss per common share and common share
equivalent................................ $ (.37) $ (.43) $ (.40) $ (.22)
======== ======== ======== ========
1993:(4)
Revenues..................................... $ 63,826 $ 50,826 $ 42,377 $ 65,175
======== ======== ======== ========
Gross profit(1).............................. $ 44,644 $ 32,009 $ 26,782 $ 46,618
======== ======== ======== ========
Net loss..................................... $(17,088) $(14,445) $(27,480) $(43,435)
======== ======== ======== ========
Net loss per common share and common share
equivalent................................ $ (.44) $ (.37) $ (.71) $ (1.06)
======== ======== ======== ========
1992:(4)
Revenues..................................... $ 58,919 $ 51,556 $ 48,171 $ 78,466
======== ======== ======== ========
Gross profit(1).............................. $ 18,533 $ 7,399 $ 8,987 $ 25,770
======== ======== ======== ========
Net loss..................................... $(21,973) $(20,622) $(29,128) $(17,509)
======== ======== ======== ========
Net loss per common share and common share
equivalent................................ $ (.57) $ (.53) $ (.76) $ (.45)
======== ======== ======== ========
</TABLE>
- ---------------
(1) Gross profit consists of total revenues less lease operating expenses,
production and other taxes and DD&A.
(2) The loss in the third quarter of 1996 is primarily due to (i) seasonal
decline in prices and (ii) a $59.4 million extraordinary loss on debt
extinguishment.
(3) The loss in the third quarter of 1995 is primarily due to (i) seasonal
decline in prices and (ii) increased legal expenses accrued in association
with a challenge by a dissident shareholder group.
(4) Mesa entered into an agreement in early 1992, effective to January 1, 1991,
allocating the production and reserves of Mesa's West Panhandle field
properties at 77% to Mesa and 23% to a third party. Throughout 1991, 1992
and 1993, Mesa produced less than its 77% entitlement. Throughout 1992, Mesa
recorded an additional $23.3 million as revenues, $17.2 million as gas
balancing receivables and $6.1 million as operating expenses relating to its
entitlement.
F-100
<PAGE> 311
AUDITORS' REPORT
To the Shareholders of
Chauvco Resources Ltd.
We have audited the consolidated statement of financial position of Chauvco
Resources Ltd. as at December 31, 1996 and 1995 and the consolidated statements
of earnings and retained earnings and changes in cash position for each of the
years in the three year period ended December 31, 1996. 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1996 and 1995 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended December 31, 1996
in accordance with Canadian generally accepted accounting principles.
/s/ PRICE WATERHOUSE
------------------------------------
Calgary, Alberta
February 14, 1997,
except for Note 12(b)
which is as of
September 3, 1997
F-101
<PAGE> 312
'
CHAUVCO RESOURCES LTD.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN THOUSANDS OF CANADIAN DOLLARS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ---------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 5,675 $ 970 $ 509
Accounts receivable....................................... 33,359 34,948 27,981
Other..................................................... 2,399 1,698 1,514
--------- --------- ---------
41,433 37,616 30,004
--------- --------- ---------
CAPITAL ASSETS, AT COST:
Petroleum and natural gas................................. 1,155,281 947,849 853,249
Corporate................................................. 17,684 16,768 15,621
--------- --------- ---------
1,172,965 964,617 868,870
Accumulated depletion and depreciation.................... (421,270) (385,547) (321,958)
--------- --------- ---------
751,695 579,070 546,912
--------- --------- ---------
LONG-TERM RECEIVABLES, INVESTMENTS AND DEFERRED CHARGES..... 37,365 20,750 13,574
--------- --------- ---------
$ 830,493 $ 637,436 $ 590,490
========= ========= =========
LIABILITIES
CURRENT LIABILITIES:
Bank indebtedness......................................... $ 8,097 $ 2,743 $ 1,703
Accounts payable.......................................... 37,544 38,316 20,444
Taxes payable............................................. (296) 3,998 380
--------- --------- ---------
45,345 45,057 22,527
COMMERCIAL PAPER AND BANK DEBT (NOTE 4)..................... 205,346 46,627 58,507
SENIOR NOTES PAYABLE (NOTE 5)............................... 80,580 80,580 80,580
FUTURE SITE RESTORATION AND ABANDONMENT (NOTE 6)............ 9,542 7,439 6,021
DEFERRED INCOME TAXES....................................... 71,774 59,982 59,963
--------- --------- ---------
412,587 239,685 227,598
--------- --------- ---------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (NOTE 3)...................................... 216,660 215,683 214,955
RETAINED EARNINGS........................................... 201,246 182,068 147,937
--------- --------- ---------
417,906 397,751 362,892
--------- --------- ---------
$ 830,493 $ 637,436 $ 590,490
========= ========= =========
</TABLE>
Approved by the Board /s/ Guy J. Turcotte Director
----------------------
/s/ W. Glen Russell Director
----------------------
F-102
<PAGE> 313
CHAUVCO RESOURCES LTD.
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------
1997 1996 1996 1995 1994
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Petroleum and natural gas sales
(Note 8)........................ $123,576 $104,017 $215,947 $206,497 $189,061
Royalties, net of Alberta Royalty
Tax Credit...................... (22,720) (17,870) (38,822) (36,447) (29,961)
Overhead recoveries and other
income.......................... 1,460 595 1,635 1,432 1,650
Investment income (loss) and
foreign exchange gain (loss).... 210 (3) (217) (1,168) 3,631
-------- -------- -------- -------- --------
102,526 86,739 178,543 170,314 164,381
-------- -------- -------- -------- --------
EXPENSES:
Operations......................... 26,402 22,521 46,583 49,672 42,481
Administration..................... 6,111 5,353 11,087 10,125 8,295
Interest on long-term debt......... 6,568 5,819 11,341 12,985 10,226
Depletion, depreciation and
amortization.................... 37,862 30,017 66,381 65,466 62,762
-------- -------- -------- -------- --------
76,943 63,710 135,392 138,248 123,764
-------- -------- -------- -------- --------
EARNINGS BEFORE TAXES................ 25,583 23,029 43,151 32,066 40,617
-------- -------- -------- -------- --------
PROVISION FOR TAXES:
Income taxes (Note 7).............. 6,111 5,463 8,143 6,450 11,099
Capital taxes...................... 294 587 877 191 466
-------- -------- -------- -------- --------
6,405 6,050 9,020 6,641 11,565
-------- -------- -------- -------- --------
NET EARNINGS FOR THE YEAR............ 19,178 16,979 34,131 25,425 29,052
RETAINED EARNINGS AT BEGINNING OF
YEAR............................... 182,068 147,937 147,937 122,512 93,460
-------- -------- -------- -------- --------
RETAINED EARNINGS AT END OF YEAR..... $201,246 $164,916 $182,068 $147,937 $122,512
======== ======== ======== ======== ========
NET EARNINGS PER COMMON SHARE --BASIC
AND FULLY DILUTED.................. $ 0.40 $ 0.35 $ 0.71 $ 0.54 $ 0.65
======== ======== ======== ======== ========
Weighted average common shares
outstanding........................ 48,397 48,284 48,300 47,339 44,441
======== ======== ======== ======== ========
</TABLE>
F-103
<PAGE> 314
CHAUVCO RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN CASH POSITION
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------
1997 1996 1996 1995 1994
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings for the year.......... $ 19,178 $16,979 $ 34,131 $ 25,425 $ 29,052
Add:
Depletion, depreciation and
amortization.................. 37,862 30,017 66,381 65,466 62,762
Deferred income taxes........... 2,611 1,460 19 3,064 5,911
Other........................... (133) (8) 71 1,126 (363)
-------- ------- -------- -------- --------
Cash flow from operations before
changes in working capital...... 59,518 48,448 100,602 95,081 97,362
Changes in non-cash working capital
(Note 9)........................ (4,178) (4,468) 14,339 (7,318) (14,993)
-------- ------- -------- -------- --------
55,340 43,980 114,941 87,763 82,369
-------- ------- -------- -------- --------
FINANCING ACTIVITIES:
Share capital...................... 977 137 728 55,356 2,113
Commercial paper and bank debt..... 158,719 5,729 (11,880) (41,628) 48,730
Senior notes payable............... -- -- -- -- 80,580
Other.............................. (8,210) (547) (3,446) (13,239) (1,047)
-------- ------- -------- -------- --------
151,486 5,319 (14,598) 489 130,376
-------- ------- -------- -------- --------
TOTAL CASH RESOURCES PROVIDED........ 206,826 49,299 100,343 88,252 212,745
-------- ------- -------- -------- --------
INVESTING ACTIVITIES:
Petroleum and natural gas.......... 111,550 45,636 92,751 83,618 128,787
Major acquisitions (Note 2)........ 86,703 -- -- -- 85,174
Corporate.......................... 916 569 1,147 2,631 3,029
Investments and deferred charges... 8,294 2,682 3,853 29 (733)
Site restoration and abandonment... 12 -- 3,171 1,066 358
-------- ------- -------- -------- --------
207,475 48,887 100,922 87,344 216,615
-------- ------- -------- -------- --------
INCREASE (DECREASE) IN CASH.......... (649) 412 (579) 908 (3,870)
CASH AT BEGINNING OF YEAR............ (1,773) (1,194) (1,194) (2,102) 1,768
-------- ------- -------- -------- --------
CASH AT END OF YEAR.................. $ (2,422) $ (782) $ (1,773) $ (1,194) $ (2,102)
======== ======= ======== ======== ========
CASH CONSISTS OF:
Cash............................... $ 5,675 $ 1,356 $ 970 $ 509 $ 1,180
Bank indebtedness.................. (8,097) (2,138) (2,743) (1,703) (3,282)
-------- ------- -------- -------- --------
$ (2,422) $ (782) $ (1,773) $ (1,194) $ (2,102)
======== ======= ======== ======== ========
WORKING CAPITAL (DEFICIENCY) AT END
OF YEAR............................ $ (3,912) $12,357 $ (7,441) $ 7,477 $ (749)
======== ======= ======== ======== ========
</TABLE>
F-104
<PAGE> 315
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(UNAUDITED JUNE 30, 1997 AND 1996)
(COLUMNAR DOLLAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE
INDICATED)
1 SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. Unaudited interim financial
statements for June 30, 1997 and 1996 have been prepared on a basis consistent
with the audited annual financial statements included herein.
(a) BASIS OF CONSOLIDATION
All subsidiaries are wholly-owned and included in the Consolidated
Financial Statements. A substantial portion of Chauvco's activities are
conducted jointly with others and the Consolidated Financial Statements reflect
only the Company's proportionate interest in such activities.
(b) CAPITAL ASSETS
(i) Capitalized costs
The Company follows the full cost method of accounting for petroleum and
natural gas operations whereby all costs incurred for exploration and
development of petroleum and natural gas properties are capitalized in separate
cost centres for each country. Such costs include land acquisition costs,
geological and geophysical costs, costs of drilling both productive and
nonproductive properties, related plant and production equipment costs, carrying
costs of nonproductive properties, and that portion of administration costs
($7,497,000 for the six months ended June 30, 1997; 1996 -- $10,925,000;
1995 -- $10,273,000; 1994 -- $7,155,000) applicable to exploration and
development activities. No gains or losses are recognized upon the disposition
of petroleum and natural gas properties except under circumstances which result
in a major disposal of reserves.
(ii) Depletion and depreciation
Depletion and depreciation of petroleum and natural gas capital assets is
calculated on the unit of production method based on the Company's share of
gross proved reserves of petroleum and natural gas. Production and reserves of
natural gas and associated liquids are converted to equivalent barrels of crude
oil based on heat equivalency. Included in the calculation are estimates for
future development costs of undeveloped proved reserves (six months ended June
30, 1997 -- $41,257,000; years ended December 31, 1996 -- $41,445,000;
1995 -- $53,854,000; 1994 -- $76,182,000). Costs excluded from depletion include
the historical cost of unevaluated acreage, new projects not yet on production
and international new ventures (six months ended June 30, 1997 -- $100,297,000;
years ended December 31, 1996 -- $55,707,000; 1995 -- $43,900,000;
1994 -- $39,584,000).
Included in the annual depletion expense are the new venture costs incurred
in countries where no further business development is planned (six months ended
June 30, 1997 -- $0; years ended December 31, 1996 -- $1,579,000;
1995 -- $439,000; 1994 -- $0).
(iii) Ceiling test
The carrying value of capitalized petroleum and natural gas costs, net of
deferred income taxes and accrued site restoration and abandonment costs, is
limited to the estimated future net revenue from production of proved reserves
at year end wellhead prices plus the lower of cost or estimated fair market
value of unproved properties less estimated future administration and financing
expenses and income taxes.
F-105
<PAGE> 316
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(iv) Future site restoration and abandonment
The Company records an annual provision for future site restoration and
abandonment costs based on the unit of production method.
(v) Other capital assets
Depreciation of other capital assets is provided annually over their
estimated useful lives on the following basis:
- Pipelines -- straight-line basis over 10 years
- Office equipment -- 20 percent declining balance basis
- Computer hardware and software -- straight-line basis over three years
- Field vehicles -- depreciated over a two to three year life based on
geographic location
- Leasehold improvements -- over the term of the lease on a straight-line
basis
(c) FOREIGN CURRENCY TRANSLATION
Foreign currency balances of foreign subsidiaries are translated on the
following basis:
- Monetary assets and liabilities are translated at the rates of exchange
prevailing at the balance sheet dates
- Non-monetary assets, liabilities and related depreciation and depletion
expense are translated at historical rates
- Sales, other revenues, royalties and all other expenses are translated at
the average rate of exchange during the month in which they are
recognized.
Any resulting foreign exchange gains and losses are included in earnings.
(d) EXCESS GAS SALES
The Company's operations in Tierra del Fuego, Argentina provide for the
separate delivery and sale of natural gas by each of the joint venture
participants, which may result in gas sales volume imbalances. To December 31,
1996, the Company has sold 4.8 billion cubic feet of natural gas in excess of
its proportionate working interest in the Tierra del Fuego properties, and has
recognized net earnings relating to these volumes. This imbalance is expected to
be equalized between participants over time.
2 MAJOR ACQUISITIONS
(a) During 1994, the Company acquired two properties in the Neuquen Basis
of Argentina for $38,368,000 (US $28,265,000) cash.
(b) Effective April 1, 1994, the Company acquired for $46,806,000 (US
$33,781,000) cash plus a contingent note payable of US $1.0 million (based on
future production levels and oil prices) an additional 11.66 percent working
interest in the Tierra del Fuego properties. The purchase increased the
Company's total working interest in the properties to 35 percent.
(c) Effective January 3, 1997, the Company acquired the outstanding shares
of Tidal Resources Inc. for cash consideration and assumption of bank debt and
working capital for $56,798,000. Effective January 1, 1997, the Company acquired
additional interests in the Chinchaga area for cash consideration of
$29,905,000.
F-106
<PAGE> 317
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 SHARE CAPITAL
(a) AUTHORIZED
The Company's authorized share capital consists of an unlimited number of
common shares.
(b) ISSUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES AMOUNT
---------- --------
<S> <C> <C>
June 30, 1997 (unaudited)
Balance at beginning of period............................ 48,353,452 $215,683
Exercise of stock options................................. 81,810 977
---------- --------
Balance at end of period.................................. 48,435,262 $216,660
========== ========
December 31, 1996
Balance at beginning of year.............................. 48,278,052 $214,955
Exercise of stock options(a).............................. 75,400 728
---------- --------
Balance at end of year.................................... 48,353,452 $215,683
========== ========
December 31, 1995
Balance at beginning of year.............................. 44,538,152 $158,930
Share issue............................................... 3,500,000 55,125
Exercise of stock options................................. 239,900 1,752
Issue costs, net of tax benefits.......................... -- (852)
---------- --------
Balance at end of year.................................... 48,278,052 $214,955
========== ========
December 31, 1994
Balance at beginning of year.............................. 44,232,322 $156,817
Exercise of stock options................................. 305,830 2,113
---------- --------
Balance at end of year.................................... 44,538,152 $158,930
========== ========
</TABLE>
June 30, 1997 (unaudited)
As at June 30, 1997, the Company has reserved 4,641,790 common shares for
issuance under a share option plan for officers and employees. The following
options were outstanding:
Employees -- 1,541,815 shares at prices ranging from $8.25 to $20.75 per
share to July 21, 2005.
Officers -- 1,402,000 shares at prices ranging from $9.25 to $17.50 per
share to January 8, 2005.
December 31, 1996
As at December 31, 1996, the Company has reserved 4,800,000 common shares
for issuance under a share option plan for officers and employees. The following
options were outstanding:
Employees -- 1,250,475 shares at prices ranging from $8.25 to $19.25 per
share to December 31, 2000.
Officers -- 1,048,150 shares at prices ranging from $9.25 to $17.50 per
share to November 10, 2003.
F-107
<PAGE> 318
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4 COMMERCIAL PAPER AND BANK DEBT
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, -----------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Commercial paper(a).................................... $ 96,704 $43,057 $55,653
Bank loan(b)........................................... 108,642 3,570 2,854
-------- ------- -------
$205,346 $46,627 $58,507
======== ======= =======
</TABLE>
- ---------------
(a) The Company has an unsecured $100,000,000 commercial paper facility of which
$96,704,000 was outstanding at June 30, 1997 (December 31,
1996 -- $43,057,000). Due to the revolving nature of the debt and the
existence of an undrawn bank term debt facility, the outstanding balance of
commercial paper is classified as long-term debt.
(b) The Company has an unsecured $240,000,000 (December 31,
1996 -- $150,000,000) loan facility from Canadian chartered banks of which
$108,642,000 was outstanding at June 30, 1997 (December 31,
1996 -- $3,570,000). The loan facility revolves to April 30, 1998 at which
time the outstanding portion of the facility will become payable in equal
quarterly installments over a five-year period unless the revolving loan
facility is extended by mutual agreement with the banks. If not extended,
the first quarterly instalment would be due three months after the extension
election date. The interest rate on outstanding debt varies but approximates
the lenders' prime rate. Financial covenants to be maintained include
consolidated tangible net worth of at least $175,000,000, minimum annual
cash flow from operations before interest expense greater than two times
interest expense, a maximum long-term debt to consolidated cash flow ratio
of 2.50:1 and a debt to equity ratio no greater than 1.2:1.
5 SENIOR NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, -----------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Senior notes payable (US $60 million).................. $ 82,866 $82,176 $81,912
Cross currency hedge agreement......................... (2,286) (1,596) (1,332)
-------- ------- -------
Canadian dollar equivalent balance..................... $ 80,580 $80,580 $80,580
======== ======= =======
</TABLE>
On February 17, 1994, the Company issued US $60,000,000 of 5.87 percent
senior unsecured notes with a seven and a half year term maturing August 15,
2001. The notes are repayable in four equal installments of US $15,000,000
beginning August 15, 1998 with interest payable quarterly in arrears until
maturity. The debt ranks equally with the Company's other debt obligations and
is subject to the following financial covenants:
(a) total debt to total capitalization shall not exceed 0.55:1; and
(b) consolidated tangible net worth shall not be less than Cdn.
$150,000,000.
On February 22, 1994, the Company entered into an interest rate and
exchange rate swap that fixed the Senior notes principal repayment at Cdn.
$80,580,000 and fixed the interest payments on the Canadian dollar principal
amount at 6.5 percent (Note 8).
6 FUTURE SITE RESTORATION AND ABANDONMENT
The Company has provided $2,115,000 for the six month period ended June 30,
1997 ($2,740,000 for the year ended December 31, 1996; 1995 -- $1,735,000;
1994 -- $1,482,000) for future site restoration and abandonment costs, which is
included in depletion, depreciation and amortization expense. The Company's
estimated total future liability for site restoration is $32,511,000 at December
31, 1996.
F-108
<PAGE> 319
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7 INCOME TAXES
The provision for income taxes differs from the calculated tax obtained by
applying the combined Canadian federal and provincial income tax rate to
earnings before income taxes. The difference is accounted for as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earnings before taxes......... $25,583 $23,029 $43,151 $32,066 $40,617
------- ------- ------- ------- -------
Calculated tax expense........ 11,406 10,292 19,444 14,328 17,872
Increase (decrease) in taxes
resulting from:
Lower tax rates on foreign
operations............... (5,974) (4,777) (10,796) (8,565) (6,846)
Non-deductible royalties and
taxes paid to Provincial
Governments, net of
ARTC..................... 6,091 4,899 10,888 9,634 9,192
Resource allowance.......... (5,047) (4,914) (9,912) (8,909) (9,303)
Other....................... (365) (37) (1,481) (38) 184
------- ------- ------- ------- -------
$ 6,111 $ 5,463 $ 8,143 $ 6,450 $11,099
======= ======= ======= ======= =======
</TABLE>
Total income taxes are comprised of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current taxes................. $3,500 $4,003 $ 8,124 $ 3,386 $ 5,188
Deferred taxes................ 2,611 1,460 19 3,064 5,911
------ ------ ------- ------- -------
$6,111 $5,463 $ 8,143 $ 6,450 $11,099
====== ====== ======= ======= =======
</TABLE>
F-109
<PAGE> 320
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 HEDGING ACTIVITIES
The Company enters into hedge transactions on crude oil, natural gas,
exchange rates and interest rates. Amounts receivable or payable under these
agreements are reflected as adjustments to revenue or interest expense. The
Company's petroleum and natural gas sales include a loss of $9,802,000 (1995
gain -- $2,063,000; 1994 loss $37,000) and interest expense includes $868,000
(1995 -- $535,000; 1994 -- $1,068,000) as a result of hedging activities. The
Company has the following hedge transactions outstanding at December 31, 1996:
<TABLE>
<CAPTION>
VOLUMES SOLD (THOUSANDS) TOTAL
FIXED ---------------------------------------------------------- FUTURE
TYPE UNITS PRICE EXPIRY 1996 1997 1998 1999 2000 2001 VOLUMES
---- ----- ------- ------------ ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Crude oil US$/Bbl $ 17.97 Feb. 21/97 314 52 -- -- -- -- 52
Crude oil US$/Bbl $ 19.25 Dec. 31/97 -- 365 -- -- -- -- 365
Crude oil US$/Bbl $ 19.20 Dec. 31/97 -- 365 -- -- -- -- 365
Crude oil US$/Bbl $ 18.42 May 31/97 1,464 1,460 604 -- -- -- 2,064
------- -------- ------- ------- ------- ------- --------
1,778 2,242 604 -- -- -- 2,846
------- -------- ------- ------- ------- ------- --------
Natural gas US$/Mmbtu $ 2.10 Mar. 31/97 -- 270 -- -- -- -- 270
Natural gas US$/Mmbtu $ 2.43 Mar. 31/97 -- 270 -- -- -- -- 270
Natural gas US$/Mmbtu $ 1.82 Mar. 31/97 122 180 -- -- -- -- 180
Natural gas US$/Mmbtu $ 2.03 Oct. 31/98 305 1,825 1,520 -- -- -- 3,345
------- -------- ------- ------- ------- ------- --------
427 2,545 1,520 -- -- -- 4,065
------- -------- ------- ------- ------- ------- --------
US Dollar Cdn$/US$ $0.7080 Dec. 31/97 $36,000 $ 36,000 $ -- $ -- $ -- $ -- $ 36,000
US Dollar Cdn$/US$ $0.7117 Oct. 31/00 36,000 36,000 36,000 36,000 30,000 -- 138,000
------- -------- ------- ------- ------- ------- --------
$72,000 $ 72,000 $36,000 $36,000 $30,000 $ -- $174,000
------- -------- ------- ------- ------- ------- --------
Interest rate cap Cdn rate % 9.00% Sept. 2/97 $80,000 $ 80,000 $ -- $ -- $ -- $ -- N/A
Interest rate cap Cdn rate % 8.00% Sept. 1/99 -- 80,000 80,000 80,000 -- -- N/A
------- -------- ------- ------- ------- -------
$80,000 $160,000 $80,000 $80,000 $ -- $ --
------- -------- ------- ------- ------- ------- --------
Interest rate swap Cdn rate % 8.125% June 9/97 $20,000 $ 20,000 $ -- $ -- $ -- $ -- N/A
------- -------- ------- ------- ------- -------
Interest and
principal
repayments under
cross currency
agreement related
to Senior Notes Cdn rate % 6.5%
Payable US$/Cdn$ $0.7446 Aug. 15/01 $ 5,252 $ 5,266 $25,042 $23,736 $22,441 $21,124 $ 97,609
------- -------- ------- ------- ------- ------- --------
<CAPTION>
UNREALIZED
MARKET
TYPE VALUE
---- ----------
<S> <C>
Crude oil $ (896)
Crude oil (1,695)
Crude oil (1,678)
Crude oil (10,640)
--------
$(14,909)
--------
Natural gas $ (166)
Natural gas (138)
Natural gas (159)
Natural gas (1,028)
--------
$ (1,491)
--------
US Dollar $ 2,534
US Dollar 6,243
--------
$ 8,777
--------
Interest rate cap $ (118)
Interest rate cap (110)
--------
$ (228)
--------
Interest rate swap $ (478)
--------
Interest and
principal
repayments under
cross currency
agreement related
to Senior Notes
Payable $ (2,596)
--------
</TABLE>
F-110
<PAGE> 321
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's petroleum and natural gas sales to June 30, 1997 include a
loss of $4,153,000 as a result of hedging activities. The Company has the
following hedge transactions outstanding at June 30, 1997.
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------------------
VOLUMES SOLD (THOUSANDS) TOTAL
FIXED ------------------------------------------------ FUTURE
TYPE UNITS PRICE EXPIRY 1997 1998 1999 2000 2001 VOLUMES
---- ----- ------- ----------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Crude oil US$/Bbl $ 18.42 May 31/98 736 604 -- -- -- 1,340
Crude oil US$/Bbl $ 19.25 Dec. 31/97 184 -- -- -- -- 184
Crude oil US$/Bbl $ 19.20 Dec. 31/97 184 -- -- -- -- 184
-------- ------- ------- ------- ------- --------
1,104 604 -- -- -- 1,708
-------- ------- ------- ------- ------- --------
Natural gas US$/Mmbtu $ 2.03 Oct. 31/98 920 1,520 -- -- -- 2,440
-------- ------- ------- ------- ------- --------
US Dollar Cdn$/US$ $0.7482 Dec. 31/97 $ 18,000 $ -- $ -- $ -- $ -- $ 18,000
US Dollar Cdn$/US$ $0.7080 Dec. 31/97 18,000 -- -- -- -- 18,000
US Dollar Cdn$/US$ $0.7117 Oct. 31/00 18,000 36,000 36,000 30,000 -- 120,000
-------- ------- ------- ------- ------- --------
$ 54,000 $36,000 $36,000 $30,000 $ -- $156,000
-------- ------- ------- ------- ------- --------
Interest rate cap Cdn rate % 9.00% Sept. 2/97 $ 80,000 $ -- $ -- $ -- $ -- N/A
Interest rate cap Cdn rate % 8.00% Sept. 1/99 80,000 80,000 80,000 -- -- N/A
-------- ------- ------- ------- -------
$160,000 $80,000 $80,000 $ -- $ -- N/A
-------- ------- ------- ------- -------
Interest and principal
repayments under cross
currency agreement related
to Senior Notes Payable Cdn rate % 6.5%
US$/Cdn$ $0.7446 Aug. 15/01 $ 1,350 $25,042 $23,736 $22,441 $21,124 $ 93,693
-------- ------- ------- ------- ------- --------
<CAPTION>
UNREALIZED
MARKET
TYPE VALUE
---- ----------
<S> <C>
Crude oil $(2,907)
Crude oil (170)
Crude oil (181)
-------
$(3,258)
-------
Natural gas (212)
-------
US Dollar $ (705)
US Dollar 940
US Dollar 5,812
-------
$ 6,047
-------
Interest rate cap $ (30)
Interest rate cap (205)
-------
$ (235)
-------
Interest and principal
repayments under cross
currency agreement related
to Senior Notes Payable
$(1,204)
-------
</TABLE>
F-111
<PAGE> 322
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 CHANGES IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- -----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable..................... $ 1,589 $(5,881) $(6,967) $ 8,050 $(22,477)
Accounts payable........................ (772) 1,130 17,872 (15,512) 14,159
Taxes payable........................... (4,294) 1,184 3,618 380 (4,742)
Other................................... (701) (901) (184) (236) (1,933)
------- ------- ------- -------- --------
$(4,178) $(4,468) $14,339 $ (7,318) $(14,993)
======= ======= ======= ======== ========
</TABLE>
10 SEGMENTED INFORMATION
The Company has operations in Canada, Argentina and Gabon. The Company's
entire operating activities are related to exploration, development and
production of petroleum and natural gas.
<TABLE>
<CAPTION>
CANADA ARGENTINA GABON TOTAL
-------- --------- ------- --------
<S> <C> <C> <C> <C>
JUNE 30, 1997 (UNAUDITED)
Petroleum and natural gas sales..................... $ 64,956 $ 35,900 $ -- $100,856
-------- -------- ------- --------
Operating earnings.................................. $ 22,850 $ 15,202 $ -- $ 38,052
-------- -------- ------- --------
Less:
Administration.................................... (6,111)
Investment income and foreign exchange............ 210
Interest on long-term debt........................ (6,568)
Capital and income taxes.......................... (6,405)
--------
Net earnings........................................ $ 19,178
-------- -------- ------- --------
Capital expenditures................................ $112,398 $ 46,900 $39,871 $199,169
-------- -------- ------- --------
Identifiable assets................................. $439,250 $338,109 $53,134 $830,493
-------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
CANADA ARGENTINA GABON TOTAL
-------- --------- ------- --------
<S> <C> <C> <C> <C>
JUNE 30, 1996 (UNAUDITED)
Petroleum and natural gas sales..................... $ 60,469 $ 25,678 $ -- $ 86,147
-------- -------- ------- --------
Operating earnings.................................. $ 21,992 $ 12,212 $ -- $ 34,204
-------- -------- ------- --------
Less:
Administration.................................... (5,353)
Investment income and foreign exchange............ (3)
Interest on long-term debt........................ (5,819)
Capital and income taxes.......................... (6,050)
--------
Net earnings........................................ $ 16,979
-------- -------- ------- --------
Capital expenditures................................ $ 32,906 $ 13,299 $ -- $ 46,205
-------- -------- ------- --------
Identifiable assets................................. $342,192 $276,561 $ -- $618,753
-------- -------- ------- --------
</TABLE>
F-112
<PAGE> 323
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CANADA ARGENTINA GABON TOTAL
-------- --------- ------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Petroleum and natural gas sales..................... $152,813 $ 63,134 $ -- $215,947
-------- -------- ------- --------
Operating earnings.................................. $ 33,486 $ 23,939 $ -- $ 57,425
-------- -------- ------- --------
Less:
Administration.................................... (2,716)
Investment income and foreign exchange............ (217)
Interest on long-term debt........................ (11,341)
Capital and income taxes.......................... (9,020)
--------
Net earnings........................................ $ 34,131
-------- -------- ------- --------
Capital expenditures................................ $ 47,058 $ 33,179 $13,661 $ 93,898
-------- -------- ------- --------
Identifiable assets................................. $330,897 $292,786 $13,753 $637,436
-------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
CANADA ARGENTINA GABON TOTAL
-------- --------- ------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Petroleum and natural gas sales..................... $143,814 $ 62,683 $ -- $206,497
-------- -------- ------- --------
Operating earnings.................................. $ 26,891 $ 21,826 $ -- $ 48,717
-------- -------- ------- --------
Less:
Administration.................................... (2,498)
Investment income and foreign exchange............ (1,168)
Interest on long-term debt........................ (12,985)
Capital and income taxes.......................... (6,641)
--------
Net earnings........................................ $ 25,425
-------- -------- ------- --------
Capital expenditures................................ $ 43,195 $ 43,054 $ -- $ 86,249
-------- -------- ------- --------
Identifiable assets................................. $324,696 $265,794 $ -- $590,490
-------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
CANADA ARGENTINA GABON TOTAL
-------- --------- ------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Petroleum and natural gas sales..................... $147,000 $ 42,061 $ -- $189,061
-------- -------- ------- --------
Operating earnings.................................. $ 32,012 $ 17,303 $ -- $ 49,315
-------- -------- ------- --------
Less:
Administration.................................... (2,103)
Investment income and foreign exchange............ 3,631
Interest on long-term debt........................ (10,226)
Capital and income taxes.......................... (11,565)
--------
Net earnings........................................ $ 29,052
--------
Capital expenditures................................ $ 82,534 $134,456 $ -- $216,990
-------- -------- ------- --------
Identifiable assets................................. $326,523 $238,129 $ -- $564,652
-------- -------- ------- --------
</TABLE>
F-113
<PAGE> 324
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11 CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP). As indicated below, in certain
aspects GAAP as applied in the United States differs from Canadian GAAP.
CONSOLIDATED BALANCE SHEET
Accounts payable
Included in accounts payable are the following amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Trade payables.......................................... $11,021 $17,751 $16,382
Accrued liabilities..................................... 25,863 19,907 3,402
Accrued interest........................................ 660 658 660
------- ------- -------
$37,544 $38,316 $20,444
======= ======= =======
</TABLE>
Capital assets
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
As reported, Canadian GAAP............................ $751,695 $579,070 $546,912
Decrease in depletion expense(a)...................... 3,754 11,906 14,129
Adjustments to prior years(a)......................... (51,983) (63,889) (78,018)
-------- -------- --------
Capital assets, US GAAP............................... $703,466 $527,087 $483,023
======== ======== ========
</TABLE>
Share capital
The following information would have been presented on the face of the
balance sheet:
The common shares had no par value at June 30, 1997, December 31, 1996
and December 31, 1995.
An unlimited number of common shares were authorized at June 30, 1997,
December 31, 1996 and December 31, 1995.
Common shares issued were 48,435,262 at June 30, 1997, 48,353,452 at
December 31, 1996 and 48,278,052 at December 31, 1995.
Under US GAAP, an option continuity schedule would be provided:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------
1997 1996 1996 1995 1994
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period..................... 2,298,625 1,731,975 1,731,975 1,981,200 1,559,000
Options granted.............. 889,615 679,125 918,675 243,200 863,450
Options exercised............ (173,615) (48,625) (264,625) (239,900) (305,830)
Options cancelled/expired.... (70,810) (14,800) (87,400) (252,525) (135,420)
--------- --------- --------- --------- ---------
2,943,815 2,347,675 2,298,625 1,731,975 1,981,200
========= ========= ========= ========= =========
</TABLE>
F-114
<PAGE> 325
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings as reported.......... $19,178 $16,979 $34,131 $25,425 $29,052
Decrease (increase) in depletion
expense(a)...................... 3,754 4,072 11,906 14,129 (8,018)
Decrease (increase) in income tax
expenses(a)..................... (1,652) (1,792) (4,761) (6,217) 3,528
------- ------- ------- ------- -------
Net earnings in accordance with US
GAAP............................ $21,280 $19,259 $41,276 $33,337 $24,562
======= ======= ======= ======= =======
Net earnings per common share..... $ 0.44 $ 0.40 $ 0.85 $ 0.71 $ 0.55
======= ======= ======= ======= =======
</TABLE>
(a) Under US GAAP the carrying value of petroleum and natural gas properties,
net of deferred income taxes, is limited to the 10 percent present value of
after-tax future net revenue from proved reserves (based on prices and costs
at the balance sheet date) and the unimpaired cost of unproved properties
(the "US ceiling test"). Under Canadian GAAP, future net revenue is not
discounted but projected financing costs are deducted. Due to this
difference, an adjustment to reflect a write-down in capital assets at
December 31, 1993 and 1994 was required. Such write-downs amounted to
$70,000,000 ($39,200,000 after income taxes) at December 31, 1993 and a
further write-down of $15,000,000 ($8,400,000 after income taxes) at
December 31, 1994. The December 31, 1994 charge has been reported as
additional depletion expense for the year; the December 31, 1993 charge has
been reported as a charge against retained earnings.
In Canada, earnings per share is calculated based on the weighted average
number of shares outstanding during the period. For US GAAP, earnings per share
would be calculated using common stock equivalents outstanding during the
period. The weighted average shares outstanding gives approximately the same
earnings per share as using the common stock equivalents.
F-115
<PAGE> 326
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For US reporting the information contained in the consolidated statement of
operations and retained earnings and Note 3 share capital, would be combined to
develop a complete statement of changes in shareholders' equity.
The effect of US GAAP on retained earnings in that statement is as follows:
<TABLE>
<S> <C>
Retained earnings under Canadian GAAP, December 31, 1993.... $ 93,460
--------
Write-down of oil and gas assets required under US ceiling
test at December 31, 1993................................. 70,000
Less: Related income taxes.................................. 30,800
--------
39,200
--------
Retained earnings at December 31, 1993 restated under US
GAAP...................................................... 54,260
Net income under US GAAP for the years ended:
December 31, 1994......................................... 24,562
December 31, 1995......................................... 33,337
December 31, 1996......................................... 41,276
--------
Retained earnings at December 31, 1996 under US GAAP........ 153,435
Net income under US GAAP for the six months ended June 30,
1997...................................................... 21,280
--------
Retained earnings at June 30, 1997 restated under US GAAP... $174,715
========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN CASH POSITION
The statement of changes in financial position is substantially the same as
the statement of cash flows prepared under US GAAP except for the following
differences:
For US GAAP, additional disclosure for cash interest and taxes paid would
be made.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid...................... $6,566 $5,819 $11,343 $12,985 $10,226
====== ====== ======= ======= =======
Taxes paid (refunded).............. $ (500) $3,406 $ 5,383 $ 2,174 $10,762
====== ====== ======= ======= =======
</TABLE>
The reported cash flows under the consolidated statement of changes in
financial position are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------
1997 1996 1996 1995 1994
----------- ----------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities......... $ 50,555 $ 42,145 $ 94,696 $ 94,197 $ 75,183
Financing activities......... 151,488 5,319 (14,600) 489 131,036
Investing activities......... (202,692) (47,052) (80,675) (93,778) (210,089)
--------- -------- -------- -------- ---------
$ (649) $ 412 $ (579) $ 908 $ (3,870)
========= ======== ======== ======== =========
</TABLE>
Cash flows reported under U.S. GAAP differ from those reported under
Canadian GAAP in certain respects; substantially all such difference reported
above relates to an allocation of changes in non-cash working capital between
operating, financing and investing activities.
F-116
<PAGE> 327
CHAUVCO RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12 SUBSEQUENT EVENTS
(a) On January 3, 1997, the Company acquired substantially all of the
outstanding shares of Tidal Resources Inc. ("Tidal") for cash consideration of
$48 million, plus the assumption of Tidal's bank debt, working capital and
acquisition costs estimated to be $7 million in aggregate. The acquisition was
financed with existing credit facilities.
(b) On September 3, 1997, Chauvco announced, subject to shareholder
approval of a Plan of Arrangement, its agreement to merge its Canadian and
Argentinean businesses with Pioneer Natural Resources Company ("Pioneer"), a
United States based independent oil and gas producer, and to carry on the
Company's Gabon operations and pursue additional international opportunities
under its wholly owned subsidiary, Chauvco Resources International Ltd. ("CRI").
Under this arrangement, shareholders would receive, depending on Pioneer's
trading price, between 0.45 and 0.49 of a Pioneer common share, or a Canadian
freely trading common share equivalent, together with one share of CRI for each
Chauvco common share held. It was also announced that prior to the merger with
Pioneer, shareholders would receive the right to subscribe for Chauvco's 20%
investment interest in the Alliance Pipeline Project.
F-117
<PAGE> 328
ANNEX A
[CHAUVCO RESOURCES LOGO]
CHAUVCO RESOURCES INTERNATIONAL LTD.
INFORMATION BULLETIN
<PAGE> 329
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Map
SUMMARY................................ 3
RISK FACTORS........................... 6
Oil Exploration, Development and
Production........................ 6
Depletion of Reserves, Necessity of
Successful Exploration and
Development....................... 6
Uncertainty of Estimates of Reserves
and Future Net Revenues........... 6
Capital Requirements................. 7
Acquisition Risks.................... 7
Prices and Markets for Crude Oil..... 7
Marketing and Transportation of Crude
Oil............................... 7
International Operations............. 8
Exchange Rate Fluctuations........... 8
Environmental Risks.................. 8
Governmental Regulation.............. 8
Competition.......................... 9
Availability of Equipment and
Personnel......................... 9
Dependence on Key Personnel.......... 9
Limited Operating History, Lack of
Profitable Operations and
Management of Growth.............. 9
Enforcement of Civil Remedies........ 9
Absence of Public Market............. 9
Holding Corporation Structure........ 10
Corporate Strategy................... 10
CONVERSION............................. 11
CURRENCY............................... 11
ELIGIBILITY FOR INVESTMENT............. 11
CHAUVCO RESOURCES INTERNATIONAL LTD.... 12
General.............................. 12
Business Strategy.................... 12
GABON.................................. 13
General.............................. 13
Oil Production....................... 13
Regulation, Royalties and Taxes...... 14
Currency............................. 14
Foreign Exchange Controls............ 14
</TABLE>
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Industry Conditions.................. 15
Geology of Interior Basin............ 15
BUSINESS AND PROPERTIES OF THE
CORPORATION.......................... 16
Introduction......................... 16
Land Holdings........................ 18
Drilling History..................... 19
Capital Expenditures................. 19
Oil Wells............................ 19
Reserves............................. 20
CAPITALIZATION......................... 22
DIRECTORS AND OFFICERS................. 23
MANAGEMENT............................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS... 24
Capital Resources.................... 24
RELATIONSHIP BETWEEN THE CORPORATION
AND CHAUVCO.......................... 25
DESCRIPTION OF SHARE CAPITAL........... 25
DIVIDEND POLICY........................ 27
THE ARRANGEMENT........................ 27
REMUNERATION OF DIRECTORS AND EXECUTIVE
OFFICERS............................. 28
Compensation of Executives........... 28
Compensation of Directors............ 28
STOCK OPTIONS.......................... 28
PRIOR SALES............................ 28
PRINCIPAL HOLDERS OF SECURITIES........ 28
INTEREST OF MANAGEMENT AND OTHERS IN
MATERIAL TRANSACTIONS................ 29
MATERIAL CONTRACTS..................... 29
LEGAL MATTERS.......................... 29
AUDITORS, TRANSFER AGENT AND
REGISTRAR............................ 30
PROMOTER............................... 30
GLOSSARY OF TERMS...................... 31
FINANCIAL STATEMENTS INDEX............. 33
</TABLE>
A-i
<PAGE> 330
CENTRAL WEST AFRICA PROPERTIES
<TABLE>
<S> <C>
MAP MAP
MAP
</TABLE>
A-2
<PAGE> 331
SUMMARY
THE FOLLOWING IS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO, AND MUST BE READ IN CONJUNCTION WITH, THE MORE DETAILED
INFORMATION APPEARING HEREIN.
THE CORPORATION
Chauvco Resources International Ltd. (the "Corporation" or "CRI") was
incorporated under the laws of Bermuda by Memorandum of Association dated July
29, 1997. The Corporation is an international natural resource company formed
for the purpose of engaging directly and indirectly in the business of acquiring
properties and exploring for, developing, producing and marketing crude oil and
natural gas. The Corporation's principal properties, operations and oil reserves
will be located in Gabon, central west Africa, where its exploration and
development activities will be conducted through wholly-owned subsidiaries. In
addition, the Corporation proposes to actively evaluate other international
petroleum resource opportunities. See "Business and Properties of the
Corporation".
Following the Arrangement, the Corporation's assets will consist of
approximately $5,000,000 cash and all of the issued and outstanding securities
of Chauvco Resources (Gabon) S.A. ("CRG"), Chauvco Resources (Gabon-Ngalo) S.A.
("Ngalo"), Chauvco Resources (Gabon-Maga) S.A. ("Maga"), Chauvco Resources
(Gabon-Avomo) S.A. ("Avomo") and CR Trading Co. Ltd. ("CR Trading") and 75% of
the issued and outstanding securities of Westoil Marine & Transport Co. Ltd.
("Westoil"). CR Trading and Westoil are corporations incorporated under the laws
of Bermuda, and each of CRG, Ngalo, Maga and Avomo are either incorporated or in
the process of finalizing their formal organization as Gabonese corporate
entities.
Each of CRG, Ngalo, Maga and Avomo have signed exploration and production
sharing contracts ("PSC's") with the Republic of Gabon for onshore permits
encompassing 2,473,000 net acres. CRG has also entered into a Participation
Agreement with Santa Fe Energy Resources of Gabon (Mondah Bay) Ltd. with respect
to an offshore exploration play in the Mondah Bay Block (collectively, the CRG,
Ngalo, Maga and Avomo PSC's, and CRG's participation in Mondah Bay are defined
as the "Gabon Properties"). Westoil and CR Trading will provide, respectively,
crude oil transportation and marketing to the Corporation. See "Business and
Properties of the Corporation".
Gilbert Laustsen Jung Associates Ltd. ("Gilbert"), in a report dated August
19, 1997, evaluated the Remboue property as at August 1, 1997. The following
table summarizes Gilbert's evaluation of the CRG interest in the gross and net
reserves and future net revenue of the Remboue property. See "Business and
Properties of the Corporation".
<TABLE>
<CAPTION>
GROSS RESERVES NET RESERVES
-------------- ------------
CRUDE OIL CRUDE OIL
BASED ON ESCALATING PRICE ASSUMPTIONS (MBBLS) (MBBLS)
------------------------------------- -------------- ------------
<S> <C> <C>
Proved Non-producing Reserves.............................. 7,553 6,610
Probable Reserves.......................................... 1,848 1,368
----- -----
Total Proved and Probable Reserves.................... 9,401 7,978
===== =====
</TABLE>
<TABLE>
<CAPTION>
DISCOUNTED AT THE RATE OF
PRESENT WORTH OF FUTURE NET PRODUCTION ---------------------------
REVENUE BASED ON ESCALATING PRICE ASSUMPTIONS UNDISCOUNTED 10% 15% 20%
- --------------------------------------------- ------------ ------- ------- -------
(THOUSANDS IN US DOLLARS)
<S> <C> <C> <C> <C>
Proved Non-producing Reserves................ $49,990 $41,186 $37,920 $35,188
Probable Reserves at 50%..................... 6,112 5,265 4,937 4,497
------- ------- ------- -------
Total Proved and Probable Reserves...... $56,102 $46,451 $42,857 $39,845
======= ======= ======= =======
</TABLE>
A-3
<PAGE> 332
<TABLE>
<CAPTION>
GROSS RESERVES NET RESERVES
-------------- ------------
CRUDE OIL CRUDE OIL
BASED ON CONSTANT PRICE ASSUMPTIONS (MBBLS) (MBBLS)
----------------------------------- -------------- ------------
<S> <C> <C>
Proved Non-producing Reserves.............................. 7,553 6,654
Probable Reserves.......................................... 1,848 1,365
----- -----
Total Proved and Probable Reserves.................... 9,401 8,019
----- -----
</TABLE>
<TABLE>
<CAPTION>
DISCOUNTED AT THE RATE OF
PRESENT WORTH OF FUTURE NET PRODUCTION ---------------------------
REVENUE BASED ON CONSTANT PRICE ASSUMPTIONS UNDISCOUNTED 10% 15% 20%
- ------------------------------------------- ------------ ------- ------- -------
(THOUSANDS IN US DOLLARS)
<S> <C> <C> <C> <C>
Proved Non-producing Reserves............... $46,888 $38,903 $35,922 $33,418
Probable Reserves at 50%.................... 5,836 5,059 4,756 4,497
------- ------- ------- -------
Total Proved and Probable Reserves.......... $52,724 $43,962 $40,678 $37,915
======= ======= ======= =======
</TABLE>
THE ARRANGEMENT
Arrangement:............... Pursuant to the Arrangement, at the Effective Time
the following transactions shall occur and be
deemed to occur in the following order:
(a) the Additional Subscription;
(b) the Acquisition;
(c) Pioneer Canada will purchase from Chauvco all
of the issued and outstanding common shares of
the Corporation; and
(d) Chauvco Shareholders and Chauvco Optionholders
shall transfer their Chauvco Common Shares and
Chauvco Options to Pioneer Canada for the
Distributed Shares.
See "The Arrangement".
Share Capital:............. Currently, there are 1,200,000 common shares of the
Corporation issued and outstanding. As part of the
Arrangement, at the Effective Time, the Corporation
will issue the Additional Shares to Chauvco
pursuant to the Additional Subscription. See
"Description of Share Capital".
Dividend Policy:........... It is not currently anticipated that dividends will
be paid on the common shares in the foreseeable
future. See "Dividend Policy".
Risk Factors:.............. Ownership of the Distributed Shares is subject to
risk factors associated with the exploration for
and development of international crude oil and
natural gas properties and certain additional risk
factors specifically related to the Corporation.
The Corporation was only recently incorporated and
has no business history. Following the Arrangement
the Corporation's assets will consist of
approximately $5,000,000 cash, all the issued and
outstanding securities of CRG, Ngalo, Maga, Avomo
and CR Trading and 75% of the issued and
outstanding securities of Westoil. Although the
Corporation anticipates actively evaluating a
number of international oil prospects, there is no
assurance that such prospects will be profitable.
Acquiring, developing and exploring for oil
involves many risks, which even a combination of
experience, knowledge and careful evaluation may
not be able to overcome. These risks include
encountering unexpected formations or pressures,
premature declines of reservoirs, blow-outs,
equipment failures and other accidents, sour gas
releases,
A-4
<PAGE> 333
uncontrollable flows of oil, natural gas or well
fluids, adverse weather conditions, pollution,
other environmental risks, fires and spills.
The marketability of oil recovered from any
reserves produced or acquired by the Corporation
will be affected by numerous factors beyond the
control of the Corporation. These factors include
market fluctuations in the world price of oil, the
supply and demand for oil, the proximity and
capacity of transportation systems and processing
equipment and government regulations, including
regulations relating to prices, taxes, royalties,
land tenure, allowable production, the import and
export of oil and environmental protection. The
effect of these factors cannot be accurately
predicted. Moreover, the oil industry is intensely
competitive and the Corporation will have to
compete with a number of other corporations, many
of which possess greater resources.
Initially, all of the Corporation's operations will
be conducted in Gabon and all of the Corporation's
reserves will be located in Gabon. The Corporation
intends to expand its operations to other countries
in west Africa and internationally. International
resource operations are subject to political,
economic and other uncertainties, including, among
others, risk of war, revolution, border disputes,
expropriation, renegotiation or modification of
existing contracts, import, export and
transportation regulations and tariffs, taxation
policies, including royalty and tax increases and
retroactive tax claims, currency exchange controls,
limits on repatriation of investment and on
allowable levels of production, currency
fluctuations, labour disputes and other
uncertainties arising out of foreign government
sovereignty over the Corporation's international
operations. See "Risk Factors".
Selected Pro Forma
Financial Information:..... The following is a summary of selected pro forma
financial information of the Corporation after
giving effect to the Arrangement including the
Additional Subscription, the Acquisition and the
distribution of the Distributed Shares.
The following information should be read in
conjunction with the Unaudited Pro Forma
Consolidated Financial Statements and notes thereto
contained herein.
Unless otherwise stated, the financial and
operating data included herein present the proforma
consolidated results of the Corporation and CRG,
Ngalo, Maga, Avomo, Westoil and CR Trading as if
the Acquisition had already been completed.
<TABLE>
<CAPTION>
JULY 31, 1997
-------------
<S> <C>
Assets........................................... $51,515,936
Long Term Debt................................... Nil
Shareholders' Equity............................. $42,856,280
Working Capital Deficiency....................... $ 190,971
</TABLE>
As part of the Arrangement, at the Effective Time,
the Corporation will issue the Additional Shares to
Chauvco pursuant to the Additional Subscription.
See "Description of Share Capital."
A-5
<PAGE> 334
RISK FACTORS
OIL EXPLORATION, DEVELOPMENT AND PRODUCTION
Oil exploration involves a high degree of risk and there is no assurance
that expenditures made on future exploration by the Corporation will result in
new discoveries of oil that are commercially or economically producible. The
Corporation's operations are subject to the risks of exploration, development
and operation of oil properties and the drilling of wells thereon, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, sour gas releases, fires and spills. Losses resulting
from the occurrence of any of the these risks could have a materially adverse
effect on the Corporation's results of operations, liquidity and financial
condition. The Corporation may become subject to liability for pollution,
blow-outs or other hazards. The Corporation has insurance in place with respect
to these hazards which the Corporation believes is standard in the industry.
However, such insurance has limitations on liability that may not be sufficient
to cover the full extent of such liabilities. The payment of such uninsured
liabilities would reduce the funds available to the Corporation.
DEPLETION OF RESERVES, NECESSITY OF SUCCESSFUL EXPLORATION AND DEVELOPMENT
Producing oil reservoirs generally are characterized by declining
production rates that vary depending upon reservoir characteristics and other
factors. The Corporation's future oil reserves and production, and, therefore,
cash flow and income, are highly dependent upon the Corporation's success in
efficiently developing and exploiting reserves and economically finding
additional reserves that are economically recoverable. Without reserve additions
through successful exploration and development activities, the Corporation's
total reserves and production would decline. There can be no assurance that the
Corporation will be able to find, develop or acquire additional reserves to
replace its production.
There is no assurance that oil will be produced in sufficient quantities to
make the Corporation's acquired discoveries economic. The long-term commercial
success of the Corporation depends on its ability to find, acquire, develop and
commercially produce additional oil reserves.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties inherent in estimating oil reserves and
their values, including many factors beyond the Corporation's control. The
reserve information set forth herein represents estimates only. Although the
Corporation believes such estimates to be reasonable, reserve estimates are
imprecise and should be expected to change as additional information becomes
available.
Estimates of oil reserves, by necessity, are projections based on
engineering data, and there are uncertainties inherent in the interpretation of
such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil that are difficult to measure. The
accuracy of any reserve estimate is a function of the quality of available data,
engineering and geological interpretation, and judgment. As a result, estimates
of different engineers, including those used by the Corporation, may vary.
Estimates of economically recoverable oil reserves and of future net revenues
necessarily depend upon a number of 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 prices, operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. Any significant variance in the assumptions
could materially affect estimates of economically recoverable quantities of oil
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net revenues
expected therefrom. Moreover, there can be no assurance that the Corporation's
developed reserves will ultimately be produced or that its undeveloped reserves
will be developed within the period anticipated. Actual production, revenues and
expenditures with respect to the Corporation's anticipated reserves will likely
vary from estimates, and such variances may be material.
A-6
<PAGE> 335
CAPITAL REQUIREMENTS
The Corporation will make, and intends to continue to make, substantial
capital expenditures for the development, exploration, acquisition and
production of oil. CRG and the Permit Holders have made capital expenditures of
$9.6 million in 1996, $34.6 million in the first seven months of 1997 and have
budgeted capital expenditures of approximately $13 million for the remaining
1997 term.
The Corporation believes that its anticipated proforma cash and working
capital will be sufficient to fund its activities through to June 30, 1998.
Subsequent to that time, the Corporation may need to seek additional capital
from various sources, including equity or debt offerings, non-recourse
financings or joint ventures. The Corporation's ability to access additional
capital will depend on its success in exploring for and developing its reserves
and the status of the capital markets at the time such capital is sought.
Accordingly, there can be no assurance that capital will be available to the
Corporation from any source or that, if available, it will be at prices or on
terms acceptable to the Corporation. Should the Corporation be unable to access
the capital markets or should sufficient capital not be otherwise available, the
development and exploration of the Corporation's properties could be delayed or
reduced and, accordingly, revenues and operating results may be adversely
affected.
ACQUISITION RISKS
In the future, the Corporation expects to evaluate and pursue various other
acquisition opportunities. The successful acquisition of producing properties
requires an assessment of recoverable reserves, future oil prices, operating
costs, potential environmental and other liabilities and other factors beyond
the Corporation's control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with such an assessment, the
Corporation will use evaluation parameters it believes to be generally
consistent with industry practices. Any such evaluation, however, will not
reveal all existing or potential problems, nor will it permit the Corporation to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections generally are not performed on every
well, and structural and environmental problems are not necessarily observable
even when an inspection is undertaken. Even when problems are identified, the
vendor may not be willing or financially able to give contractual protection
against such problems, and the Corporation may decide to assume environmental
and other liabilities in connection with acquired properties. There can be no
assurance that the Corporation's acquisitions will be successful. Any
unsuccessful acquisition could have a material adverse effect on the
Corporation's financial condition and results of operations.
PRICES AND MARKETS FOR CRUDE OIL
Oil is a commodity whose price is determined based on world demand, supply
and other factors, all of which are beyond the control of the Corporation. World
prices for oil have fluctuated widely in recent years. Future price fluctuations
in world oil prices will have significant impact upon the projected revenue of
the Corporation, the projected return from and the financial viability of the
Corporation's existing and future reserves.
MARKETING AND TRANSPORTATION OF CRUDE OIL
In addition to establishing markets for its oil, the Corporation must also
successfully market its oil to prospective buyers. Numerous factors will affect
the ability of the Corporation to market its oil, including the prevailing world
oil price, current demand and supply and the quality and quantity of the oil
being sold. While the Corporation, through its wholly-owned subsidiary CR
Trading, has limited direct experience in the marketing of oil, management has
expertise in the marketing of crude oil.
The Corporation's initial production is in an area of lowland jungle with
mangrove swamps and river access. To transport the Corporation's oil to market,
the Corporation is utilizing Estuary Tankers to move the crude oil to a floating
Storage Tanker which will in turn unload the crude oil to a larger ocean
transport tanker.
The operation of Estuary Tankers and floating Storage Tanker is subject to
many risks including adverse weather conditions, tidal influences, environmental
risks and fires. The Corporation is also subject to changes
A-7
<PAGE> 336
in the laws affecting the transportation and storage of oil including changes in
the design of the equipment utilized. The Corporation, through its subsidiary
Westoil, has no direct experience in marine transportation and storage of oil.
However, the minority owner of Westoil and the operator of the Estuary Tankers
and floating storage facility has extensive expertise in marine operations.
INTERNATIONAL OPERATIONS
At present, the Corporation's anticipated principal operations are
currently being conducted in Gabon. The Corporation may also commence operations
in other countries in western Africa and internationally. International
operations are subject to political, economic and other uncertainties,
including, among others, risk of war, revolution, border disputes,
expropriation, renegotiation or modification of existing contracts, import,
export and transportation regulations and tariffs, taxation policies, including
royalty and tax increases and retroactive tax claims, exchange controls, limits
on allowable levels of production, currency fluctuations, labour disputes and
other uncertainties arising out of foreign government sovereignty over the
Corporation's international operations. Certain regions of the world have a
history of political and economic instability. Such instability could result in
new governments or the adoption of new policies that might display a
substantially more hostile attitude toward foreign investment. Furthermore, in
the event of a dispute arising from international operations, the Corporation
may be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdiction of courts in
Canada.
EXCHANGE RATE FLUCTUATIONS
The Corporation is exposed to foreign exchange risks since a portion of its
expenditures are in Central African Francs (CFA franc). The exchange rate
between CFA francs and US dollars has varied substantially in the last five
years. The CFA franc was fixed to the French franc at CFA franc 50: French franc
1 from 1948 until its devaluation by 50% on January 12, 1994. Parity is
currently fixed at CFA franc 100: French franc 1.
ENVIRONMENTAL RISKS
All phases of the oil business, including exploration, development,
production, transportation and marketing, present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions, state laws, regulations and contractual obligations.
Environmental legislation and contractual obligations provide for, among other
things, restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with the Corporation's operations.
The legislation and obligations also require that wells and facility sites be
operated, maintained, abandoned and reclaimed to the satisfaction of applicable
authorities. Compliance with such legislation and obligations can require
significant expenditures and a breach may result in the imposition of fines and
penalties, some of which may be material. Environmental legislation is evolving
in a manner expected to result in stricter standards and enforcement, larger
fines and liability and potentially increased capital expenditures and operating
costs. Although the Corporation believes that it is in substantial compliance
with all existing material environmental regulations and contractual
obligations, there can be no assurance that future environmental costs will not
have a material adverse effect on the Corporation's financial condition or
results of operations.
GOVERNMENTAL REGULATION
The oil business is particularly subject to regulation and intervention by
governments in such matters as the awarding of exploration and production
interests, the imposition of specific drilling obligations, environmental
protection controls, control over the development and abandonment of fields
(including restrictions on production) and possibly expropriation or
cancellation of contract rights, as well as with respect to prices, taxes,
royalties and the exportation of oil. Such regulation may be changed from time
to time in response to economic or political conditions. The implementation of
new regulations or the modification of existing regulations affecting the oil
industry could reduce demand for oil, increase the Corporation's costs and have
a material adverse effect on the Corporation.
A-8
<PAGE> 337
COMPETITION
There is strong competition relating to all aspects of the oil industry, in
particular the exploration for and development of new oil reserves. The
Corporation will actively compete for reserve acquisitions, exploration leases,
licences and concessions and skilled industry personnel with a substantial
number of other oil and gas companies, many of which have significantly greater
financial resources than the Corporation. The Corporation's competitors will
include major integrated oil and natural gas companies and numerous other
independent oil and natural gas companies and individual producers and
operators.
AVAILABILITY OF EQUIPMENT AND PERSONNEL
The recent increase in drilling activity throughout the world has increased
the demand for drilling rigs, drilling equipment and personnel experienced in
the oil industry in general. As a result, the Corporation believes that there
currently is, and will continue to be, a shortage of available drilling rigs and
other equipment in West Africa and other international destinations which could
adversely affect the timing or cost of planned drilling projects. In addition,
the costs of such equipment, services and personnel have risen significantly in
recent years. No assurance can be given that such services, equipment and
personnel will be available in a timely manner or that the costs thereof will
not increase significantly in the future.
DEPENDENCE ON KEY PERSONNEL
The Corporation will depend, in the foreseeable future, on the services of
its executive officers with extensive experience and expertise in petroleum
exploration, evaluating and analyzing producing oil properties and drilling
prospects, maximizing production from oil properties (including through enhanced
recovery methods) and marketing and transporting oil production. The ability of
the Corporation to retain such officers and attract key employees is important
to the success and growth of the Corporation. The loss of key personnel could
have a material adverse effect on the Corporation.
LIMITED OPERATING HISTORY, LACK OF PROFITABLE OPERATIONS AND MANAGEMENT OF
GROWTH
The Corporation has no operating history and is still in a developmental
stage, commencing operations in the third quarter of 1997. Shareholders
therefore have limited historical financial information about the Corporation
upon which to base an evaluation of the Corporation's performance and ownership
in the common shares. There can be no assurance that the Corporation will be
profitable or will generate positive cash flow in future years. The Corporation
anticipates experiencing growth, which could place a strain on its operational
and personnel resources. If the Corporation is unable to manage its growth
effectively, including retaining qualified employees and consultants, or if
production levels fail to grow substantially, such events could have a material
adverse effect on the Corporation's results of operations, liquidity and
financial condition.
ENFORCEMENT OF CIVIL REMEDIES
The Corporation is organized under the laws of the Bermuda and all of the
Corporation's present material assets will be located outside of North America.
As a result, it may be difficult for holders of common shares to realize in
North America upon judgments rendered against it.
ABSENCE OF PUBLIC MARKET
Prior to the Effective Time, there will have been no public market for the
common shares. There can be no assurance that an active trading market will
develop or continue upon completion of the distribution. The initial value
assigned to the common shares will be determined by the Board of Directors of
Chauvco after careful and thorough analysis, yet may not be indicative of the
market price of the common shares after the distribution. The market price of
the common shares could be subject to significant fluctuations in response to
variations in quarterly and yearly operating results, the success of the
Corporation's business strategy, general trends in the oil industry,
competition, changes in governmental regulations affecting the Corporation or
the oil industry and other factors. In addition, the stock market in recent
years has experienced extreme price and
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<PAGE> 338
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of affected companies. These fluctuations may adversely
affect the market price of the common shares.
HOLDING CORPORATION STRUCTURE
The Corporation is a holding corporation and substantially all of the
Corporation's business activities and assets will be operated and held by its
subsidiaries. Accordingly, the Corporation's ability to meet its financial
obligations will be dependent primarily on the ability of its operating
subsidiaries to generate cash from operations and the payment of such cash by
the operating subsidiaries to the Corporation in the form of loans, dividends or
otherwise.
CORPORATE STRATEGY
It is anticipated that the Corporation's operational and financial
strategies will enable it to effectively manage the business and petroleum
industry risks. In this way, the Corporation will control its costs as well as
manage the risks inherent in the industry which are outside of it's control.
In addition to the Corporation's business philosophy and strategies which
are designed to manage these risks, other factors will contribute to achieving a
careful balance between risk and reward. The Corporation will employ highly
competent and professional staff who will undertake extensive geological,
geophysical, engineering and environmental analyses prior to committing
resources to new projects. To this end, the Corporation will utilize the most
advanced technology and information systems. The Corporation also anticipates
generating many of its exploration prospects internally, and will assume a high
degree of operational control by maintaining high working interest positions.
A-10
<PAGE> 339
CONVERSION
The following table sets forth certain standard conversions between
Standard Imperial Units and the International System of Units (or metric units).
<TABLE>
<CAPTION>
TO CONVERT FROM TO MULTIPLY BY
--------------- -- -----------
<S> <C> <C>
cubic metres cubic feet 35.494
bbls cubic metres 0.159
cubic metres Bbls 6.289
feet metres 0.305
metres feet 3.281
miles kilometers 1.609
kilometers miles 0.621
acres hectares 0.405
hectares acres 2.471
</TABLE>
CURRENCY
All currency amounts herein are stated in United States dollars unless
otherwise indicated. The following table sets forth, for the periods indicated,
certain exchange rates based on the noon buying rate in the City of New York for
cable transfers in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York (the "Noon Buying Rate"). Such rates are set
forth as United States dollars per Cdn. $1.00 and are the inverse of rates
quoted by the Federal Reserve Bank of New York for Canadian dollars per US
$1.00.
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR
ENDED ENDED
JULY 31, DECEMBER 31,
1996 1997
-------------- -------------
<S> <C> <C>
Noon Buying Rate at end of period......................... US $.7239 US $.7301
Average Noon Buying Rate during period.................... $.7282 $.7330
Highest Noon Buying Rate during period.................... $.7489 $.7515
Lowest Noon Buying Rate during period..................... $.7145 $.7214
</TABLE>
ELIGIBILITY FOR INVESTMENT
In the opinion of Bennett Jones Verchere, provided the Distributed Shares
are listed on a prescribed stock exchange (which currently includes The Toronto
Stock Exchange), the Distributed Shares will be qualified investments under the
Income Tax Act (Canada) for trusts governed by a registered retirement savings
plan, a registered retirement income fund or a deferred profit sharing plan
(other than a trust governed by deferred profit sharing plans under which the
employer is the Corporation or a corporation which does not deal at arm's length
with the Corporation for the purposes of the Income Tax Act (Canada)) ("Tax
Act").
Deferred income plans, such as registered retirement savings plans,
registered retirement income funds and deferred profit sharing plans, which
invest more than 20% of their assets in "foreign property", within the meaning
of the Tax Act, are subject to a penalty tax with respect to the value of the
foreign property in excess of this 20% limit. In the opinion of Bennett Jones
Verchere, the Distributed Shares will constitute foreign property for the
purposes of the Tax Act.
A-11
<PAGE> 340
CHAUVCO RESOURCES INTERNATIONAL LTD.
GENERAL
Chauvco Resources International Ltd. was incorporated under the laws of
Bermuda by Memorandum of Association dated July 29, 1997 for the purpose of
engaging, directly and indirectly, in the business of acquiring properties and
exploring for, developing and producing crude oil in commercial quantities. The
Corporation currently anticipates that its head and executive offices will be
located in London, United Kingdom but such location has not been definitely
determined. In any event, it is unlikely that the head and executive offices
will be located in Canada. The registered office of the Corporation is located
at Clarendon House, 2 Church Street, P.O. Box HM666, Hamilton, Bermuda HM CX.
Pursuant to the Arrangement, the Corporation will acquire the Gabon
Securities from CRIL. See "The Arrangement".
The following diagram details the structure of the Corporation's holdings
following the Arrangement:
[DIAGRAM]
NOTES:
(1) Incorporated under the laws of Bermuda.
(2) Incorporated or to be incorporated under the laws of the Republic of Gabon.
(3) Before State Back-in of 10 percent at Remboue, Ngalo, Maga and Avomo, and 15
percent (7.5 percent net to the Corporation) at Mondah Bay.
BUSINESS STRATEGY
The Corporation's primary interest is in the exploration for, and
development and production of medium or light gravity crude oil. The
Corporation's strategy is to select new international areas that meet the
following three entry criteria:
<TABLE>
<S> <C>
Materiality -- average daily production of 5,000 to 10,000 bbls/d within
eighteen months of entry. The initial project must involve
discovered reserves that are both material and profitable.
Profitability -- early production and cash flow and meaningful earnings
contribution. Development opportunities must have attractive
finding and development costs and be immediately profitable.
Growth -- potential for two to three times initial production rates
within three to five years. The opportunity must offer a
high likelihood of additional exploration and/or development
to allow for significant future growth.
</TABLE>
A-12
<PAGE> 341
The Corporation is currently focusing its activities on the interior basin
of Gabon, primarily on development in the Remboue area. In the future, the
Corporation intends to pursue a growth strategy based on the following:
- Fully assessing the potential of the 2.66 million acres of exploration
lands in the Interior Basin of Gabon through an aggressive exploration
program,
- Expand the Corporation's operations in central west Africa through a
strategy of targeting areas with characteristics similar to the coastal
and interior basins of Gabon,
- Expand into other international areas where it believes that its entry
criteria for materiality, profitability and growth can be attained.
GABON
GENERAL
Gabon is an independent republic which forms part of the central west
region of Africa. The country is situated on the Equator and has a coastline of
550 miles. The capital city, Libreville, is located at the mouth of the Como
delta in the north. On the west coast, Gabon's terrain is comprised of
sedimentary plains and swamps, while the remaining landscape is dominated by an
uneven relief of plateau interlocking with mountains. More than half of the
country is covered by tropical forests. The Corporation's lands are in an area
of lowland jungle with mangrove swamps and large estuaries that indent the
coastline and connect to navigable rivers which extend up to 60 miles inland.
In the middle of the 19th century, Gabon formed an alliance with France
under various protection treaties. In 1910, it became part of French Equatorial
Africa, which covered a large area including modern-day Gabon, Congo, the former
nation of Zaire and Chad. Gabon declared independence from France in 1960 and
the first presidential elections were subsequently held. Soon after, a
single-party system was implemented. This was followed by the adoption of a
constitution which instituted a multi-party system in 1990. In 1994, the "Paris
Accords" were signed which resulted in an enlarged government and elections to
be held under an independent electoral committee. Gabon's first referendum, held
in 1995 resulted in overwhelming support to implement the Paris Accords.
Today, Gabon is a unitary republic with a legal system based on its
constitution. The current head of state is President Omar Bongo, who has held
this position since 1967 and was last elected in 1993. The next presidential
election is scheduled for 1998. The National Assembly, which has 120 members, is
led by the current Prime Minister Paulin Obame Nguema, who was appointed in
October 1993. He leads a majority government, which includes the Parti
Democratique Gabonais, the former sole party which held a majority in the
National Assembly.
For historic reasons, France remains a political ally and an important
trade partner for Gabon. In the last few years, the Gabonese government has
increasingly developed political and trade relations with other industrialized
and developing countries.
OIL PRODUCTION
Gabon is sub-Saharan Africa's third largest oil producer (after Nigeria and
Angola), with oil exports of over $2 billion in 1995, representing as much as
80% of the country's total export revenues and about 30 percent of gross
domestic product. Gabon is a former member of OPEC, having withdrawn its
membership in 1996. Gabon's free-market economy, which is dominated by the
private sector, maintains favourable laws toward foreign investment. It has
large proven, hydrocarbon reserves (1.0 billion bbls), good reservoirs with high
well productivity rates (average 800 bbls/d), moderate fiscal terms which the
government is willing to negotiate, acceptable political stability, and well
developed infrastructure.
Petroleum exploration in Gabon was initiated in 1926 but it was not until
1956 that production commenced. Over the subsequent 12 years, oil production
centered on the onshore fields near Port Gentil.
A-13
<PAGE> 342
Between 1968 and 1990, major new contributions were made from the Gamba onshore
field operated by Shell Gabon S.A. ("Shell"), and from the offshore fields
operated by Elf Gabon S.A. ("Elf") including the Anguille, Torpille and Grondin
fields. In 1989, a downward production trend was reversed when the Shell-
operated onshore Rabi-Kounga field came on stream.
Prior to the discovery of Gamba and Rabi-Kounga, offshore oil fields
supplied most of Gabon's petroleum production. The offshore fields are of medium
size, with the exception of eight large fields of more than 100 million barrels
of recoverable oil. Since the onshore Rabi-Kounga field came on-stream in 1989,
onshore and offshore production has been approximately balanced. Recently, other
onshore discoveries have been made at Gamba, Echira, Coucal and Avocette. These
discoveries have stimulated renewed interest in onshore exploration.
The oil service centre of Gabon is located at Port Gentil, which is
approximately 120 miles south of the capital, Libreville. Today, Gabon has 35
producing fields with a total of approximately 440 producing wells which are in
the onshore and offshore region around Port Gentil or to the south of Port
Gentil. The average productivity per well is greater than 800 bbls/d. The major
producers are Elf, Shell and Perenco Gabon S.A., although numerous other
international operators are conducting exploration in Gabon.
REGULATION, ROYALTIES AND TAXES
Gabon legislation establishes State ownership of all natural resources with
royalties and duties payable by any company exploring the country's mineral
resources. The Gabonese government grants exploration and production permits in
the form of production sharing contracts under which it receives petroleum
revenue from two major sources; Royalty and State Profit Oil. The State Profit
Oil includes the Corporation's share of corporate income taxes. In addition, the
State may receive a State Back-in which it negotiates as part of a PSC. Other
than these payments, PSC income is exempt from all other Gabonese taxes.
CURRENCY
Gabon's currency is the Central African Franc (CFA franc), which is freely
convertible without limit into French francs. In 1994, the CFA franc was
devalued to 100 CFA francs = 1 French franc, a 50% devaluation.
The following table sets forth, for the periods indicated, certain exchange
rates set by the Bank of France. Such rates are set forth as US dollars per CFA
franc and are the inverse of rates quoted by the Bank of France for CFA franc
per US $1.00.
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED JULY 31, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Noon Buying Rate at end of period....................... US $0.00162 US $0.00191
Average Noon Buying Rate during period.................. $0.00174 $0.00196
Highest Noon Buying Rate during period.................. $0.00192 $0.00204
Lowest Noon Buying Rate during period................... $0.00161 $0.00189
</TABLE>
FOREIGN EXCHANGE CONTROLS
The Foreign exchange controls that govern the Corporation's operations are
those in general effect in Gabon with the following PSC specific exceptions. The
PSC's allow for: (1) no restrictions on the importation of foreign funds
intended for the performance of the Corporation's obligations under the PSC; (2)
the Corporation to freely convert its assets in Gabon into convertible
currencies and the right to export the funds from Gabon without restriction; and
(3) the opening and maintaining of bank accounts both inside and outside of
Gabon and the receipt of the proceeds from any sale of production in any of
these accounts. The PSC's do not require the Corporation to import into Gabon,
funds intended for the performance of the Corporation's obligations, where such
obligations require the payment to be made abroad.
A-14
<PAGE> 343
INDUSTRY CONDITIONS
General
Oil and Gas activities in Gabon are governed under Law No. 15/62 of June 2,
1962 and subsequent amendments which established a mining code in Gabon. In
addition, Decree No. 981/PR of October 16, 1970 established the conditions for
the application of the mining code and Law No. 14/82 of January 24, 1983
established regulation for hydrocarbon exploration and exploitation activities.
Under these laws and decrees the State is the owner of the natural resources for
both onshore and offshore areas. The State has established the Direction
Generale de L'Exploration et de L'Exploitation des Hydrocarbures ("DGH") as the
department that administers hydrocarbon activities within Gabon.
Exploration and Production Sharing Contracts
The DGH negotiates contracts for the exploration for and production of
hydrocarbons in the form of PSC's with third parties ("Contractors").
The PSC is normally for an initial period of two to three years during
which the Contractor commits to perform certain exploration activities within a
prescribed area. Should the initial work commitment be met, the Contractor is
permitted to continue the PSC for a further period of two to three years during
which time the Contractor is committed to perform certain additional exploration
work commitments. Generally, there is no relinquishment of any of the permit
area between the respective exploration periods. Should the Contractor not
fulfill its work commitments, it would be liable to the State for the cost of
such unfulfilled commitments. All real property that is part of the costs within
a PSC are the property of the State. The Contractor may utilize those while
operating under the terms of a PSC.
The Contractor is obligated to file with the DGH annual work programs and
budgets and to report monthly on conducted activities. Should there be no
commercial discoveries within the exploration period(s), the area is
relinquished to the State, although the State may grant additional exploration
periods if the Contractor commits to perform further exploration work.
Exclusive Exploitation Areas
Should the Contractor discover one or more fields within the time periods
defined under a PSC that the DGH agrees is commercially exploitable, then the
DGH will establish an Exclusive Exploitation Area (EEA) which is limited to the
presumed size of each field. The Contractor has two years from the date of the
granting of an EEA to commence production from the field. The EEA is granted for
an initial term of 10 years and may be extended for two additional periods of
five years each. The Contractor may relinquish an EEA at any time for any reason
including non-commerciality of the production from the EEA.
Environmental Law
A new Environmental Law was passed by the Gabonese Parliament in 1993. For
the law to become effective, implementation regulations need to be developed.
The petroleum operators with activities in Gabon, through UPEGA (Union
Petroliere Gabonaise), have volunteered to develop the regulations and provide
them to the Government and the Ministry of Environment.
GEOLOGY OF INTERIOR BASIN
The Corporation's proposed holdings cover most of the Interior Basin of
Gabon and are situated in the equatorial region of the northwest onshore. They
are bounded by the basement outcrop of the Lambarene Horst to the west and by
the outcrop of the pre-Cambrian shield to the east and south. The Interior Basin
opens up into the coastal Atlantic or North Gabon Basin to the northwest.
The sedimentary and petroleum geology is closely associated with the plate
tectonic events that caused the separation, through continental rift and drift,
of Africa and South America during the Cretaceous Period. The Interior Basin is
interpreted to be a broad interior fracture basin (rift zone) that was the locus
of
A-15
<PAGE> 344
sedimentary deposition during the Cretaceous Period. Thick organic rich muds and
sands were deposited in this basin. These sediments now form the main petroleum
source and reservoir rocks in the basin.
Numerous surface seeps drew the early French prospectors to this area in
the 1920's -- 1950's. Of the 41 wells drilled to date in the basin, most are old
shallow wells, although many have recorded oil shows, despite the fact that some
of these wells were incorrectly located due to poor early seismic survey data.
The relatively recent discovery at Remboue in 1992 of a significant
accumulation of high quality oil (34 degrees API) confirms the presence of an
active hydrocarbon generation system. The shallow depth of this accumulation
(approximately 1200 feet) highlights the under explored nature of the pre-salt
section in the Interior Basin.
BUSINESS AND PROPERTIES OF THE CORPORATION
INTRODUCTION
Following the Arrangement, the Corporation's assets will consist of
approximately $5,000,000 cash, all of the issued and outstanding securities of
CRG, Ngalo, Maga, Avomo and CR Trading and 75% of the issued and outstanding
securities of Westoil.
In 1996, CRG began oil and gas exploration and development operations in
Gabon, central west Africa, under two separate contracts. On July 1, 1996, CRG
signed a PSC for the Remboue Permit (the "Remboue Permit"), an onshore block
encompassing 224,000 acres. The Remboue Permit contains two known oil
discoveries and has exploration potential. In the third quarter of 1996, CRG
entered into a farm-in agreement with Santa Fe Energy Resources of Gabon (Mondah
Bay), Ltd. on the Mondah Bay Permit (the "Mondah Bay Permit") where an
unsuccessful offshore exploration well was drilled in June 1997. This 378,000
acre permit is situated in relatively shallow water and close proximity to the
Remboue Permit.
In April 1997, Ngalo, Maga and Avomo acquired three additional PSCs (the
"1997 Permits"). The 1997 Permits encompass 2.06 million acres and are
contiguous with CRG's existing Remboue Permit and Mondah Bay Permit. An
extensive database of seismic and well data has been obtained from the State and
is currently being analyzed.
CRG has developed one of the known oil discoveries (the Remboue Gamba Pool)
during the past year and began oil production in August 1997.
Remboue Permit
The fiscal terms negotiated on the Remboue Permit include Royalties, Profit
Oil and Cost Oil terms. The Remboue Permit is believed to have excellent
exploration potential and contains two known oil discoveries, one of which has
been developed by CRG (the Remboue Gamba Pool). CRG has a 100% interest in the
Remboue Permit subject to a 10% State Back-in.
Between 1989 and 1991, the previous operator of lands which included the
Remboue Permit drilled eight exploration wells and acquired approximately 370
miles of two-dimensional seismic data. The Remboue Gamba and Fourou Plage
discoveries were made in 1991 by the drilling of the AbRe-1 and AbRe-2 wells
respectively. At present, there have been approximately 20 prospective crude oil
leads identified.
The terms of the Remboue Permit include two exploration periods, the first
period being three years and the optional second period being two years with no
relinquishment between the periods. CRG's work commitment during the first
exploration period included drilling two appraisal wells and one 4,920 foot
exploration well. The drilling undertaken in 1996 and the first six months of
1997 has fulfilled CRG's commitment to drill the two appraisal wells. The
Corporation's work commitment for the second exploration period will include
drilling two wells (1,640 feet and 4,920 feet) and shooting 62 miles of
two-dimensional seismic.
A-16
<PAGE> 345
After signing the Remboue PSC with the Government of Gabon in July 1996,
CRG drilled its first appraisal well at ReRe-1 on the existing Gamba oil
discovery during the fourth quarter of 1996. This has been followed up with an
11 horizontal well development program. The Corporation began production in
August 1997 from the Remboue Gamba pool. Each well is expected to produce at
rates between 550 and 1,575 bbls/d. Initial total production from the 10
horizontal wells equipped as producers is forecast at 7,500 bbls/d of oil.
The Remboue Gamba pool reservoir is a Lower Cretaceous sandstone containing
an estimated 50 million barrels of original oil in place. The reservoir depth is
approximately 1,200 feet with an average porosity of 20%. The crude oil has a
gravity of 34 degrees API and contains minor amounts of sulphur.
Production facilities were installed at Remboue during the third quarter of
1997. These facilities include roads and camp facilities, a pipeline gathering
system and fluid separation and treating equipment utilized to prepare crude oil
to market specifications. A separate crude oil storage and tanker loading
facility has been constructed adjacent to the Remboue River.
CRG has also commenced an appraisal and exploration program to evaluate the
Gamba potential in the Remboue area, using a slim hole mining rig. Slim hole
wells drilled at ReRe-10, ReRe-17 and ReRe-15 have identified Gamba oil
potential to the east of the Remboue Gamba pool (ReRe East). CRG has contracted
a conventional drilling rig, expected to be onsite in October 1997. At this
time, the Corporation anticipates using it to drill a horizontal well at ReRe
East and an exploration well to test the Fourou Plage discovery beneath the
Remboue Gamba pool. The current exploration program also includes an
experimental high resolution seismic survey and four additional slim hole wells
to further evaluate the Gamba potential in the Remboue area. The conventional
drilling rig will also drill development wells at Remboue and elsewhere, pending
results of the exploration program.
Although the Remboue Permit is onshore in an area of tropical rainforest,
there is good access to the area up the Remboue River. In addition, good quality
roads were built into the area of the oil discovery by the previous operator
providing good operational access. Crude oil produced from the Remboue discovery
is being transported to storage and off-loading facilities operated by Westoil.
See "Marketing and Transportation".
Mondah Bay Permit
CRG earned a 50% interest, subject to a 7.5% State Back-in, in the Mondah
Bay Permit in June 1997 by funding an exploration well in the shallow offshore
(estuary) portion of the permit. The well was spudded on May 10, 1997, drilled
to a total depth of 2,130 feet and abandoned on June 5, 1997. Minor oil shows
were encountered while drilling through the Vembo shale above the main target of
the Gamba sand. Although excellent reservoir sands were encountered in the
Gamba, no oil shows were present and the well was abandoned.
This well fulfilled the work commitment of the Mondah Bay Permit for the
initial term of two years. Should the permit be continued into the second phase,
the work commitment is for 124 miles of 2-dimensional seismic or 31 square miles
of 3-dimensional seismic and one well to 3,280 feet.
Ngalo, Maga and Avomo Permits
The Corporation is developing an exploration program for the 1997 Permits.
The terms of the Ngalo, Maga and Avomo PSC's include two exploration periods,
the first period being three years and the optional second period being two
years. The Corporation's combined work commitments for all three permits during
the first exploration period will include the reprocessing of existing seismic
data and the drilling of five exploration wells. The commitment wells will be
drilled to depths ranging from 1,641 feet to 4,922 feet. The fiscal terms
negotiated on the 1997 Permits include Royalties, Profit Oil and Cost Oil terms.
The Corporation's work commitments for the second exploration period will
include drilling three wells to 1,641 feet and one well to 3,281 feet. Ngalo,
Maga, and Avomo have a 100% interest in their respective permits, subject to a
10% State Back-in. The Corporation is planning to commence drilling the
exploration commitment wells in the fourth quarter of 1997.
A-17
<PAGE> 346
The Maga and Avomo permits are onshore in an area of tropical rainforest
similar to the Remboue Permit with good access to the area by river and road.
The Ngalo permit is an onshore permit surrounding the capital city of Libreville
and covering the shallow waters of the Estuaire du Gabon. It is anticipated that
oil produced from the 1997 Permits would be transported to storage and
off-loading facilities on the coast.
MARKETING AND TRANSPORTATION
Ninety-five percent of Gabonese crude oil production is exported by ocean
tanker, with the majority shipped to sophisticated refining centers in the
United States. It is anticipated that CR Trading will market the Corporation's
production to either west African crude oil traders or North American refiners.
The Remboue Gamba Pool crude oil compares favourably with the best quality crude
exported from Gabon.
The Corporation began delivering its initial production from the Remboue
Permit in August 1997 to a leased Storage Tanker (580,000 bbls capacity).
Westoil has purchased two European Estuary Tankers (minimum capacity of 12,000
bbls each) and is transporting sales quality crude oil from the Remboue Gamba
Pool to the Storage Tanker, which is moored offshore near the entrance to the
Estuaire du Gabon. Every 40 to 60 days, the Storage Tanker will move into deeper
water to transfer its cargo as a part load to an ocean tanker for transport to
markets. The first shipment of crude to market is expected to take place in late
October or early November 1997.
The Corporation will evaluate the option of building a pipeline and marine
terminal to ship crude to market. It is anticipated that the transportation of
crude using Estuary Tankers would continue until sufficient reserves have been
discovered to meet a production level of 25,000 bbls/d sustainable for five
years. At that time, a pipeline is expected to be constructed to reduce
transportation costs.
LAND HOLDINGS
The following table sets forth the land holdings of CRG, Ngalo, Maga and
Avomo (the "Permit Holders") respectively, as at June 30, 1997.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
----------------- ----------------- -----------------
GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2)
-------- ------ -------- ------ -------- ------
(THOUSANDS OF ACRES)
<S> <C> <C> <C> <C> <C> <C>
Remboue.......................... 2 2 222 222 224 224
Mondah Bay....................... -- -- 378 189 378 189
Ngalo............................ -- -- 602 602 602 602
Maga............................. -- -- 610 610 610 610
Avomo............................ -- -- 850 850 850 850
--- --- ----- ----- ----- -----
Total....................... 2 2 2,662 2,473 2,664 2,475
=== === ===== ===== ===== =====
</TABLE>
NOTES:
(1) "Gross Acres" represents the total number of acres in which the Permit
Holders have an interest.
(2) "Net Acres" refers to the total of the acres in which the Corporation has an
interest multiplied by the percentage interest of the Permit Holders
therein. The State and other Gabonese parties have an option to back-in to
development projects for a 10% interest at Remboue, Ngalo, Maga and Avomo
and a 15% (7.5% net to the Corporation) interest at Mondah Bay.
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<PAGE> 347
DRILLING HISTORY
The Permit Holders drilled, or participated in the drilling of the
following wells during the period indicated.
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS
ENDED FOR THE YEAR ENDED
JULY 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
GROSS(1) NET(2) GROSS(1) NET(2)
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Crude Oil........................... 9.0 9.0 3.0 3.0
Drilled and abandoned(3)............ 3.0 2.5 -- --
---- ---- ---- ----
Total Wells.................... 12.0 11.5 3.0 3.0
---- ---- ---- ----
Success Ratio....................... 75% 100%
</TABLE>
NOTES:
(1) "Gross" means the number of wells in which the Permit Holders have a working
interest.
(2) "Net" means the aggregate number of wells obtained by multiplying each gross
well by the Permit Holders' percentage working interest therein. The State
and other Gabonese parties have an option to back-in to development projects
for a 10% interest at Remboue, Ngalo, Maga and Avomo and a 15% (7.5% net to
the Corporation) interest at Mondah Bay.
(3) Includes the ReRe-10 and ReRe-17 slim-hole appraisal wells, which found oil
but were abandoned as they had no value as future production or injection
wells due to the small-hole diameter.
CAPITAL EXPENDITURES
The following table summarizes the consolidated pro forma capital
expenditures of the Corporation for the periods indicated.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED FOR THE YEAR ENDED
JULY 31, 1997 DECEMBER 31, 1996
------------------ ------------------
(THOUSANDS IN US DOLLARS)
<S> <C> <C>
Drilling and equipping wells..................... $16,721 $7,955
Production facilities............................ 8,717 nil
Estuary tankers.................................. 3,900 nil
Land acquisition................................. 3,500 750
Capitalized administration....................... 1,519 849
Corporate........................................ 194 82
------- -------
Total....................................... $34,551 $9,636
======= =======
</TABLE>
OIL WELLS
At July 31, 1997, the Corporation had interests in ten wells, (nine net
wells after State Back-in) which were capable of or were being completed and
tied-in for production of crude oil.
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<PAGE> 348
RESERVES
Gilbert Laustsen Jung Associates Ltd. ("Gilbert"), in a report (the
"Gilbert Report") dated August 19, 1997, evaluated the Remboue property of CRG
as at August 1, 1997.
The following table summarizes Gilbert's evaluation of the CRG interest in
the gross and net reserves and future net revenue of the Remboue property. Under
the terms of the production sharing contracts, revenues are received in the form
of Cost Oil and Profit Oil. All evaluations of future net production revenue set
forth in the tables are stated prior to provision for indirect costs and after
deduction of royalties. CRG's income taxes are included in the State Profit Oil.
Accordingly, the net production revenue set forth in the table is stated after
Gabon taxes. Included in royalties is the State Profit Oil royalty amounts. It
should not be assumed that the discounted net revenues shown below represent the
fair market value of the reserves.
<TABLE>
<CAPTION>
GROSS RESERVES NET RESERVES
-------------- ------------
CRUDE OIL CRUDE OIL
BASED ON ESCALATING PRICE ASSUMPTIONS (MBBLS) (MBBLS)
------------------------------------- -------------- ------------
<S> <C> <C>
Proved Non-producing Reserves.............................. 7,553 6,610
Probable Reserves.......................................... 1,848 1,368
----- -----
Total Proved and Probable Reserves.................... 9,401 7,978
===== =====
</TABLE>
<TABLE>
<CAPTION>
DISCOUNTED AT THE RATE OF
PRESENT WORTH OF FUTURE NET PRODUCTION ---------------------------
REVENUE BASED ON ESCALATING PRICE ASSUMPTIONS UNDISCOUNTED 10% 15% 20%
- --------------------------------------------- ------------ ------- ------- -------
(THOUSANDS IN US DOLLARS)
<S> <C> <C> <C> <C>
Proved Non-producing Reserves................ $49,990 $41,186 $37,920 $35,188
Probable Reserves at 50%..................... 6,112 5,265 4,937 4,657
------- ------- ------- -------
Total Proved and Probable Reserves...... $56,102 $46,451 $42,857 $39,845
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS RESERVES NET RESERVES
-------------- ------------
CRUDE OIL CRUDE OIL
BASED ON CONSTANT PRICE ASSUMPTIONS (MBBLS) (MBBLS)
----------------------------------- -------------- ------------
<S> <C> <C>
Proved Non-producing Reserves.............................. 7,553 6,654
Probable Reserves.......................................... 1,848 1,365
----- -----
Total Proved and Probable Reserves.................... 9,401 8,019
===== =====
</TABLE>
<TABLE>
<CAPTION>
DISCOUNTED AT THE RATE OF
PRESENT WORTH OF FUTURE NET PRODUCTION ---------------------------
REVENUE BASED ON CONSTANT PRICE ASSUMPTIONS UNDISCOUNTED 10% 15% 20%
- ------------------------------------------- ------------ ------- ------- -------
(THOUSANDS IN US DOLLARS)
<S> <C> <C> <C> <C>
Proved Non-producing Reserves............... $46,888 $38,903 $35,922 $33,418
Probable Reserves at 50%.................... 5,836 5,059 4,756 4,657
------- ------- ------- -------
Total Proved and Probable Reserves..... $52,724 $43,962 $40,678 $37,915
======= ======= ======= =======
</TABLE>
NOTES TO GABON ESCALATING AND CONSTANT PRICE RESERVES AND FUTURE NET REVENUE
TABLES:
(1) "Gross reserves" are defined as the total of CRG's working interest share
of reserves. "Net reserves" are defined as CRG's gross reserves less all
royalties and State Profit Oil in excess of corporate income taxes.
(2) "Proved reserves" are those reserves estimated as recoverable under current
technology and existing economic conditions in the case of constant price
and cost analyses and anticipated economic conditions in the case of
escalated price and cost analyses, from that portion of a reservoir which
can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data,
including the reserve to be obtained by enhanced recovery processes
demonstrated to be economically and technically successful in the subject
reservoir.
A-20
<PAGE> 349
(3) "Producing reserves" are those reserves that are actually on production and
could be recovered from existing wells and facilities. An increase in
existing compression horsepower or the restaging of an existing compressor
is categorized as producing, as is the installation of a pumping unit,
where either the investment or the incremental reserves are small. In
multi-well pools involving a competitive situation, reserves may be
subdivided into producing and non-producing reserves, in order to reflect
allocation of reserves to specific wells and their respective development
status. Producing reserves require near zero future capital to be expended
in order to be produced.
(4) "Non-producing reserves" are those reserves that are not classified as
producing.
(5) "Probable reserves" are those reserves which analysis of drilling,
geological, geophysical and engineering data does not demonstrate to be
proved under current technology and existing economic conditions, but where
such analysis suggest the likelihood of their existence and future
recovery. Probable additional reserves to be obtained by the application of
enhanced recovery processes will be the increased recovery over and above
that estimated in the proved category which can be realistically estimated
for the pool on the basis of enhanced recovery processes which can be
reasonably expected to be instituted in the future. The extent to which
probable reserves ultimately may be reclassified as proved reserves is
dependent upon future drilling, testing, and well performance. The degree
of risk to be applied in evaluating probable reserves is influenced by
economic and technological factors as well as the time element. FOR
PURPOSES OF THIS INFORMATION BULLETIN, CRG HAS REDUCED ITS PRESENT WORTH
VALUES ON PROBABLE RESERVES BY 50% TO ACCOUNT FOR GEOLOGICAL AND
ENGINEERING RISK FACTORS.
(6) "Net production revenue" is income derived from the sale of net reserves of
petroleum and natural gas, less all capital costs, production taxes and
operating costs and before administrative overhead costs.
(7) The escalating price assumptions assume the continuance of current laws and
regulations and any increases in wellhead selling prices and take into
account inflation with respect to future operating and capital costs. In
the escalating price assumption evaluation, operating and capital costs
have been escalated in accordance with Note 10 below. The field oil price
forecasts effective August 1, 1997 are summarized as follows:
<TABLE>
<CAPTION>
WTI FIELD PRICE
($/BBL) ($/BBL)
------------ ------------
<S> <C> <C>
1997.............................. 19.50 17.60
1998.............................. 20.00 18.10
1999.............................. 20.50 18.60
2000.............................. 21.00 19.10
2001.............................. 21.50 19.60
2002.............................. 22.00 20.10
2003.............................. 22.50 20.60
2004.............................. 23.00 21.10
2005.............................. 23.50 21.60
Thereafter........................ +2% per year +2% per year
</TABLE>
(8) The constant price assumptions assume the continuance of current laws,
regulations and operating costs in effect on the date of the evaluation.
Product prices have not been escalated beyond 1997. The field price used to
calculated the net production revenue was $17.60/bbl (WTI $19.50).
In addition, operating and capital costs have not been increased on an
inflationary basis.
(9) Total capital costs, net to CRG, necessary to achieve the estimated future
net proved and probable production revenues, based on escalating price and
cost assumptions, are estimated to be $4.2 million with all costs to be
incurred in fiscal year 1997. The comparable values for the constant cost
assumptions are $4.2 million in 1997. These values relate to the total
proved and probable reserve cases.
(10) The costs used in the Escalating Price Assumption case have been escalated
by 2% per year beginning in 1998.
A-21
<PAGE> 350
CAPITALIZATION
The following table sets forth the capitalization of the Corporation as at
certain dates and after certain events:
<TABLE>
<CAPTION>
OUTSTANDING AS AT
--------------------------------------------
JULY 31, 1997
AFTER GIVING EFFECT TO
DESCRIPTION AUTHORIZED JULY 31, 1997 THE ARRANGEMENT
----------- ---------- ------------------ ----------------------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Debt......................... Nil Nil Nil
Common Shares(1)............. 1,200,000(2) $12,000 $ 513,324
(1,200,000 shares) (approximately
51,332,432(3) shares)
</TABLE>
NOTES:
(1) After giving effect to the Arrangement, the proforma contributed surplus and
retained earnings as of July 31, 1997 is $42,342,956.
(2) At the Effective Time, the authorized capital of the Corporation will be
increased to facilitate the Additional Subscription.
(3) The precise number of the Additional Shares will be determined at the
Effective Time. The Corporation currently estimates that 50,132,432 common
shares will be subscribed for by Chauvco. See "The Arrangement".
As of August 1, 1997, the 25% minority interest in Westoil was $1,139,777.
A-22
<PAGE> 351
DIRECTORS AND OFFICERS
The name, municipality of residence, position held with the Corporation and
principal occupation of each of the present and proposed directors and officers
of the Corporation is set forth below.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION HELD CURRENT PRINCIPAL OCCUPATION(2)
---------------- ------------- -------------------------------
<S> <C> <C>
Guy J. Turcotte(1) Chairman and Director Chairman, C.E.O. and Director of Chauvco
Calgary, Alberta
W. Glen Russell President, Chief Executive President, C.O.O. and Director of Chauvco
Calgary, Alberta Officer and Director
James K. Wilson Executive Vice-President Senior Vice-President, Finance and
Calgary, Alberta and Chief Financial Officer Administration & C.F.O. of Chauvco
M. Simon Hatfield Executive Vice-President, Vice-President, International Exploration
Calgary, Alberta Operations of Chauvco
James R. Baroffio Director Corporate Director
Maraga, California
Bernard F. Isautier Director Corporate Director
Papeete, French
Polynesia
Graham Collis(1) Director Partner
Hamilton, Bermuda Conyers Dill & Pearman
(Bermuda law firm)
Anthony Whaley(1) Director Partner
Hamilton, Bermuda Conyers Dill & Pearman
(Bermuda law firm)
</TABLE>
NOTE:
(1) Messrs. Turcotte, Collis and Whaley serve as the initial Directors of the
Corporation pending the subsequent installation of the remaining slate. Upon
appointment of Messrs. Russell, Baroffio and Isautier, Mr. Whaley will
resign. Other individuals may also be appointed Directors of the Corporation
prior to the Effective Time.
(2) At the Effective Time, the principal occupations of the individuals who are
officers of the Corporation will change as their positions with the
Corporation will become their principal occupation.
Each of the above listed individuals has been engaged in the principal
occupation or in other capacities with the same firm or organization for the
last five years except for Mr. Baroffio who prior to November 1, 1994 was
President of Chevron Canada Resources, Mr. Isautier who prior to January 1, 1996
was President and C.E.O. of Canadian Occidental Petroleum Ltd., Mr. Russell who
prior to February 15, 1995 was Senior Vice-President and C.O.O. of Gulf Canada
Resources Limited, and Mr. Hatfield who prior to December 12, 1994 was Manager,
Geology and Geophysics, Frontiers and International, Petro-Canada Inc.
A-23
<PAGE> 352
MANAGEMENT
The following is a brief summary of the technical qualifications of the
senior officers of the Corporation.
GUY J. TURCOTTE, Chairman and Director -- Mr. Turcotte founded Chauvco
Resources Ltd. in January, 1981 and was appointed Chairman of the Board and
Chief Executive Officer on January 1, 1993. From 1984 to 1988, and from 1989 to
1994, Mr. Turcotte served on the board of the Canadian Association of Petroleum
Producers (CAPP) (formerly IPAC). He has also served on various Boards in the
industry and is currently on the Board of Directors of Gendis Inc.,
Trans-Dominion Energy Corporation, Alliance Pipeline Ltd., and is a member of
the Young Presidents' Organization. Mr. Turcotte received the Independent
Petroleum Association of Canada Chairman's Award in 1990 and the Wall Street
Transcript Gold Award for the outstanding Chief Executive Officer of Canadian
Junior Oil Producers in 1990. In 1991, he received the same award in the
Canadian Intermediate Oil Producer category and the Pinnacle Award honoring
Entrepreneurship in Alberta.
W. GLEN RUSSELL, President, Chief Executive Officer and Director -- In
October 1995, Mr. Russell was appointed President and Chief Operating Officer of
Chauvco Resources Ltd. and elected a director of Chauvco Resources Ltd. in April
1996. He has over 27 years of broad oil and gas experience and has been
responsible for all domestic and international activities of Chauvco Resources
Ltd. Since 1983, Mr. Russell held various senior executive positions with Gulf
Canada in both growth and restructuring environments and was named Senior Vice
President and Chief Operating Officer in 1993. Mr. Russell was a participant and
chairman of numerous joint venture management committees for developments such
as Hibernia and Terra Nova off the east coast of Canada, Amauligak in the
Beaufort Sea, and heavy oil/oil sands projects such as Syncrude, OSLO, Alsands
and the Plains Upgrader. He has served on various boards in the industry,
including Center for Cold Oceans Resource Engineering, Center for Frontier
Engineering Research, Syncrude Canada Limited, Komiarcticoil Joint Stock Company
and Rimbey Pipeline Company Limited.
JAMES K. WILSON, Executive Vice President and Chief Financial Officer -- In
August 1990, Mr. Wilson was named Vice President, Finance and Chief Financial
Officer of Chauvco Resources Ltd. He was promoted in 1995 to Senior Vice
President, Finance and Administration & Chief Financial Officer. Mr. Wilson has
been responsible for finance, accounting, treasury, information systems and
administration at Chauvco Resources Ltd. Since 1982 he has held various
positions of increasing responsibility for accounting, treasury and finance
activities in the oil and gas industry. Mr. Wilson is a member of the Institute
of Chartered Accountants of Alberta, Financial Executives Institute of Canada,
Canadian Petroleum Tax Society and Treasury Management Association of Canada.
M. SIMON HATFIELD, Executive Vice President, Operations -- Mr. Hatfield
joined Chauvco Resources Ltd. in December 1994 as Vice President, International
Exploration to form an International New Ventures Group and provide dedicated
focus to the Company's international business units. The identification of the
Gabon opportunity was a result of this group's focus. Previously, he held
various senior managerial positions of increasing responsibility in two of the
world's largest oil and gas companies (Esso/Exxon and Petro-Canada). Mr.
Hatfield is a petroleum explorationist with over 20 years of oil and gas
industry experience with 15 years in international ventures/operations in
Africa, Middle East, Asia, South America and Europe.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES
The Corporation may require additional financing to develop its properties,
and to place them into commercial production. The development of its properties
will, therefore, depend upon the Corporation's ability to obtain financing
through the joint venturing of projects, debt financing, equity financing or
other means. There is no assurance that the Corporation will be successful in
obtaining such required financing. Failure to obtain such financing would result
in the delay or indefinite postponement of exploration and development work on
its properties, as well as the possible relinquishment of its properties.
A-24
<PAGE> 353
RELATIONSHIP BETWEEN THE CORPORATION AND CHAUVCO
Chauvco took the initiative in founding and organizing the Corporation on
July 29, 1997. To date, Chauvco has contributed $12,000 to the Corporation on
the subscription for 1,200,000 common shares. Chauvco currently owns 100% of the
issued and outstanding common shares of the Corporation.
Chauvco was incorporated under the laws of the Province of Alberta on
January 16, 1981. Chauvco is an Alberta-based, international petroleum
exploration and production company. The registered office of Chauvco and its
head office and principal place of business are located at 2900, 255 - 5th
Avenue, S.W., Calgary, Alberta, T2P 3G6.
The common shares of Chauvco are listed and posted for trading on The
Toronto Stock Exchange, The Alberta Stock Exchange and the Montreal Exchange.
The Combination Agreement provides that, in connection with the
transactions leading to the distribution of the Distributed Shares in accordance
with the Arrangement, the purchase and sale agreement between CRIL and the
Corporation with respect to the transfer of CRIL's interest in the Gabon
Securities to the Corporation shall be in a form mutually acceptable to Chauvco
and Pioneer Canada and shall provide that: (i) the Corporation will assume and
be responsible for and will indemnify, defend and hold CRIL, Chauvco and Pioneer
Canada harmless from and against any liabilities that CRIL, Chauvco or Pioneer
Canada may be or become subject to if any taxing authority challenges the value
placed on the Gabon Securities or the corresponding value of the Distributed
Shares transferred to the holders of Common Shares of Chauvco and holders of
Chauvco Options; (ii) the Corporation will assume all liabilities with respect
to the underlying operations of the Gabon Subsidiaries being purchased; (iii)
the Corporation will assume and be responsible for and will indemnify, defend
and hold CRIL, Chauvco and Pioneer Canada harmless from and against any
liabilities that CRIL, Chauvco and Pioneer Canada may be or become subject to
which relate to the assets, business, operations, debts or liabilities of CRIL
and Chauvco which are being purchased by the Corporation and with respect to the
transactions contemplated in respect thereof (provided that with respect to tax
matters, the extent of the indemnity shall be limited to that set out in (i));
(iv) CRIL and Chauvco will assume and be responsible for and will indemnify,
defend and hold the Corporation harmless from and against any liabilities the
Corporation may be or become subject to which relate to the assets, business,
operations, debts or liabilities of CRIL and Chauvco which are not being
purchased by the Corporation; (v) Chauvco, subject to confidentiality
provisions, will retain copies of the books and records of such companies; (vi)
the Chauvco name shall not be used in connection with, and the Corporation shall
not engage in, any oil and gas operations in the western Canadian sedimentary
basin for a period of one (1) year from the Effective Date; and (vii) the
Corporation will use its best efforts to have Chauvco released from any and all
guarantees Chauvco has given to the Gabonese Government. In addition, Chauvco
will provide an additional C$13.5 million of funding into the Gabon Subsidiaries
through CRIL between September 3, 1997 and the Effective Date which shall remain
in the Gabon Subsidiaries for their operations and shall not be repaid to CRIL
except to the extent that the same may be reflected in the determination of the
fair market value of the Gabon Securities on the Effective Date.
DESCRIPTION OF SHARE CAPITAL
As at July 31, 1997, the authorized, issued and outstanding share capital
of the Corporation consisted of 1,200,000 common shares with par value equal to
$0.01 per common share. At the Effective Time, the number of authorized common
shares of the Corporation will be increased to facilitate the Additional
Subscription and Chauvco will subscribe for the Additional Shares at a
subscription price equal to the aggregate of $5,000,000 and the fair market
values of the Gabon Securities. For each of the Additional Shares, $0.01 will be
added to the stated capital account of the common shares of the Corporation, and
to the extent that the aggregate of such amount is less than the subscription
price paid by Chauvco, the difference shall be contributed surplus.
A-25
<PAGE> 354
BERMUDA COMPANY LAW
Set forth below is a summary of certain significant provisions of the
Companies Act 1981 of Bermuda (including any modifications adopted pursuant to
the Corporation's by-laws) applicable to the Corporation. The following
statements are summaries, and do not purport to deal with all aspects of Bermuda
law that may be relevant to the Corporation and its shareholders.
Interested Directors. The by-laws provide that any transaction entered into
by the Corporation in which a director has an interest is not voidable by the
Corporation nor can such director be liable to the Corporation for any profit
realised pursuant to such transaction provided the nature of the interest is
disclosed at the first opportunity at a meeting of directors, or in writing to
the directors.
Merger and Similar Arrangements. The Corporation may acquire the business
of another Bermuda corporation similarly exempt from Bermuda taxes or a
corporation incorporated outside Bermuda and carry on such business when it is
within the objects of its Memorandum. The Corporation may amalgamate with
another Bermuda corporation or with a corporation incorporated in another
jurisdiction which permits such a corporation to amalgamate with a Bermuda
corporation, subject to shareholder approval. A shareholder may apply to a
Bermuda court for a proper valuation of such shareholder's shares if such
shareholder is not satisfied that fair value has been paid for such shares. The
court ordinarily would not disapprove the transaction on that ground absent
evidence of fraud or bad faith.
Takeovers. Bermuda law provides that where an offer is made for shares of
another corporation and, within four months of the offer the holders of not less
than 90% of the shares which are the subject of the offer accept, the offeror
may by notice require the nontendering shareholders to transfer their shares on
the terms of the offer. Dissenting shareholders may apply to the court within
one month of the notice objecting to the transfer. The burden is on the
dissenting shareholders to show that the court should exercise its discretion to
enjoin the required transfer, which the court will be unlikely to do unless
there is evidence of fraud or bad faith or collusion as between the offeror and
the holder of the shares who have accepted the offer as a means of unfairly
forcing out minority shareholders.
Shareholder's Suit. Class actions and derivative actions are generally not
available to shareholders under the laws of Bermuda. However, the Bermuda courts
ordinarily would be expected to follow English case law precedent, which would
permit a shareholder to commence an action in the name of the Corporation to
remedy a wrong done to the Corporation where the act complained of is alleged to
be beyond the corporate power of the Corporation or is illegal or would result
in the violation of the Memorandum and by-laws. Furthermore, consideration would
be given by the court to acts that are alleged to constitute a fraud against the
minority shareholders or where an act requires the approval of a greater
percentage of the Corporation's shareholders than actually approved it. The
winning party in such an action generally would be able to recover a portion of
attorneys fees incurred in connection with such action.
Indemnification of Directors. The Corporation may indemnify its directors
or officers in their capacity as such in respect of any loss arising or
liability attaching to them by virtue of any rule of law in respect of any
negligence, default, breach of duty or breach of trust of which a director or
officer may be guilty in relation to the Corporation other than in respect of
his own fraud or dishonesty.
Inspection of Corporate Records. Members of the general public have the
right to inspect the public documents of the Corporation available at the office
of the Registrar of Companies in Bermuda which will include the Memorandum
(including its objects and powers) and any alteration to the Memorandum and
documents relating to an increase or reduction of authorised capital. The
shareholders have the additional right to inspect the bye-laws, minutes of
general meetings and audited financial statements of the Corporation, which must
be presented to the annual general meeting of shareholders. The register of
shareholders of the Corporation is also open to inspection by shareholders
without charge, and to members of the public for a fee. The Corporation is
required to maintain its share register in Bermuda but may establish a branch
register outside Bermuda. The Corporation is required to keep at its registered
office a register of its directors and officers which is open for inspection by
members of the public without charge. Bermuda law does not, however, provide a
general right for shareholders to inspect or obtain copies of any other
corporate records.
A-26
<PAGE> 355
DIVIDEND POLICY
The Corporation, since its date of incorporation, has not paid any
dividends on the common shares and it is not currently anticipated that
dividends will be paid on the common shares in the foreseeable future.
THE ARRANGEMENT
Pursuant to the Arrangement at the Effective Time, the following
transactions shall occur and be deemed to occur in the following order:
(a) Chauvco will subscribe for that number of common shares of the Corporation
(the "Additional Shares") as is equal to (i) the number of Chauvco Common
Shares which are issued and outstanding on the Record Date, (ii) plus that
number of Chauvco Common Shares which the holders of Chauvco Options would
otherwise be entitled to acquire on the exercise of their Chauvco Options on
a fully vested basis on the Record Date, (iii) less that number of common
shares of the Corporation then held by Chauvco, and (iv) less that number of
common shares of Chauvco held by shareholders who exercise rights of dissent
and who are ultimately entitled to be paid the fair value for such shares.
The subscription price payable by Chauvco for such common shares of the
Corporation shall be the aggregate amount equal to US$5,000,000 plus the
fair market value on the Effective Date (as determined and adjusted as set
forth below) of the Gabon Securities (the "Additional Subscription");
(b) the Corporation will purchase from CRIL for cash in an aggregate amount
equal to the fair market value on the Effective Date (as determined and
adjusted as set forth below), (i) all of the issued and outstanding
securities of CRG, Ngalo, Maga, Avomo and CR Trading (collectively, the
"Gabon Subsidiaries"), (ii) 75% of the issued and outstanding securities of
Westoil and (iii) all of the rights of CRIL under a loan in the amount of
U.S. $909,421.60 made by CRIL to Olympic Marine Services International, Inc.
(which owns the remaining 25% of the issued and outstanding securities of
Westoil), any and all advances made by CRIL to Westoil, and any and all
advances made by Chauvco (all of which shall have first been assigned by
Chauvco to CRIL) to the Gabon Subsidiaries and Westoil (all of the
securities described in items (i), (ii) and (iii) of this subparagraph (b),
collectively, the "Gabon Securities");
(c) Chauvco shall transfer, assign and convey to the Corporation, in
consideration for $1.00, all of Chauvco's right, title, benefit and interest
in and to any and all trademarks (including registrations and applications
therefor), trade names and the internet domain name "chauvco.com" owned by
Chauvco as at the Effective Time, and certain other assets and property;
(d) Pioneer Canada shall purchase from Chauvco all of the issued and outstanding
common shares of the Corporation in consideration of the payment by way of a
promissory note in an amount equal to the aggregate subscription price paid
for such common shares of the Corporation by Chauvco in subparagraph (a)
above;
(e) each of the Chauvco Options will vest, if not already vested and will be
transferred to Pioneer Canada in exchange for one common share of the
Corporation and certain securities of Pioneer; and
(f) holders of common shares of Chauvco shall transfer such shares to Pioneer
Canada in exchange for one common share of the Corporation and certain
securities of Pioneer and/or Pioneer Canada (all of the common shares of the
Corporation to be distributed as described in subparagraph (e) above and
this subparagraph (f) collectively referred to as the "Distributed Shares").
Chauvco determined that the fair market value of the Gabon Securities to
Chauvco on September 3, 1997 was approximately US$47.9 million relying on (i)
the bidding process in connection with the sale of Chauvco, (ii) the reserve and
evaluation reports prepared by Chauvco's independent engineers, (iii) the review
and recommendation of Chauvco's senior management which established a range of
values at various discount factors and an assessment of the exploration and
development potential of the applicable properties and (iv) an independent
appraisal obtained to confirm and support the allocation to the CRI Shares of a
A-27
<PAGE> 356
portion of the consideration received by the Chauvco Shareholders. The fair
market value of the Gabon Securities to Chauvco on the Effective Date shall be
revalued and determined by Chauvco using consistent principles. Notwithstanding
the determination of the fair market value of the Gabon Securities to Chauvco on
the Effective Date pursuant to the foregoing, unless Chauvco and Pioneer Canada
otherwise agree, the amount which will be payable by CRI for the Gabon
Securities may not exceed US$100 million.
The distribution of the Distributed Shares will be made in the United
States and Canada pursuant to statutory or discretionary exemptions from the
applicable securities laws. See "The Transaction -- Resale of Exchangeable
Shares and Pioneer Common Stock Received in Transaction -- Canada" in the
Information Circular for the particulars of the resale restrictions governing
the resale of the Distributed Shares.
REMUNERATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF EXECUTIVES
The Corporation currently has named four executive officers. To date, no
remuneration has been paid by the Corporation to the executive officers for
their services. The compensation policy of the Corporation will be designed to
recognize and reward individual contribution to corporate performance and
provide a competitive industry level of compensation.
COMPENSATION OF DIRECTORS
The Corporation currently has three directors, one of whom is also an
executive officer. No remuneration has been paid to the directors for their
services as directors to the date hereof. Directors who are not full-time
employees will receive an annual retainer fee and a fee for attending Directors'
meetings. Such fees will be competitive with comparable industry compensation
levels.
STOCK OPTIONS
The Corporation intends to establish a stock option plan (the "Plan") for
its directors, officers and key employees that would provide for the granting of
options to purchase common shares. The terms of the Plan and the options granted
under the Plan will be subject to shareholder and regulatory approval.
PRIOR SALES
In the 12 months ended as of the date hereof, the following common shares
have been issued by the Corporation:
<TABLE>
<CAPTION>
DATE OF ISSUANCE NUMBER OF SHARES AMOUNT PER SHARE AGGREGATE CONSIDERATION
- ------------------------ ------------------------ ------------------------ ------------------------
<C> <C> <C> <C>
July 29, 1997 1,200,000 $0.01 $12,000
</TABLE>
At the Effective Time, Chauvco will subscribe for the Additional Shares
pursuant to the Arrangement. See "Description of Share Capital" and "The
Arrangement".
A-28
<PAGE> 357
PRINCIPAL HOLDERS OF SECURITIES
To the knowledge of management of the Corporation the following table sets
forth the names of shareholders, directors and executive officers who will,
after giving effect to the distribution of the Distributed Shares, own of record
or beneficially, directly or indirectly, or exercise control or direction over,
more than 5% of the outstanding common shares.
<TABLE>
<CAPTION>
NAME AND PERCENTAGE
MUNICIPALITY OF NUMBER OF OF OUTSTANDING
RESIDENCE TYPE OF OWNERSHIP COMMON SHARES COMMON SHARES
--------------- ----------------- ------------- --------------
<S> <C> <C> <C>
3106829 Canada Inc.(1) of record and beneficially 14,688,610 28.6
Winnipeg, Manitoba
Trimac Corporation of record and beneficially 6,873,392 13.4
Calgary, Alberta
</TABLE>
NOTE:
(1) A wholly-owned subsidiary of Gendis Inc.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
None of the directors, senior officers or principal shareholders of the
Corporation and no associates or affiliates or any of them has any material
interest in any transaction within the past year or in any proposed transaction
which materially affected or will materially affect the Corporation, other than
as disclosed herein.
MATERIAL CONTRACTS
The Corporation, CRG, Ngalo, Avomo, Maga and Westoil have not entered into
any material contract within two years prior to the date hereof, other than
contracts in the ordinary course of business, except:
1. Exploration and Production Sharing Contract executed July 1, 1996 between
The Gabonese Republic and Chauvco Resources (Gabon) S.A. with respect to
Remboue Permit No. G4-168;
2. Exploration and Production Sharing Contract executed April 14, 1997 between
The Gabonese Republic and Chauvco Resources (Gabon-Avomo) S.A. with respect
to Avomo Permit No. G4-180;
3. Exploration and Production Sharing Contract executed April 14, 1997 between
The Gabonese Republic and Chauvco Resources (Gabon-Maga) S.A. with respect
to Maga Permit No. G4-178;
4. Exploration and Production Sharing Contract executed April 14, 1997 between
The Gabonese Republic and Chauvco Resources (Gabon-Ngalo) S.A. with respect
to Ngalo Permit No. G4-179;
5. Participation Agreement effective July 29, 1996 between Santa Fe Energy
Resources of Gabon (Mondah Bay), Ltd. and Chauvco Resources (Gabon) S.A.
with respect to the Mondah Bay Block;
6. Purchase and Sale Agreement dated , 1997 between CRI and CRIL
relating to the Gabon Securities.
7. Conveyance Agreement dated , 1997 between CRI and Chauvco
relating to certain intellectual property and other assets.
8. Purchase and Sale Agreement dated June 13, 1997 between Westoil and Fuel
Transport Service B.V. with respect to the purchase of the M.T. Erik B
(Estuary Tanker) for US $1,970,000.
9. Purchase and Sale Agreement dated June 22, 1997 between Westoil and Timmer &
Schoon V.O.F. with respect to the purchase of the M.T. Magna (Estuary
Tanker) for Deutschemarks 2,092,500.
10. Lease Agreement dated July 23, 1997 between Chauvco Resources Gabon S.A. and
Varnicos Primero S.A. for the lease of the Kriti Star (Storage Tanker) (US
$13,750/day for 12-month term).
A-29
<PAGE> 358
LEGAL MATTERS
Certain Canadian legal and tax matters relating to the Arrangement will be
passed upon by Bennett Jones Verchere and certain US matters relating to the
Arrangement will be passed upon by Baker & Botts, L.L.P. To the knowledge of
Chauvco and the Corporation, at September 11, 1997, partners and associates of
Bennett Jones Verchere, as a group, and partners and associates of Baker &
Botts, L.L.P., as a group, owned, directly and indirectly, less than 1% of the
common shares of Chauvco and none of the common shares of the Corporation.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Corporation are Price Waterhouse, Chartered
Accountants, Bermuda.
The Transfer Agent and Registrar for the common shares of the Corporation
in Canada is Montreal Trust Company of Canada at its principal offices in
Calgary and Toronto.
PROMOTER
Chauvco may be considered to be the promoter of the Corporation pursuant to
applicable securities legislation in that it took the initiative in founding and
organizing the Corporation in July 1997. See "Relationship between the
Corporation and Chauvco".
A-30
<PAGE> 359
GLOSSARY OF TERMS
The following abbreviations and terms shall have the meanings ascribed to
them below for the purposes hereof.
"Acquisition" means the acquisition by the Corporation of the Gabon
Securities. See "The Arrangement";
"Additional Shares" has the meaning ascribed to such term under
subparagraph (a) of the heading "The Arrangement";
"Additional Subscription" has the meaning ascribed to such term under
subparagraph (a) of the heading "The Arrangement";
"Arrangement" means the proposed arrangement of Chauvco under Section 186
of the Business Corporations Act (Alberta) pursuant to the Plan of Arrangement;
"bbl" means one stock tank barrel of crude oil or NGL;
"bbls/d" means barrels per day;
"Chauvco" means Chauvco Resources Ltd., a corporation amalgamated pursuant
to the Business Corporations Act (Alberta);
"Chauvco Option" means an outstanding option to purchase a common share of
Chauvco that has not been exercised prior to the Record Date;
"Cost Oil Volume"or "Cost Oil" means that portion of the production from a
PSC that is allocated to the permit holder under the terms of the PSC for the
recovery of the permit holders's exploration, exploitation, development and
operating expenses. The Cost Oil Volume is limited to a percentage of the Net
Production Volume of the PSC;
"CRIL" means CR International Limited;
"Distributed Shares" has the meaning ascribed to such term under
subparagraph (f) of the heading "The Arrangement";
"Effective Date" means the date shown on the Certificate of Amendment
issued by the Registrant under the Business Corporations Act (Alberta) giving
effect to the Arrangement;
"Effective Time" means 12:01 a.m. (Calgary time) on the Effective Date;
"Gabon Securities" has the meaning ascribed to such term under subparagraph
(b) of the heading "The Arrangement";
"Gross Production Volume" means the total production that is derived from a
PSC for a given year;
"Information Circular" means the Joint Management Information Circular and
Proxy Statement dated November , 1997 with respect to the Arrangement to which
this Information Bulletin forms Annex A;
"Mbbls" means 1,000 barrels;
"Mmbbls" means 1,000,000 barrels;
"Net Production Volume" means the Gross Production Volume of a PSC less the
Royalty Volume;
"Pioneer" means Pioneer Natural Resources Company;
"Pioneer Canada" means Pioneer Natural Resources (Canada) Ltd.;
"Plan of Arrangement" means the plan of arrangement proposed under Section
186 of the Business Corporations Act (Alberta) substantially in the form of
Annex E to the Information Circular, as amended, modified or supplemented from
time to time in accordance with its terms;
"Profit Oil" means that portion of the Profit Oil Volume that is allocated
to the permit holder;
A-31
<PAGE> 360
"Profit Oil Split" means the allocation of the Profit Oil Volume between
the permit holder and the State as determined in the PSC. The Profit Oil Split
varies based on a sliding scale depending on the Gross Production Volume of the
PSC;
"Profit Oil Volume" means that production from a PSC that is the Net
Production Volume less Cost Oil Volume;
"PSC" means Exploration and Production Sharing Contract;
"Record Date" has the meaning ascribed to such term in the Plan of
Arrangement;
"Royalty Volume" or "Royalty" means that percentage of the gross production
from a PSC that is allocated to the State under the terms of the PSC. The
Royalty Volume percentage varies based on a sliding scale depending on the Gross
Production Volume of the PSC;
"State" means the Republic of Gabon, central west Africa;
"State Back-in" means an entitlement of the State and local Gabon investors
to acquire a specific working interest percentage in the rights and obligations
derived from a PSC;
"State Profit Oil" means that portion of the Profit Oil Volume that is
allocated to the State; and
"WTI" means West Texas Intermediate, the reference price paid in US dollars
at Cushing, Oklahoma for crude oil of standard grade.
A-32
<PAGE> 361
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Chauvco Resources International Ltd.
Auditors' Report.......................................... 34
Statement of financial position........................... 35
Notes to financial statements............................. 36
Compilation report........................................ 37
Consolidated statement of financial position as at July
31, 1997............................................... 38
Notes to pro forma consolidated statement of financial
position as at July 31, 1997........................... 39
Compilation report........................................ 40
Consolidated statement of financial position as at January
1, 1997................................................ 41
Notes to pro forma consolidated statement of financial
position as at January 1, 1997......................... 42
Chauvco Resources (Gabon) S.A.
Auditors' Report.......................................... 43
Statement of Financial Position........................... 44
Statement of Loss and Deficit............................. 45
Statement of Changes in Financial Position as at December
31, 1996............................................... 46
Notes to the Financial Statements......................... 47
</TABLE>
A-33
<PAGE> 362
[Price Waterhouse Letterhead]
September 3, 1997
AUDITORS' REPORT
To the Shareholder of Chauvco Resources International Ltd.
We have audited the statement of financial position of Chauvco Resources
International Ltd. as at July 31, 1997. This statement of financial position is
the responsibility of the company's management. Our responsibility is to express
an opinion on this statement of financial position based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the statement of financial position is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of financial position.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, this statement of financial position presents fairly, in all
material respects, the financial position of the Company as at July 31, 1997 in
accordance with Canadian generally accepted accounting principles.
/s/ PRICE WATERHOUSE
- ------------------------------------
Chartered Accountants
A-34
<PAGE> 363
CHAUVCO RESOURCES INTERNATIONAL LTD.
STATEMENT OF FINANCIAL POSITION
AS AT JULY 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash...................................................... $12,000
=======
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 2)...................................... $12,000
=======
</TABLE>
On behalf of the Board
/s/ GUY J. TURCOTTE
------------------------------------
Guy J. Turcotte
Director
/s/ W. GLEN RUSSELL
------------------------------------
W. Glen Russell
Director
A-35
<PAGE> 364
CHAUVCO RESOURCES INTERNATIONAL LTD.
NOTES TO THE FINANCIAL STATEMENTS
JULY 31, 1997
1. INCORPORATION
Chauvco Resources International Ltd. (the "Company") is a wholly-owned
subsidiary of Chauvco Resources Ltd. (the "Parent"). The Company was
incorporated under the laws of Bermuda on July 29, 1997 for the purposes of
international investments in oil exploration and development.
Since the Company has no activity prior to July 31, 1997, the Company has
not recorded any revenue nor has it charged any expenses to the statement of
earnings.
2. SHARE CAPITAL
The Company has authorized and issued all outstanding share capital
consisting of 1,200,000 common shares at a price of $0.01 per share.
3. SUBSEQUENT EVENT
Pursuant to the terms of the Combination Agreement dated September 3, 1997
between the Parent and Pioneer Natural Resources Company ("Pioneer"), the
Company will purchase all of the outstanding shares of the subsidiaries of CR
International Limited ("CR"), a wholly owned subsidiary of the Parent, at the
effective date of the plan of arrangement contemplated therein. Immediately
prior to such transaction and pursuant to the plan of arrangement, the Parent
will subscribe for that number of common shares of the Company as is equal to
(i) the number of common shares of the Parent which are issued and outstanding,
(ii) plus that number of common shares of the Parent which the holders of
options would otherwise be entitled to acquire on the exercise of such options
on a fully vested basis, (iii) less that number of common shares of the Company
then held by the Parent, and (iv) less that number of common shares of the
Parent held by shareholders who exercise rights of dissent and who are
ultimately entitled to be paid the fair value for such shares. The subscription
price payable by the Parent to the Company for such common shares of the Company
shall be the aggregate amount equal to $5,000,000 plus the fair market value of
the securities of the subsidiaries of CR. The Company will then purchase all of
the shares of the subsidiaries of CR for the fair market value of such
securities. As part of the plan of arrangement, Pioneer Canada will acquire all
of the outstanding shares of the Company and distribute them to the Parent's
shareholders on a one-for-one basis.
A-36
<PAGE> 365
[Price Waterhouse Letterhead]
September 3, 1997
COMPILATION REPORT
To the Directors of Chauvco Resources International Ltd.
We have reviewed, as to compilation only, the accompanying pro forma
consolidated statement of financial position of Chauvco Resources International
Ltd. as at July 31, 1997. This pro forma consolidated statement of financial
position has been prepared for inclusion in the Joint Management Information
Circular relating to Chauvco Resources International Ltd. forming part of the
Joint Management Information Circular and Proxy Statement with respect to an
Arrangement involving Pioneer Natural Resources Company and Chauvco Resources
Ltd. In our opinion, the unaudited pro forma consolidated statement of financial
position has been properly compiled to give effect to the proposed transactions
and the assumptions described in the Notes thereto.
/s/ PRICE WATERHOUSE
- ------------------------------------
Chartered Accountants
A-37
<PAGE> 366
CHAUVCO RESOURCES INTERNATIONAL LTD.
PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT JULY 31, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PARENT (SUBSIDIARIES)
------------- ----------------------------------------------------------
CHAUVCO CHAUVCO CHAUVCO CHAUVCO CHAUVCO
RESOURCES RESOURCES RESOURCES RESOURCES RESOURCES
INTERNATIONAL (GABON) (GABON-MAGA) (GABON-NGALO) (GABON-AVOMO)
LTD. S.A. S.A. S.A. S.A.
------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash......................... $12,000 $ -- $ -- $ -- $ --
Accounts receivable.......... -- -- -- -- --
Prepaid expenses............. -- 956,175 -- -- --
------- ----------- ----------- ----------- -----------
12,000 956,175 -- -- --
------- ----------- ----------- ----------- -----------
Capital Assets, at cost
Petroleum and natural gas.... -- 37,062,403 1,067,144 1,056,404 1,048,865
Corporate.................... -- 276,337 -- -- --
------- ----------- ----------- ----------- -----------
-- 37,338,740 1,067,144 1,056,404 1,048,865
------- ----------- ----------- ----------- -----------
Intercompany................... -- 3,012,046 (1,004,080) (1,004,080) (1,004,080)
------- ----------- ----------- ----------- -----------
$12,000 $41,306,961 $ 63,064 $ 52,324 $ 44,785
======= =========== =========== =========== ===========
LIABILITIES
Accounts payable and accrued
liabilities.................. $ -- $ 6,667,764 $ -- $ -- $ --
Due to parent.................. 34,628,405 51,064 40,324 32,785
------- ----------- ----------- ----------- -----------
-- 41,296,169 51,064 40,324 32,785
------- ----------- ----------- ----------- -----------
Non-controlling interest in
Westoil Marine & Transport
Co. Ltd...................... -- -- -- -- --
------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Share Capital.................. 12,000 11,000 12,000 12,000 12,000
Contributed surplus............ -- -- -- -- --
Retained earnings.............. -- (208) -- -- --
------- ----------- ----------- ----------- -----------
12,000 10,792 12,000 12,000 12,000
------- ----------- ----------- ----------- -----------
$12,000 $41,306,961 $ 63,064 $ 52,324 $ 44,785
======= =========== =========== =========== ===========
<CAPTION>
(SUBSIDIARIES)
------------------------
WESTOIL
CR MARINE &
TRADING TRANSPORT CO. CONSOLIDATED
CO. LTD. LTD. ADJUSTMENTS TOTAL
-------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Current Assets
Cash......................... $12,000 $ 71,950 $ 52,887,607(1) $ 5,095,950
(47,887,607)(2)
Accounts receivable.......... -- 367,361 909,422(3) 1,276,783
Prepaid expenses............. -- -- -- 956,175
------- ---------- ------------ -----------
12,000 439,311 5,909,422 7,328,908
------- ---------- ------------ -----------
Capital Assets, at cost
Petroleum and natural gas.... -- 3,675,667 208(2) 43,910,691
Corporate.................... -- -- -- 276,337
------- ---------- ------------ -----------
-- 3,675,667 208 44,187,028
------- ---------- ------------ -----------
Intercompany................... -- 194 -- --
------- ---------- ------------ -----------
$12,000 $4,115,172 $ 5,909,630 $51,515,936
======= ========== ============ ===========
Accounts payable and accrued
liabilities.................. $ -- $ 852,115 $ -- $ 7,519,879
Due to parent.................. -- 3,251,057 (38,003,635)(2) --
------- ---------- ------------ -----------
-- 4,103,172 (38,003,635) 7,519,879
------- ---------- ------------ -----------
Non-controlling interest in
Westoil Marine & Transport
Co. Ltd...................... -- -- 1,139,777(3) 1,139,777
------- ---------- ------------ -----------
Share Capital.................. 12,000 12,000 501,324(1) 513,324
(68,000)(2)
(3,000)(3)
Contributed surplus............ -- -- 52,386,283(1) 42,342,956
(9,815,972)(2)
(227,355)(3)
Retained earnings.............. -- -- 208(2) --
------- ---------- ------------ -----------
12,000 12,000 42,773,488 42,856,280
------- ---------- ------------ -----------
$12,000 $4,115,172 $ 5,909,630 $51,515,936
======= ========== ============ ===========
</TABLE>
A-38
<PAGE> 367
CHAUVCO RESOURCES INTERNATIONAL LTD.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT JULY 31, 1997
THE AGREEMENT
The following is a summary and reference should be made to the details
contained elsewhere in this document. Funds are expressed in United States
dollars.
The unaudited pro forma consolidated statement of financial position as at
July 31, 1997 (the "Statement of Financial Position") gives effect to the
purchase by Chauvco Resources International Ltd. of all the subsidiaries of CR
International Limited pursuant to the terms of a Combination Agreement (the
"Agreement") between Chauvco Resources Ltd. and Pioneer Natural Resources
Company dated September 3, 1997. The Agreement, provides for the acquisition by
Chauvco Resources International Ltd. of all common shares held by CR
International Limited of its wholly-owned subsidiaries as follows: (1) Chauvco
Resources (Gabon) S.A.; (2) Chauvco Resources (Gabon-Maga) S.A.; (3) Chauvco
Resources (Gabon-Ngalo) S.A.; (4) Chauvco Resources (Gabon-Avomo) S.A.; and (5)
CR Trading Co. Ltd. The Agreement also provided for the acquisition of all
common shares held by CR International Limited of Westoil Marine & Transport Co.
Ltd., a majority interest subsidiary (75%) of CR International Limited.
A pro forma statement of combined earnings has not been presented herein as
operations have not commenced as at July 31, 1997.
THE STATEMENT OF FINANCIAL POSITION
The accompanying unaudited pro forma consolidated statement of financial
position as at July 31, 1997 is prepared from the audited statement of financial
position of Chauvco Resources International Ltd. at July 31, 1997 and the
unaudited statements of financial position of each of the subsidiaries as at
July 31, 1997.
The unaudited pro forma Consolidated Statement of Financial Position as at
July 31, 1997 was prepared based upon the following transactions and
assumptions:
(1) Chauvco Resources Ltd. invests an additional $52,887,607 in Chauvco
Resources International Ltd. represented by a subscription for 50,132,432
shares at a stated value of $0.01 per share. The remaining $52,386,283
represents contributed surplus.
(2) Consideration attributed to the purchase of the shares of the subsidiaries
and repayment of the advances due to parent was $47,887,607. The transaction
is recorded at the carrying value of the underlying assets acquired. The
excess of invested funds over the carrying value of acquired net assets,
being $9,815,972, was recorded as a reduction of contributed surplus of
Chauvco Resources International Ltd. The elimination of the share capital
accounts of the acquired subsidiaries and the capitalization of
subsidiaries' deficits were recorded as part of this transaction.
(3) Effective August 1, 1997, a strategic partner acquired a 25% ownership
interest in Westoil Marine & Transport Co. Ltd. for $1,139,777. The acquired
interest was funded by a cash contribution of $230,355 and a loan of
$909,422 from CR International Limited. The loan is to be acquired by
Chauvco Resources International Ltd. when the Agreement becomes effective.
A-39
<PAGE> 368
[Price Waterhouse Letterhead]
September 3, 1997
COMPILATION REPORT
To the Directors of Chauvco Resources International Ltd.
We have reviewed, as to compilation only, the accompanying pro forma
consolidated statement of financial position of Chauvco Resources International
Ltd. as at January 1, 1997. This pro forma consolidated balance sheet has been
prepared for inclusion in the Joint Management Information Circular relating to
Chauvco Resources International Ltd. forming part of the Joint Management
Information Circular and Proxy Statement with respect to an Arrangement
involving Pioneer Natural Resources Company and Chauvco Resources Ltd. In our
opinion, the unaudited pro forma consolidated statement of financial position
has been properly compiled to give effect to the proposed transactions and the
assumptions described in the Notes thereto.
/s/ PRICE WATERHOUSE
- ------------------------------------
Chartered Accountants
A-40
<PAGE> 369
CHAUVCO RESOURCES INTERNATIONAL LTD.
PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT JANUARY 1, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
(PARENT) (SUBSIDIARIES)
------------- ---------------------------------------------------------
CHAUVCO CHAUVCO CHAUVCO CHAUVCO CHAUVCO
RESOURCES RESOURCES RESOURCES RESOURCES RESOURCES
INTERNATIONAL (GABON) (GABON-MAGA) (GABON-NGALO) (GABON-AVOMO)
LTD. S.A. S.A. S.A. S.A.
------------- ---------- ------------ ------------- -------------
(EXPRESSED IN U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
Current Assets
Cash.......................... $12,000(1) $ 51,633 $ -- $ -- $ --
Accounts Receivable........... -- -- -- -- --
Prepaid expenses.............. -- 15,287 -- -- --
------- ---------- ---------- -------- --------
12,000 66,920 -- -- --
------- ---------- ---------- -------- --------
Capital Assets, at cost
Petroleum and natural gas..... -- 9,553,319 -- -- --
Corporate..................... -- 82,262 -- -- --
------- ---------- ---------- -------- --------
-- 9,635,581 -- -- --
------- ---------- ---------- -------- --------
$12,000 $9,702,501 $ -- $ -- $ --
======= ========== ========== ======== ========
LIABILITIES
Accounts payable and accrued
liabilities................... $ -- $6,318,942 $ -- $ -- $ --
Due to (from) affiliates........ -- 3,372,767 (12,000) (12,000) (12,000)
------- ---------- ---------- -------- --------
-- 9,691,709 (12,000) (12,000) (12,000)
------- ---------- ---------- -------- --------
Non-controlling interest in
Westoil Marine & Transport Co.
Ltd........................... -- -- -- -- --
------- ---------- ---------- -------- --------
SHAREHOLDERS' EQUITY
Share Capital................... 12,000(1) 11,000 12,000 12,000 12,000
Contributed surplus............. -- -- -- -- --
Retained earnings............... -- (208) -- -- --
------- ---------- ---------- -------- --------
12,000 10,792 12,000 12,000 12,000
------- ---------- ---------- -------- --------
$12,000 $ 12,000 $9,702,501 $ -- $ --
======= ========== ========== ======== ========
<CAPTION>
(SUBSIDIARIES)
------------------------
WESTOIL
CR MARINE &
TRADING TRANSPORT CO. CONSOLIDATED
CO. LTD. LTD. ADJUSTMENTS TOTAL
-------- ------------- ------------ ------------
(EXPRESSED IN U.S. DOLLARS)
<S> <C> <C> <C> <C>
Current Assets
Cash.......................... $ -- $ -- $ 52,887,607(2) $39,754,501
(13,196,739)(3)
Accounts Receivable........... -- -- 909,422(3) 909,422
Prepaid expenses.............. -- -- -- 15,287
-------- -------- ------------ -----------
-- -- 40,600,290 40,679,210
-------- -------- ------------ -----------
Capital Assets, at cost
Petroleum and natural gas..... -- -- 208(3) 9,553,527
Corporate..................... -- -- -- 82,262
-------- -------- ------------ -----------
-- -- 208 9,635,789
-------- -------- ------------ -----------
$ -- $ -- $ 40,600,498 $50,314,999
======== ======== ============ ===========
Accounts payable and accrued
liabilities................... $ -- $ -- $ -- $ 6,318,942
Due to (from) affiliates........ (12,000) (12,000) (3,312,767)(3) --
-------- -------- ------------ -----------
(12,000) (12,000) (3,312,767) 6,318,942
-------- -------- ------------ -----------
Non-controlling interest in
Westoil Marine & Transport Co.
Ltd........................... -- -- 1,139,777(4) 1,139,777
-------- -------- ------------ -----------
Share Capital................... 12,000 12,000 501,324(2) 513,324
(68,000)(3)
(3,000)(4)
Contributed surplus............. -- -- 52,386,283(2) 42,342,956
(9,815,972)(3)
(227,355)(4)
Retained earnings............... -- -- 208(3) --
-------- -------- ------------ -----------
12,000 12,000 42,773,488 42,856,280
-------- -------- ------------ -----------
$ -- $ -- $ 40,600,498 $50,314,999
======== ======== ============ ===========
</TABLE>
A-41
<PAGE> 370
CHAUVCO RESOURCES INTERNATIONAL LTD.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT JANUARY 1, 1997
THE AGREEMENT
The following is a summary and reference should be made to the details
contained elsewhere in this document. Funds are expressed in United States
dollars.
The unaudited pro forma consolidated statement of financial position as at
January 31, 1997 (the "Statement of Financial Position") gives effect to the
purchase by Chauvco Resources International Ltd. of all the subsidiaries of CR
International Limited pursuant to the terms of a Combination Agreement (the
"Agreement") between Chauvco Resources Ltd. and Pioneer Natural Resources
Company dated September 3, 1997. The Agreement, provides for the acquisition by
Chauvco Resources International Ltd. of all common shares held by CR
International Limited of its wholly-owned subsidiaries as follows: (1) Chauvco
Resources (Gabon) S.A.; (2) Chauvco Resources (Gabon-Maga) S.A.; (3) Chauvco
Resources (Gabon-Ngalo) S.A.; (4) Chauvco Resources (Gabon-Avomo) S.A.; and (5)
CR Trading Co. Ltd. The Agreement also provided for the acquisition of all
common shares held by CR International Limited of Westoil Marine &Transport Co.
Ltd., a majority interest subsidiary (75%) of CR International Limited.
A pro forma statement of combined earnings has not been presented herein as
operations have not commenced as at July 31, 1997.
THE STATEMENT OF FINANCIAL POSITION
The accompanying unaudited pro forma consolidated statement of financial
position as at January 1, 1997 is prepared from the audited statement of
financial position of Chauvco Resources International Ltd., as at July 31, 1997
and the audited statement of financial position of Chauvco Resources (Gabon)
S.A. as at December 31, 1996. The remaining subsidiaries presented are unaudited
as of their respective incorporation dates.
The reader is cautioned that the Statement of Financial Position is not
necessarily indicative of what the results would have been had the Agreement
been effected on January 1, 1997.
The unaudited pro forma Consolidated Statement of Financial Position as at
January 1, 1997 was prepared based upon the following transactions and
assumptions:
(1) Chauvco Resources International Ltd. was incorporated on July 29, 1997. This
statement presents Chauvco International Ltd. as if it had been incorporated
with fully funded shares at January 1, 1997.
(2) Chauvco Resources Ltd. invests an additional $52,887,607 in Chauvco
Resources International Ltd. represented by a subscription for 50,132,432
shares at a stated value of $0.01 per share. The remaining $52,386,283
represents contributed surplus.
(3) Consideration attributed to the purchase of the shares of the subsidiaries
and repayment of the advances due to parent was $13,196,739. The transaction
is recorded at the carrying value of the underlying assets acquired. The
excess of invested funds over the carrying value of net assets acquired,
being $9,815,972, was recorded as a reduction of contributed surplus of
Chauvco Resources International Ltd. The elimination of the share capital
accounts of the acquired subsidiaries and the capitalization of
subsidiaries' deficits were recorded as part of this transaction.
(4) Effective August 1, 1997, a strategic partner acquired a 25% ownership
interest in Westoil Marine & Transport Co. Ltd. for $1,139,777. The acquired
interest was funded by a cash contribution of $230,355 and a loan of
$909,422 from CR International Limited. The loan is to be acquired by
Chauvco Resources International Ltd. when the agreement becomes effective.
A-42
<PAGE> 371
AUDITORS' REPORT
To the Shareholder of Chauvco Resources (Gabon) S.A.
We have audited the statement of financial position of Chauvco Resources
(Gabon) S.A. as at December 31, 1996 and the statements of loss and deficit and
of changes in financial position for the period ended December 31, 1996. 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 an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1996 and the
results of its operations and the changes in its financial position for the
period ended December 31, 1996 in accordance with Canadian generally accepted
accounting principles.
/s/ PRICE WATERHOUSE
------------------------------------
Chartered Accountants
July 23, 1997,
except Note 4 which is
as of September 3, 1997
Calgary, Alberta
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CHAUVCO RESOURCES (GABON) S.A.
(A WHOLLY OWNED SUBSIDIARY OF CHAUVCO RESOURCES INTERNATIONAL LTD.)
STATEMENT OF FINANCIAL POSITION
AS AT DECEMBER 31, 1996
(EXPRESSED IN UNITED STATES CURRENCY)
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash...................................................... $ 51,633
Prepaid expenses.......................................... 15,287
-----------
66,920
-----------
Capital assets, at cost
Petroleum and natural gas................................. 9,553,319
Corporate................................................. 82,262
-----------
9,635,581
-----------
$ 9,702,501
===========
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities.................. $ 6,318,942
Related party indebtedness (Note 2)
Due to Chauvco Resources Ltd.............................. 712,767
Exchangeable notes payable................................ 2,660,000
-----------
9,691,709
-----------
SHAREHOLDERS' EQUITY
Share Capital (Note 3)...................................... 11,000
Deficit..................................................... (208)
-----------
10,792
-----------
$ 9,702,501
===========
</TABLE>
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CHAUVCO RESOURCES (GABON) S.A.
(A WHOLLY OWNED SUBSIDIARY OF CHAUVCO RESOURCES INTERNATIONAL LTD.)
STATEMENT OF LOSS AND DEFICIT
FOR THE PERIOD ENDED DECEMBER 31, 1996
(EXPRESSED IN UNITED STATES CURRENCY)
<TABLE>
<S> <C>
EXPENSES
General and administrative................................ $ 208
-----
NET LOSS AND DEFICIT FOR THE PERIOD......................... $(208)
=====
</TABLE>
A-45
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CHAUVCO RESOURCES (GABON) S.A.
(A WHOLLY OWNED SUBSIDIARY OF CHAUVCO RESOURCES INTERNATIONAL LTD.)
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE PERIOD ENDED DECEMBER 31, 1996
(EXPRESSED IN UNITED STATES CURRENCY)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss for the period................................... $ (208)
----------
FINANCING ACTIVITIES
Share Capital............................................. 11,000
Advances from Chauvco Resources Ltd....................... 712,767
Exchangeable notes payable................................ 2,660,000
----------
3,383,767
----------
CHANGE IN NON-CASH WORKING CAPITAL.......................... 6,303,655
----------
TOTAL CASH RESOURCES PROVIDED............................... 9,687,214
----------
INVESTING ACTIVITIES
Petroleum and natural gas assets purchased................ 9,553,319
Corporate assets purchased................................ 82,262
----------
9,635,581
----------
INCREASE IN CASH AND CASH AT END OF PERIOD.................. $ 51,633
==========
</TABLE>
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CHAUVCO RESOURCES (GABON) S.A.
(A WHOLLY OWNED SUBSIDIARY OF CHAUVCO RESOURCES INTERNATIONAL LTD.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Chauvco Resources (Gabon) S.A. (the "Company") is a wholly-owned subsidiary
of CR International Ltd. (the "Parent"), which is a wholly-owned subsidiary of
Chauvco Resources Ltd. ("Chauvco") The Company was incorporated under the laws
of Gabon in 1996 for the purposes of oil exploration and development and in July
1996 entered into a production sharing contract with the Republic of Gabon for
an onshore permit.
Since the Company has not begun production as at December 31, 1996, the
Company has not recorded any revenues nor has it charged any production related
expenses to the statement of earnings.
(b) CAPITAL ASSETS
(i) Capitalized Costs
The Company follows the full cost method of accounting for petroleum
operations whereby all costs incurred for exploration and development of
petroleum properties are capitalized in separate cost centers for each country.
Such costs include land acquisition costs, geological and geophysical costs,
costs of drilling both productive and non-productive properties, related plant
and production equipment costs, carrying costs of non-productive properties,
related plant and production equipment costs, carrying costs of non-productive
properties, and that portion of administration costs (1996 -- $849,218)
applicable to exploration and development activities. No gains or losses are
recognized upon the disposition of petroleum properties except under
circumstances which result in a major disposal of reserves.
(ii) Depletion and Depreciation
Depletion and depreciation of petroleum capital assets will be calculated
on the unit of production method based on the Company's share of gross proved
reserves of petroleum.
(iii) Ceiling test
The carrying value of capitalized petroleum costs, net of deferred income
taxes and accrued site restoration and abandonment costs, is limited to the
estimated future net revenue from production of proved reserves at year end
wellhead prices plus the lower of cost or estimated fair market value of
unproved properties less estimated future administration and financing expenses
and income taxes.
(iv) Future site restoration and abandonment
Future site restoration and abandonment costs will be charged on an annual
basis based on the unit of production method.
(v) Depreciation of other capital assets
Depreciation of other capital assets is provided annually over their
estimated useful lifes, at the following rates:
<TABLE>
<S> <C>
Office equipment............ straight line basis over 10 years
Field vehicles.............. straight line basis over a 2 to 3 year period based on
geographic location.
</TABLE>
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CHAUVCO RESOURCES (GABON) S.A.
(A WHOLLY OWNED SUBSIDIARY OF CHAUVCO RESOURCES INTERNATIONAL LTD.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2. RELATED PARTY INDEBTEDNESS
The Company has received advances of funds from Chauvco Resources Ltd. (the
"Parent") in the amount of $1,164,245 in 1996. These advances are due on demand
and are non-interest bearing.
The Company has received advances in the form of exchangeable notes from
the Parent in the amount of $2,660,000 in 1996. These notes are due on demand
and bear an interest charge of 0.125% per annum. The notes are exchangeable at
the option of the Parent into fully paid common shares at a rate of $20 per
common share.
3. SHARE CAPITAL
During the year, the Company authorized and issued all outstanding share
capital consisting of 500 common shares at a price of $11,000.
4. SUBSEQUENT EVENT
Pursuant to the terms of the Combination Agreement dated September 3, 1997,
between the Parent and Pioneer Natural Resources Company ("Pioneer"), all of the
outstanding shares of the Company will be acquired by Chauvco Resources
International Ltd. ("CRI"), a wholly owned subsidiary of the Parent. As part of
the transaction, Pioneer Natural Resources (Canada) Ltd., an indirect
wholly-owned subsidiary of Pioneer, will acquire all of the common shares of CRI
and distribute them to the Parent's shareholders on a one-for-one basis.
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<PAGE> 377
ANNEX B
FORM OF ARRANGEMENT RESOLUTION
<PAGE> 378
RESOLUTION FOR CONSIDERATION AT
THE SPECIAL MEETING OF THE SHAREHOLDERS
OF
CHAUVCO RESOURCES LTD.
(THE "CORPORATION")
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. the arrangement involving the Corporation (the "Arrangement") under section
186 of the Business Corporations Act (Alberta) (the "ABCA"), as more
particularly described in the Joint Management Information Circular and Proxy
Statement of the Corporation and Pioneer Natural Resources Company (the
"Joint Proxy Statement") accompanying the notice of this meeting is hereby
authorized, approved and adopted;
2. the plan of arrangement involving the Corporation, the full text of which is
set out as Annex E to the Joint Proxy Statement is hereby approved and
adopted;
3. notwithstanding the passing of this resolution by shareholders or the
approval of the Court of Queen's Bench of Alberta, the Board of Directors of
the Corporation, without further notice to or approval of the shareholders,
may decide not to proceed with the Arrangement or may revoke the resolution
at any time prior to the Arrangement becoming effective pursuant to the ABCA;
and
4. the proper officers of the Corporation are hereby authorized and directed for
and on behalf of the Corporation to execute or cause to be executed and to
deliver or cause to be delivered all such documents, agreements and
instruments and to do or cause to be done all such other acts and things as
such officers of the Corporation shall determine to be necessary or desirable
in order to carry out the intent of the foregoing paragraphs of this
resolution and the matters authorized thereby, such determination to be
conclusively evidenced by the execution and delivery of such document,
agreement or instrument or the doing of any such act or thing.
B-1
<PAGE> 379
ANNEX C
COMBINATION AGREEMENT
<PAGE> 380
COMBINATION AGREEMENT
THIS COMBINATION AGREEMENT (this "Agreement") is entered into as of
September 3, 1997, by and between Pioneer Natural Resources Company, a Delaware
corporation ("US Co"), and Chauvco Resources Ltd., an Alberta corporation
("Chauvco").
RECITALS
WHEREAS, the respective boards of directors of US Co and Chauvco have
approved the transactions contemplated by this Agreement, and have agreed to
submit the applicable transactions included in the Plan of Arrangement (as
defined in Section 1.1) and other transactions contemplated hereby to their
respective shareholders for approval.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE 1
GENERAL
1.1 PLAN OF ARRANGEMENT
As promptly as practicable after the execution of this Agreement, Chauvco
will apply to the Court of Queen's Bench of Alberta (the "Court") pursuant to
Part 15 of the Business Corporations Act (Alberta) (the "ABCA") for an interim
order (the "Interim Order") providing for, among other things, the calling and
holding of the Chauvco Meeting (as hereinafter defined) for the purpose of
considering and, if deemed advisable, approving the arrangement (the
"Arrangement") under Part 15 of the ABCA and pursuant to this Agreement and the
Plan of Arrangement substantially in the form of Exhibit A hereto (the "Plan of
Arrangement"). If the Chauvco shareholders approve the Arrangement, thereafter
Chauvco will take the necessary steps to submit the Arrangement to the Court and
apply for a final order of the Court approving the Arrangement in such fashion
as the Court may direct (the "Final Order") and file Articles of Arrangement in
respect of the Arrangement. At 12:01 a.m. (the "Effective Time") on the date
(the "Effective Date") shown on the certificate of arrangement issued by the
Registrar under the ABCA giving effect to the Arrangement (which shall be within
60 days after the date of the Final Order), the following shall occur and shall
be deemed to occur in the following order without any further act or formality:
(a) Chauvco shall subscribe for that number of common shares in the
capital of Chauvco Resources International Ltd. ("CRI") as is equal to (i)
the number of common shares of Chauvco (the "Chauvco Common Shares") which
are issued and outstanding three trading days prior to the Effective Date
(the "Record Date"), (ii) plus that number of Chauvco Common Shares which
all Optionholders (as hereinafter defined) would otherwise be entitled to
acquire on the exercise of their Chauvco Options (as hereinafter defined)
on a fully vested basis on the Record Date, (iii) less that number of
common shares of CRI then held by Chauvco, and (iv) less that number of
Chauvco Common Shares held by shareholders who have exercised their rights
of dissent in accordance with the Plan of Arrangement and who are
ultimately entitled to be paid the fair value for such shares. The
subscription price for the common shares of CRI shall be paid for in cash
in the aggregate amount equal to US$5,000,000 plus the fair market value on
the Effective Date (as determined and adjusted in accordance with Section
7.7) of the Gabon Securities (as hereinafter defined);
(b) CRI shall purchase from CR International Limited ("CR"), a
wholly-owned subsidiary of Chauvco, for cash in an aggregate amount equal
to the fair market value thereof on the Effective Date (as determined in
accordance with Section 7.7), (i) all of the issued and outstanding
securities of Chauvco Resources (Gabon) S.A., Chauvco Resources
(Gabon-Ngalo) S.A., Chauvco Resources (Gabon-Maga) S.A., Chauvco Resources
(Gabon-Avomo) S.A. and CR Trading Co. Ltd. (collectively, the "Gabon
Subsidiaries"), (ii) 75% of the issued and outstanding securities of
Westoil Marine & Transport Co. Ltd. ("Westoil"), and (iii) all of its
rights under a loan in the amount of U.S.$909,421.60
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<PAGE> 381
made by CR to Olympic Marine Services International, Inc. (which owns the
remaining 25% of the issued and outstanding securities of Westoil), any and
all advances made by CR to Westoil, and any and all advances made by
Chauvco (all of which shall have first been assigned by Chauvco to CR) to
the Gabon Subsidiaries and Westoil (such securities in Section 1.1(b)(i),
(ii) and (iii) collectively, the "Gabon Securities");
(c) Chauvco shall transfer, assign and convey to CRI, in consideration
for $1.00, all of Chauvco's right, title, benefit and interest in and to
any and all trademarks (including registrations and applications therefor),
trade names and the internet domain name "chauvco.com" owned by Chauvco as
at the Effective Time, and the other assets and property which are set out
in Exhibit F;
(d) US Co Sub (as hereinafter defined) shall purchase from Chauvco all
of the issued and outstanding common shares of CRI (the "CRI Shares") in
consideration of the payment by way of promissory note of US Co Sub to
Chauvco in an amount equal to the subscription price paid for such CRI
Shares by Chauvco under Section 1.1(a);
(e) each of the outstanding options to purchase Chauvco Common Shares
which has not been exercised prior to the Record Date (collectively, the
"Chauvco Options") (which includes all outstanding options granted under
Chauvco's stock option plan as amended and restated on November 10, 1995
(the "Chauvco Option Plan")) will vest, if not already vested, and be
transferred to US Co Sub in consideration for one (1) CRI Share and, in
accordance with the election of each holder thereof (the "Optionholder")
and the remainder of this Section 1.1(e) and Section 1.1(f), a number of
shares of US Co common stock ("US Co Common Stock") determined in
accordance with the Exchange Ratio (as hereinafter defined) in which event,
in addition to transferring the Chauvco Options to US Co Sub, the
Optionholder will be required to make a payment to US Co Sub (the "Option
Payment") in an amount equal to the aggregate exercise price which the
Optionholder would otherwise be required to pay on the exercise of such
options. As an alternative to making the Option Payment, Optionholders will
be entitled to elect to reduce the number of shares of US Co Common Stock
to be received by the number obtained by dividing the Option Payment by the
US Co Stock Price, as defined in Section 1.3 (converted into Canadian
dollars using the Currency Exchange Rate (as hereinafter defined)). Each
Optionholder will receive only a whole number of shares of US Co Common
Stock resulting from the transfer of his Chauvco Options. In lieu of
fractional shares of US Co Common Stock, each Optionholder who would
otherwise be entitled to receive such fractional shares shall be paid by US
Co Sub an amount determined in accordance with the Plan of Arrangement in
full satisfaction of such fractional entitlement;
(f) an Optionholder electing to make the Option Payment and receive
the applicable number of shares of US Co Common Stock under Section 1.1(e)
above shall give effect to the election by depositing with Montreal Trust
Company of Canada (the "Depositary"), prior to the date which is two (2)
days prior to the date of the Chauvco Meeting (the "Election Deadline"), a
duly completed letter of transmittal and election form (the "Option Letter
of Transmittal and Election Form") in the form provided by Chauvco along
with the proxy materials indicating such holder's election and by agreeing
to pay the Option Payment to the Depositary as agent for US Co Sub.
Coincident with the receipt of the CRI Shares and shares of US Co Common
Stock, such Optionholder shall pay the Option Payment to the Depositary as
agent for US Co Sub less any amounts receivable by such Optionholder in
connection with fractional entitlements under the Plan of Arrangement. In
the event that an Optionholder who has elected to make the Option Payment
fails to make the Option Payment on or before the delivery of the
securities to the Optionholder, the Depositary shall be entitled to sell
all or any portion of the shares of US Co Common Stock held on behalf of
such Optionholder to satisfy the Option Payment and remit the same to US Co
Sub. In the event that an Optionholder has failed to make an election in
the Option Letter of Transmittal and Election Form pursuant to this
paragraph, such Optionholder shall be deemed to have elected the option to
receive less shares of US Co Common Stock by not making the Option Payment;
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<PAGE> 382
(g) each of the outstanding Chauvco Common Shares will be transferred
to US Co Sub in consideration for one (1) CRI Share and, at the election of
the holders of the Chauvco Common Shares:
(i) a number of shares of US Co Common Stock determined in
accordance with the Exchange Ratio. Each such holder of Chauvco Common
Shares will receive only a whole number of shares of US Co Common Stock
resulting from the transfer of such holder's Chauvco Common Shares to US
Co Sub. In lieu of fractional shares of US Co Common Stock, each holder
of a Chauvco Common Share who otherwise would be entitled to receive
such fractional share shall be paid by US Co Sub an amount determined in
accordance with the Plan of Arrangement in full satisfaction of such
fractional entitlement; or
(ii) a number of shares of Exchangeable Shares determined in
accordance with the Exchange Ratio. Each such holder of Chauvco Common
Shares will receive only a whole number of Exchangeable Shares resulting
from the transfer of such holder's Chauvco Common Shares to US Co Sub.
In lieu of fractional Exchangeable Shares, each holder of a Chauvco
Common Share who otherwise would be entitled to receive such fractional
share shall be paid by US Co Sub an amount determined in accordance with
the Plan of Arrangement in full satisfaction of such fractional
entitlement;
(h) a holder of Chauvco Common Shares shall give effect to the
election in Section 1.1(g) above by depositing with the Depositary, prior
to the Election Deadline, a duly completed letter of transmittal and
election form (the "Letter of Transmittal and Election Form") in the form
provided by Chauvco along with the proxy materials indicating such holder's
election. In the event that a holder of Chauvco Common Shares has failed to
validly make an election under Section 1.1(g) in the Letter of Transmittal
and Election Form pursuant to this paragraph, such holder shall be deemed
to have elected the option under Section 1.1(g)(i). Notwithstanding any
provision to the contrary, holders of Chauvco Common Shares who are not
residents of Canada for the purposes of the Income Tax Act (Canada) (the
"ITA") will not be entitled to elect to receive Exchangeable Shares under
Section 1.1(g)(ii);
(i) upon the transfer of shares referred to in Section 1.1(g) above:
(i) each holder of a Chauvco Common Share shall cease to be such a holder,
shall have his name removed from the register of holders of Chauvco Common
Shares and shall become a holder of the number of fully paid CRI Shares and
Exchangeable Shares or shares of US Co Common Stock to which he is entitled
as a result of the transfer of shares referred to in Section 1.1(g) and
such holder's name shall be added to the register of holders of such
securities accordingly; and (ii) US Co Sub shall become the legal and
beneficial owner of all of the Chauvco Common Shares so transferred;
(j) holders of Chauvco Common Shares who are residents of Canada for
the purposes of the ITA shall be entitled to make an income tax election
pursuant to subsection 85(1) of the ITA with respect to the transfer of
their Chauvco Common Shares to US Co Sub referred to in Section 1.1(g)(ii)
by providing two signed copies of the necessary election forms to US Co Sub
within 90 days following the Effective Date, duly completed with the
details of the number of shares transferred and the applicable agreed
amounts for the purposes of such elections. Thereafter, subject to the
election forms complying with the provisions of the ITA, the forms will be
signed by US Co Sub and returned to such holders of Chauvco Common Shares
for filing with Revenue Canada, Customs, Excise and Taxation; and
(k) US Co Sub shall be continued as a corporation under the ABCA and
its Articles of Continuance shall include the items set forth in Exhibit G.
1.2 US CO SUB
(a) On or prior to the Effective Date, US Co shall (directly or through a
wholly-owned subsidiary incorporated in the United States) incorporate a new
corporation under the Company Act (British Columbia) ("US Co Sub") to be named
Pioneer Natural Resources (Canada) Ltd. and shall include the following
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<PAGE> 383
provisions in its memorandum of association (or as may be amended by mutual
agreement on the advice of outside counsel to comply with the Company Act):
(i) a class of common voting shares (the "US Co Sub Common Shares")
unlimited in number;
(ii) a class of exchangeable shares (the "Exchangeable Shares")
unlimited in number; and
(iii) a restriction on the business of US Co Sub;
all as set out in Exhibit G and, in connection with such incorporation, US Co
shall (directly or through a wholly-owned subsidiary incorporated in the United
States) cause US Co Sub to purchase from US Co that number of newly issued
shares of US Co Common Stock which will enable US Co Sub to satisfy its
obligation to deliver US Co Common Stock to holders of Chauvco Common Shares and
to Optionholders who transfer their Chauvco Common Shares or Chauvco Options to
US Co Sub under Sections 1.1(g)(i) and 1.1(e) above.
(b) US Co shall cause US Co Sub to complete the transactions contemplated
herein.
1.3 EXCHANGE RATIO
As used herein, the term "Exchange Ratio" means in respect of Exchangeable
Shares or US Co Common Stock to be delivered upon the transfer of Chauvco Common
Shares or Chauvco Options to US Co Sub, a ratio of the number of Exchangeable
Shares or shares of US Co Common Stock per Chauvco Common Share or Chauvco
Option equal to:
(a) if the US Co Stock Price is less than US$33.50, (.493827);
(b) if the US Co Stock Price is at least US$33.50 but less than
US$39.01,
.493827 -- ((US Co Stock Price - 33.50) X .042360)
5.51
and
(c) if the US Co Stock Price is equal to or greater than $39.01,
(.451467).
The Exchange Ratio as so determined in each case shall be rounded to six decimal
places. The "US Co Stock Price" shall mean the average closing sales price,
regular way, per share of the US Co Common Stock on the NYSE in United States
dollars as reported in the Wall Street Journal over the ten (10) consecutive
trading days ending on the third trading day next preceding the date of the
Chauvco Meeting. Notwithstanding the foregoing, if the Exchange Ratio is above
.465116, US Co may elect to cause US Co Sub to deliver, in lieu of Exchangeable
Shares and shares of US Co Common Stock, a number of Exchangeable Shares or
shares of US Co Common Stock for each Chauvco Common Share or Chauvco Option
based on the Exchange Ratio as set forth above equal to (.465116) and an amount
in cash (in Canadian dollars) per Chauvco Common Share or Chauvco Option equal
to the product of (x) the US Co Stock Price multiplied by the noon spot rate of
exchange of US dollars to Canadian dollars announced by the Bank of Canada on
the day preceding the date of calculation for the exchange (the "Currency
Exchange Rate") and (y)
Exchange Ratio -- .465116
1.4 ADJUSTMENTS FOR CAPITAL CHANGES
Prior to the Effective Time, Chauvco shall not recapitalize through a
subdivision of its outstanding shares into a greater number of shares, or a
combination of its outstanding shares into a lesser number of shares, or
reorganize, reclassify or otherwise change its outstanding shares into the same
or a different number of shares of other classes, or declare a dividend on its
outstanding shares payable in shares of its capital stock or securities
convertible or exchangeable into shares of its capital stock. Prior to the
Effective Time, US Co may with prior written consent of Chauvco recapitalize
through a subdivision of its outstanding shares into a greater number of shares,
or a combination of its outstanding shares into a lesser number of shares, or
reorganize,
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<PAGE> 384
reclassify or otherwise change its outstanding shares into the same or a
different number of shares of other classes, or declare a dividend on its
outstanding shares payable in shares of its capital stock or securities
convertible or exchangeable into shares of its capital stock, provided that, in
connection therewith the Exchange Ratio shall be adjusted appropriately so as to
maintain the relative proportionate interests of the holders of Chauvco Common
Shares and the holders of the shares of US Co Common Stock and provided further
that, the consent of Chauvco may not be withheld if the foregoing proviso is
complied with. No such changes shall be made by US Co other than those made in
accordance with this Agreement.
1.5 DISSENTING SHAREHOLDERS
Holders of Chauvco Common Shares may exercise rights of dissent with
respect to such shares in connection with the Arrangement pursuant to and in the
manner set forth in Section 184 of the ABCA and Section 3.1 of the Plan of
Arrangement (such holders referred to as "Dissenters" or as "Dissenting
Shareholders"). Chauvco shall give US Co (i) prompt notice of any written
demands of a right of dissent, withdrawals of such demands, and any other
instruments served pursuant to the ABCA and received by Chauvco and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
such rights. Without the prior written consent of US Co, except as required by
applicable law, Chauvco shall not make any payment with respect to any such
rights or offer to settle or settle any such rights. The obligations in respect
of Dissenting Shareholders shall be apportioned between Chauvco and CRI as set
forth in the Plan of Arrangement.
1.6 OTHER EFFECTS OF THE ARRANGEMENT
The Arrangement will, from and after the Effective Time, have all of the
effects provided by applicable law, including, without limitation, the ABCA.
1.7 JOINT PROXY STATEMENT; FORM F-4, FORM S-4 AND FORM S-3 REGISTRATION
STATEMENT
(a) As promptly as practicable after execution of this Agreement, US Co and
Chauvco shall prepare and file with the United States Securities and Exchange
Commission (the "SEC") a preliminary joint management information circular and
proxy statement (the "Joint Proxy Statement"), together with any other documents
required by the Securities Act of 1933, as amended (the "Securities Act"), or
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
connection with the Arrangement and the other transactions contemplated hereby.
The Joint Proxy Statement shall constitute (i) the management information
circular of Chauvco with respect to the meeting of shareholders of Chauvco
relating to the Arrangement and the approval of certain matters in connection
therewith (the "Chauvco Meeting") and (ii) the proxy statement of US Co with
respect to the meeting of stockholders of US Co with respect to the issuance of
US Co Common Stock from time to time upon exchange of Exchangeable Shares and
any other matters requiring approval of such stockholders in connection with the
Arrangement (the "US Co Stockholders Meeting"). As promptly as practicable after
the preliminary Joint Proxy Statement is cleared by the SEC, US Co and Chauvco
shall cause the Joint Proxy Statement to be mailed to each company's respective
stockholders. If either Chauvco or US Co determines on the advice of its outside
counsel (with the concurrence of outside counsel for the other) that the offer
and sale of the Exchangeable Shares or the CRI Shares in connection with the
Arrangement is required to be registered under the Securities Act, then as
applicable, US Co shall cause US Co Sub to file with the SEC a registration
statement on Form S-4 (or other applicable form) (such registration statement,
the "Form S-4") and if it is determined that the offer and sale of the CRI
Shares is not otherwise exempt from such registration, Chauvco and US Co shall
(a) agree on appropriate and equitable adjustments to the Plan of Arrangement so
that CRI Shares that would otherwise be issued to holders who are residents of
the United States shall instead be sold by a trustee or agent and the net
proceeds of such sales remitted to such holders and otherwise as may be
necessary to avoid offers and sales of the CRI Shares being deemed to take place
within the United States, if such adjustments will avoid the necessity for such
registration or (b) if such adjustments cannot reasonably be undertaken so as to
avoid the necessity for such registration, Chauvco shall cause CRI to file with
the SEC a registration statement on Form F-4 (or other applicable form) covering
such offer and sale (such registration statement, the
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"Form F-4") and the Joint Proxy Statement shall also constitute the prospectuses
of US Co Sub and CRI, as applicable, with respect to such offer and sale and
shall be included in the Form S-4 or Form F-4, as applicable. Notwithstanding
anything herein to the contrary, neither Chauvco nor US Co shall be under any
obligation to cause to be filed the Form S-4 or Forms F-4 if it shall have
determined on the advice of its outside counsel (with the concurrence of outside
counsel for the other) that the offer and sale of the Exchangeable Shares and
the CRI Shares pursuant to the Arrangement is exempt from the registration
requirements of Section 5 of the Securities Act by virtue of Section 3(a)(10)
thereof. In connection with such determination, US Co and Chauvco shall prepare
and file with the SEC a request for no action (the "No Action Request") seeking
to confirm the availability of such exemption. If US Co determines on the advice
of its outside counsel (with the concurrence of outside counsel for Chauvco)
that it is necessary to file a registration statement on Form S-3 (or other
applicable form)(the "Form S-3") in order to register the US Co Common Stock to
be issued from time to time after the Effective Time upon exchange of the
Exchangeable Shares, then US Co shall file the Form S-3 with the SEC and use its
best efforts to maintain the effectiveness of such registration for the period
that such Exchangeable Shares remain outstanding, and US Co and Chauvco shall
use their best efforts to cause the Form S-3 to become effective.
(b) Each party shall promptly furnish to the other party all information
concerning such party and its stockholders as may be reasonably required in
connection with any action contemplated by this Section 1.5. The Joint Proxy
Statement and, if required, the Form F-4, Form S-4 and Form S-3, shall comply in
all material respects with all applicable requirements of law. Each of US Co and
Chauvco will notify the other promptly of the receipt of any comments from the
SEC and of any request by the SEC for amendments or supplements to the Joint
Proxy Statement or the Form F-4, Form S-4 or Form S-3, if required, or for
additional information, and will supply the other with copies of all
correspondence with the SEC with respect to the Joint Proxy Statement or the
Form S-3, if required. Whenever any event occurs which should be set forth in an
amendment or supplement to the Joint Proxy Statement or the Form F-4, Form S-4
or Form S-3, if required, US Co or Chauvco, as the case may be, shall promptly
inform the other of such occurrence and cooperate in filing with the SEC, and/or
mailing to stockholders of US Co or Chauvco, as may be applicable, such
amendment or supplement.
(c) US Co and Chauvco shall take any action required to be taken under any
applicable provincial or state securities laws (including "blue sky" laws) in
connection with the issuance of the Exchangeable Shares, CRI Shares or US Co
Common Stock and the Arrangement; provided, however, that with respect to the
blue sky and Canadian provincial qualifications, neither US Co nor Chauvco shall
be required to register or qualify as a foreign corporation or reporting issuer
where any such entity is not now so registered or qualified except as to matters
and transactions arising solely from the offer and sale of the US Co Common
Stock, the CRI Shares or the issuance of the Exchangeable Shares.
1.8 REORGANIZATION
The parties intend to adopt this Agreement and the Plan of Arrangement as a
qualified stock purchase under Section 338(d)(3) of the Internal Revenue Code of
1986, as amended (the "Code").
1.9 MATERIAL ADVERSE EFFECT
In this Agreement, any reference to any event, change or effect being
"material" with respect to any entity or group of entities means any material
event, change or effect related to the condition (financial or otherwise),
properties or business of such entity or group of entities. In this Agreement,
the term "Material Adverse Effect" used with respect to any party means any
event, change or effect that is materially adverse to the condition (financial
or otherwise), properties or business of such party and its subsidiaries, taken
as a whole; provided, that a Material Adverse Effect shall not include any
adverse effect resulting from changes in general economic conditions or
conditions generally affecting the industries in which US Co or Chauvco operate.
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1.10 CURRENCY
Unless otherwise specified, all references in this Agreement to "dollars"
or "$" shall mean Canadian dollars.
1.11 EXHIBITS
The following exhibits attached hereto shall form part of this Agreement:
<TABLE>
<S> <C> <C> <C>
(a) Exhibit A -- Plan of Arrangement;
(b) Exhibit B -- Support Agreement;
(c) Exhibit C -- Voting and Exchange Trust Agreement;
(d) Exhibit D -- Terms and Conditions of US Co Special Voting Stock;
(e) Exhibit E -- List of Lock-up Shareholders;
(f) Exhibit F -- List of Other Assets to be Transferred to CRI; and
(g) Exhibit G -- Provisions of Memorandum of Association of US Co Sub.
</TABLE>
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF CHAUVCO
Except as set forth in a letter dated the date of this Agreement and
delivered by Chauvco to US Co concurrently herewith (the "Chauvco Disclosure
Letter") and subject to Sections 7.7 and 7.8 hereof, Chauvco hereby represents
and warrants to US Co that:
2.1 ORGANIZATION AND STANDING
Chauvco and each partnership, joint venture, corporation, association or
other business entity of which more than 50% of the total voting power of shares
of stock or units of ownership or beneficial interest entitled to vote in the
election of directors (or members of a comparable governing body) is owned or
controlled, directly or indirectly, by Chauvco (the "Chauvco Subsidiaries"), is
duly incorporated or formed, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation,
has full requisite power and authority to carry on its business as it is
currently conducted, and to own, lease and operate the properties currently
owned, leased and operated by it, and is duly qualified or licensed to do
business and is in good standing as a foreign corporation or organization
authorized to do business in all jurisdictions in which the character of the
properties owned or leased or the nature of the business conducted by it would
make such qualification or licensing necessary, except where the failure to be
so qualified or licensed would not have a Material Adverse Effect on Chauvco.
The Chauvco Disclosure Letter sets forth a complete list of the Chauvco
Subsidiaries (and all other subsidiaries in which Chauvco has an interest of 50%
or less determined as described above), the percentage of each subsidiary's
outstanding capital stock or other ownership interest owned by Chauvco or
another Chauvco Subsidiary and a description of any lien, charge, mortgage,
security interest, option, preferential purchase right or other right or
interest of any other person (collectively, an "Encumbrance") on such stock, on
treasury stock or other ownership interest and a complete list of each
jurisdiction in which each of Chauvco and each Chauvco Subsidiary is duly
qualified, registered and in good standing to do business.
2.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS
(a) Chauvco has all requisite corporate power and authority to enter into
this Agreement and, subject to approval of this Agreement and the Arrangement by
the shareholders of Chauvco and approval by the Court, to perform its
obligations hereunder and to consummate the Arrangement and the other
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Chauvco and, subject to approval of this Agreement and the
Arrangement by the shareholders of Chauvco and approval by the Court, the
consummation by Chauvco of the Arrangement and the other transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Chauvco. This Agreement has been duly executed and delivered by
Chauvco and is the valid and binding obligation of Chauvco, enforceable in
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accordance with its terms, except that such enforceability may be subject to (i)
bankruptcy, insolvency, reorganization or other similar laws affecting or
relating to enforcement of creditors' rights generally and (ii) general
equitable principles.
(b) Neither the execution, delivery and performance of this Agreement or
the Arrangement by Chauvco, nor the consummation of the transactions
contemplated hereby or thereby by Chauvco nor compliance with the provisions
hereof or thereof by Chauvco will: (i) conflict with, or result in any
violations of, the articles of amalgamation or bylaws of Chauvco or any
equivalent document of any of the Chauvco Subsidiaries, or (ii) result in any
breach of or cause a default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, amendment, cancellation or
acceleration of any obligation contained in, or the loss of any material benefit
under, or result in the creation of any Encumbrance upon any of the material
properties or assets of Chauvco or any of the Chauvco Subsidiaries under, any
term, condition or provision of any loan or credit agreement, note, bond,
mortgage, indenture, lease or other material agreement, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Chauvco or any of the
Chauvco Subsidiaries or their respective properties or assets, other than any
such breaches, defaults, losses, or encumbrances which, individually or in the
aggregate, would not have a Material Adverse Effect on Chauvco.
2.3 GOVERNMENTAL CONSENTS
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign (each a
"Governmental Entity"), is required to be obtained by Chauvco or any of the
Chauvco Subsidiaries in connection with the execution and delivery of this
Agreement or the Plan of Arrangement or the consummation of the transactions
contemplated hereby or thereby, except for: (i) the filing with the applicable
Canadian provincial securities commissions or regulatory authorities (the
"Commissions") and the Court and the mailing to shareholders of Chauvco of the
Joint Proxy Statement relating to the Chauvco Meeting to be held with respect to
the approval of this Agreement and the Arrangement, (ii) the furnishing to the
SEC of all required filings under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated by the
SEC thereunder, as may be required in connection with this Agreement and the
transactions contemplated hereby (the "SEC Filings"); (iii) approval by the
Court of the Arrangement and the filings of the articles of arrangement and
other required arrangement or other documents as required by the ABCA; (iv) such
filings, authorizations, orders and approvals as may be required under state
"control share acquisition," "anti-takeover" or other similar statutes, any
other applicable federal, provincial or state securities laws and the rules of
the NYSE or The Toronto Stock Exchange ("TSE"); (v) such filings and
notifications as may be necessary under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"); (vi) such notices and
filings as may be necessary under the Investment Canada Act and under the
Competition Act (Canada); and (vii) where the failure to obtain such consents,
approvals, etc., would not prevent or delay the consummation of the Arrangement
or otherwise prevent Chauvco from performing its obligations under this
Agreement and would not reasonably be expected to have a Material Adverse Effect
on Chauvco.
2.4 CAPITALIZATION
The authorized capital stock of Chauvco consists of an unlimited number of
Chauvco Common Shares, no par value. At the close of business on August 29,
1997, 48,464,312 Chauvco Common Shares were issued and outstanding, and no
Chauvco Common Shares were held by Chauvco in its treasury. As of August 29,
1997, an aggregate of 2,901,995 Chauvco Common Shares were reserved for issuance
pursuant to outstanding Chauvco Options granted under the Chauvco Option Plan.
All issued and outstanding Chauvco Common Shares have been duly authorized,
validly issued and are fully paid and non-assessable. Except in connection with
the Chauvco Option Plan and in connection with Chauvco's shareholder rights plan
adopted pursuant to that agreement dated April 24, 1997 between Chauvco and
Montreal Trust Company of Canada (the "Chauvco SRP"), no person, firm or
corporation has any agreement or option or any right or privilege, whether by
law, pre-emptive or contractual, capable of becoming an agreement, including
convertible
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securities, warrants or convertible obligations of any nature, for the purchase,
subscription, allotment or issuance of any of the unissued shares in the capital
of Chauvco or of any securities of Chauvco.
2.5 SECURITIES REPORTS AND FINANCIAL STATEMENTS
Chauvco and all predecessor corporations to Chauvco have filed all forms,
reports and documents with the Commissions required to be filed by it or them
pursuant to relevant Canadian securities statutes, regulations, policies and
rules (collectively, the "Chauvco Securities Reports"), all of which have
complied in all material respects with all applicable requirements of such
statutes, regulations, policies and rules. None of the Chauvco Securities
Reports, at the time filed or as subsequently amended, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Chauvco and such predecessor corporations contained in
the Chauvco Securities Reports complied in all material respects with the then
applicable accounting requirements and the published rules and regulations of
the relevant Canadian securities statutes with respect thereto, were prepared in
accordance with Canadian generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may have been indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
applicable laws, rules or regulations) and fairly present (subject, in the case
of the unaudited statements, to normal, year-end audit adjustments) the
consolidated financial position of Chauvco and such predecessor corporations and
the consolidated Chauvco Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and cash flows for the respective
periods then ended. There has been no change in the accounting policies or the
methods of making accounting estimates of Chauvco or its predecessor
corporations or changes in estimates that are material to such financial
statements, except as described in the notes thereto.
2.6 LIABILITIES
Chauvco and the Chauvco Subsidiaries do not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have any
knowledge of any potential liabilities or obligations, other than those (i)
disclosed in the Chauvco Securities Reports, (ii) set forth in the Chauvco
Disclosure Letter, (iii) incurred in the ordinary course of business since June
30, 1997; or (iv) which individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect on Chauvco.
2.7 INFORMATION SUPPLIED
None of the information supplied or to be supplied by Chauvco for inclusion
or incorporation by reference in the Joint Proxy Statement (and, if filed, the
Form S-3, S-4 or F-4) will, at the time the Joint Proxy Statement is mailed to
the shareholders of Chauvco and at the time of the Chauvco Meeting (and, if
filed, at the time the Form S-3, S-4 or F-4 is declared effective), 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, in light of
the circumstances under which they are made, not misleading. The Joint Proxy
Statement will comply as to form in all material respects with the provisions of
the ABCA and applicable Canadian securities laws and the rules and regulations
promulgated thereunder.
2.8 NO DEFAULTS
Neither Chauvco nor any Chauvco Subsidiary is, or has received notice that
it would be with the passage of time, in default or violation of any term,
condition or provision of (i) its charter documents or bylaws; (ii) any
judgment, decree or order applicable to it; or (iii) any loan or credit
agreement, note, bond, mortgage, indenture, material contract, agreement, lease,
license or other instrument to which Chauvco or any Chauvco Subsidiary is now a
party or by which it or any of its properties or assets may be bound, except in
the case of item (iii) for defaults and violations which, individually or in the
aggregate, would not have a Material Adverse Effect on Chauvco.
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2.9 LITIGATION; INVESTIGATIONS
There is no claim, action, suit or proceeding pending or, to the knowledge
of Chauvco, threatened, which would, if adversely determined, individually or in
the aggregate, have a Material Adverse Effect on Chauvco, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against Chauvco or any of the Chauvco Subsidiaries
having, or which, insofar as reasonably can be foreseen, in the future could
have, any such effect. There is no investigation pending or, to the knowledge of
Chauvco, threatened, against Chauvco or any of the Chauvco Subsidiaries before
any Governmental Entity which could have any such effect.
2.10 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in the Chauvco Disclosure Letter, other than as a
result of the transactions contemplated by this Agreement, since June 30, 1997,
there has not been:
(a) Financial Change. Any material adverse change in the financial
condition, operations, assets, liabilities or business of Chauvco or the
Chauvco Subsidiaries;
(b) Property Damage. Any material damage, destruction, or loss to the
business or properties of Chauvco or the Chauvco Subsidiaries (whether or
not covered by insurance);
(c) Dividends or Redemptions. Any declaration, setting aside, or
payment of any dividend or other distribution in respect of the capital
stock of Chauvco, or any direct or indirect redemption, purchase or any
other acquisition by Chauvco of any such stock;
(d) Capitalization Change. Any change in the capital stock or in the
number of shares or classes of Chauvco's authorized or outstanding capital
stock as described in Section 2.4 (other than as a result of exercises of
currently outstanding Chauvco Options); or
(e) Other Material Changes. Any other event or condition known to
Chauvco particularly pertaining to and adversely affecting the operations,
assets or business of Chauvco or the Chauvco Subsidiaries (other than
events or conditions which are of a general or industry-wide nature and of
general public knowledge) which would constitute a Material Adverse Effect
on Chauvco.
2.11 ADDITIONAL CHAUVCO INFORMATION
The Chauvco Disclosure Letter contains true, complete and correct lists of
the following items with respect to Chauvco and the Chauvco Subsidiaries, and
Chauvco agrees that upon the request of US Co, it will furnish to US Co true,
complete and correct copies of any documents referred to in such lists:
(a) Material Contracts. All contracts which involve, or may involve,
aggregate payments by any party thereto of $5,000,000 or more, which are to
be performed in whole or in part after the Effective Time;
(b) Employee Compensation Plans. All bonus, retention bonus, company
severance policy, employee stock option plans, incentive compensation,
deferred compensation, profit-sharing, retirement, pension, welfare, group
insurance, death benefit, or other fringe benefit plans, arrangements or
trust agreements together with copies of the most recent reports with
respect to such plans, arrangements, or trust agreements filed with any
Governmental Entity and all tax determination letters that have been
received with respect to such plans;
(c) Employee Agreements. Any collective bargaining agreements with any
labor union or other representative of employees, including amendments and
supplements, in each case covering ten (10) or more employees, all
employment agreements involving, individually, remuneration greater than
$100,000 per annum and all executive termination agreements;
(d) Patents. All patents, trademarks, copyrights and other material
intellectual property rights owned, licensed or used;
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(e) Trade Names. All trade names and fictitious names used or held,
whether and where such names are registered and where used;
(f) Promissory Notes. All long-term and short-term promissory notes,
installment contracts, loan agreements, credit agreements, and any other
agreements relating thereto or with respect to collateral securing the
same; and
(g) Guarantees. All indebtedness, liabilities and commitments of
others and as to which it is a guarantor, endorser, co-maker, surety, or
accommodation maker, or is contingently liable therefor (excluding
liabilities as an endorser of checks and the like in the ordinary course of
business) and all letters of credit, whether stand-by or documentary,
issued by any third party.
2.12 CERTAIN AGREEMENTS
Except in connection with Chauvco's executive termination agreements,
retention bonus plan, company severance policy and Stock Option Plan, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
without limitation, severance, unemployment compensation, parachute payment,
bonus or otherwise) becoming due to any director, employee or independent
contractor of Chauvco or the Chauvco Subsidiaries under any Chauvco Plan (as
hereinafter defined) or otherwise, (ii) materially increase any benefits
otherwise payable under any Chauvco Plan or otherwise or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
2.13 EMPLOYEE BENEFIT PLANS
Except for health insurance, vacation, severance and similar plans which
are set forth in the Chauvco Disclosure Letter ("Chauvco Plans"), there are no
employee benefits plans covering active, former or retired employees of Chauvco
and the Chauvco Subsidiaries. Each Chauvco Plan has been maintained and
administered in material compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations.
2.14 INTELLECTUAL PROPERTY
Chauvco or the Chauvco Subsidiaries owns or possesses licenses to use all
patents, patent applications, trademarks and service marks (including
registrations and applications therefor), trade names, copyrights and written
know-how, trade secrets and all other similar proprietary data and the goodwill
associated therewith (collectively, the "Chauvco Intellectual Property") that
are either material to the business of Chauvco or any Chauvco Subsidiary or that
are necessary for the manufacture, use, license or sale of any services or
products manufactured, used, licensed or sold by Chauvco or the Chauvco
Subsidiaries, including all such intellectual property listed in the Chauvco
Disclosure Letter. The Chauvco Intellectual Property is owned or licensed by
Chauvco or the Chauvco Subsidiaries free and clear of any Encumbrance other than
such Encumbrances as are listed in the Chauvco Disclosure Letter. Except as
otherwise indicated in such letter or in the ordinary course of business,
neither Chauvco nor the Chauvco Subsidiaries has granted to any other person any
license to use any Chauvco Intellectual Property. Neither Chauvco nor the
Chauvco Subsidiaries has received any notice of infringement, misappropriation,
or conflict with, the intellectual property rights of others in connection with
the use by Chauvco or the Chauvco Subsidiaries of the Chauvco Intellectual
Property.
2.15 TITLE TO PROPERTIES
Except for goods and other property sold, used or otherwise disposed of in
the ordinary course of business for fair value, Chauvco has good and
indefeasible title to all its properties, interests in properties and assets,
real and personal, reflected in its June 30, 1997 financial statements, free and
clear of any Encumbrance, except (i) Encumbrances reflected in the balance sheet
of Chauvco dated June 30, 1997, (ii) liens for current taxes not yet due and
payable, and (iii) such imperfections of title, easements and Encumbrances, if
any, which would not, individually or in the aggregate, have a Material Adverse
Effect on Chauvco. All leases pursuant to which Chauvco or any Chauvco
Subsidiary leases (whether as lessee or lessor) any substantial
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amount of real or personal property are in good standing, valid, and effective;
and there is not, under any such leases, any existing or prospective default or
event of default or event which with notice or lapse of time, or both, would
constitute a default by Chauvco or any Chauvco Subsidiary which would,
individually or in the aggregate, have a Material Adverse Effect on Chauvco and
in respect to which Chauvco or a Chauvco Subsidiary has not taken adequate steps
to prevent a default from occurring. The buildings and premises of Chauvco and
the Chauvco Subsidiaries that are used in its business are in good operating
condition and repair, subject only to ordinary wear and tear. All major items of
operating equipment of Chauvco and the Chauvco Subsidiaries are in good
operating condition and in a state of reasonable maintenance and repair,
ordinary wear and tear excepted, and are free from any known defects except as
may be repaired by routine maintenance and such minor defects as to not
substantially interfere with the continued use thereof in the conduct of normal
operations.
2.16 ENVIRONMENTAL MATTERS
Except as set forth in the Chauvco Disclosure Letter:
(a) Environmental Conditions. There are no environmental conditions or
circumstances, such as the presence or release of any hazardous substance,
on any property presently or previously owned or leased by Chauvco or the
Chauvco Subsidiaries that could result in a Material Adverse Effect on
Chauvco.
(b) Permits, etc. Chauvco and the Chauvco Subsidiaries have in full
force and effect all environmental permits, licenses, approvals and other
authorizations required to conduct their operations and are operating in
material compliance thereunder.
(c) Compliance. Chauvco's and the Chauvco Subsidiaries' operations and
use of their assets do not violate any applicable United States or Canadian
or other federal, provincial, state or local law, statute, ordinance, rule,
regulation, order or notice requirement (collectively the "Applicable
Environmental Laws") pertaining to (a) the condition or protection of air,
groundwater, surface water, soil, or other environmental media, (b) the
environment, including natural resources or any activity which affects the
environment, or (c) the regulation of any pollutants, contaminants, waste
or substances (whether or not hazardous or toxic), including, without
limitation, the Comprehensive Environmental Response Compensation and
Liability Act (42 U. S.C. sec. 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. sec. 1801 et seq.), the Resource Conservation
and Recovery Act (42 U.S.C. sec. 6901 et seq.) the Clean Water Act (33
U.S.C. sec. 1251 et seq.), the Clean Air Act (42 U.S.C. sec. 7401 et seq.),
the Toxic Substances Control Act (15 U. S.C. sec. 2601 et seq.), the Safe
Drinking Water Act (4 U. S.C. sec. 300f et seq.), the Rivers and Harbors
Act (33 U.S.C. sec. 401 et seq.), the Oil Pollution Act (33 U. S.C.
sec. 2701 et seq.) and analogous Canadian, Argentine, foreign, provincial,
state and local provisions, as any of the foregoing may have been amended
or supplemented from time to time, except for violations which, either
singly or in the aggregate, would not result in a Material Adverse Effect
on Chauvco.
(d) Past Compliance. None of the operations or assets of Chauvco or
the Chauvco Subsidiaries has ever been conducted or used by Chauvco or the
Chauvco Subsidiaries in such a manner as to constitute a violation of any
of the Applicable Environmental Laws, except for violations which, either
singly or in the aggregate, would not result in a Material Adverse Effect
on Chauvco.
(e) Environmental Claims. No notice has been served on Chauvco or any
Chauvco Subsidiaries from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or inquiry
related to alleged violations under any Applicable Environmental Laws, or
regarding any claims for remedial obligations or contribution under any
Applicable Environmental Laws, other than any of the foregoing which,
either singly or in the aggregate, would not result in a Material Adverse
Effect on Chauvco.
(f) Renewals. Chauvco does not know of any reason it or US Co would
not be able to renew any of the permits, licenses, or other authorizations
required pursuant to any Applicable Environmental Laws to operate and use
any of Chauvco's or the Chauvco Subsidiaries' assets for their current
purposes and uses.
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2.17 COMPLIANCE WITH OTHER LAWS
Except as set forth in the Chauvco Disclosure Letter, neither Chauvco nor
any Chauvco Subsidiary is in violation of or in default with respect to, or in
alleged violation of or alleged default with respect to any other applicable law
or any applicable rule, regulation, or any writ or decree of any court or any
governmental commission, board, bureau, agency, or instrumentality, or
delinquent with respect to any report required to be filed with any Governmental
Entity, except for violations which, either singly or in the aggregate, do not
and are not expected to result in a Material Adverse Effect on Chauvco.
2.18 TAXES
Except with respect to failures which, in the aggregate, would not result
in a Material Adverse Effect on Chauvco, proper and accurate federal,
provincial, state and local income, capital, withholding, value added, sales,
use, franchise, gross revenue, turnover, excise, payroll, property, employment,
customs duties and any and all other tax returns, reports, and estimates have
been filed with appropriate governmental agencies, domestic and foreign, by
Chauvco and each of the Chauvco Subsidiaries for each period for which any
returns, reports, or estimates were due (taking into account any extensions of
time to file before the date hereof); all taxes shown by such returns to be
payable and any other taxes due and payable have been paid other than those
being contested in good faith by Chauvco or a Chauvco Subsidiary; and the tax
provision reflected in Chauvco's financial statements as of June 30, 1997, is
adequate, in accordance with Canadian generally accepted accounting principles,
to cover liabilities of Chauvco and the Chauvco Subsidiaries at the date thereof
for all taxes, including any interest, penalties and additions to taxes of any
character whatsoever applicable to Chauvco and the Chauvco Subsidiaries or their
assets or businesses. There are no tax liens on any assets of Chauvco or the
Chauvco Subsidiaries except for taxes not yet currently due and those which
could not reasonably be expected to result in a Material Adverse Effect on
Chauvco.
2.19 VOTE REQUIRED
Except as may be provided in the Interim Order, at the Chauvco Meeting at
which a quorum is present, the affirmative vote of the holders of two-thirds of
the Chauvco Common Shares present is the only vote required to approve this
Agreement, the Arrangement and the consummation of the transactions contemplated
hereby.
2.20 BROKERS AND FINDERS
Other than Salomon Brothers Inc. and RBC Dominion Securities Inc. in
accordance with the terms of their respective engagement letters in final forms,
copies of which have previously been provided to US Co, none of Chauvco or any
of the Chauvco Subsidiaries nor any of their respective directors, officers or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or similar payments in
connection with the transactions contemplated by this Agreement.
2.21 DISCLOSURE
No representation or warranty made by Chauvco in this Agreement, nor any
document, written information statement, financial statement, certificate or
Exhibit prepared and furnished or to be prepared and furnished by Chauvco or its
representatives pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contained any untrue statement of a
material fact when made, or omitted to state a material fact necessary to make
the statements or facts contained herein or therein not misleading in light of
the circumstances under which they were furnished.
2.22 FAIRNESS OPINION
Chauvco's board of directors has received favourable written opinions from
Salomon Brothers Inc and RBC Dominion Securities Inc. as to the fairness of the
Plan of Arrangement and the other transactions contemplated herein.
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2.23 RESTRICTIONS ON BUSINESS ACTIVITIES
There is no material agreement, judgment, injunction, order or decree
binding upon Chauvco or any Chauvco Subsidiary that has or could reasonably be
expected to have the effect of prohibiting or materially impairing any business
practice of Chauvco or any Chauvco Subsidiary, any acquisition of property by
Chauvco or any Chauvco Subsidiary, the conduct of business by Chauvco or any
Chauvco Subsidiary as currently conducted or the consummation of the
Arrangement.
2.24 BOOKS AND RECORDS
The books, records and accounts of Chauvco and the Chauvco Subsidiaries (a)
have been maintained in accordance with good business practices on a basis
consistent with prior years, (b) are stated in reasonable detail and accurately
and fairly reflect the transactions and dispositions of the assets of Chauvco
and the Chauvco Subsidiaries and (c) accurately and fairly reflect the basis for
the Chauvco financial statements. Chauvco has devised and maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(a) transactions are executed in accordance with management's general or
specific authorization; and (b) transactions are recorded as necessary (i) to
permit preparation of financial statements in conformity with Canadian generally
accepted accounting principles or any other criteria applicable to such
statements and (ii) to maintain accountability for assets.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF US CO
Except as set forth in a letter dated the date of this Agreement and
delivered by US Co to Chauvco concurrently herewith (the "US Co Disclosure
Letter"), US Co hereby represents and warrants to Chauvco, in each case with
respect to itself and with respect to its predecessor corporations, that:
3.1 ORGANIZATION AND STANDING
US Co and each partnership, joint venture, corporation, association or
other business entity of which more than 50% of the total voting power of shares
of stock or units of ownership or beneficial interest entitled to vote in the
election of directors (or members of a comparable governing body) is owned or
controlled, directly or indirectly, by US Co (the "US Co Subsidiaries"), is duly
incorporated or formed, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or formation, has full
requisite power and authority to carry on its business as it is currently
conducted, and to own, lease and operate the properties currently owned, leased
and operated by it, and is duly qualified or licensed to do business and is in
good standing as a foreign corporation or organization authorized to do business
in all jurisdictions in which the character of the properties owned or leased or
the nature of the business conducted by it would make such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not have a Material Adverse Effect on US Co. The US Co Disclosure Letter
sets forth a complete list of the US Co Subsidiaries.
3.2 AGREEMENT AUTHORIZED AND ITS EFFECT ON OTHER OBLIGATIONS
(a) US Co has all requisite corporate power and authority to enter into
this Agreement and to perform its obligations hereunder and, subject to approval
of US Co's stockholders as provided in this Agreement, to consummate the
Arrangement and the other transactions contemplated by this Agreement. The
execution and delivery of this Agreement by US Co and, subject to approval of US
Co's stockholders as provided in this Agreement, the consummation by US Co of
the Arrangement and the other transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of US Co. This
Agreement has been duly executed and delivered by US Co and is the valid and
binding obligation of US Co, enforceable in accordance with its terms, except
that such enforceability may be subject to (i) bankruptcy, insolvency,
reorganization or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles.
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(b) Neither the execution, delivery and performance of this Agreement or
the Arrangement by US Co, nor the consummation of the transactions contemplated
hereby or thereby by US Co nor compliance with the provisions hereof or thereof
by US Co will: (i) conflict with, or result in any violations of, the
certificate of incorporation or bylaws of US Co or any equivalent document of
any of the US Co Subsidiaries, or (ii) result in any breach of or cause a
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, amendment, cancellation or acceleration of any
obligation contained in, or the loss of any material benefit under, or result in
the creation of any Encumbrance upon any of the material properties or assets of
US Co or any of the US Co Subsidiaries under, any term, condition or provision
of any loan or credit agreement, note, bond, mortgage, indenture, lease or other
material agreement, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to US Co or any of the US Co Subsidiaries or their
respective properties or assets, other than any such breaches, defaults, losses,
or encumbrances which, individually or in the aggregate, would not have a
Material Adverse Effect on US Co. Without limiting the generality of the
foregoing, upon the consummation of the Arrangement, except as contemplated
herein, no person or group of persons shall have any right, contingent or
otherwise, to elect, designate or appoint any director of US Co and no person or
group of persons shall have any right, contingent or otherwise that is
inconsistent with the provisions hereof.
3.3 GOVERNMENTAL CONSENTS
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required to be obtained
by US Co or any of the US Co Subsidiaries in connection with the execution and
delivery of this Agreement or the Plan of Arrangement or the consummation of the
transactions contemplated hereby or thereby, except for: (i) the filing with the
Commissions and the mailing to stockholders of US Co of the Joint Proxy
Statement relating to the US Co Stockholders Meeting, (ii) the furnishing to the
SEC of SEC Filings; (iii) approval by the Court of the Arrangement and the
filings of the articles of arrangement and other required arrangement or other
documents as required by the ABCA; (iv) such filings, authorizations, orders and
approvals as may be required under state "control share acquisition,"
"anti-takeover" or other similar statutes, any other applicable federal,
provincial or state securities laws and the rules of the NYSE or the TSE; (v)
such filings and notifications as may be necessary under the HSR Act; (vi) such
notices and filings as may be necessary under the Investment Canada Act and
under the Competition Act (Canada); (vii) the filing of a Certificate of
Designation with the Delaware Secretary of State with respect to the creation of
special voting stock; and (viii) where the failure to obtain such consents,
approvals, etc., would not prevent or delay the consummation of the Arrangement
or otherwise prevent US Co from performing its obligations under this Agreement
and would not reasonably be expected to have a Material Adverse Effect on US Co.
3.4 CAPITALIZATION
The authorized capital stock of US Co consists of 500,000,000 common
shares, U.S.$0.01 par value ("US Co Common Stock") and 100,000,000 referred
shares, $0.01 par value (the "US Co Preferred Stock"). As of August 29, 1997,
there were 73,555,501 shares of US Co Common Stock outstanding, and 3,718,314
shares of US Co Common Stock were reserved for issuance upon the exercise of
stock options outstanding under US Co's stock option plan; at the same date, no
shares of US Co Preferred Stock were outstanding. Except in connection with US
Co's stock option plan, no person, firm or corporation has any agreement or
option or any right or privilege, whether by law, pre-emptive or contractual,
capable of becoming an agreement, including convertible securities, warrants or
convertible obligations of any nature, for the purchase, subscription, allotment
or issuance of any of the unissued shares in the capital of US Co or of any
securities of US Co. US Co has no shareholder rights plan or similar arrangement
in place in connection with the US Co Common Stock or otherwise (provided that
US Co shall be entitled to institute such a plan or similar arrangement prior to
the Effective Date so long as such plan treats the holders of Exchangeable
Shares in substantially the same manner as the holders of US Co Common Stock and
provided the institution of the shareholder rights plan does not have a tax
impact on the holders of Exchangeable Shares.
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3.5 SECURITIES REPORTS AND FINANCIAL STATEMENTS
US Co and all predecessor corporations to US Co have filed all forms,
reports and documents required to be filed by them by the SEC or pursuant to
relevant United States securities statutes, regulations, policies and rules
(collectively, the "US Co Securities Reports"), all of which have complied in
all material respects with all applicable requirements of such statutes,
regulations, policies and rules. None of the US Co Securities Reports, at the
time filed or as subsequently amended, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of US Co and such predecessor corporations contained in the US Co
Securities Reports complied in all material respects with the then applicable
accounting requirements and the published rules and regulations of the relevant
United States securities statutes with respect thereto, were prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis during the periods involved (except as may have been
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by applicable laws, rules or regulations) and fairly present (subject,
in the case of the unaudited statements, to normal, year-end audit adjustments)
the consolidated financial position of US Co and such predecessor corporations
and the consolidated US Co Subsidiaries as at the respective dates thereof and
the consolidated results of their operations and cash flows for the respective
periods then ended. There has been no change in the accounting policies or the
methods of making accounting estimates or changes in estimates of US Co or its
predecessor corporations that are material to such financial statements, except
as described in the notes thereto.
3.6 LIABILITIES
US Co and the US Co Subsidiaries do not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have any
knowledge of any potential liabilities or obligations, other than those (i)
disclosed in the US Co Securities Reports or those of its predecessors, (ii) set
forth in the US Co Disclosure Letter, (iii) incurred in the ordinary course of
business since June 30, 1997, or (iv) which individually or in the aggregate
would not reasonably be expected to have a Material Adverse Effect on US Co.
3.7 INFORMATION SUPPLIED
None of the information supplied or to be supplied by US Co for inclusion
or incorporation by reference in the Joint Proxy Statement (and, if filed, the
Form F-4 or Form S-3) will, at the time the Joint Proxy Statement is mailed to
the shareholders of US Co and at the time of the US Co Stockholders Meeting
(and, if filed, at the time the Form F-4 or Form S-3 is declared effective),
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,
in light of the circumstances under which they are made, not misleading. The
Joint Proxy Statement will comply as to form in all material respects with the
provisions of applicable United States securities laws and the rules and
regulations of the SEC.
3.8 NO DEFAULTS
Neither US Co nor any US Co Subsidiary is, or has received notice that it
would be with the passage of time, in default or violation of any term,
condition or provision of (i) its charter documents or bylaws; (ii) any
judgment, decree or order applicable to it; or (iii) any loan or credit
agreement, note, bond, mortgage, indenture, material contract, agreement, lease,
license or other instrument to which US Co or any US Co Subsidiary is now a
party or by which it or any of its properties or assets may be bound, except in
the case of item (iii) for defaults and violations which, individually or in the
aggregate, would not have a Material Adverse Effect on US Co.
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3.9 LITIGATION; INVESTIGATIONS
There is no claim, action, suit or proceeding pending or, to the knowledge
of US Co, threatened, which would, if adversely determined, individually or in
the aggregate, have a Material Adverse Effect on US Co, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against US Co or any of the US Co Subsidiaries having, or
which, insofar as reasonably can be foreseen, in the future could have, any such
effect. There is no investigation pending or, to the knowledge of US Co,
threatened, against US Co or any of the US Co Subsidiaries before any
Governmental Entity which could have any such effect.
3.10 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in the US Co Disclosure Letter, other than as a result
of the transactions contemplated by this Agreement, since June 30, 1997, there
has not been:
(a) Financial Change. Any material adverse change in the financial
condition, operations, assets, liabilities or business of US Co or the US
Co Subsidiaries or its predecessors;
(b) Property Damage. Any material damage, destruction, or loss to the
business or properties of US Co or the US Co Subsidiaries (whether or not
covered by insurance);
(c) Dividends or Redemptions. Except as contemplated herein, any
declaration, setting aside, or payment of any dividend or other
distribution in respect of the capital stock of US Co, or any direct or
indirect redemption, purchase or any other acquisition by US Co of any such
stock;
(d) Capitalization Change. Any change in the capital stock or in the
number of shares or classes of US Co's authorized or outstanding capital
stock as described in Section 3.4 (other than as a result of exercises of
currently outstanding options to purchase US Co Common Stock and other than
as contemplated in Section 1.4); or
(e) Other Material Changes. Any other event or condition known to US
Co particularly pertaining to and adversely affecting the operations,
assets or business of US Co or the US Co Subsidiaries (other than events or
conditions which are of a general or industry-wide nature and of general
public knowledge) which would constitute a Material Adverse Effect on US
Co.
3.11 ADDITIONAL US CO INFORMATION
The US Co Disclosure Letter contains true, complete and correct lists of
the following items with respect to US Co and the US Co Subsidiaries, and US Co
agrees that upon the request of Chauvco, it will furnish to Chauvco true,
complete and correct copies of any documents referred to in such lists:
(a) Material Contracts. All contracts which involve, or may involve,
aggregate payments by any party thereto of $25,000,000 or more, which are
to be performed in whole or in part after the Effective Time; or
(b) Employee Compensation Plans. All bonus, retention bonus, company
severance policy, employee stock option plans, incentive compensation,
deferred compensation, profit-sharing, retirement, pension, welfare, group
insurance, death benefit, or other fringe benefit plans, arrangements or
trust agreements.
3.12 CERTAIN AGREEMENTS
Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will (i) result in any payment
(including without limitation, severance, unemployment compensation, parachute
payment, bonus or otherwise) becoming due to any director, employee or
independent contractor of US Co or the US Co Subsidiaries under any US Co Plan
(as hereinafter defined) or otherwise, (ii) materially increase any benefits
otherwise payable under any US Co Plan or otherwise or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
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3.13 TITLE TO PROPERTIES
Except for goods and other property sold, used or otherwise disposed of in
the ordinary course of business for fair value, US Co has good and indefeasible
title to all its properties, interests in properties and assets, real and
personal, reflected in its June 30, 1997, pro forma financial statements, free
and clear of any Encumbrance, except (i) Encumbrances reflected in the pro forma
balance sheet of US Co dated June 30, 1997, (ii) liens for current taxes not yet
due and payable, and (iii) such imperfections of title, easements and
Encumbrances, if any, which would not individually or in the aggregate, have a
Material Adverse Effect on US Co. All leases pursuant to which US Co or any US
Co Subsidiary leases (whether as lessee or lessor) any substantial amount of
real or personal property are in good standing, valid, and effective; and there
is not, under any such leases, any existing or prospective default or event of
default or event which with notice or lapse of time, or both, would constitute a
default by US Co or any US Co Subsidiary which would, individually or in the
aggregate, have a Material Adverse Effect on US Co and in respect to which US Co
or a US Co Subsidiary has not taken adequate steps to prevent a default from
occurring. The buildings and premises of US Co and the US Co Subsidiaries that
are used in its business are in good operating condition and repair, subject
only to ordinary wear and tear. All major items of operating equipment of US Co
and the US Co Subsidiaries are in good operating condition and in a state of
reasonable maintenance and repair, ordinary wear and tear excepted, and are free
from any known defects except as may be repaired by routine maintenance and such
minor defects as to not substantially interfere with the continued use thereof
in the conduct of normal operations.
3.14 ENVIRONMENTAL MATTERS
Except as set forth in the US Co Disclosure Letter:
(a) Environmental Conditions. There are no environmental conditions or
circumstances, such as the presence or release of any hazardous substance,
on any property presently or previously owned or leased by US Co or the US
Co Subsidiaries that could result in a Material Adverse Effect on US Co.
(b) Permits, etc. US Co and the US Co Subsidiaries have in full force
and effect all environmental permits, licenses, approvals and other
authorizations required to conduct their operations and are operating in
material compliance thereunder.
(c) Compliance. US Co's and the US Co Subsidiaries' operations and use
of their assets do not violate any applicable United States or Canadian or
other federal, provincial, state or local law, statute, ordinance, rule,
regulation, order or notice requirement pertaining to (a) the condition or
protection of air, groundwater, surface water, soil, or other environmental
media, (b) the environment, including natural resources or any activity
which affects the environment, or (c) the regulation of any pollutants,
contaminants, waste, substances (whether or not hazardous or toxic),
including, without limitation, the Applicable Environmental Laws, except
for violations which, either singly or in the aggregate, would not result
in a Material Adverse Effect on US Co.
(d) Past Compliance. None of the operations or assets of US Co or the
US Co Subsidiaries has ever been conducted or used by US Co or the US Co
Subsidiaries in such a manner as to constitute a violation of any of the
Applicable Environmental Laws, except for violations which, either singly
or in the aggregate, would not result in a Material Adverse Effect on US
Co.
(e) Environmental Claims. No notice has been served on US Co or any US
Co Subsidiaries from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or inquiry
related to alleged violations under any Applicable Environmental Laws, or
regarding any claims for remedial obligations or contribution under any
Applicable Environmental Laws, other than any of the foregoing which,
either singly or in the aggregate, would not result in a Material Adverse
Effect on US Co.
(f) Renewals. US Co does not know of any reason it would not be able
to renew any of the permits, licenses, or other authorizations required
pursuant to any Applicable Environmental Laws to operate and use any of US
Co's or the US Co Subsidiaries' assets for their current purposes and uses.
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3.15 COMPLIANCE WITH OTHER LAWS
Except as set forth in the US Co Disclosure Letter, neither US Co nor any
US Co Subsidiary is in violation of or in default with respect to, or in alleged
violation of or alleged default with respect to any other applicable law or any
applicable rule, regulation, or any writ or decree of any court or any
governmental commission, board, bureau, agency, or instrumentality, or
delinquent with respect to any report required to be filed with any Governmental
Entity, except for violations which, either singly or in the aggregate, do not
and are not expected to result in a Material Adverse Effect on US Co.
3.16 TAXES
(a) Except with respect to failures which, in the aggregate, would not
result in a Material Adverse Effect on US Co, proper and accurate federal, state
and local income, capital, withholding, value added, sales, use, franchise,
gross revenue, turnover, excise, payroll, property, employment, customs duties
and any and all other tax returns, reports, and estimates have been filed with
appropriate governmental agencies, domestic and foreign, by US Co and all
predecessor corporations and each of the US Co Subsidiaries for each period for
which any returns, reports, or estimates were due (taking into account any
extensions of time to file before the date hereof); all taxes shown by such
returns to be payable and any other taxes due and payable have been paid other
than those being contested in good faith by US Co or a US Co Subsidiary; and the
tax provision reflected in US Co's pro forma financial statements as of June 30,
1997, is adequate, in accordance with United States generally accepted
accounting principles, to cover liabilities of US Co and the US Co Subsidiaries
at the date thereof for all taxes, including any interest, penalties and
additions to taxes of any character whatsoever applicable to US Co and the US Co
Subsidiaries or their assets or businesses. There are no tax liens on any assets
of US Co or the US Co Subsidiaries except for taxes not yet currently due and
those which could not reasonably be expected to result in a Material Adverse
Effect on US Co.
(b) On and after the Effective Date and until such time as no person, other
than US Co or an affiliate of US Co, holds any Exchangeable Shares, neither US
Co nor any of its affiliates will be a "specified financial institution" as that
term is defined in the ITA.
3.17 VOTE REQUIRED
At a stockholders meeting at which a quorum is present, the affirmative
vote of the holders of a majority of the outstanding shares of US Co Common
Stock present at the meeting is required to approve the issuance of the US Co
Common Stock pursuant to this Agreement and upon exchange of the Exchangeable
Shares. Except as aforesaid, no vote or other approval of the stockholders of US
Co is required, under the stockholder approval policy of the NYSE, corporate law
or otherwise, to approve this Agreement, the Arrangement and the consummation of
the transactions contemplated hereby.
3.18 BROKERS AND FINDERS
Other than Goldman, Sachs & Co. in accordance with the terms of its
engagement letter, none of US Co or any of the US Co Subsidiaries nor any of
their respective directors, officers or employees has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or similar payments in connection with the transactions
contemplated by this Agreement.
3.19 DISCLOSURE
No representation or warranty made by US Co in this Agreement, nor any
document, written information, statement, financial statement, certificate or
Exhibit prepared and furnished or to be prepared and furnished by US Co or its
representatives pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contained any untrue statement of a
material fact when made, or omitted to state a material fact necessary to make
the statements or facts contained herein or therein not misleading in light of
the circumstances under which they were furnished.
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3.20 FAIRNESS OPINION
US Co's board of directors has received a written opinion from Goldman,
Sachs & Co. that as of the date hereof the consideration to be paid by US Co in
connection with this Agreement is fair to US Co.
3.21 RESTRICTIONS ON BUSINESS ACTIVITIES
There is no material agreement, judgment, injunction, order or decree
binding upon US Co or any US Co Subsidiary that has or could reasonably be
expected to have the effect of prohibiting or materially impairing any business
practice of US Co or any US Co Subsidiary, any acquisition of property by US Co
or any US Co Subsidiary, the conduct of business by US Co or any US Co
Subsidiary as currently conducted or the consummation of the Arrangement.
3.22 BOOKS AND RECORDS
The books, records and accounts of US Co and the US Co Subsidiaries (a)
have been maintained in accordance with good business practices on a basis
consistent with prior years, (b) are stated in reasonable detail and accurately
and fairly reflect the transactions and dispositions of the assets of US Co and
the US Co Subsidiaries and (c) accurately and fairly reflect the basis for the
US Co financial statements. US Co has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's general or specific
authorization; and (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with United States generally
accepted accounting principles or any other criteria applicable to such
statements and (ii) to maintain accountability for assets.
3.23 US CO SUB
US Co Sub will be incorporated solely for the purpose of participating in
the transactions contemplated herein, will carry on no other business, and,
except as contemplated herein, will not have any liabilities or obligations,
either accrued, absolute, contingent, or otherwise as of the Effective Date.
ARTICLE 4
OBLIGATIONS PENDING EFFECTIVE DATE
4.1 AGREEMENTS OF US CO AND CHAUVCO
US Co and Chauvco agree to take the following actions after the date
hereof:
(a) Regulatory Approvals. Each party will promptly execute and file or
join in the execution and filing of any application or other document that
may be necessary in order to obtain the authorization, approval or consent
of any Governmental Entity, the Commissions or the SEC which may be
reasonably required, or which the other party may reasonably request, in
connection with the consummation of the transactions contemplated by this
Agreement. Each party will use its commercially reasonable efforts to
promptly obtain such authorizations, approvals and consents. Without
limiting the generality of the foregoing, as promptly as practicable after
the execution of this Agreement, each party shall make all required filings
with the Federal Trade Commission (the "FTC") and the Antitrust Division of
the Department of Justice (the "DOJ"), a pre-merger notification report
under the HSR Act and shall make such filings as are necessary under the
Investment Canada Act and the Competition Act (Canada).
(b) Access. Each party will allow the other and its agents reasonable
access to the premises and properties of the other and to the files, books,
records and offices of the other and the other's subsidiaries, including,
without limitation, any and all information relating to such party's tax
matters, contracts, leases, licenses and real, personal and intangible
property and financial condition. Each party will cause its accountants to
cooperate with the other in making available to the other party all
financial information
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reasonably requested, including, without limitation, the right to examine
all working papers pertaining to tax matters and financial statements
prepared or audited by such accountants.
(c) Joint Proxy Statement. US Co and Chauvco shall cooperate in the
preparation and prompt filing of the Joint Proxy Statement (and, if
required, the Form F-4, S-4 or Form S-3) with the SEC;
(d) Notice of Material Developments. Each of US Co and Chauvco will
promptly notify the other in writing (i) of any event occurring subsequent
to the date of this Agreement which would render, or might reasonably be
expected to render, any representation and warranty of such party contained
in this Agreement untrue or inaccurate in any material respect, (ii) of any
Material Adverse Effect on such party and (iii) of any breach by such party
of any covenant or agreement contained in this Agreement; and
(e) Satisfaction of Conditions Precedent. During the term of this
Agreement, each of US Co and Chauvco will use its commercially reasonable
efforts to satisfy or cause to be satisfied all the conditions precedent
that are set forth in Article 5 hereof, and each of US Co and Chauvco will
use its commercially reasonable efforts to cause the Arrangement and the
other transactions contemplated by this Agreement to be consummated.
4.2 ADDITIONAL AGREEMENTS OF CHAUVCO
Chauvco agrees that from the date hereof to the Effective Date, it will,
and will cause each of the Chauvco Subsidiaries to:
(a) Operate in Ordinary Course/Consult. Other than as contemplated by
this Agreement, operate its business only in the usual, regular, and
ordinary manner and, to the extent consistent with such operation, use all
commercially reasonable efforts to preserve intact its present business
organization, keep available the services of its present officers and
employees, and preserve its relationships with customers, suppliers,
distributors, and others having business dealings with it; permit US Co
representatives to meet with Chauvco officers and attend such Chauvco
business meetings, and provide US Co with such periodic reports, all as US
Co may reasonably request to become and keep generally informed as to
Chauvco's business, assets and operations;
(b) Maintenance of Properties. Maintain all of its property and assets
in customary repair, order, and condition, reasonable wear and use and
damage by fire or unavoidable casualty excepted;
(c) Maintenance of Books and Records. Maintain its books of account
and records in the usual, regular, and ordinary manner, in accordance with
generally accepted accounting principles applied on a consistent basis;
(d) Compliance with Law. Duly comply in all material respects with all
laws applicable to it and to the conduct of its business;
(e) Employment Matters. Allow reasonable access by US Co to employees
in order for US Co to explore continuing employment arrangements; not (i)
enter into any contracts of employment which (1) cannot be terminated on
notice of 30 days or less or (2) provide for any severance payments or
benefits covering a period beyond the termination date of such employment
contract, except as may be required by law; (ii) amend any employee benefit
plan or stock option plan, except as may be required for compliance with
applicable law or as contemplated by this Agreement; or (iii) except with
the prior written consent of US Co, such consent not to be unreasonably
withheld, increase salaries or declare bonuses prior to the Effective Date
provided that Chauvco shall be permitted to declare and pay bonuses in an
amount not to exceed $750,000 without the consent of US Co;
(f) Prohibition of Certain Loans. Not incur any borrowings except (i)
the refinancing of indebtedness now outstanding or additional borrowings
under its existing revolving credit facilities, (ii) the prepayment by
customers of amounts due or to become due for goods sold or services
rendered or to be rendered in the future, (iii) trade payables incurred in
the ordinary course of business, (iv) other borrowings incurred in the
ordinary course of business to finance normal operations, (v) borrowing to
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finance expenditures not prohibited under paragraph (g) (provided however
with respect to items (i) to (v) the borrowing shall not exceed current
borrowing limits under current credit facilities), or (vi) as is otherwise
agreed to in writing by US Co;
(g) Prohibition of Certain Commitments. Not enter into commitments of
a capital expenditure nature or incur any contingent liability which would
exceed $1,000,000, in the aggregate, except (i) as may be necessary for the
maintenance of existing facilities, machinery and equipment in good
operating condition and repair in the ordinary course of business, (ii) as
may be required by law, (iii) as contemplated in Chauvco's Estimated
Capital Expenditures for the period July 1, 1997 to December 31, 1997, a
copy of which has been attached to the Chauvco Disclosure Letter or (iv) as
is otherwise agreed to in writing by US Co;
(h) Disposal of Assets. Not sell, dispose of, or encumber, any
property or assets, except (i) in the ordinary course of business and not
exceeding $10,000,000 in value in the aggregate, (ii) Encumbrances as may
be reasonably required in connection with borrowings under Section 4.2(f),
or (iii) as is otherwise agreed to in writing by US Co;
(i) Maintenance of Insurance. Maintain insurance upon all its
properties and with respect to the conduct of its business of such kinds
and in such amounts as is customary in the type of business in which it is
engaged, but not less than that presently carried by it;
(j) No Amendment to Charter Documents, etc. Except as otherwise
provided in this Agreement, not amend its charter documents or bylaws or
other organizational documents or merge or consolidate with or into any
other corporation or change in any manner the rights of its capital stock
or the character of its business;
(k) No Issuance, Sale, or Purchase of Securities. Except as otherwise
provided in this Agreement, not issue or sell (except upon the exercise of
outstanding options), or issue options or rights to subscribe to, or enter
into any contract or commitment to issue or sell, any shares of its capital
stock or subdivide or in any way reclassify any shares of its capital
stock, or acquire, or agree to acquire, any shares of its capital stock;
(l) Prohibition on Dividends. Not declare or pay any dividend on
shares of its capital stock or make any other distribution of assets to the
holders thereof;
(m) Supplemental Financial Statements. Deliver to US Co, within 45
days after the end of the fiscal quarter of Chauvco ending September 30,
1997, unaudited consolidated balance sheets and related unaudited
statements of income, retained earnings and cash flows as of the end of
such fiscal quarter of Chauvco, and as of the corresponding fiscal quarter
of the previous fiscal year. Chauvco hereby represents and warrants that
such unaudited consolidated financial statements shall (i) be complete in
all material respects except for the omission of notes and schedules
contained in audited financial statements, (ii) present fairly the
financial condition of Chauvco as at the dates indicated and the results of
operations for the periods indicated, (iii) shall have been prepared in
accordance with Canadian generally accepted accounting principles applied
on a consistent basis, except as noted therein and (iv) shall contain all
adjustments which Chauvco considers necessary for a fair presentation of
its results for the fiscal period;
(n) Exclusivity; Acquisition Transactions. Unless and until this
Agreement shall have been terminated by either party pursuant to Article 6
hereof, it shall not (and it shall cause its directors, representatives,
agents or affiliates (collectively "Representatives")) not to take or cause
to take (or cause any of the Chauvco Subsidiaries to take), directly or
indirectly, any of the following actions with any party other than US Co
and its designees: (i) solicit, encourage, initiate or participate in any
negotiations, inquiries or discussions with respect to any offer or
proposal (x) to acquire in any manner, directly or indirectly, all or any
significant part of the business or assets of Chauvco and the Chauvco
Subsidiaries taken as a whole or (y) to acquire in any manner, directly or
indirectly, more than 25% of the voting power of the capital shares of
Chauvco, whether by arrangement, amalgamation, merger, consolidation, other
business combination, purchase of assets, tender or exchange offer or
otherwise (each
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of the foregoing, an "Acquisition Transaction"), (ii) after the date hereof
furnish or provide any information with respect to, or otherwise take any
action that facilitates, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to any inquiry, offer or
proposal for, an Acquisition Transaction except in the ordinary course of
business (and unrelated to an Acquisition Transaction) and as required by
law or pursuant to a governmental request for information, (iii) enter into
or execute any agreement or arrangement relating to an Acquisition
Transaction, plan of reorganization, or other agreement calling for the
sale of all or any significant part of its business and properties or the
acquisition in any manner of more than 25% of the voting power of the
capital shares of Chauvco; or (iv), except as required by law, make or
authorize any public statement, recommendation or solicitation with respect
to any Acquisition Transaction or any offer or proposal relating to an
Acquisition Transaction other than with respect to the Arrangement
(provided that neither the Board of Directors of Chauvco nor any committee
thereof shall (x) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to US Co, the approval and recommendation by such Board of
Directors or such committee of this Agreement, the Plan of Arrangement or
the Arrangement or (y) approve or recommend, or propose to approve or
recommend, any Acquisition Transaction, except with respect to either
clause (x) or (y) in the case of a Superior Transaction (as hereinafter
defined) and then only at or after the termination of this Agreement
pursuant to Section 6.1(g)); and
(o) Alternative Transaction. Notwithstanding the foregoing, prior to
the approval of this Agreement and the Arrangement by the holders of
Chauvco Common Shares at the Chauvco Meeting, nothing contained in this
Agreement shall prevent the Board of Directors of Chauvco (or its
Representatives pursuant to its instructions) from: (i) engaging in
discussions or negotiations with (but not soliciting or initiating such
discussions or negotiations or encouraging inquiries from) a party
concerning an unsolicited Acquisition Transaction; or (ii) providing
non-public information in connection with an unsolicited Acquisition
Transaction with respect to Chauvco or the Chauvco Subsidiaries that has
previously been provided to US Co pursuant to a customary confidentiality
agreement (having terms substantially similar to the Confidentiality
Agreement (as hereinafter defined)), in each case if the Chauvco Board of
Directors first determines in good faith, based on the advice of outside
legal counsel, that such action is required by reason of the fiduciary
duties of the members of the Board of Directors of Chauvco to Chauvco or to
Chauvco's shareholders under applicable law and that such unsolicited
Acquisition Transaction involves consideration to the shareholders of
Chauvco with a value that the Board of Directors of Chauvco in good faith
believe, after receiving advice from Chauvco's financial advisors, is
superior to the consideration to the shareholders provided for in the
Arrangement; provided that in each such event, Chauvco first notifies US Co
of such determination by the Chauvco Board of Directors and further
notifies US Co of the fact that it is furnishing information to or entering
into discussions or negotiations with a person or entity and Chauvco keeps
US Co informed of the status (including all terms and conditions thereof
but not the identity of such person or entity) of any such discussions or
negotiations. Except to the extent expressly referenced in this Section,
nothing in this Section, however, shall relieve Chauvco from complying with
the other terms of this Agreement. If Chauvco or any Chauvco Subsidiary
receives any unsolicited offer or proposal to enter negotiations relating
to an Acquisition Transaction, Chauvco shall immediately notify US Co
thereof. On the date hereof, Chauvco shall immediately cease and cause to
be terminated any existing solicitation, initiation, encouragement,
activity, discussion or negotiation with any parties conducted heretofore
by Chauvco or any Representatives with respect to any Acquisition
Transaction and, in connection therewith, Chauvco shall exercise all rights
to require the return of information regarding Chauvco previously provided
to such parties. In no event may the Board of Directors of Chauvco or any
committee thereof (x) withdraw or modify, or propose to withdraw or modify,
in a manner adverse to US Co, the approval and recommendation by such Board
of Directors or such committee of this Agreement, the Plan of Arrangement
or the Arrangement or (y) approve or recommend, or propose to approve or
recommend, any Acquisition Transaction, except with respect to either
clause (x) or (y) in the case of a Superior Proposal and then only at or
after the termination of this Agreement pursuant to Section 6.1(g). As used
in this Agreement, a "Superior Proposal" means (x) a bona fide written
offer for an Acquisition Transaction to acquire, directly or indirectly,
for consideration consisting of cash and/or securities, more
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than 50% of the shares and/or voting power of the capital shares of Chauvco
then outstanding or all or substantially all the assets of Chauvco, and (y)
otherwise on terms which the Board of Directors of Chauvco determines in
its good faith judgment to be more favorable to Chauvco than the
Arrangement (based on the written opinion, with only customary
qualifications, of Chauvco's independent financial advisor that the value
of the consideration provided for in such proposal is superior to the value
of the consideration provided for in the Arrangement), for which financing,
to the extent required, is then committed or which, in the good faith
judgment of the Board of Directors of Chauvco, based on advice from
Chauvco's independent financial advisor, is reasonably capable of being
financed by such third party and for which the Board of Directors of
Chauvco determines, in its good faith judgment, that such proposed
transaction is reasonably likely to be consummated without undue delay;
(p) Chauvco Options. Ensure that the consent of the Optionholders as a
class is either obtained or not required;
(q) Chauvco Affiliates. On or prior to the Effective Time, cause its
Affiliates (as such term is defined in the Exchange Act) to execute and
deliver customary letters in connection with Rule 145 of the Securities
Act;
(r) Shareholders Rights Plan. Take such action as may be necessary so
that the Chauvco SRP shall be waived immediately prior to the Effective
Time and not apply to the transactions contemplated herein. Chauvco shall
utilize its best efforts to keep the Chauvco SRP in full force and effect
unamended until such waiver; and
(s) International Contracts. Not enter into any binding contracts with
any party in any country upon which the U.S. Government has imposed
international economic sanctions with respect to U.S. persons doing
business.
4.3 ADDITIONAL AGREEMENTS OF US CO
US Co agrees that from the date hereof to the Effective Date, it will, and
will cause each of the US Co Subsidiaries to:
(a) Operate in Ordinary Course. Other than as contemplated by this
Agreement, operate its business only in the usual, regular, and ordinary
manner and, to the extent consistent with such operation, use all
commercially reasonable efforts to preserve intact its present business
organization, keep available the services of its present officers and
employees, and preserve its relationships with customers, suppliers,
distributors, and others having business dealings with it;
(b) Maintenance and Disposition of Properties. Maintain all of its
property and assets in customary repair, order, and condition, reasonable
wear and use and damage by fire or unavoidable casualty excepted and only
dispose thereof (and such disposal shall be permitted) in the ordinary
course of business;
(c) Maintenance of Books and Records. Maintain its books of account
and records in the usual, regular, and ordinary manner, in accordance with
generally accepted accounting principles applied on a consistent basis;
(d) Compliance with Law. Duly comply in all material respects with all
laws applicable to it and to the conduct of its business;
(e) Maintenance of Insurance. Maintain insurance upon all its
properties and with respect to the conduct of its business of such kinds
and in such amounts as is customary in the type of business in which it is
engaged, but not less than that presently carried by it;
(f) No Amendment to Charter Documents, etc. Except as otherwise
contemplated in and subject to Section 1.4, not amend its charter documents
or merge or consolidate with or into any other corporation without the
prior written consent of Chauvco (provided that such consent shall not be
necessary if such transaction will not adversely affect the ability of
Chauvco shareholders to exchange Exchangeable
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Shares after the Effective Date as contemplated herein) or change in any
manner the rights of its capital stock or the character of its business
provided nothing herein shall prevent the issuance of preferred stock by US
Co and the filing of Certificates of Designation with the Secretary of
State of Delaware in connection therewith;
(g) Prohibition on Dividends. Except for US Co's regular semi-annual
5c/share dividends, or any dividend pursuant to the implementation or
maintenance of a shareholder rights plan or similar arrangement which plan
or arrangement makes adequate provision with respect to the holders of
Exchangeable Shares, not declare or pay any dividend on shares of its
capital stock or make any other distribution of assets to the holders
thereof;
(h) Supplemental Financial Statements. Deliver to Chauvco, within 45
days after the end of the fiscal quarter of US Co ending September 30,
1997, unaudited consolidated balance sheets and related unaudited
statements of income, retained earnings and cash flows for the period
ending and as of the end of such quarter of US Co. US Co hereby represents
and warrants that such unaudited consolidated financial statements shall
(i) be complete in all material respects except for the omission of notes
and schedules contained in audited financial statements, (ii) present
fairly the financial condition of US Co as at the dates indicated and the
results of operations for the periods indicated, (iii) shall have been
prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis, except as noted therein and (iv)
shall contain all adjustments which US Co considers necessary for a fair
presentation of its results for the fiscal period; and
(i) Listings. Use its commercially reasonable efforts to cause, with
the cooperation and assistance of Chauvco, the Exchangeable Shares to be
listed on the TSE.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF CHAUVCO
The obligations of Chauvco to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction of the following
conditions, or to the waiver thereof by Chauvco in the manner contemplated by
this Agreement before the Effective Date:
(a) Representations and Warranties of US Co True at Effective Date.
The representations and warranties of US Co herein contained shall be
accurate in all material respects at the Effective Date, with the same
effect as though made at such date, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case as of such date), and except to the extent of the failure of
such representations to be true and correct would not in the aggregate have
a Material Adverse Effect on US Co, and except as affected by transactions
permitted or contemplated by this Agreement; US Co shall have performed and
complied with all covenants required by this Agreement to be performed or
complied with, in all material respects, by US Co before the Effective
Date; and US Co shall have delivered to Chauvco a certificate, dated the
Effective Date and signed by its chairman of the board or its president on
behalf of US Co, and by its chief financial or accounting officer, and its
secretary, to both such effects;
(b) Opinion of US Co Counsel. Chauvco shall have received opinions,
dated as of the Effective Date, from Vinson & Elkins, L.L.P., United States
counsel for US Co, and from MacKimmie Matthews, Canadian counsel for US Co
in form and substance satisfactory to Chauvco dealing with due
authorization, execution, delivery and enforceability of documents and such
other matters as US Co shall agree to;
(c) Consents of Certain Parties in Privity with US Co. Chauvco shall
have received all written consents, assignments, waivers, authorizations or
other certificates necessary to provide for the continuation in full force
and effect of all material contracts and leases of US Co and for US Co to
consummate
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the transactions contemplated hereby, except when the failure to receive
such consents or other certificates would not have a Material Adverse
Effect on US Co;
(d) Shareholder Approval. This Agreement, the Arrangement and the
other transactions contemplated hereby shall have been approved and adopted
by the Chauvco shareholders in accordance with applicable law and Chauvco's
articles of amalgamation and bylaws;
(e) US Co Approvals. The issuance of US Co Common Stock from time to
time upon the exchange of the Exchangeable Shares shall have been approved
by the US Co stockholders in accordance with the rules of the NYSE and
applicable law;
(f) No Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the Arrangement shall have been issued by any Canadian or
United States federal, provincial or state court and remain in effect, nor
shall any proceeding seeking any of the foregoing be pending. There shall
be no order, decree or ruling by any governmental agency or threat thereof,
or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Arrangement, which would prohibit or render
illegal the transactions contemplated by this Agreement;
(g) Court Approval. The Court shall have issued its final order
approving the Arrangement in form and substance satisfactory to US Co and
Chauvco (such approvals not to be unreasonably withheld or delayed by US Co
or Chauvco) and reflecting the terms hereof;
(h) Commissions, etc. All necessary orders shall have been obtained
from the Commissions and other relevant United States and Canadian
securities regulatory authorities in connection with the Arrangement. All
waiting periods required by HSR shall have expired with respect to the
transactions contemplated by this Agreement, or early termination with
respect thereto shall have been obtained, without the imposition of any
governmental request or order requiring the sale or disposition or holding
separate (through a trust or otherwise) of particular assets or businesses
of Chauvco or US Co. US Co shall have filed all notices and information (if
any) required under Part IX of the Competition Act (Canada) and the
applicable waiting periods and any extensions thereof shall have expired or
the parties shall have received an Advance Ruling Certificate pursuant to
Section 102 of the Competition Act (Canada) setting out that the Director
under such Act is satisfied he would not have sufficient grounds on which
to apply for an order in respect of the Arrangement. The Arrangement shall
have received the allowance or approval or deemed allowance or approval by
the responsible Minister under the Investment Canada Act in respect of the
Arrangement, to the extent such allowance or approval is required;
(i) SEC Filings. The Forms F-4 and S-4, if filed, and the Form S-3
shall have been declared effective under the Securities Act and shall not
be the subject of any stop-order or proceedings seeking a stop-order, and
the Joint Proxy Statement shall on the Closing Date not be subject to any
similar proceedings commenced or threatened by the SEC or the Commissions;
(j) Appointment to US Co Board. US Co shall cause James R. Baroffio to
be appointed as a director of US Co on or prior to the Effective Date as a
Class II Director to serve until US Co's 1999 annual stockholders' meeting;
Guy J. Turcotte to be nominated as a director of US Co for election at US
Co's 1998 annual stockholders' meeting and Mr. Baroffio to be nominated for
re-election at US Co's 1999 annual stockholders' meeting. US Co shall put
forth Messrs. Turcotte and Baroffio for election to its board of directors
as aforesaid and will cause to be solicited proxies for its stockholder's
meetings in favour of the election of such individual.
(k) Listings. The Exchangeable Shares shall be listed on the TSE,
subject to notice of issuance, and the US Co Common Stock issuable pursuant
to the Arrangement and upon exchange of the Exchangeable Shares shall have
been approved for listing on the NYSE, subject to notice of issuance;
(l) Certificates and Resolutions. Chauvco shall have received such
other certificates and resolutions of US Co as may be reasonably required
in connection with the consummation of this Agreement; and
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(m) Material Adverse Effect. There shall have been no event, change or
effect after the date hereof and on or prior to the Effective Date
resulting in a Material Adverse Effect on US Co.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF US CO
The obligations of US Co to consummate and effect the transactions
contemplated hereunder shall be subject to the satisfaction of the following
conditions, or to the waiver thereof by US Co in the manner contemplated by this
Agreement, before the Effective Date:
(a) Representations and Warranties of Chauvco True at Effective Date.
The representations and warranties of Chauvco herein contained shall be
accurate in all material respects at the Effective Date, with the same
effect as though made at such date, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case as of such date), and except to the extent of the failure of
such representations to be true and correct would not in the aggregate have
a Material Adverse Effect on Chauvco and except as affected by transactions
permitted or contemplated by this Agreement; Chauvco shall have performed
and complied with all covenants required by this Agreement to be performed
or complied with, in all material respects, by Chauvco before the Effective
Date; and Chauvco shall have delivered to US Co a certificate, dated the
Effective Date and signed by its chairman of the board or its president on
behalf of Chauvco and by its chief financial or accounting officer, and its
secretary, to both such effects;
(b) Opinion of Chauvco Counsel. US Co shall have received opinions,
dated as of the Effective Date, from Baker & Botts, L.L.P., United States
counsel for Chauvco, and from Bennett Jones Verchere, Canadian counsel for
Chauvco in form and substance satisfactory to Chauvco dealing with due
authorization, execution, delivery and enforceability of documents and such
other matters as Chauvco shall agree to;
(c) Consents of Certain Parties in Privity with Chauvco. US Co shall
have received all written consents, assignments, waivers, authorizations or
other certificates necessary to provide for the continuation in full force
and effect of all material contracts and leases of Chauvco and for Chauvco
to consummate the transactions contemplated hereby, except when the failure
to receive such consents or other certificates would not have a Material
Adverse Effect on Chauvco;
(d) Stockholder Approval. The issuance of US Co Common Stock hereunder
and from time to time upon exchange of the Exchangeable Shares shall have
been approved by the US Co stockholders in accordance with the rules of the
NYSE and applicable law;
(e) Chauvco Approvals. This Agreement, the Arrangement and the other
transactions contemplated hereby shall have been approved and adopted by
the Chauvco shareholders in accordance with applicable law and Chauvco's
articles of amalgamation and bylaws, and Chauvco shall not have received on
or prior to the Effective Time notice from the holders of more than 5% of
the Chauvco Common Shares of their intention to exercise their rights of
dissent under Section 184 of the ABCA;
(f) No Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the Arrangement shall have been issued by any Canadian or
U.S. federal, provincial or state court and remain in effect, nor shall any
proceeding seeking any of the foregoing be pending. There shall be no
order, decree or ruling by any governmental agency or threat thereof, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Arrangement, which would prohibit or render illegal the
transactions contemplated by this Agreement;
(g) Court Approval. The Court shall have issued its final order
approving the Arrangement in form and substance satisfactory to Chauvco and
US Co (such approvals not to be unreasonably withheld or delayed by Chauvco
or US Co) and reflecting the terms hereof;
(h) Commissions, etc. All necessary orders shall have been obtained
from the Commissions and other relevant United States and Canadian
securities regulatory authorities in connection with the
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Arrangement. All waiting periods required by HSR shall have expired with
respect to the transactions contemplated by this Agreement, or early
termination with respect thereto shall have been obtained, without the
imposition of any governmental request or order requiring the sale or
disposition or holding separate (through a trust or otherwise) of
particular assets or businesses of US Co or Chauvco. Chauvco shall have
filed all notices and information (if any) required under Part IX of the
Competition Act (Canada) and the applicable waiting periods and any
extensions thereof shall have expired or the parties shall have received an
Advance Ruling Certificate pursuant to Section 102 of the Competition Act
(Canada) setting out that the Director under such Act is satisfied he would
not have sufficient grounds on which to apply for an order in respect of
the Arrangement. The Arrangement shall have received the allowance or
approval or deemed allowance or approval by the responsible Minister under
the Investment Canada Act in respect of the Arrangement, to the extent such
allowance or approval is required, on terms and conditions satisfactory to
US Co, acting reasonably;
(i) SEC Filings. The Forms S-3 and S-4 and the Form F-4, if filed,
shall have been declared effective under the Securities Act and shall not
be the subject of any stop order or proceedings seeking a stop-order and
the Joint Proxy Statement shall on the Closing Date not be subject to any
similar proceedings commenced or threatened by the SEC or the Commissions;
and
(j) Certificates and Resolutions. US Co shall have received such other
certificates and resolutions of Chauvco as may be reasonably required in
connection with the consummation of this Agreement.
(k) Material Adverse Effect. There shall have been no event, change or
effect after the date hereof and on or prior to the Effective Date
resulting in a Material Adverse Effect on Chauvco.
ARTICLE 6
TERMINATION
6.1 TERMINATION
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the transactions contemplated hereby by the
stockholders of US Co or the shareholders of Chauvco, as follows:
(a) by mutual agreement of Chauvco and US Co;
(b) by Chauvco, in the event of a breach by US Co of any
representation, warranty, covenant or other agreement contained in this
Agreement which (i) would give rise to the failure of a condition set forth
in Section 5.1(a) and (ii) has not been cured within 15 business days after
written notice thereof from Chauvco (except that no cure period shall be
provided for a matter which by its nature cannot be cured and in no event
shall such cure period extend beyond the Termination Date) provided that
Chauvco is not then in material breach (giving effect to any applicable
cure periods) of any representation, warranty, covenant or other agreement
contained in this Agreement;
(c) by US Co., in the event of a breach by Chauvco of any
representation, warranty, covenant or other agreement contained in this
Agreement which (i) would give rise to the failure of a condition set forth
in Section 5.2(a) and (ii) has not been cured within 15 business days after
written notice thereof from US Co (except that no cure period shall be
provided for a matter which by its nature cannot be cured and in no event
shall such cure period extend beyond the Termination Date) provided that US
Co is not then in material breach (giving effect to any applicable cure
periods) of any representation, warranty, covenant or other agreement
contained in this Agreement;
(d) by Chauvco if the stockholders of US Co do not approve the
issuance of US Co Common Stock issuable upon exchange of Exchangeable
Shares or any other matters related to the Plan of Arrangement requiring
their approval at the US Co Stockholders Meeting;
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(e) by US Co if the shareholders of Chauvco do not approve the Plan of
Arrangement at the Chauvco Meeting;
(f) by either party, if any of such party's conditions precedent under
Article 5 for Closing (as defined in Section 7.2) the Arrangement shall not
have been satisfied or waived on or before 5:00 p.m., Calgary, Alberta time
on March 31, 1998 (the "Termination Date"), other than as a result of a
breach of this Agreement by the terminating party;
(g) by Chauvco prior to obtaining the approval by the shareholders of
Chauvco of the Plan of Arrangement, if (i) the Board of Directors of
Chauvco shall have determined in good faith, based on the advice of outside
counsel, that it is necessary, in order to comply with its fiduciary duties
to Chauvco or its shareholders under applicable law, to enter into an
agreement with respect to or to consummate a transaction constituting a
Superior Proposal, (ii) Chauvco shall have given notice to US Co advising
US Co that Chauvco has received a Superior Proposal from a third party,
specifying the terms and conditions of such Superior Proposal and that
Chauvco intends to terminate this Agreement in accordance with this Section
6.1(g), and (iii) either (A) US Co shall not have revised its takeover
proposal within five business days after the date on which such notice is
deemed to have been given to US Co, or (B) if US Co within such period
shall have revised its takeover proposal, the Board of Directors of
Chauvco, after receiving advice from Chauvco's financial advisors, shall
have determined in its good faith judgment that the third party's
Acquisition Transaction is superior to US Co's revised takeover proposal;
provided that Chauvco may not effect such termination pursuant to this
Section 6.1(g) unless Chauvco has contemporaneously with such termination
tendered payment to US Co, or its designee, of the Termination Fee that is
due US Co or its designee pursuant to Section 6.4(c).
6.2 NOTICE OF TERMINATION
Any termination of this Agreement under Section 6.1 above will be effective
by the delivery of written notice by the terminating party to the other party
hereto.
6.3 EFFECT OF TERMINATION
Subject to Section 6.4, in the event of termination of this Agreement by
either Chauvco or US Co as provided in Section 6.1, this Agreement shall
forthwith become void and have no effect, and there shall be no liability or
obligation on the part of US Co or Chauvco or their respective officers or
directors, except that (i) the provisions of the confidentiality and standstill
agreements dated May 23, 1997 and July 28, 1997, respectively, between Chauvco
and US Co shall survive any such termination and abandonment (the
"Confidentiality Agreement"), and (ii) no party shall be released or relieved
from any liability arising from the breach by such party of any of its
representations, warranties, covenants or agreements as set forth in this
Agreement.
6.4 TERMINATION FEES
Notwithstanding Section 6.3:
(a) if this Agreement is terminated by Chauvco pursuant to Section
6.1(d) as a result of the failure of the stockholders of US Co to approve
the matters contemplated in Section 6.1(d), then US Co shall pay to Chauvco
(by wire transfer or cashier's cheque) a fee of $25 million within two
business days of the delivery of the notice of termination pursuant to
Section 6.2. Chauvco shall not be entitled to receive such payment if, at
the time of delivery of the applicable notice of termination pursuant to
Section 6.2, Chauvco is in material breach of this Agreement;
(b) if this Agreement is terminated by US Co pursuant to Section
6.1(e) as a result of the failure of the shareholders of Chauvco to approve
the matters contemplated in Section 6.1(e), then Chauvco shall pay to US Co
(by wire transfer or cashier's cheque) a fee of $25 million within two
business days of the delivery of the notice of termination pursuant to
Section 6.2. US Co shall not be entitled to receive such
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payment if, at the time of delivery of the applicable notice of termination
pursuant to Section 6.2, US Co is in material breach of this Agreement;
(c) if this Agreement is terminated pursuant to Section 6.1(g), then
Chauvco shall pay to US Co (by wire transfer or cashier's cheque) a fee of
$40 million concurrently with the delivery of the notice of termination
pursuant to Section 6.2. US Co shall not be entitled to receive such
payment if, at the time of delivery of the applicable notice of termination
pursuant to Section 6.2, US Co is in material breach of this Agreement or
US Co's stockholders have disapproved any of the matters contemplated in
Section 6.1(d);
(d) if this Agreement is terminated pursuant to Section 6.1(e) and
within six months of such termination definitive documentation with respect
to an Acquisition Transaction has been entered into or 50% or more of the
outstanding capital shares of Chauvco has been acquired pursuant to a
tender offer made as an Acquisition Transaction, then Chauvco shall pay (by
wire transfer or cashier's cheque), in addition to the termination fee
contemplated in Section 6.4(b), a fee of $15 million contemporaneously with
the closing of such Acquisition Transaction; and
(e) the obligation of the paying party to pay any termination fee set
forth in this Section 6.4 is in lieu of any damages or any other payment
which such party might otherwise be obligated to pay to the receiving party
as a result of any termination for which payment is due under this Section
6.4.
ARTICLE 7
ADDITIONAL AGREEMENTS
US Co and Chauvco each agree to take the following actions after the
execution of this Agreement:
7.1 MEETINGS
Chauvco and US Co shall each duly call a meeting of its stockholders to be
held within 45 days after the SEC has indicated that it has no further comments
on the Joint Proxy Statement for the purpose of (a) in the case of Chauvco,
voting upon the Plan of Arrangement and the transactions contemplated hereby and
thereby, and (b) in the case of US Co, voting upon a proposal to approve the
issuance of such number of shares of US Co Common Stock as are necessary to
consummate the Arrangement and issue upon exchange of Exchangeable Shares and
each shall, subject to Section 4.2(o), through its board of directors, recommend
to their stockholders approval of such matters and shall coordinate and
cooperate with respect to the timing of such meetings.
7.2 THE CLOSING
Subject to the termination of this Agreement as provided in Article 6, the
closing of the transactions contemplated by this Agreement (the "Closing") will
take place at the offices of Bennett Jones Verchere, Calgary, Alberta, Canada on
a date (the "Closing Date") and at a time to be mutually agreed upon by the
parties, which date shall be no later than the fifth business day after all
conditions to Closing set forth herein shall have been satisfied or waived,
unless another place, time and date is mutually selected by Chauvco and US Co.
7.3 ANCILLARY DOCUMENTS/RESERVATION OF SHARES/SPECIAL VOTING SHARES
(a) Provided all other conditions of this Agreement have been satisfied or
waived, on the Closing Date, the Articles of Arrangement shall be filed pursuant
to Part 15 of the ABCA to give effect to the Plan of Arrangement.
(b) On the Effective Date:
(i) US Co shall execute and deliver a Support Agreement containing the
terms and conditions set forth in Exhibit B hereto, together with such
other terms and conditions as may be agreed to by the parties hereto acting
reasonably; and
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(ii) US Co, US Co Sub and the Depositary shall execute and deliver a
Voting and Exchange Trust Agreement containing the terms and conditions set
forth in Exhibit C hereto, together with such other terms and conditions as
may be agreed to by the parties hereto acting reasonably.
(c) On or before the Effective Date, US Co will:
(i) reserve for issuance such number of shares of US Co Common Stock
as shall be necessary to give effect to this agreement plus the exchange of
the Exchangeable Shares; and
(ii) designate a series of its preferred shares as "Special Voting
Stock", such series having the rights, restrictions, privileges and
conditions set forth in Exhibit E hereto.
7.4 INDEMNIFICATION AND RELATED MATTERS
(a) US Co agrees that all rights to indemnification existing in favor of
the present or former directors and officers of Chauvco (as such) or any of the
Chauvco Subsidiaries or present or former directors and officers (as such) of
Chauvco or any of the Chauvco Subsidiaries serving or who served at Chauvco's or
any of the Chauvco Subsidiaries' request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, as provided in Chauvco's charter or bylaws or similar documents of
any of the Chauvco Subsidiaries in effect as of the date hereof with respect to
matters occurring prior to the Effective Time, shall survive and shall continue
in full force and effect and without modification for a period of not less than
the statutes of limitations applicable to such matters.
(b) From and after the Effective Time, US Co shall and shall cause Chauvco
to indemnify and hold harmless to the fullest extent permitted under the ABCA,
each director and officer of US Co Sub, Chauvco or any Chauvco Subsidiary
including, without limitation, officers and directors, serving on or prior to
the date hereof against any costs and expenses (including reasonable attorney's
fees on a solicitor and his own client basis), judgments, fines, losses, claims
and damages and liabilities, and amounts paid in settlement thereof with the
consent of the indemnifying party, in connection with any claim, action, suit,
proceeding or investigation relating to any of the transactions contemplated
hereby or the Arrangement. In the event of any such claim, action, suit,
proceeding or investigation, US Co shall cause Chauvco to pay the reasonable
fees and expenses of counsel in advance of the final disposition of any such
claim, action, suit, proceeding or investigation to the fullest extent permitted
by law subject to the limitations imposed by the ABCA. Without limiting the
foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any indemnified parties, (i) the indemnified
parties may retain counsel reasonably satisfactory to US Co and, subject to
limitations imposed by the ABCA, Chauvco shall (or US Co shall cause Chauvco to)
pay all reasonable fees and expenses of such counsel for the indemnified parties
promptly as statements therefor are received; and (ii) US Co will use all
reasonable efforts to assist in the defense of such matter; provided, however,
that neither Chauvco nor US Co shall be liable for any settlement effected
without its prior written consent. Any indemnified party wishing to claim
indemnification under this section, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify US Co (but the failure to so
notify shall not relieve a party from any liability which it may have under this
section except to the extent such failure prejudices such party). The
indemnified parties as a group may retain only one law firm in any jurisdiction
to represent them with respect to each such matter unless such counsel
determines that there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
indemnified parties, in which event such additional counsel may be required to
be retained by the indemnified parties.
(c) Subject to limitations imposed by the ABCA, Chauvco shall (or US Co
shall cause Chauvco to) pay all expenses, including attorney's fees on a
solicitor and his own client basis, as the same may be incurred by any
indemnified parties in any action by any indemnified party or parties seeking to
enforce the indemnity or other obligations provided for in this section;
provided, however, that Chauvco will be entitled to reimbursement for any
advances made under this section to any indemnified party who ultimately proves
unsuccessful in enforcing the indemnity as finally determined by a
non-appealable judgment in a court of competent jurisdiction, and payment of
such expenses in advance of the final disposition of the action shall be made
only upon receipt of any undertaking by the indemnified party to reimburse all
amounts advanced if such action ultimately proves unsuccessful.
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(d) There shall be maintained in effect for not less than six years from
the Effective Time the current policies of the directors' and officers'
liability insurance maintained by Chauvco in the amounts and with the coverages
in effect on the date of this Agreement. US Co may, however, substitute therefor
policies of at least the same coverage containing terms and conditions which are
no less advantageous, provided that such substitution shall not result in any
gaps or lapses in coverages with respect to matters occurring prior to the
Effective Time.
(e) This section, which shall survive the consummation of this Agreement
and the Arrangement, is intended to benefit each person or entity indemnified
hereunder.
7.5 LOCK-UP AGREEMENTS
Concurrently with the execution of this Agreement, Chauvco shall cause
those shareholders of Chauvco listed in Exhibit E hereto and US Co shall cause
those shareholders of US Co listed in Exhibit E hereto to execute and deliver to
the other lock-up agreements in such forms as may be mutually agreed by the
parties, acting reasonably.
7.6 EMPLOYEE MATTERS
Subject to applicable law, US Co, the US Co Subsidiaries, and the employee
benefit plans and programs ("US Co Benefit Plans") of US Co shall recognize the
number of years of service currently recognized by Chauvco of each individual
employed by Chauvco or a Chauvco Subsidiary immediately prior to the Effective
Date, provided nothing in this provision shall require US Co to amend any of the
US Co Benefit Plans where such amendment would require regulatory filings or
approvals.
7.7 ANCILLARY TRANSACTIONS -- GABON AND OTHER INTERNATIONAL PROPERTIES
It is acknowledged and agreed that:
(a) Chauvco shall cause the entities referred to in Sections 1.1(a)
through (c) to complete the transactions contemplated therein including,
without limitation, the subscription for the CRI Shares for an aggregate
cash subscription price of US$5,000,000 plus the fair market value of the
Gabon Securities on the Effective Date, and the transfer of the Gabon
Securities from CR to CRI for a cash purchase price equal to the fair
market value of the Gabon Securities on the Effective Date leaving
US$5,000,000 as cash in CRI;
(b) Chauvco has determined that the fair market value of the Gabon
Securities on the date hereof is approximately US$60,000,000 relying on (i)
the bidding process in connection with the sale of Chauvco, (ii) the
reserve and evaluation reports prepared by Chauvco's independent engineers,
(iii) the review and recommendation of Chauvco's senior management which
established a range of values at various discount factors and an assessment
of the exploration and development potential of the applicable properties,
and (iv) the fairness opinion supporting such valuation from professional
advisors. The fair market value of the Gabon Securities on the Effective
Date shall be revalued and determined by Chauvco using consistent
principles;
(c) notwithstanding the determination of the fair market value of the
Gabon Securities on the Effective Date under Section 7.7(b), unless the
parties otherwise agree, the amount which will be payable with respect to
such value may not exceed US$100,000,000;
(d) the purchase and sale agreement between CR and CRI with respect to
the transfer of CR's interest in the Gabon Securities to CRI shall be in a
form mutually acceptable to Chauvco and US Co and shall: (i) provide that
CRI will assume and be responsible for and will indemnify, defend and hold
CR, Chauvco and US Co Sub harmless from and against any liabilities CR,
Chauvco or US Co Sub may be or become subject to if any taxing authority
challenges the value placed on the Gabon Securities or the corresponding
value of the CRI Shares transferred to the holders of Chauvco Common Shares
and Optionholders; (ii) provide that CRI will assume all liabilities with
respect to the underlying operations of the Gabon Subsidiaries being
purchased; (iii) provide that CRI will assume and be responsible for and
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will indemnify, defend and hold CR, Chauvco and US Co Sub harmless from and
against any liabilities CR, Chauvco and US Co Sub may be or become subject
to which relate to the assets, business, operations, debts or liabilities
of CR and Chauvco which are being purchased by CRI and with respect to the
transactions contemplated in this Section 7.7 (provided that with respect
to tax matters, the extent of the indemnity shall be limited to that set
out in (i)); (iv) provide that CR and Chauvco will assume and be
responsible for and will indemnify, defend and hold CRI harmless from and
against any liabilities CRI may be or become subject to which relate to the
assets, business, operations, debts or liabilities of CR and Chauvco which
are not being purchased by CRI; (v) provide that Chauvco, subject to
confidentiality provisions, will retain copies of the books and records of
such companies; and (vi) provide that the Chauvco name shall not be used in
connection with, and CRI shall not engage in, any oil and gas operations in
the Western Canadian sedimentary basin for a period of one (1) year from
the Effective Date; and (vii) provide that CRI will use its best efforts to
have Chauvco released from any and all guarantees Chauvco has given to
Gabonese Government;
(e) Chauvco will provide an additional $13,500,000 of funding into the
Gabon Subsidiaries through CR between the date hereof and the Effective
Date which shall remain in the Gabon Subsidiaries for their operations and
shall not be repaid to CR except to the extent that the same may be
reflected in the determination of the fair market value of the Gabon
Securities on the Effective Date pursuant to Section 7.7(b);
(f) Chauvco shall be responsible for all costs and expenses
(including, without limitation, costs related to establishment and
promotion of CRI and legal fees) incurred on or prior to the Effective Date
to implement the transactions contemplated in this Section 7.7;
(g) CRI shall on or prior to the Effective Date, be provided with
copies of all confidentiality agreements entered into by Chauvco in
connection with the strategic alternatives review process of Chauvco; and
(h) the representations and warranties of Chauvco contained in this
Agreement shall be read as if the transactions in this Section 7.7 shall
have already been completed.
7.8 ANCILLARY TRANSACTIONS -- ALLIANCE
It is acknowledged and agreed that:
(a) on or prior to the Effective Date, Chauvco shall enter into a
transaction causing all of its rights and assets (including, without
limitation, copies of all books and records related thereto) relating to
the Alliance pipeline project (the "APP") to be distributed to or through
an entity (the "Alliance Entity") for a cash payment to Chauvco from the
Alliance Entity of $13,500,000 to be made on or prior to the Effective
Date;
(b) Chauvco shall be entitled to provide funding and commitments in
respect of the regular capital funding and commitments of the APP between
the date hereof and Closing provided that such funding shall be repaid, and
such commitments shall be assumed, by the Alliance Entity on or before the
Effective Time. Chauvco shall not be entitled to commit to provide any
additional funding to the APP other than in respect of such regularly
scheduled capital commitments (and shall notify US Co as and when such
funding or commitments are provided) and, in particular, Chauvco shall not
be entitled to commit to the approximate $260 million equity financing
commitment due in October, 1997;
(c) the Alliance Entity shall be responsible for all costs and
expenses (including, without limitation, costs related to establishment and
promotion of the Alliance Entity) incurred on or prior to the Effective
Date to implement the transactions contemplated in this Section 7.8;
(d) the purchase and sale agreement between the Alliance Entity and
Chauvco with respect to the transfer of Chauvco's interest in the APP to
the Alliance Entity will be in a form mutually acceptable to Chauvco and US
Co and provide that (i) the Alliance Entity will assume and be responsible
for and will indemnify, defend and hold harmless Chauvco from and against
any liabilities Chauvco may be or
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become subject, including any tax liability, to which relate in any manner
whatever to the transfer of Chauvco's interest in the APP to the Alliance
Entity and with respect to the transactions contemplated in this Section
7.8, (ii) Chauvco will assume and be responsible for and will indemnify,
defend and hold harmless the Alliance Entity from and against any
liabilities the Alliance Entity may be or become subject to which relate to
the assets, business, debts and liabilities of Chauvco unrelated to the
APP, and (iii) Chauvco, subject to confidentiality provisions, will retain
copies of the books and records relating to Chauvco's interest in the APP;
and
(e) the representations and warranties of Chauvco contained in this
Agreement shall be read as if the transactions in this Section 7.8 shall
have already been completed.
7.9 CHAUVCO TRADEMARKS AND TRADE NAMES
US Co covenants, whenever so requested by CRI, to execute or cause Chauvco
to execute any and all applications, assignments or other instruments which CRI
shall deem necessary in order to apply for and obtain registered proprietary
rights for the trademarks, trade names and domain name to be conveyed to CRI
pursuant to the Plan of Arrangement and in order to assign and convey to CRI the
sole and exclusive right, title and interest in and to the said trademarks,
trade names and domain name.
7.10 QUALIFICATION OF CRI SHARES
On or before the Effective Date, the CRI Shares shall be qualified for
distribution by prospectus which will be filed with the securities commissions
in each of the provinces of Canada. Chauvco will sign the prospectus as a
promoter pursuant to applicable Canadian securities legislation. Chauvco shall
cause CRI to make an application to the TSE to list the CRI Shares on such
exchange. Alternatively, the CRI Shares shall be issued pursuant to an exemption
from prospectus requirements.
ARTICLE 8
MISCELLANEOUS
8.1 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations and warranties of the parties contained in this
Agreement will expire and be of no further force or effect at the Closing. All
agreements and covenants of the parties shall survive the Closing, except as
otherwise set forth in this Agreement.
8.2 NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, by facsimile (receipt confirmed)
or mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to US Co to:
Pioneer Natural Resources Company
1400 Williams Square West
5205 N. O'Connor Blvd.
Irving, Texas 75039-3746
Attention: General Counsel
Facsimile No. (972) 402-7057
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with a copy to
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201-2975
Attention: Michael D. Wortley
Facsimile No. (214) 220-7716
and
MacKimmie Matthews
700, 401 -- 9th Avenue S.W.
Calgary, Alberta
T2P 2M2
Attention: Jack MacGillivray
Facsimile No. (403) 232-0888
(b) if to Chauvco to:
Chauvco Resources Ltd.
2900, 255 -- 5th Avenue S.W.
Calgary, Alberta
T2P 3G6
Attention: President
Facsimile No. (403) 269-9497
with a copy to
Bennett Jones Verchere
4500 Bankers Hall East
855 2nd Street S.W.
Calgary, Alberta
T2P 4K7
Attention: Martin A. Lambert
Facsimile No. (403) 265-7219
and
Baker & Botts L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Attention: C. Michael Watson
Facsimile No. (713) 229-1522
8.3 INTERPRETATION
When a reference is made in this Agreement to Sections or Exhibits, such
reference shall be to a Section or Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used therein
shall be deemed in each case to be followed by the words "without limitation."
The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
8.4 COUNTERPARTS
This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of
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the parties and delivered to each of the other parties, it being understood that
all parties need not sign the same counterpart.
8.5 MISCELLANEOUS
This Agreement, each of the agreements attached as an exhibit hereto and
any other documents referred to herein or contemplated hereby (a) constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof other than the
confidentiality and standstill agreements dated May 23, 1997 and July 28, 1997,
respectively, between Chauvco and US Co which shall continue in full force and
effect; (b) is not intended to confer upon any other person any rights or
remedies hereunder (except as otherwise expressly provided herein and except
that Section 7.4 is for the benefit of Chauvco's directors and officers,
Sections 1.1(e) and (f) are for the benefit of holders of Chauvco Options,
Section 7.6 is for the benefit of the Chauvco Employees, Section 7.7 is for the
benefit of CRI and Section 7.8 is for the benefit of the Alliance Entity (and
said sections are intended to confer rights on such persons); and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided.
8.6 GOVERNING LAW
This Agreement shall be governed in all respects, including validity,
interpretation and effect, by the laws of the Province of Alberta and the
federal laws of Canada applicable therein.
8.7 AMENDMENT AND WAIVERS
Any term or provision of this Agreement may be amended, and the observance
of any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively) only by a writing signed by
the party to be bound thereby. The waiver by a party of any breach hereof or
default in the performance hereof will not be deemed to constitute a waiver of
any other default or any succeeding breach or default. The Agreement may be
amended by the parties hereto at any time before or after approval of the
Chauvco shareholders or US Co stockholders, but, after such approval, no
amendment will be made which by applicable law requires the further approval of
the Chauvco shareholders or US Co stockholders without obtaining such further
approval.
8.8 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS
Neither party hereto may assign any of its rights or obligations hereunder
without the prior written consent of the other party hereto. This Agreement will
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.9 SEVERABILITY
If any provision of this Agreement, or the application thereof, will for
any reason and to any extent be invalid or unenforceable, the remainder of this
Agreement and application of such provision to other persons or circumstances
will be interpreted so as reasonably to effect the intent of the parties hereto.
The parties further agree to replace such void or unenforceable provision of
this Agreement with a valid and enforceable provision that will achieve, to the
greatest extend possible, the economic, business and other purpose of the void
and unenforceable provision.
8.10 OTHER REMEDIES
The parties agree that irreparable damage would occur and that they would
not have any adequate remedy at law in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
(without the requirement of posting a bond) and to enforce specifically the
terms and provisions of this Agreement in any court located in Alberta, this
being in addition to any other remedy to which they are entitled at law or in
equity.
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8.11 NO JOINT VENTURE
Nothing contained in this Agreement will be deemed or construed as creating
a joint venture or partnership between any of the parties. No party is by virtue
of this Agreement authorized as an agent, employee or legal representative of
any other party. No party will have the power to control the activities and
operations of any other and the status of each is, and at all times, will
continue to be, that of an independent contractor with respect to the other. No
party will have any power or authority to bind or commit any other. No party
will hold itself out as having any authority or relationship in contravention of
this section.
8.12 FURTHER ASSURANCES
Each party agrees to cooperate fully with the other party, to act
reasonably in respect of, and to execute, such further instruments, documents
and agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and select the transactions described
herein and contemplated hereby and to carry into effect the intents and purposes
of this Agreement.
8.13 EXPENSES
Except as otherwise set forth in this Agreement, each party will bear its
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated hereby.
IN WITNESS WHEREOF, US Co and Chauvco have caused this Agreement to be
signed by their respective officers thereunder duly authorized, all as of the
date first written above.
PIONEER NATURAL
RESOURCES COMPANY
Per: /s/ SCOTT D. SHEFFIELD
----------------------------------------
Per: /s/ MARK L. WITHROW
----------------------------------------
CHAUVCO RESOURCES LTD.
Per: /s/ GUY J. TURCOTTE
----------------------------------------
Per: /s/ W.G. RUSSELL
----------------------------------------
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EXHIBIT A
PLAN OF ARRANGEMENT
UNDER SECTION 186
OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
See Annex E of the Joint Proxy Statement.
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EXHIBIT B
SUPPORT AGREEMENT
See Annex H of the Joint Proxy Statement.
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EXHIBIT C
VOTING AND EXCHANGE TRUST AGREEMENT
See Annex I of the Joint Proxy Statement.
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EXHIBIT D
TERMS AND CONDITIONS OF PIONEER SPECIAL PREFERRED VOTING STOCK
See Annex G of the Joint Proxy Statement.
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EXHIBIT E
LIST OF LOCK-UP SHAREHOLDERS
A. CHAUVCO
1. Trimac Corporation
2. Gendis Inc.
3. Guy J. Turcotte
B. US CO
1. Richard E. Rainwater
2. Scott D. Sheffield
3. I. Jon Brumley
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EXHIBIT F
All of Chauvco's right, title, estate and interest in and to
(a) property, assets and rights relating to petroleum, natural gas and
related hydrocarbons;
(b) International Data Files;
(c) country correspondence and administration background files;
(d) Gabon correspondence, administration and background files;
(e) computer hardware and software; and
(f) office furniture and contents;
all as relating to countries other than Canada, Argentina and U.S.A., all as
more particularly agreed to in writing by Chauvco and US Co.
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EXHIBIT G
EXCHANGEABLE SHARE PROVISIONS
See Annex F of the Joint Proxy Statement.
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ANNEX D
INTERIM ORDER
<PAGE> 425
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF Section 186 of the Business Corporations Act
(Alberta), being Chapter B-15, of the Statutes of Alberta, 1981,
as amended;
AND IN THE MATTER OF a proposed Arrangement among Chauvco
Resources Ltd. and its Shareholders and Optionholders, Pioneer
Natural Resources Company and Pioneer Natural Resources (Canada)
Ltd.
<TABLE>
<S> <C>
BEFORE THE HONOURABLE JUSTICE - IN CHAMBERS AT THE COURT HOUSE, IN THE CITY OF CALGARY,
PROVINCE OF ALBERTA ON -, THE -TH DAY OF -,
1997.
</TABLE>
INTERIM ORDER
UPON the application by Petition of Chauvco Resources Ltd. ("Chauvco")
pursuant to s.186 of the Business Corporations Act (Alberta);
AND UPON reading the said Petition, and the Affidavit of James K. Wilson,
Senior Vice President Finance & Administration and Chief Financial Officer of
Chauvco, and the documents referred to therein, filed;
AND UPON it appearing that notice of this application has been given to the
Executive Director of the Alberta Securities Commission;
AND UPON hearing counsel for the Petitioner
IT IS HEREBY ORDERED THAT:
1. Chauvco shall convene a special meeting (the "Meeting") of the
holders of its issued and outstanding common shares (the "Common Shares")
to consider, and if deemed advisable, to pass, with or without variation, a
resolution (the "Arrangement Resolution") to approve a proposed Plan of
Arrangement involving Chauvco, its said holders of Common Shares (the
"Shareholders") and Options (the "Optionholders"), Pioneer Natural
Resources Company and Pioneer Natural Resources (Canada) Ltd. (the "Plan of
Arrangement"), a true copy of which Plan of Arrangement in its
substantially final form is marked as Exhibit "A" to the Affidavit of James
K. Wilson sworn the -th day of -, 1997.
2. The Meeting shall be called, held and conducted in accordance with
the Business Corporations Act (Alberta) (the "ABCA") and the Articles of
Amalgamation and the By-laws of Chauvco subject to what may be provided
hereafter.
3. The only persons entitled to notice of the Meeting shall be the
registered Shareholders as they may appear on the records of Chauvco as at
the close of business on the -th day of -, 1997, the directors and auditors
of Chauvco, the Registrar of Corporations under the ABCA and the Alberta
Securities Commission, and the only persons entitled to be represented and
to vote at the Meeting, either in person or by proxy, shall be such
Shareholders, subject to the provisions of Section 132 of the ABCA. A
meeting of the Optionholders shall not be required.
4. Chauvco shall mail the Notice of the Special Meeting of
Shareholders, Notice of Petition, and Joint Management Proxy Circular (the
"Proxy Circular") in substantially the form contained in Exhibit "A" to the
Affidavit of James K. Wilson, with such amendments thereto as counsel for
Chauvco may advise are necessary or desirable, provided that such
amendments are not inconsistent with the terms of this Order, to the
Shareholders, to the Optionholders, to the directors and auditors of
Chauvco, the Registrar of Corporations under the ABCA and to the Alberta
Securities Commission by mailing the same by prepaid ordinary mail to such
persons at least 21 days prior to the date of the Meeting, excluding
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<PAGE> 426
the date of mailing and excluding the date of the Meeting. Such mailing
shall constitute good and sufficient service of notice of the Petition, the
Meeting and the hearing in respect of the Petition.
5. The accidental omission to give notice of the Meeting, or the
non-receipt of such notice by one or more of the persons specified in
paragraph 4 hereof, shall not invalidate any resolution passed or
proceedings taken at the Meeting.
6. The majority required to pass the Arrangement Resolution shall be
66 2/3 of the votes cast by the Shareholders in respect of the Arrangement
Resolution, present in person or by proxy at the Meeting.
7. The Shareholders who are registered Shareholders shall have the
right to dissent from the Arrangement Resolution in accordance with the
provisions of Section 184 of the ABCA, as modified hereby, and to be paid
the fair value of their Common Shares, provided that:
(a) notwithstanding subsection 184(5) of the ABCA, the written
objection to the Arrangement Resolution referred to in subsection 184(5)
of the ABCA which is required to be sent to Chauvco must be received by
Chauvco, c/o Corporate Shareholder Services Inc. at Suite 1485,
550 - Sixth Avenue S.W., Calgary, Alberta, T2P 0S2, or the Chairman of
the Meeting, before commencement of the Meeting; and
(b) the holders exercising such right of dissent otherwise comply
with the requirements of Section 184 of the ABCA.
8. Upon approval of the Plan of Arrangement at the Meeting in the
manner set forth in this Order, Chauvco may apply before this Court for
approval of the Plan of Arrangement, which application (the "Final
Application") shall be heard by this Honourable Court at the Court House,
611 - 4th Street S.W., in the City of Calgary, on the -th day of -, 1997 at
- a.m. or so soon thereafter as counsel may be heard.
9. Any Shareholder, Optionholder and any interested person may appear
on the application for the approval of the Arrangement, provided that such
holder or person shall file with this Court and serve on the solicitors for
Chauvco on or before -, 1997, a Notice of Intention to Appear setting out
the address for service in respect of such holder or person, and indicating
whether such holder or person intends to support or oppose the application
or make submissions thereat together with any evidence or materials which
are to be presented to this Court, such Notice of Appearance to be effected
by delivery, at the address set forth below:
Bennett Jones Verchere
4500 Bankers Hall East
855 - 2nd Street S.W.
Calgary, Alberta
T2P 4K7
Attention: Martin A. Lambert
10. In the event the Final Application is adjourned, only those
persons who have filed and served a Notice of Appearance shall be served
with notice of the adjourned date.
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11. Chauvco shall be entitled at any time to seek leave to vary this
Order.
------------------------------------
J.C.Q.B.A.
ENTERED this -th day of -, 1997.
- ------------------------------------------------------
Clerk of the Court of Queen's Bench
of Alberta
ACTION NO: - , 1997
------------------------------------
IN THE COURT OF QUEEN'S BENCH
OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
------------------------------------
BETWEEN:
IN THE MATTER OF Section 186 of the
Business Corporations Act (Alberta),
being Chapter B-15, of the Statutes
of Alberta, 1981, as amended;
AND IN THE MATTER OF a proposed
Arrangement among Chauvco Resources
Ltd. and its Shareholders, Pioneer
Natural Resources Company and
Pioneer Natural Resources (Canada)
Ltd.
------------------------------------
INTERIM ORDER
------------------------------------
BENNETT JONES VERCHERE
Barristers and Solicitors
4500 Bankers Hall East
855 - 2nd Street S.W.
CALGARY, Alberta
T2P 4K7
Martin A. Lambert (403) 298-3100
Our File No. 7105-77
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<PAGE> 428
ANNEX E
PLAN OF ARRANGEMENT
<PAGE> 429
PLAN OF ARRANGEMENT
UNDER SECTION 186
OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
ARTICLE 1
INTERPRETATION
1.1 Definitions. In this Plan of Arrangement unless there is
something in the subject matter or context inconsistent therewith, the
following terms shall have the respective meanings set out below and
grammatical variations of such terms shall have corresponding meanings:
"ABCA" means the Business Corporations Act (Alberta), as amended;
"Arrangement" means the arrangement under section 186 of the ABCA on
the terms and subject to the conditions set out in this Plan of
Arrangement, subject to any amendments thereto made in accordance with
Section 6.1 hereof or made at the direction of the Court in the Final
Order;
"Arrangement Resolution" means the special resolution passed by the
holders of the Chauvco Common Shares at the Meeting;
"Automatic Redemption Date" has the meaning attributed thereto in the
Exchangeable Share Provisions;
"Average Closing Price" means the average closing sales price, regular
way, per share of the US Co Common Stock on the NYSE in United States
dollars as reported in the Wall Street Journal over the ten (10)
consecutive trading days ending on the third trading day next preceding the
date of the Meeting converted to Canadian dollars using the Currency
Exchange Rate;
"Business Day" has the meaning attributed thereto in the Exchangeable
Share Provisions;
"Cash Payment" means the cash payment, if any, which a holder of
Chauvco Common Shares or Chauvco Options is entitled to receive in
accordance with Section 2.2;
"Certificates" means, collectively, the certificates representing the
Exchangeable Shares and shares of US Co Common Stock (in each case rounded
down to the nearest whole number) and the CRI Shares which a holder of
Chauvco Common Shares or Chauvco Options is entitled to receive pursuant to
the Arrangement;
"Chauvco" means Chauvco Resources Ltd., a corporation organized and
existing under the ABCA and any successor corporation;
"Chauvco Common Shares" means the common shares in the capital of
Chauvco;
"Chauvco Options" has the meaning attributed thereto in Section
2.1(e);
"Combination Agreement" means the agreement by and among US Co and
Chauvco, dated as of September 3, 1997, as the same may be amended and
restated, providing for, among other things, the Arrangement;
"Court" means the Court of Queen's Bench of Alberta;
"CR" means CR International Limited, a corporation organized and
existing under the laws of Bermuda;
"CRI" means Chauvco Resources International Ltd., a corporation
organized and existing under the laws of Bermuda;
"CRI Shares" means the common shares in the capital of CRI;
"Currency Exchange Rate" means the noon spot rate of exchange of US
dollars to Canadian dollars announced by the Bank of Canada on the day
preceding the date of calculation;
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<PAGE> 430
"Depositary" means Montreal Trust Company of Canada at its principal
office in Calgary, Alberta;
"Dissent Procedures" has the meaning attributed thereto in Section
3.1;
"Effective Date" means the date shown on the certificate of
arrangement issued by the Registrar under the ABCA giving effect to the
Arrangement;
"Effective Time" means 12:01 a.m. on the Effective Date;
"Election Deadline" means that date which is two (2) days prior to the
date of the Meeting;
"Exchange Ratio" has the meaning attributed thereto in Section 2.2;
"Exchangeable Share Consideration" has the meaning attributed thereto
in the Exchangeable Share Provisions;
"Exchangeable Share Price" has the meaning attributed thereto in the
Exchangeable Share Provisions;
"Exchangeable Share Provisions" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares;
"Exchangeable Shares" means the exchangeable shares in the capital of
US Co Sub;
"Final Order" means the final order of the Court approving the
Arrangement as such order may be amended by the Court at any time prior to
the Effective Time;
"Gabon Securities" has the meaning attributed thereto in Section
2.1(b);
"Gabon Subsidiaries" has the meaning attributed thereto in Section
2.1(b);
"ITA" means the Income Tax Act (Canada), as amended;
"Joint Proxy Statement" means the Joint Management Information
Circular and Proxy Statement of Chauvco and US Co dated ,
1997;
"Letter of Transmittal and Election Form" has the meaning attributed
thereto in Section 2.1(h);
"Liquidation Call Purchase Price" has the meaning attributed thereto
in Section 5.1;
"Liquidation Call Right" has the meaning attributed thereto in Section
5.1;
"Liquidation Date" has the meaning attributed thereto in the
Exchangeable Share Provisions;
"Meeting" means the special meeting of the shareholders of Chauvco to
be held to consider the Arrangement;
"NYSE" means the New York Stock Exchange;
"Optionholders" means holders of Chauvco Options;
"Option Letter of Transmittal and Election Form" has the meaning
attributed thereto in Section 2.1(f);
"Option Payment" has the meaning attributed thereto in Section 2.1(e);
"Record Date" means that date which is three trading days prior to the
Effective Date;
"Redemption Call Purchase Price" has the meaning attributed thereto in
Section 5.2;
"Redemption Call Right" has the meaning attributed thereto in Section
5.2;
"Subsidiary" has the meaning attributed thereto in the Exchangeable
Share Provisions;
"US Co" means Pioneer Natural Resources Company, a corporation
organized and existing under the laws of the State of Delaware and any
successor corporation;
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<PAGE> 431
"US Co Common Stock" has the meaning attributed thereto in the
Exchangeable Share Provisions;
"US Co Stock Price" has the meaning attributed thereto in Section 2.2;
"US Co Sub" means Pioneer Natural Resources (Canada) Ltd., a
corporation organized and existing under the laws of British Columbia and
any successor corporation;
"US Co Sub Common Shares" means the common shares in the capital of US
Co Sub;
"Westoil" means Westoil Marine & Transport Co Ltd., a corporation
organized and existing under the laws of Bermuda; and
"Voting and Exchange Trust Agreement" has the meaning attributed
thereto in the Exchangeable Share Provisions.
1.2 Sections and Headings. The division of this Plan of Arrangement into
sections and the insertion of headings are for reference purposes only and shall
not affect the interpretation of this Plan of Arrangement. Unless otherwise
indicated, any reference in this Plan of Arrangement to a section or an Appendix
refers to the specified section of or Appendix to this Plan of Arrangement.
1.3 Number, Gender and Persons. In this Plan of Arrangement, unless the
context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, corporations, partnerships, associations,
trusts, unincorporated organizations, governmental bodies and other legal or
business entities of any kind.
1.4 Currency. Unless otherwise specified, all references herein to
"dollars" or "$" shall mean Canadian dollars.
ARTICLE 2
ARRANGEMENT
2.1 Arrangement. At the Effective Time, the following transactions shall
occur and shall be deemed to occur in the following order without any further
act or formality:
(a) Chauvco shall subscribe for that number of CRI Shares as is equal
to (i) the number of Chauvco Common Shares which are issued and outstanding
on the Record Date, (ii) plus that number of Chauvco Common Shares which
all Optionholders would otherwise be entitled to acquire on the exercise of
their Chauvco Options on a fully vested basis on the Record Date, (iii)
less that number of CRI Shares then held by Chauvco, and (iv) less that
number of Chauvco Common Shares held by shareholders who have exercised
their rights of dissent in accordance herewith and who are ultimately
entitled to be paid the fair value for such shares. The subscription price
for the CRI Shares shall be paid for in cash in the aggregate amount equal
to US$5,000,000 plus the fair market value on the Effective Date (as
determined and adjusted in accordance with Section 2.3) of the Gabon
Securities;
(b) CRI shall purchase from CR for cash in an aggregate amount equal
to the fair market value thereof on the Effective Date (as determined and
adjusted in accordance with Section 2.3), (i) all of the issued and
outstanding securities of Chauvco Resources (Gabon) S.A., Chauvco Resources
(Gabon-Ngalo) S.A., Chauvco Resources (Gabon-Maga) S.A., Chauvco Resources
(Gabon-Avomo) S.A. and CR Trading Co. Ltd. (collectively, the "Gabon
Subsidiaries"), (ii) 75% of the issued and outstanding securities of
Westoil, and (iii) all of its rights under a loan in the amount of U.S.
$909,421.60 made by CR to Olympic Marine Services International, Inc.
(which owns the remaining 25% of the issued and outstanding securities of
Westoil), any and all advances made by CR to Westoil, and any and all
advances made by Chauvco (all of which shall have first been assigned by
Chauvco to CR) to the Gabon Subsidiaries and Westoil (such securities in
Section 2.1(b)(i), (ii) and (iii) collectively, the "Gabon Securities");
(c) Chauvco shall transfer, assign and convey to CRI, in consideration
for $1.00, all of Chauvco's right, title, benefit and interest in and to
any and all trademarks (including registrations and applications
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<PAGE> 432
therefor), trade names and the internet domain name "chauvco.com" owned by
Chauvco as at the Effective Time, and the other assets and property which
are set out in Exhibit I;
(d) US Co Sub shall purchase from Chauvco all of the issued and
outstanding CRI Shares in consideration of the payment by way of promissory
note of US Co Sub to Chauvco in an amount equal to the subscription price
paid for such CRI Shares by Chauvco under Section 2.1(a);
(e) each of the outstanding options to purchase Chauvco Common Shares
which has not been exercised prior to the Record Date (collectively, the
"Chauvco Options") (which includes all outstanding options granted under
Chauvco's stock option plan as amended and restated on November 10, 1995)
will vest, if not already vested, and be transferred to US Co Sub in
consideration for one (1) CRI Share and, in accordance with the election of
each Optionholder and the remainder of this Section 2.1(e) and Section
2.1(f), a number of shares of US Co Common Stock determined in accordance
with the Exchange Ratio in which event, in addition to transferring the
Chauvco Options to US Co Sub, the Optionholder will be required to make a
payment to US Co Sub (the "Option Payment") in an amount equal to the
aggregate exercise price which the Optionholder would otherwise be required
to pay on the exercise of such options. As an alternative to making the
Option Payment, Optionholders will be entitled to elect to reduce the
number of shares of US Co Common Stock to be received by the number
obtained by dividing the Option Payment by the US Co Stock Price (converted
into Canadian dollars using the Currency Exchange Rate). Each Optionholder
will receive only a whole number of shares of US Co Common Stock resulting
from the transfer of his Chauvco Options. In lieu of fractional shares of
US Co Common Stock, each Optionholder who would otherwise be entitled to
receive such fractional shares shall be paid by US Co Sub an amount
determined in accordance herewith in full satisfaction of such fractional
entitlement;
(f) an Optionholder electing to make the Option Payment and receive
the applicable number of shares of US Co Common Stock under Section 2.1(e)
above must have given effect to the election by depositing with the
Depositary, prior to the Election Deadline, a duly completed letter of
transmittal and election form (the "Option Letter of Transmittal and
Election Form") in the form provided by Chauvco along with the Joint Proxy
Statement indicating such holder's election and by agreeing to pay the
Option Payment to the Depositary as agent for US Co Sub. Coincident with
the receipt of the CRI Shares and shares of US Co Common Stock, such
Optionholder shall pay the Option Payment to the Depositary as agent for US
Co Sub less any amounts receivable by such Optionholder in connection with
fractional entitlements hereunder. In the event that an Optionholder who
has elected to make the Option Payment fails to make the Option Payment on
or before the delivery of the securities to the Optionholder, the
Depositary shall be entitled to sell all or any portion of the shares of US
Co Common Stock held on behalf of such Optionholder to satisfy the Option
Payment and remit the same to US Co Sub. In the event that an Optionholder
has failed to validly make an election in the Option Letter of Transmittal
and Election Form pursuant to this paragraph, such Optionholder shall be
deemed to have elected the option to receive the reduced number of shares
of US Co Common Stock by not making the Option Payment;
(g) each of the outstanding Chauvco Common Shares will be transferred
to US Co Sub in consideration for one (1) CRI Share and, at the election of
the holders of the Chauvco Common Shares:
(i) a number of shares of US Co Common Stock determined in
accordance with the Exchange Ratio. Each such holder of Chauvco
Common Shares will receive only a whole number of shares of US
Co Common Stock resulting from the transfer of such holder's
Chauvco Common Shares to US Co Sub. In lieu of fractional
shares of US Co Common Stock, each holder of a Chauvco Common
Share who otherwise would be entitled to receive such
fractional share shall be paid by US Co Sub an amount
determined in accordance herewith in full satisfaction of such
fractional entitlement; or
(ii) a number of shares of Exchangeable Shares determined in
accordance with the Exchange Ratio. Each such holder of
Chauvco Common Shares will receive only a whole number of
Exchangeable Shares resulting from the transfer of such
holder's Chauvco Common Shares to US Co Sub. In lieu of
fractional Exchangeable Shares, each holder of a Chauvco
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<PAGE> 433
Common Share who otherwise would be entitled to receive such
fractional share shall be paid by US Co Sub an amount determined
in accordance herewith in full satisfaction of such fractional
entitlement;
provided that, for greater certainty, such holders shall be entitled to
elect to receive a combination of shares of US Co Common Stock and
Exchangeable Shares on the transfer of their Chauvco Common Shares;
(h) a holder of Chauvco Common Shares must have given effect to the
election in Section 2.1(g) above by depositing with the Depositary, prior
to the Election Deadline, a duly completed letter of transmittal and
election form (the "Letter of Transmittal and Election Form") in the form
provided by Chauvco along with the Joint Proxy Statement indicating such
holder's election. In the event that a holder of Chauvco Common Shares has
failed to validly make an election under Section 2.1(g) in the Letter of
Transmittal and Election Form pursuant to this paragraph, such holder shall
be deemed to have elected the option under Section 2.1(g)(i).
Notwithstanding any provision to the contrary, holders of Chauvco Common
Shares who are not residents of Canada for the purposes of the ITA will not
be entitled to receive Exchangeable Shares under Section 2.1(g)(ii). Each
holder of Chauvco Common Shares who, prior to the Election Deadline,
returned to Chauvco a duly completed Letter of Transmittal and Election
Form (containing a declaration of residency status) shall be treated as a
resident shareholder or non-resident shareholder, as applicable, in
accordance with his declaration. Any holder of Chauvco Common Shares who
did not complete such declaration by the Election Deadline and who has an
address on the register of holders of Chauvco Common Shares which is
outside of Canada shall be deemed to be a non-resident shareholder;
(i) upon the transfer of shares referred to in Section 2.1(g) above:
(i) each holder of a Chauvco Common Share shall cease to be such a holder,
shall have his name removed from the register of holders of Chauvco Common
Shares and shall become a holder of the number of fully paid CRI Shares and
Exchangeable Shares and/or shares of US Co Common Stock to which he is
entitled as a result of the transfer of shares referred to in Section
2.1(g) and such holder's name shall be added to the register of holders of
such securities accordingly; and (ii) US Co Sub shall become the legal and
beneficial owner of all of the Chauvco Common Shares so transferred;
(j) holders of Chauvco Common Shares who are residents of Canada for
the purposes of the ITA and who have elected to receive Exchangeable Shares
under Section 2.1(g)(ii) shall be entitled to make an income tax election
pursuant to subsection 85(1) of the ITA with respect to the transfer of
their Chauvco Common Shares to US Co Sub by providing two signed copies of
the necessary election forms to US Co Sub within 90 days following the
Effective Date, duly completed with the details of the number of shares
transferred and the applicable agreed amounts for the purposes of such
elections. Thereafter, subject to the election forms complying with the
provisions of the ITA, the forms will be signed by US Co Sub and returned
to such holders of Chauvco Common Shares for filing with Revenue Canada,
Customs, Excise and Taxation; and
(k) US Co Sub shall be continued as a corporation under the ABCA.
2.2 Exchange Ratio. As used herein, the term "Exchange Ratio" means in
respect of Exchangeable Shares or US Co Common Stock to be delivered upon the
transfer of Chauvco Common Shares or Chauvco Options to US Co Sub, a ratio of
the number of Exchangeable Shares or shares of US Co Common Stock per Chauvco
Common Share or Chauvco Option equal to:
(a) if the US Co Stock Price is less than US$33.50, (.493827);
(b) if the US Co Stock Price is at least US$33.50 but less than
US$39.01,
.493827-((US Co Stock Price -- 33.50) X .042360)
5.51
and
(c) if the US Co Stock Price is equal to or greater than $39.01,
(.451467).
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<PAGE> 434
The Exchange Ratio as so determined in each case shall be rounded to six decimal
places. The "US Co Stock Price" shall mean the average closing sales price,
regular way, per share of the US Co Common Stock on the NYSE in United States
dollars as reported in the Wall Street Journal over the ten (10) consecutive
trading days ending on the third trading day next preceding the date of the
Meeting. Notwithstanding the foregoing, if the Exchange Ratio is above .465116,
US Co may elect to cause US Co Sub to deliver, in lieu of Exchangeable Shares
and shares of US Co Common Stock, a number of Exchangeable Shares or shares of
US Co Common Stock for each Chauvco Common Share or Chauvco Option based on the
Exchange Ratio as set forth above equal to (.465116) and an amount in cash (in
Canadian dollars) per Chauvco Common Share or Chauvco Option equal to the
product of (x) the US Co Stock Price multiplied by the Currency Exchange Rate
and (y)
Exchange Ratio -- .465116.
2.3 Fair Market Value. (a) Chauvco determined that the fair market value
of the Gabon Securities on September 3, 1997 was approximately US$60,000,000
relying on (i) the bidding process in connection with the sale of Chauvco, (ii)
the reserve and evaluation reports prepared by Chauvco's independent engineers,
(iii) the review and recommendation of Chauvco's senior management which
established a range of values at various discount factors and an assessment of
the exploration and development potential of the applicable properties, and (iv)
a fairness opinion supporting such valuation from its professional advisors. The
fair market value of the Gabon Securities on the Effective Date shall be
revalued and determined by Chauvco using consistent principles.
(b) Notwithstanding the determination of the fair market value of the Gabon
Securities on the Effective Date under Section 2.3(a), unless Chauvco and US Co
otherwise agree, the amount which will be payable with respect to such value may
not exceed US$100,000,000.
ARTICLE 3
RIGHTS OF DISSENT
3.1 Rights of Dissent. Holders of Chauvco Common Shares may exercise
rights of dissent with respect to such shares pursuant to and in the manner set
forth in section 184 of the ABCA and this Section 3.1 (the "Dissent Procedures")
in connection with the Arrangement and holders who duly exercise such rights of
dissent and who:
(a) are ultimately entitled to be paid the fair value for their
Chauvco Common Shares shall be deemed to have transferred such Chauvco
Common Shares to Chauvco for cancellation on the Effective Date; or
(b) are ultimately not entitled, for any reason, to be paid the fair
value for their Chauvco Common Shares shall be deemed to have participated
in the Arrangement on the same basis as any non-dissenting holder of
Chauvco Common Shares,
but in no case shall Chauvco be required to recognize such holders as holders of
Chauvco Common Shares on and after the Effective Date, and the names of such
holders of Chauvco Common Shares shall be deleted from the register of holders
of Chauvco Common Shares on the Effective Date.
3.2 Dissent Payments. The obligations to make payments in respect of
dissenting shareholders (the "Dissent Obligations") shall be apportioned between
Chauvco and CRI as follows:
(a) CRI shall pay that portion of the Dissent Obligations equal to the
result determined by applying the following formula:
<TABLE>
<S> <S> <C>
Fair market value of the Gabon Securities determined in
accordance with Section 2.3 X the Currency Exchange Rate
------------------------------------------------------------------------------------- X Total Dissent Obligations
(US Co Stock Price X the Currency Exchange Rate) X (the total number of Chauvco Common
Shares outstanding on the Effective
Date
X the Exchange Ratio)
</TABLE>
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<PAGE> 435
(b) Chauvco shall pay the remaining portion of the Dissent
Obligations.
ARTICLE 4
CERTIFICATES, CASH PAYMENT AND FRACTIONAL SHARES
4.1 Delivery of Certificates and Cash Payment. At or promptly after the
Effective Time, US Co Sub shall deposit with the Depositary, for the benefit of
the holders of Chauvco Common Shares and Chauvco Options transferred pursuant to
the Arrangement, the Certificates and Cash Payment, if any, to which each such
holder is entitled pursuant to the Arrangement. Upon surrender to the
Depositary:
(a) in the case of holders of Chauvco Common Shares, for cancellation
of a certificate which immediately prior to the Effective Time represented
outstanding Chauvco Common Shares, together with a duly completed Letter of
Transmittal and Election Form; and
(b) in the case of Optionholders of a duly completed Option Letter of
Transmittal and Election Form and, if applicable, the Option Payment;
and, in either case, of such additional documents and instruments as the
Depositary may reasonably require, each such holder shall be entitled to
receive, and the Depositary shall deliver to each such holder, the Certificates
and the Cash Payment to which such holder has the right to receive pursuant to
the Arrangement (together with any dividends or distributions with respect to
the Exchangeable Shares, US Co Common Stock or CRI Shares, as applicable,
pursuant to Section 4.2 and any cash in lieu of fractional shares pursuant to
Section 4.3), and any certificates so surrendered shall forthwith be cancelled.
In the event of a transfer of ownership of Chauvco Common Shares which is not
registered in the transfer records of Chauvco, the Certificates may be issued
and the Cash Payment, if any, may be paid and delivered to a transferee if the
certificate representing such Chauvco Common Shares is presented to the
Depositary, accompanied by all documents required to evidence and effect such
transfer. Until surrendered as contemplated by this Section 4.1, each
certificate which immediately prior to the Effective Time represented
outstanding Chauvco Common Shares and the Chauvco Options that were transferred
pursuant to the Arrangement shall be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender (a) the Certificates
and the Cash Payment, if any, to which the holder of Chauvco Common Shares or
Chauvco Options has the right to receive pursuant to the Arrangement, (b) a cash
payment in lieu of any fractional shares as contemplated by Section 4.3 and (c)
any dividends or distributions with a record date after the Effective Time
theretofore paid or payable with respect to the Exchangeable Shares, US Co
Common Stock and CRI Shares, as applicable, as contemplated by Section 4.2. No
interest will be paid from or after the Effective Date in respect of the Cash
Payment.
4.2 Distributions Limited. No dividends or other distributions declared or
made after the Effective Time with respect to the Exchangeable Shares, US Co
Common Stock and CRI Shares, as applicable, with a record date after the
Effective Time shall be paid to the holder of any unsurrendered certificate and
who has not returned a Letter of Transmittal and Election Form which,
immediately prior to the Effective Time, represented outstanding Chauvco Common
Shares or to any Optionholder who has not returned an Option Letter of
Transmittal and Election Form, duly completed and, if applicable, paid the
Option Payment pursuant to Section 2.1(e), and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 4.3, (and
no interest will be earned or payable on these proceeds) unless and until such
certificate and Letter of Transmittal and Election Form or Option Letter of
Transmittal and Election Form and Option Payment, if applicable, shall be
received by the Depositary in accordance with Section 4.1. Subject to applicable
law and to Section 4.5, at the time of such surrender of any such certificate
and Letter of Transmittal and Election Form or Option Letter of Transmittal and
Election Form and Option Payment, if applicable, (or, in the case of clause (c)
below, at the appropriate payment date), there shall be paid to the record
holder of such certificate or to the applicable Optionholder without interest,
(a) the amount of any cash payable in lieu of fractional shares to which such
holder is entitled pursuant to Section 4.3, (b) the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to the Exchangeable Shares, US Co Common Stock and CRI Shares, as
applicable, and (c) the amount of
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dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to the Exchangeable Shares, US Co Common Stock and CRI Shares, as
applicable.
4.3 No Fractional Shares. No fractional Exchangeable Shares or shares of
US Co Common Stock shall be issued upon the surrender for transfer of
certificates and Letter of Transmittal and Election Form or upon delivery of an
Option Letter of Transmittal and Election Form and Option Payment, if
applicable, pursuant to Section 4.1 and such fractional interests shall not
entitle the owner thereof to vote or to exercise any rights as a security holder
of Chauvco, US Co or US Co Sub. In lieu of any such fractional securities, each
person entitled to a fractional interest in an Exchangeable Share or share of US
Co Common Stock will receive an amount of cash (rounded to the nearest whole
cent), without interest, equal to the product of (a) such fraction multiplied by
(b) the Average Closing Price of the US Co Common Stock, such amount to be
provided to the Depositary by US Co Sub upon request.
4.4 Lost Certificates. If any certificate which immediately prior to the
Effective Time represented outstanding Chauvco Common Shares that were
transferred pursuant to Section 2.1 has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such certificate to
be lost, stolen or destroyed, the Depositary will issue and deliver in exchange
for such lost, stolen or destroyed certificate, the Certificates and Cash
Payment, if any, to which the holder of such certificate is entitled pursuant to
the Arrangement (and any dividends or distributions with respect thereto and any
cash pursuant to Section 4.3) deliverable in respect thereof as determined in
accordance with Section 2.1. The person who is entitled to receive such
Certificates and Cash Payment, if any, and other payments shall, as a condition
precedent to the receipt thereof, give a bond satisfactory to US Co Sub and US
Co Sub's transfer agent (the "Transfer Agent"), as the case may be, in such form
as US Co Sub may direct or otherwise indemnify US Co Sub in a manner
satisfactory to US Co Sub and the Transfer Agent against any claim that may be
made against US Co Sub or the Transfer Agent with respect to the certificate
alleged to have been lost, stolen or destroyed.
4.5 Extinguishment of Rights. Any certificate which immediately prior to
the Effective Time represented outstanding Chauvco Common Shares that were
transferred pursuant to Section 2.1 and has not been deposited, and any Chauvco
Options with respect to which an Option Letter of Transmittal and Election Form
and the Option Payment, if applicable, has not been deposited or paid, in each
case with all other instruments required by Section 4.1, on or prior to the
tenth anniversary of the Effective Date shall cease to represent a claim or
interest of any kind or nature as a shareholder of Chauvco or an Optionholder.
On such date, the consideration and other payments to which the former
registered holder of the certificate or Optionholder referred to in the
preceding sentence was ultimately entitled shall be deemed to have been
surrendered to US Co together with all entitlements to dividends, distributions
and interest thereon held for such former registered holder for no
consideration.
ARTICLE 5
CERTAIN RIGHTS OF US CO TO ACQUIRE EXCHANGEABLE SHARES
5.1 US Co Liquidation Call Right.
(a) US Co shall have the overriding right (the "Liquidation Call Right"),
in the event of and notwithstanding the proposed liquidation, dissolution or
winding-up of US Co Sub pursuant to Article 5 of the Exchangeable Share
Provisions, to purchase from all but not less than all of the holders (other
than US Co and any Subsidiary thereof) of Exchangeable Shares on the Liquidation
Date all but not less than all of the Exchangeable Shares held by each such
holder on payment by US Co to the holder of the Exchangeable Share Price
applicable on the last Business Day prior to the Liquidation Date (the
"Liquidation Call Purchase Price"). In the event of the exercise of the
Liquidation Call Right by US Co, each holder shall be obligated to sell all the
Exchangeable Shares held by the holder to US Co on the Liquidation Date on
payment by US Co to the holder of the Liquidation Call Purchase Price for each
such share.
(b) To exercise the Liquidation Call Right, US Co must notify US Co Sub's
Transfer Agent in writing, as agent for the holders of Exchangeable Shares, and
US Co Sub of US Co's intention to exercise such right at
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least 55 days before the Liquidation Date in the case of a voluntary
liquidation, dissolution or winding-up of US Co Sub and at least five Business
Days before the Liquidation Date in the case of an involuntary liquidation,
dissolution or winding-up of US Co Sub. The Transfer Agent will notify the
holders of Exchangeable Shares as to whether or not US Co has exercised the
Liquidation Call Right forthwith after the expiry of the date by which the same
may be exercised by US Co. If US Co exercises the Liquidation Call Right, on the
Liquidation Date US Co will purchase and the holders will sell all of the
Exchangeable Shares then outstanding for a price per share equal to the
Liquidation Call Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, US Co shall deposit with the Transfer
Agent, on or before the Liquidation Date, the Exchangeable Share Consideration
representing the total Liquidation Call Purchase Price. Provided that such
Exchangeable Share Consideration has been so deposited with the Transfer Agent,
on and after the Liquidation Date the rights of each holder of Exchangeable
Shares will be limited to receiving such holder's proportionate part of the
total Liquidation Call Purchase Price payable by US Co without interest upon
presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after the
Liquidation Date be considered and deemed for all purposes to be the holder of
the US Co Common Stock delivered to such holder. Upon surrender to the Transfer
Agent of a certificate or certificates representing Exchangeable Shares,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under applicable law and such additional
documents and instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be entitled to
receive in exchange therefor, and the Transfer Agent on behalf of US Co shall
deliver to such holder, the Exchangeable Share Consideration to which the holder
is entitled. If US Co does not exercise the Liquidation Call Right in the manner
described above, on the Liquidation Date the holders of the Exchangeable Shares
will be entitled to receive in exchange therefor the liquidation price otherwise
payable by US Co Sub in connection with the liquidation, dissolution or
winding-up of US Co Sub pursuant to Article 5 of the Exchangeable Share
Provisions. Notwithstanding the foregoing, until such Exchangeable Share
Consideration is delivered to the holder, the holder shall be deemed to still be
a holder of Exchangeable Shares for purposes of all voting rights with respect
thereto under the Voting and Exchange Trust Agreement.
5.2 US Co Redemption Call Right.
(a) US Co shall have the overriding right (the "Redemption Call Right"),
notwithstanding the proposed redemption of the Exchangeable Shares by US Co Sub
pursuant to Article 7 of the Exchangeable Share Provisions, to purchase from all
but not less than all of the holders (other than US Co or any Subsidiary
thereof) of Exchangeable Shares on the Automatic Redemption Date all but not
less than all of the Exchangeable Shares held by each such holder on payment by
US Co to the holder of the Exchangeable Share Price applicable on the last
Business Day prior to the Automatic Redemption Date (the "Redemption Call
Purchase Price"). In the event of the exercise of the Redemption Call Right by
US Co, each holder shall be obligated to sell all the Exchangeable Shares held
by the holder to US Co on the Automatic Redemption Date on payment by US Co to
the holder of the Redemption Call Purchase Price for each such share.
(b) To exercise the Redemption Call Right, US Co must notify the Transfer
Agent in writing, as agent for the holders of Exchangeable Shares, and US Co Sub
of US Co's intention to exercise such right at least 125 days before the
Automatic Redemption Date. The Transfer Agent will notify the holders of the
Exchangeable Shares as to whether or not US Co has exercised the Redemption Call
Right forthwith after the date by which the same may be exercised by US Co. If
US Co exercises the Redemption Call Right, on the Automatic Redemption Date US
Co will purchase and the holders will sell all of the Exchangeable Shares then
outstanding for a price per share equal to the Redemption Call Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Redemption Call Right, US Co shall deposit with the Transfer
Agent, on or before the Automatic Redemption Date, the Exchangeable Share
Consideration representing the total Redemption Call Purchase Price. Provided
that such Exchangeable Share Consideration has been so deposited with the
Transfer Agent, on and after the Automatic Redemption Date the rights of each
holder of Exchangeable Shares will be limited to receiving such holder's
proportionate part of the total Redemption Call Purchase Price payable by US Co
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without interest upon presentation and surrender by the holder of certificates
representing the Exchangeable Shares held by such holder and the holder shall on
and after the Automatic Redemption Date be considered and deemed for all
purposes to be the holder of the US Co Common Stock delivered to such holder.
Upon surrender to the Transfer Agent of a certificate or certificates
representing Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
applicable law and such additional documents and instruments as the Transfer
Agent may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the Transfer
Agent on behalf of US Co shall deliver to such holder, the Exchangeable Share
Consideration to which the holder is entitled. If US Co does not exercise the
Redemption Call Right in the manner described above, on the Automatic Redemption
Date the holders of the Exchangeable Shares will be entitled to receive in
exchange therefor the redemption price otherwise payable by US Co Sub in
connection with the redemption of the Exchangeable Shares pursuant to Article 7
of the Exchangeable Share Provisions. Notwithstanding the foregoing, until such
Exchangeable Share Consideration is delivered to the holder, the holder shall be
deemed to still be a holder of Exchangeable Shares for purposes of all voting
rights with respect thereto under the Voting and Exchange Trust Agreement.
ARTICLE 6
AMENDMENT
6.1 Plan of Arrangement Amendment. Chauvco reserves the right to amend,
modify and/or supplement this Plan of Arrangement at any time and from time to
time provided that any such amendment, modification, or supplement must be
contained in a written document that is (a) agreed to by US Co, (b) filed with
the Court and, if made following the Meeting, approved by the Court and (c)
communicated to holders of Chauvco Common Shares in the manner required by the
Court (if so required).
Any amendment, modification or supplement to this Plan of Arrangement may
be proposed by Chauvco at any time prior to or at the Meeting (provided that US
Co shall have consented thereto) with or without any other prior notice or
communication, and if so proposed and accepted by the persons voting at the
Meeting (other than as may be required under the Court's interim order), shall
become part of this Plan of Arrangement for all purposes.
Any amendment, modification or supplement to this Plan of Arrangement that
is approved by the Court following the Meeting shall be effective only (a) if it
is consented to by Chauvco (b) if it is consented to by US Co and (c) if
required by the Court or applicable law, it is consented to by the holders of
the Exchangeable Shares.
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ANNEX F
EXCHANGEABLE SHARE PROVISIONS
<PAGE> 440
EXCHANGEABLE SHARE PROVISIONS
The Exchangeable Shares in the capital of the Corporation shall have the
following rights, privileges, restrictions and conditions:
ARTICLE I
INTERPRETATION
1.1 For the purposes of these share provisions:
"Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of US Co Common Stock are entitled
to vote, consent or otherwise act, the product of (i) the number of shares
of Exchangeable Shares issued and outstanding and held by holders thereof
(other than US Co and its Subsidiaries) multiplied by (ii) the number of
votes to which a holder of one share of US Co Common Stock is entitled with
respect to such matter, proposition or question.
"Automatic Redemption Date" means the date for the automatic
redemption by the Corporation of Exchangeable Shares pursuant to Article 7
of these share provisions, which date shall be the fifth anniversary of the
date of the first issuance of Exchangeable Shares unless (a) such date
shall be extended at any time or from time to time to a specified later
date by the Board of Directors but not later than December 31, 2005 or (b)
such date shall be accelerated at any time to a specified earlier date (but
no earlier than the third anniversary of the first issuance of Exchangeable
Shares) by the Board of Directors if at such time there are issued and
outstanding less than 5% of the number of Exchangeable Shares initially
issued and outstanding pursuant to the Plan of Arrangement (other than
Exchangeable Shares held by US Co and its Subsidiaries) and as such number
of shares may be adjusted as deemed appropriate by the Board of Directors
to give effect to any subdivision or consolidation of or stock dividend on
the Exchangeable Shares, any issuance or distribution of rights to acquire
Exchangeable Shares or securities exchangeable for or convertible into
Exchangeable Shares, any issue or distribution of other securities or
rights or evidences of indebtedness or assets, or any other capital
reorganization or other transaction affecting the Exchangeable Shares, in
each case upon at least 60 days' prior written notice of any such extension
or acceleration, as the case may be, to the registered holders of the
Exchangeable Shares, in which case the Automatic Redemption Date shall be
such later or earlier date; provided, however, that the accidental failure
or omission to give any such notice of extension or acceleration, as the
case may be, to less than 10% of such holders of Exchangeable Shares shall
not affect the validity of such extension or acceleration.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day
when banks are not open for business in either or both of Dallas, Texas and
Calgary, Alberta.
"Current Market Price" means, in respect of a share of US Co Common
Stock on any date, the average of the closing prices of US Co Common Stock
during a period of 20 consecutive trading days ending not more than five
trading days before such date on the New York Stock Exchange, or, if the US
Co Common Stock is not then traded on the New York Stock Exchange, on such
other principal U.S. stock exchange or automated quotation system on which
the US Co Common Stock is listed or quoted, as the case may be, as may be
selected by the Board of Directors for such purpose; provided, however,
that if in the opinion of the Board of Directors the public distribution or
trading activity of US Co Common Stock during such period does not create a
market which reflects the fair market value of a share of US Co Common
Stock, then the Current Market Price of a share of US Co Common Stock shall
be determined by the Board of Directors based upon the advice of such
qualified independent financial advisors as the Board of Directors may deem
to be appropriate, and provided further that any such selection, opinion or
determination by the Board of Directors shall be conclusive and binding.
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"Exchangeable Share Consideration" means, for any acquisition of
Exchangeable Shares pursuant to these share provisions, the Plan of
Arrangement, the Support Agreement or the Voting and Exchange Trust
Agreement:
(a) certificates representing the aggregate number of shares of US
Co Common Stock deliverable in connection with such acquisition;
(b) a cheque or cheques payable at par at any branch of the bankers
of the payor in the amount of declared and unpaid cash dividends
deliverable in connection with such acquisition; and
(c) such stock or property constituting any declared and unpaid
non-cash dividends deliverable in connection with such acquisition;
provided that any such stock or property shall be duly issued as fully paid
and non-assessable, in the case of stock, and free and clear of any lien,
claim and encumbrance, security interest or adverse claim and provided
further that such consideration shall be paid less any tax required to be
deducted and withheld therefrom and without interest.
"Exchangeable Share Price" means, for each Exchangeable Share:
(a) the Current Market Price of a share of US Co Common Stock,
which shall be satisfied in full by causing to be delivered one share of
US Co Common Stock; plus
(b) an additional amount equal to the full amount of all cash
dividends declared and unpaid on such Exchangeable Share; plus
(c) the stock or other non-cash assets, if any, representing
non-cash dividends declared and unpaid on such Exchangeable Share.
"Exchangeable Shares" mean the Exchangeable Shares of the Corporation
having the rights, privileges, restrictions and conditions set forth
herein.
"Liquidation Amount" has the meaning attributed thereto in Section 5.1
of these share provisions.
"Liquidation Call Right" has the meaning attributed thereto in the
Plan of Arrangement.
"Liquidation Date" has the meaning attributed thereto in Section 5.1
of these share provisions.
"Plan of Arrangement" means the plan of arrangement contemplated in
that Combination Agreement dated September 3, 1997 between US Co and
Chauvco Resources Ltd.
"Purchase Price" has the meaning attributed thereto in Section 6.3 of
these share provisions.
"Redemption Call Purchase Price" has the meaning attributed thereto in
the Plan of Arrangement.
"Redemption Call Right" has the meaning attributed thereto in the Plan
of Arrangement.
"Redemption Price" has the meaning attributed thereto in Section 7.1
of these share provisions.
"Retracted Shares" has the meaning attributed thereto in Subsection
6.1(i) of these share provisions.
"Retraction Call Right" has the meaning attributed thereto in
Subsection 6.1(iii) of these share provisions.
"Retraction Date" has the meaning attributed thereto in Subsection
6.1(ii) of these share provisions.
"Retraction Price" has the meaning attributed thereto in Section 6.1
of these share provisions.
"Retraction Request" has the meaning attributed thereto in Section 6.1
of these share provisions.
"Subsidiary" of any person means each partnership, joint venture,
corporation, association or other business entity of which more than 50% of
the total voting power of shares of stock or units of ownership
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<PAGE> 442
or beneficial interest entitled to vote in the election of directors (or
members of a comparable governing body) is owned or controlled, directly or
indirectly, by such person.
"Support Agreement" means the Support Agreement between US Co and the
Corporation, made as of , 1997.
"Transfer Agent" means Montreal Trust Company of Canada or such other
person as may from time to time be the registrar and transfer agent for the
Exchangeable Shares.
"Trustee" means Montreal Trust Company of Canada and any successor
trustee appointed under the Voting and Exchange Trust Agreement.
"US Co" means Pioneer Natural Resources Company, a corporation
organized and existing under the laws of the State of Delaware and any
successor corporation.
"US Co Call Notice" has the meaning ascribed thereto in Section 6.3 of
these share provisions.
"US Co Common Stock" mean the shares of common stock of US Co, with a
par value of U.S. $0.01 per share, having voting rights of one vote per
share, and any other securities into which such shares may be changed.
"US Co Dividend Declaration Date" means the date on which the board of
directors of US Co declares any dividend on the US Co Common Stock.
"US Co Special Share" means the share of Special Preferred Voting
Stock of US Co with a par value of U.S. $0.01 and having voting rights at
meetings of holders of US Co Common Stock equal to the Aggregate Equivalent
Vote Amount.
"Voting and Exchange Trust Agreement" means the Voting and Exchange
Trust Agreement among the Corporation, US Co and the Trustee, made as of
, 199 .
ARTICLE II
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over the
Common Voting Shares and any other shares ranking junior to the Exchangeable
Shares, with respect to the payment of dividends and the distribution of assets
in the event of the liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary, or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding-up its affairs.
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ARTICLE III
DIVIDENDS
3.1 A holder of an Exchangeable Share shall be entitled to receive and the
Board of Directors shall, subject to applicable law, on each US Co Dividend
Declaration Date, declare a dividend on each Exchangeable Share (a) in the case
of a cash dividend declared on the US Co Common Stock, in an amount in cash for
each Exchangeable Share equal to the cash dividend declared on each share of US
Co Common Stock or (b) in the case of a stock dividend declared on the US Co
Common Stock to be paid in US Co Common Stock, in such number of Exchangeable
Shares for each Exchangeable Share as is equal to the number of shares of US Co
Common Stock to be paid on each share of US Co Common Stock or (c) in the case
of a dividend declared on the US Co Common Stock in property other than cash or
securities of US Co in such type and amount of property for each Exchangeable
Share as is the same as the type and amount of property declared as a dividend
on each share of US Co Common Stock or (d) in the case of a dividend declared on
the US Co Common Stock to be paid in securities of US Co other than US Co Common
Stock, in such number of either such securities or economically equivalent
securities of the Corporation, as the Board of Directors determines, for each
Exchangeable Share as is equal to the number of securities of US Co to be paid
on each share of US Co Common Stock. Such dividends shall be paid out of money,
assets or property of the Corporation properly applicable to the payment of
dividends, or out of authorized but unissued shares of the Corporation.
3.2 Cheques of the Corporation payable at par at any branch of the bankers
of the Corporation shall be issued in respect of any cash dividends contemplated
by Subsection 3.1(a) hereof and the sending of such a cheque to each holder of
an Exchangeable Share (less any tax required to be deducted and withheld from
such dividends paid or credited by the Corporation) shall satisfy the cash
dividend represented thereby unless the cheque is not paid on presentation.
Certificates registered in the name of the registered holder of Exchangeable
Shares shall be issued or transferred in respect of any stock dividends or
dividends payable in other securities contemplated by Subsections 3.1(b) or (d)
hereof and the sending of such a certificate to each holder of an Exchangeable
Share shall satisfy the stock dividend or dividend payable in other securities
represented thereby. Such other type and amount of property in respect of any
dividends contemplated by Subsection 3.1(c) hereof shall be issued, distributed
or transferred by the Corporation in such manner as it shall determine and the
issuance, distribution or transfer thereof by the Corporation to each holder of
an Exchangeable Share shall satisfy the dividend represented thereby (subject to
any adjustment for the tax required to be deducted and withheld from such
dividends paid or credited by the Corporation). No holder of an Exchangeable
Share shall be entitled to recover by action or other legal process against the
Corporation any dividend that is represented by a cheque that has not been duly
presented to the Corporation's bankers for payment or that otherwise remains
unclaimed for a period of six years from the date on which such dividend was
payable.
3.3 The record date for the determination of the holders of Exchangeable
Shares entitled to receive payment of, and the payment date for, any dividend
declared on the Exchangeable Shares under Section 3.1 hereof shall be the same
dates as the record date and payment date, respectively, for the corresponding
dividend declared on the US Co Common Stock.
3.4 If on any payment date for any dividends declared on the Exchangeable
Shares under Section 3.1 hereof the dividends are not paid in full on all of the
Exchangeable Shares then outstanding, any such dividends that remain unpaid
shall be paid on a subsequent date or dates determined by the Board of Directors
on which the Corporation shall have sufficient moneys, assets or property
properly applicable to the payment of such dividends (subject to any adjustment
for the tax required to be deducted and withheld from such dividends paid or
credited by the Corporation).
3.5 Except as provided in this Article 3, the holders of Exchangeable
Shares shall not be entitled to receive dividends in respect thereof.
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<PAGE> 444
ARTICLE IV
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the
Corporation shall not at any time without, but may at any time with, the
approval of the holders of the Exchangeable Shares given as specified in Section
9.2 of these share provisions:
(a) pay any dividends on the Common Voting Shares, or any other shares
ranking junior to the Exchangeable Shares, other than stock dividends
payable in any such other shares ranking junior to the Exchangeable Shares;
(b) redeem or purchase or make any capital distribution in respect of
Common Voting Shares or any other shares ranking junior to the Exchangeable
Shares;
(c) redeem or purchase any other shares of the Corporation ranking
equally with the Exchangeable Shares with respect to the payment of
dividends or on any liquidation distribution;
(d) issue any Exchangeable Shares or any other shares of the
Corporation ranking equally with, or superior to, the Exchangeable Shares
other than by way of stock dividends (including rights to acquire
Exchangeable Shares) to the holders of such Exchangeable Shares or
distributions of securities as contemplated by the Support Agreement; or
(e) amend the articles or by-laws of the Corporation.
The restrictions in Subsections 4.1(a), 4.1(b), and 4.1(c) above shall not apply
if all dividends on the outstanding Exchangeable Shares corresponding to
dividends declared to date on the US Co Common Stock shall have been declared on
the Exchangeable Shares and paid in full.
ARTICLE V
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding-up its affairs, a holder of Exchangeable
Shares shall be entitled, subject to applicable law, to receive from the assets
of the Corporation in respect of each Exchangeable Share held by such holder on
the effective date (the "Liquidation Date") of such liquidation, dissolution or
winding-up, before any distribution of any part of the assets of the Corporation
to the holders of the Common Voting Shares or any other shares ranking junior to
the Exchangeable Shares, an amount equal to the Exchangeable Share Price
applicable on the last Business Day prior to the Liquidation Date (the
"Liquidation Amount"). In connection with payment of the Liquidation Amount, the
Corporation shall be entitled to liquidate some of the US Co Common Stock that
would otherwise be deliverable to the particular holder of Exchangeable Shares
in order to fund any statutory withholding tax obligation.
5.2 On or promptly after the Liquidation Date, and subject to the exercise
by US Co of the Liquidation Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares the Liquidation Amount for
each such Exchangeable Share upon presentation and surrender of the certificates
representing such Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
applicable law and the by-laws of the Corporation and such additional documents
and instruments as the Transfer Agent may reasonably require, at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation by notice to the holders of the Exchangeable
Shares. Payment of the total Liquidation Amount for such Exchangeable Shares
shall be made by delivery to each holder, at the address of the holder recorded
in the securities register of the Corporation for the Exchangeable Shares or by
holding for pick up by the holder at the registered office of the Corporation or
at any office of the Transfer Agent as may be specified by the Corporation by
notice to the holders of Exchangeable Shares, on behalf of the Corporation of
the Exchangeable Share Consideration representing the total Liquidation Amount.
On and after the Liquidation
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<PAGE> 445
Date, the holders of the Exchangeable Shares shall cease to be holders of such
Exchangeable Shares and shall not be entitled to exercise any of the rights of
holders in respect thereof, other than the right to receive their proportionate
part of the total Liquidation Amount, unless payment of the total Liquidation
Amount for such Exchangeable Shares shall not be made upon presentation and
surrender of share certificates in accordance with the foregoing provisions, in
which case the rights of the holders shall remain unaffected until the total
Liquidation Amount has been paid in the manner hereinbefore provided. The
Corporation shall have the right at any time on or after the Liquidation Date to
deposit or cause to be deposited the Exchangeable Share Consideration in respect
of the Exchangeable Shares represented by certificates that have not at the
Liquidation Date been surrendered by the holders thereof in a custodial account
or for safe keeping, in the case of non-cash items, with any chartered bank or
trust company in Canada. Upon such deposit being made, the rights of the holders
of Exchangeable Shares after such deposit shall be limited to receiving their
proportionate part of the total Liquidation Amount for such Exchangeable Shares
so deposited, against presentation and surrender of the said certificates held
by them, respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of such Exchangeable Share Consideration, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be the holders of the US Co Common Stock delivered to them.
5.3 After the Corporation has satisfied its obligations to pay the holders
of the Exchangeable Shares the Liquidation Amount per Exchangeable Share
pursuant to Section 5.1 of these share provisions, such holders shall not be
entitled to share in any further distribution of the assets of the Corporation.
ARTICLE VI
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 A holder of Exchangeable Shares shall be entitled at any time, subject
to the exercise by US Co of the Retraction Call Right and otherwise upon
compliance with the provisions of this Article 6, to require the Corporation to
redeem any or all of the Exchangeable Shares registered in the name of such
holder for an amount equal to the Exchangeable Share Price applicable on the
last Business Day prior to the Retraction Date (the "Retraction Price"). In
connection with payment of the Retraction Price, the Corporation shall be
entitled to liquidate some of the US Co Common Stock that would otherwise be
deliverable to the particular holder of Exchangeable Shares in order to fund any
statutory withholding tax obligation. To effect such redemption, the holder
shall present and surrender at the registered office of the Corporation or at
any office of the Transfer Agent as may be specified by the Corporation by
notice to the holders of Exchangeable Shares the certificate or certificates
representing the Exchangeable Shares which the holder desires to have the
Corporation redeem, together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under applicable law and
the by-laws of the Corporation and such additional documents and instruments as
the Transfer Agent may reasonably require, and together with a duly executed
statement (the "Retraction Request") in the form of Exhibit A hereto or in such
other form as may be acceptable to the Corporation:
(i) specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such
certificate or certificates (the "Retracted Shares") redeemed by the
Corporation;
(ii) stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "Retraction Date"), provided
that the Retraction Date shall be not less than three Business Days nor
more than 10 Business Days after the date on which the Retraction Request
is received by the Corporation and further provided that, in the event that
no such Business Day is specified by the holder in the Retraction Request,
the Retraction Date shall be deemed to be the tenth Business Day after the
date on which the Retraction Request is received by the Corporation; and
(iii) acknowledging the overriding right (the "Retraction Call Right")
of US Co to purchase all but not less than all the Retracted Shares
directly from the holder and that the Retraction Request shall be
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deemed to be a revocable offer by the holder to sell the Retracted Shares
to US Co in accordance with the Retraction Call Right on the terms and
conditions set out in Section 6.3 below.
6.2 Subject to the exercise by US Co of the Retraction Call Right, upon
receipt by the Corporation or the Transfer Agent in the manner specified in
Section 6.1 hereof of a certificate or certificates representing the number of
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with a Retraction Request, and provided that the Retraction Request is
not revoked by the holder in the manner specified in Section 6.7, the
Corporation shall redeem the Retracted Shares effective at the close of business
on the Retraction Date and shall cause to be delivered to such holder the total
Retraction Price with respect to such shares. If only a part of the Exchangeable
Shares represented by any certificate are redeemed (or purchased by US Co
pursuant to the Retraction Call Right), a new certificate for the balance of
such Exchangeable Shares shall be issued to the holder at the expense of the
Corporation.
6.3 Upon receipt by the Corporation of a Retraction Request, the
Corporation shall immediately notify US Co thereof. In order to exercise the
Retraction Call Right, US Co must notify the Corporation in writing of its
determination to do so (the "US Co Call Notice") within two Business Days of
notification to US Co by the Corporation of the receipt by the Corporation of
the Retraction Request. If US Co does not so notify the Corporation within such
two Business Day period, the Corporation will notify the holder as soon as
possible thereafter that US Co will not exercise the Retraction Call Right. If
US Co delivers the US Co Call Notice within such two Business Day time period,
and provided that the Retraction Request is not revoked by the holder in the
manner specified in Section 6.7, the Retraction Request shall thereupon be
considered only to be an offer by the holder to sell the Retracted Shares to US
Co in accordance with the Retraction Call Right. In such event, the Corporation
shall not redeem the Retracted Shares and US Co shall purchase from such holder
and such holder shall sell to US Co on the Retraction Date the Retracted Shares
for a purchase price (the "Purchase Price") per share equal to the Retraction
Price per share. For the purposes of completing a purchase pursuant to the
Retraction Call Right, US Co shall deposit with the Transfer Agent, on or before
the Retraction Date the Exchangeable Share Consideration representing the total
Purchase Price. Provided that such Exchangeable Share Consideration has been so
deposited with the Transfer Agent, the closing of the purchase and sale of the
Retracted Shares pursuant to the Retraction Call Right shall be deemed to have
occurred as at the close of business on the Retraction Date and, for greater
certainty, no redemption by the Corporation of such Retracted Shares shall take
place on the Retraction Date. In the event that US Co does not deliver a US Co
Call Notice within such two Business Day period or otherwise comply with these
Exchangeable Share provisions in respect thereto, and provided that Retraction
Request is not revoked by the holder in the manner specified in Section 6.7, the
Corporation shall redeem the Retracted Shares on the Retraction Date and in the
manner otherwise contemplated in this Article 6.
6.4 The Corporation or US Co, as the case may be, shall deliver or cause
the Transfer Agent to deliver to the relevant holder, at the address of the
holder recorded in the securities register of the Corporation for the
Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to the holders of Exchangeable Shares, the Exchangeable
Share Consideration representing the total Retraction Price or the total
Purchase Price, as the case may be, and such delivery of such Exchangeable Share
Consideration to the Transfer Agent shall be deemed to be payment of and shall
satisfy and discharge all liability for the total Retraction Price or total
Purchase Price, as the case may be, unless any cheque included therein is not
paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the holder
of the Retracted Shares shall cease to be a holder of such Retracted Shares and
shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive his proportionate part of the total
Retraction Price or total Purchase Price, as the case may be, unless upon
presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the total Retraction Price or the total Purchase Price,
as the case may be, shall not be made, in which case the rights of such holder
shall remain unaffected until the total Retraction Price or the total Purchase
Price, as the case may be, has been paid in the manner hereinbefore provided. On
and after the close of business on the Retraction Date, provided that
presentation and surrender of certificates
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and payment of the total Retraction Price or the total Purchase Price, as the
case may be, has been made in accordance with the foregoing provisions, the
holder of the Retracted Shares so redeemed by the Corporation or purchased by US
Co shall thereafter be considered and deemed for all purposes to be a holder of
the US Co Common Stock delivered to it.
6.6 Notwithstanding any other provision of this Article 6, the Corporation
shall not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to liquidity or solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it would
not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and provided that US Co shall not have
exercised the Retraction Call Right with respect to the Retracted Shares, the
Corporation shall only be obligated to redeem Retracted Shares specified by a
holder in a Retraction Request to the extent of the maximum number that may be
so redeemed (rounded down to a whole number of shares) as would not be contrary
to such provisions and shall notify the holder at least two Business Days prior
to the Retraction Date as to the number of Retracted Shares which will not be
redeemed by the Corporation. In any case in which the redemption by the
Corporation of Retracted Shares would be contrary to liquidity or solvency
requirements or other provisions of applicable law, the Corporation shall redeem
Retracted Shares in accordance with Section 6.2 of these share provisions on a
PRO RATA basis and shall issue to each holder of Retracted Shares a new
certificate, at the expense of the Corporation, representing the Retracted
Shares not redeemed by the Corporation pursuant to Section 6.2 hereof. Provided
that the Retraction Request is not revoked by the holder in the manner specified
in Section 6.7, the holder of any such Retracted Shares not redeemed by the
Corporation pursuant to Section 6.2 of these share provisions as a result of
liquidity or solvency requirements of applicable law shall be deemed by giving
the Retraction Request to require US Co to purchase such Retracted Shares from
such holder on the Retraction Date or as soon as practicable thereafter on
payment by US Co to such holder of the Purchase Price for each such Retracted
Share, all as more specifically provided in the Voting and Exchange Trust
Agreement, and US Co shall make such purchase.
6.7 A holder of Retracted Shares may, by notice in writing given by the
holder to the Corporation before the close of business on the Business Day
immediately preceding the Retraction Date, withdraw its Retraction Request in
which event such Retraction Request shall be null and void and, for greater
certainty, the revocable offer constituted by the Retraction Request to sell the
Retracted Shares to US Co shall be deemed to have been revoked.
ARTICLE VII
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
7.1 Subject to applicable law and the Redemption Call Right, the
Corporation shall on the Automatic Redemption Date redeem the whole of the then
outstanding Exchangeable Shares for an amount equal to the Exchangeable Share
Price applicable on the last Business Day prior to the Automatic Redemption Date
(the "Redemption Price"). In connection with payment of the Redemption Price,
the Corporation shall be entitled to liquidate some of the US Co Common Stock
that would otherwise be deliverable to the particular holder of Exchangeable
Shares in order to fund any statutory withholding tax obligation.
7.2 In any case of a redemption of Exchangeable Shares under this Article
7, the Corporation shall, at least 120 days before the Automatic Redemption
Date, send or cause to be sent to each holder of Exchangeable Shares a notice in
writing of the redemption by the Corporation or the purchase by US Co under the
Redemption Call Right, as the case may be, of the Exchangeable Shares held by
such holder. Such notice shall set out the formula for determining the
Redemption Price or the Redemption Call Purchase Price, as the case may be, the
Automatic Redemption Date and, if applicable, particulars of the Redemption Call
Right.
7.3 On or after the Automatic Redemption Date and subject to the exercise
by US Co of the Redemption Call Right, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares to be redeemed the
Redemption Price for each such Exchangeable Share upon presentation and
surrender at
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the registered office of the Corporation or at any office of the Transfer Agent
as may be specified by the Corporation in such notice of the certificates
representing such Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
applicable law and the by-laws of the Corporation and such additional documents
and instruments as the Transfer Agent may reasonably require. Payment of the
total Redemption Price for such Exchangeable Shares shall be made by delivery to
each holder, at the address of the holder recorded in the securities register of
the Corporation or by holding for pick up by the holder at the registered office
of the Corporation or at any office of the Transfer Agent as may be specified by
the Corporation in such notice, on behalf of the Corporation of the Exchangeable
Share Consideration representing the total Redemption Price. On and after the
Automatic Redemption Date, the holders of the Exchangeable Shares called for
redemption shall cease to be holders of such Exchangeable Shares and shall not
be entitled to exercise any of the rights of holders in respect thereof, other
than the right to receive their proportionate part of the total Redemption
Price, unless payment of the total Redemption Price for such Exchangeable Shares
shall not be made upon presentation and surrender of certificates in accordance
with the foregoing provisions, in which case the rights of the holders shall
remain unaffected until the total Redemption Price has been paid in the manner
hereinbefore provided. The Corporation shall have the right at any time after
the sending of notice of its intention to redeem the Exchangeable Shares as
aforesaid to deposit or cause to be deposited the Exchangeable Share
Consideration with respect to the Exchangeable Shares so called for redemption,
or of such of the said Exchangeable Shares represented by certificates that have
not at the date of such deposit been surrendered by the holders thereof in
connection with such redemption, in a custodial account or for safe keeping, in
the case of non-cash items, with any chartered bank or trust company in Canada
named in such notice. Upon the later of such deposit being made and the
Automatic Redemption Date, the Exchangeable Shares in respect whereof such
deposit shall have been made shall be redeemed and the rights of the holders
thereof after such deposit or Automatic Redemption Date, as the case may be,
shall be limited to receiving their proportionate part of the total Redemption
Price for such Exchangeable Shares so deposited, against presentation and
surrender of the said certificates held by them, respectively, in accordance
with the foregoing provisions. Upon such payment or deposit of such Exchangeable
Share Consideration, the holders of the Exchangeable Shares shall thereafter be
considered and deemed for all purposes to be holders of the US Co Common Stock
delivered to them.
ARTICLE VIII
VOTING RIGHTS
8.1 Except as required by applicable law and the provisions hereof, the
holders of the Exchangeable Shares shall not be entitled as such to receive
notice of or to attend any meeting of the shareholders of the Corporation or to
vote at any such meeting.
ARTICLE IX
AMENDMENT AND APPROVAL
9.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but, except as
hereinafter provided, only with the approval of the holders of the Exchangeable
Shares given as hereinafter specified.
9.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of the
holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than two-thirds of the votes cast on such resolution by persons represented
in person or by proxy at a meeting of holders of Exchangeable Shares duly called
and held at which the holders of at least 50% (excluding Exchangeable Shares
beneficially owned by US Co or its Subsidiaries) of the outstanding Exchangeable
Shares at that time are present or represented by proxy. If at any such meeting
the holders of at least 50% (excluding Exchangeable Shares beneficially owned by
US Co or
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its Subsidiaries) of the outstanding Exchangeable Shares at that time are not
present or represented by proxy within one-half hour after the time appointed
for such meeting then the meeting shall be adjourned to such date not less than
10 days thereafter and to such time and place as may be designated by the
Chairman of such meeting. At such adjourned meeting the holders of Exchangeable
Shares present or represented by proxy thereat may transact the business for
which the meeting was originally called and a resolution passed thereat by the
affirmative vote of not less than two-thirds of the votes cast on such
resolution by holders of Exchangeable Shares represented in person or by proxy
at such meeting shall constitute the approval or consent of the holders of the
Exchangeable Shares.
ARTICLE X
RECIPROCAL CHANGES, ETC. IN RESPECT OF US CO COMMON STOCK
10.1 (a) Each holder of an Exchangeable Share acknowledges that the
Support Agreement provides, in part, that US Co will not without the prior
approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 9.2 of these share
provisions:
(i) issue or distribute US Co Common Stock (or securities exchangeable
for or convertible into or carrying rights to acquire US Co Common Stock)
to the holders of all or substantially all of the then outstanding US Co
Common Stock by way of stock dividend or other distribution; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding US Co Common Stock
entitling them to subscribe for or to purchase shares of US Co Common Stock
(or securities exchangeable for or convertible into or carrying rights to
acquire shares of US Co Common Stock); or
(iii) issue or distribute to the holders of all or substantially all
of the then outstanding shares of US Co Common Stock (A) shares or
securities of US Co of any class other than US Co Common Stock (other than
shares convertible into or exchangeable for or carrying rights to acquire
US Co Common Stock), (B) rights, options or warrants other than those
referred to in Section 10.1(a)(ii) above, (C) evidences of indebtedness of
US Co or (D) assets of US Co;
unless the Corporation is permitted under applicable law to issue or
distribute the economic equivalent on a per share basis of such rights,
options, securities, shares, evidences of indebtedness or other assets to
holders of the Exchangeable Shares and the Corporation shall issue or
distribute the economic equivalent on a per share basis of such rights,
options, securities, shares, evidences of indebtedness or other assets
simultaneously to holders of the Exchangeable Shares.
(b) Each holder of an Exchangeable Share acknowledges that the Support
Agreement further provides, in part, that US Co will not without the prior
approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with Section 9.2 of these share
provisions:
(i) subdivide, redivide or change the then outstanding shares of US Co
Common Stock into a greater number of shares of US Co Common Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of US Co Common Stock into a lesser number of shares of US Co Common
Stock; or
(iii) reclassify or otherwise change the shares of US Co Common Stock
or effect an amalgamation, merger, reorganization or other transaction
affecting the shares of US Co Common Stock;
unless the Corporation is permitted under applicable law to simultaneously
make the same or an equivalent change to, or in the rights of holders of,
the Exchangeable Shares and the same or an equivalent change is made to, or
in the rights of the holders of, the Exchangeable Shares.
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<PAGE> 450
The Support Agreement further provides, in part, that the aforesaid provisions
of the Support Agreement shall not be changed without the approval of the
holders of the Exchangeable Shares given in accordance with Section 9.2 of these
share provisions.
ARTICLE XI
ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT
11.1 The Corporation will take all such actions and do all such things as
shall be necessary or advisable to perform and comply with and to ensure
performance and compliance by US Co with all provisions of the Support Agreement
and the Voting Trust and Exchange Agreement in accordance with the terms thereof
including, without limitation, taking all such actions and doing all such things
as shall be necessary or advisable to enforce to the fullest extent possible for
the direct benefit of the Corporation all rights and benefits in favour of the
Corporation under or pursuant thereto.
11.2 The Corporation shall not propose, agree to or otherwise give effect
to any amendment to, or waiver or forgiveness of its rights or obligations
under, the Support Agreement or the Voting Trust and Exchange Agreement or
without the approval of the holders of the Exchangeable Shares given in
accordance with Section 9.2 of these share provisions other than such
amendments, waivers and/or forgiveness as may be necessary or advisable for the
purposes of:
(a) adding to the covenants of the other party or parties to such
agreement for the protection of the Corporation or the holders of
Exchangeable Shares; or
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters or
questions arising thereunder which, in the opinion of the Board of
Directors, it may be expedient to make, provided that the Board of
Directors shall be of the opinion, after consultation with counsel, that
such provisions and modifications will not be prejudicial to the interests
of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement which, on
the advice of counsel to the Corporation, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error contained therein, provided
that the Board of Directors shall be of the opinion, after consultation
with counsel, that such changes or corrections will not be prejudicial to
the interests of the holders of the Exchangeable Shares.
ARTICLE XII
LEGEND
12.1 The certificates evidencing the Exchangeable Shares shall contain or
have affixed thereto a legend, in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the provisions of the Plan of
Arrangement relating to the Liquidation Call Right and the Redemption Call
Right, and the Voting and Exchange Trust Agreement (including the provisions
with respect to the voting rights, exchange right and automatic exchange
thereunder).
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ARTICLE XIII
MISCELLANEOUS
13.1 Any notice, request or other communication to be given to the
Corporation by a holder of Exchangeable Shares shall be in writing and shall be
valid and effective if given by mail (postage prepaid) or by telecopy or by
delivery to the registered office of the Corporation and addressed to the
attention of the President. Any such notice, request or other communication, if
given by mail, telecopy or delivery, shall only be deemed to have been given and
received upon actual receipt thereof by the Corporation.
13.2 Any presentation and surrender by a holder of Exchangeable Shares to
the Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of the
Corporation or the retraction or redemption of Exchangeable Shares shall be made
by registered mail (postage prepaid) or by delivery to the registered office of
the Corporation or to such office of the Transfer Agent as may be specified by
the Corporation, in each case addressed to the attention of the President of the
Corporation. Any such presentation and surrender of certificates shall only be
deemed to have been made and to be effective upon actual receipt thereof by the
Corporation or the Transfer Agent, as the case may be. Any such presentation and
surrender of certificates made by registered mail shall be at the sole risk of
the holder mailing the same.
13.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last known address of such holder. Any such notice,
request or other communication, if given by mail, shall be deemed to have been
given and received on the fifth Business Day following the date of mailing and,
if given by delivery, shall be deemed to have been given and received on the
date of delivery. Accidental failure or omission to give any notice, request or
other communication to one or more holders of Exchangeable Shares shall not
invalidate or otherwise alter or affect any action or proceeding to be taken by
the Corporation pursuant thereto.
13.4 All Exchangeable Shares acquired by the Corporation upon the
redemption or retraction thereof shall be canceled.
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EXHIBIT A
NOTICE OF RETRACTION
To the Corporation and Pioneer Natural Resources Company
This notice is given pursuant to Article 6 of the provisions (the "Share
Provisions") attaching to the share(s) represented by this certificate and all
capitalized words and expressions used in this notice which are defined in the
Share Provisions have the meanings attributed to such words and expressions in
such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the
Retraction Call Right referred to below, the undersigned desires to have the
Corporation redeem in accordance with Article 6 of the Share Provisions:
[ ] all share(s) represented by this certificate; or
[ ] share(s) only.
The undersigned hereby notifies the Corporation that the Retraction Date
shall be .
NOTE: The Retraction Date must be a Business Day and must not be less than three
Business Days nor more than 10 Business Days after the date upon which
this notice is received by the Corporation. In the event that no such
Business Day is specified above, the Retraction Date shall be deemed to be
the tenth Business Day after the date on which this notice is received by
the Corporation.
The undersigned acknowledges the Retraction Call Right of Pioneer Natural
Resources Company to purchase all but not less than all the Retracted Shares
from the undersigned and that this notice shall be deemed to be a revocable
offer by the undersigned to sell the Retracted Shares to Pioneer Natural
Resources Company in accordance with the Retraction Call Right on the Retraction
Date for the Retraction Price and on the other terms and conditions set out in
Section 6.3 of the Share Provisions. If Pioneer Natural Resources Company
determines not to exercise the Retraction Call Right, the Corporation will
notify the undersigned of such fact as soon as possible. This notice of
retraction, and offer to sell the Retracted Shares to Pioneer Natural Resources
Company may be revoked and withdrawn by the undersigned by notice in writing
given to the Corporation at any time before the close of business on the
Business Day immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of liquidity or solvency
provisions of applicable law, the Corporation is unable to redeem all Retracted
Shares, the undersigned will be deemed to have exercised the Exchange Right (as
defined in the Voting and Exchange Trust Agreement) so as to require Pioneer
Natural Resources Company to purchase the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation and
Pioneer Natural Resources Company that the undersigned has good title to, and
owns, the share(s) represented by this certificate to be acquired by the
Corporation or Pioneer Natural Resources Company as the case may be, free and
clear of all liens, claims and encumbrances.
<TABLE>
<S> <C> <C>
- --------------------------- --------------------------------------- -----------------------------------
(Date) (Signature of Shareholder) (Guarantee of Signature)
</TABLE>
[ ] Please check box if the legal or beneficial owner of the Retracted Shares
is a non-resident of Canada.
[ ] Please check box if the securities and any cheque(s) or other non-cash
assets resulting from the retraction or purchase of the Retracted Shares
are to be held for pick-up by the shareholder at the principal transfer
office of Montreal Trust Company of Canada (the "Transfer Agent") in
Calgary, Alberta, failing which the securities and any cheque(s) or other
non-cash assets will be delivered to the last address of the shareholder as
it appears on the register by such means as the Corporation deems
appropriate.
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<PAGE> 453
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent may require, must be deposited
with the Transfer Agent at its principal transfer office in Calgary,
Alberta. The securities and any cheque(s) or other non-cash assets
resulting from the retraction or purchase of the Retracted Shares will be
issued and registered in, and made payable to, or transferred into,
respectively, the name of the shareholder as it appears on the register
of the Corporation and the securities, cheque(s) and other non-cash
assets resulting from such retraction or purchase will be delivered to
such shareholder as indicated above, unless the form appearing
immediately below is duly completed.
<TABLE>
<S> <C>
- -------------------------------------------------------- Date ------------------------------------------------
Name of Person in Whose Name Securities or Cheque(s)
or Other Non-cash Assets Are To Be Registered, Issued
or Delivered (please print)
- -------------------------------------------------------- -----------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
- -------------------------------------------------------- -----------------------------------------------------
City -- Province Signature Guaranteed by
</TABLE>
NOTE: If the notice of retraction is for less than all of the share(s)
represented by this certificate, a certificate representing the remaining
shares of the Corporation will be issued and registered in the name of
the shareholder as it appears on the register of the Corporation, unless
the Share Transfer Power on the share certificate is duly completed in
respect of such shares.
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<PAGE> 454
ANNEX G
SPECIAL PREFERRED VOTING STOCK PROVISIONS
<PAGE> 455
TERMS AND CONDITIONS OF PIONEER SPECIAL PREFERRED VOTING STOCK
Section .1 Special Preferred Voting Stock Designated. A series of
Preferred Stock, consisting of one share of such stock, is hereby designated as
"Special Preferred Voting Stock." The outstanding share of Special Preferred
Voting Stock shall be entitled at any relevant date to the number of votes
(including for purposes of determining the presence of a quorum) determined in
accordance with the terms and conditions of the "Exchangeable Shares" and the
"Plan of Arrangement" (as such terms are defined in that certain "Combination
Agreement" dated as of September 3, 1997, by and between the Corporation and
Chauvco Resources Ltd. ("Chauvco")) on all matters presented to the holders of
Common Stock of the Corporation, with the Special Preferred Voting Stock and
Common Stock voting together as a single class. The Special Preferred Voting
Stock shall have no other voting rights except as required by law. No dividend
shall be paid to the holder of Special Preferred Voting Stock. The share of
Special Preferred Voting Stock shall be entitled to $1.00 on liquidation of the
Corporation in preference to any shares of Common Stock of the Corporation, but
only after the liquidation preference of any other shares of Preferred Stock of
the Corporation has been paid in full. The Special Preferred Voting Stock is not
convertible into any other class or series of the capital stock of the
Corporation or into cash, property or other rights, and may not be redeemed,
except pursuant to the last sentence of this Section .1. The share of Special
Preferred Voting Stock purchased or otherwise acquired by the Corporation shall
be deemed retired and shall be canceled and may not thereafter be reissued or
otherwise disposed of by the Corporation. So long as any Exchangeable Shares
shall be outstanding, the number of shares comprising the Special Preferred
Voting Stock shall not be increased or decreased and no other term of the
Special Preferred Voting Stock shall be amended, except upon the approval of the
holder of the outstanding share of Special Preferred Voting Stock. At such time
as no Exchangeable Shares shall be outstanding, the Special Preferred Voting
Stock shall automatically be redeemed, with the $1.00 liquidation preference due
and payable upon such redemption.
Section .2 Restriction. So long as the share of Special Voting Stock is
outstanding, the Corporation shall (i) fully comply with all terms of the
Exchangeable Shares and with all contractual obligations of the Corporation
associated with such Exchangeable Shares and (ii) not amend, alter, change or
repeal this Section .2 except upon the unanimous approval of the holder of the
outstanding share of Special Voting Stock.
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<PAGE> 456
ANNEX H
FORM OF SUPPORT AGREEMENT
<PAGE> 457
SUPPORT AGREEMENT
MEMORANDUM OF AGREEMENT made as of the day of , 1997,
BETWEEN:
PIONEER NATURAL RESOURCES COMPANY, a corporation incorporated
under the laws of the State of Delaware and having its head and
principal office at Irving, Texas (hereinafter referred to as "US
Co")
OF THE FIRST PART,
-and -
PIONEER NATURAL RESOURCES (CANADA) LTD., a corporation continued
under the laws of the Province of Alberta and having its head and
principal office at Calgary, Alberta (hereinafter referred to as
"US Co Sub")
OF THE SECOND PART.
WHEREAS pursuant to a combination agreement dated as of September 3, 1997,
by and between US Co and Chauvco Resources Ltd. ("Chauvco") (such agreement as
it may be amended or restated is hereinafter referred to as the "Combination
Agreement"), the parties agreed that on the Effective Date (as defined in the
Combination Agreement), US Co and US Co Sub would execute and deliver a Support
Agreement containing the terms and conditions set forth in Exhibit B to the
Combination Agreement together with such other terms and conditions as may be
agreed to by the parties to the Combination Agreement acting reasonably;
AND WHEREAS pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated , 1997 filed pursuant to the Business
Corporations Act (Alberta) certain of the issued and outstanding common shares
of Chauvco ("Chauvco Common Shares") were exchanged for, among other things,
issued and outstanding Exchangeable Shares of US Co Sub (the "Exchangeable
Shares");
AND WHEREAS the Articles of US Co Sub set forth the rights, privileges,
restrictions and conditions (collectively, the "Exchangeable Share Provisions")
attaching to the Exchangeable Shares;
AND WHEREAS the parties hereto desire to make appropriate provision and to
establish a procedure whereby US Co will take certain actions and make certain
payments and deliveries necessary to ensure that US Co Sub will be able to make
certain payments and to deliver or cause to be delivered shares of US Co Common
Stock in satisfaction of the obligations of US Co Sub under the Exchangeable
Share Provisions with respect to the payment and satisfaction of dividends,
Liquidation Amounts, Retraction Prices and Redemption Prices, all in accordance
with the Exchangeable Share Provisions;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
1. DEFINITIONS AND INTERPRETATION
(a) Defined Terms. Each term denoted herein by initial capital letters and
not otherwise defined herein shall have the meaning attributed thereto in the
Exchangeable Share Provisions, unless the context requires otherwise.
(b) Interpretation Not Affected by Headings, etc. The division of this
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
(c) Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
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(d) Date for any Action. If any date on which any action is required to be
taken under this Agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day.
2. COVENANTS OF US CO AND US CO SUB
(a) Covenants of US Co Regarding Exchangeable Shares. So long as any
Exchangeable Shares are outstanding, US Co will:
(i) not declare or pay any dividend on US Co Common Stock unless (A)
US Co Sub will have sufficient assets, funds and other property available
to enable the due declaration and the due and punctual payment in
accordance with applicable law of an equivalent dividend on the
Exchangeable Shares and (B) US Co Sub shall simultaneously declare or pay,
as the case may be, an equivalent dividend on the Exchangeable Shares, in
each case in accordance with the Exchangeable Share Provisions;
(ii) advise US Co Sub sufficiently in advance of the declaration by US
Co of any dividend on US Co Common Stock and take all such other actions as
are necessary, in cooperation with US Co Sub, to ensure that the respective
declaration date, record date and payment date for a dividend on the
Exchangeable Shares shall be the same as the record date, declaration date
and payment date for the corresponding dividend on US Co Common Stock and
such dividend on the Exchangeable Shares shall correspond with any
requirement of the principal stock exchange on which the Exchangeable
Shares are listed;
(iii) ensure that the record date for any dividend declared on US Co
Common Stock is not less than 10 calendar days after the declaration date
for such dividend;
(iv) take all such actions and do all such things as are necessary or
desirable to enable and permit US Co Sub, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Amount in respect of each issued and
outstanding Exchangeable Share upon the liquidation, dissolution or
winding-up of US Co Sub, including without limitation all such actions and
all such things as are necessary or desirable to enable and permit US Co
Sub to cause to be delivered shares of US Co Common Stock to the holders of
Exchangeable Shares in accordance with the provisions of Article 5 of the
Exchangeable Share Provisions;
(v) take all such actions and do all such things as are necessary or
desirable to enable and permit US Co Sub, in accordance with applicable
law, to pay and otherwise perform its obligations with respect to the
satisfaction of the Retraction Price and the Redemption Price, including
without limitation all such actions and all such things as are necessary or
desirable to enable and permit US Co Sub to cause to be delivered shares of
US Co Common Stock to the holders of Exchangeable Shares, upon the
retraction or redemption of the Exchangeable Shares in accordance with the
provisions of Article 6 or Article 7 of the Exchangeable Share Provisions,
as the case may be; and
(vi) not exercise its vote as a direct or indirect shareholder to
initiate the voluntary liquidation, dissolution or winding-up of US Co Sub
nor take any action or omit to take any action that is designed to result
in the liquidation, dissolution or winding-up of US Co Sub.
(b) Segregation of Funds. US Co will cause US Co Sub to deposit a
sufficient amount of funds in a separate account and segregate a sufficient
amount of such assets and other property as is necessary to enable US Co Sub to
pay or otherwise satisfy the applicable dividends, Liquidation Amount,
Retraction Price or Redemption Price, in each case for the benefit of holders
from time to time of the Exchangeable Shares, and to use such funds, assets and
other property so segregated exclusively for the payment of dividends and the
payment or other satisfaction of the Liquidation Amount, the Retraction Price or
the Redemption Price, as applicable, net of any corresponding withholding tax
obligations and for the remittance of such withholding tax obligations.
(c) Reservation of Shares of US Co Common Stock. US Co hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will at
all times keep available, free from preemptive and other
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<PAGE> 459
rights, out of its authorized and unissued capital stock such number of shares
of US Co Common Stock (or other shares or securities into which US Co Common
Stock may be reclassified or changed as contemplated by section 2(g) hereof) (i)
as is equal to the sum of (A) the number of Exchangeable Shares issued and
outstanding from time to time and (B) the number of Exchangeable Shares issuable
upon the exercise of all rights to acquire Exchangeable Shares outstanding from
time to time and (ii) as are now and may hereafter be required to enable and
permit US Co Sub to meet its obligations hereunder, under the Voting and
Exchange Trust Agreement, under the Exchangeable Share Provisions and under any
other security or commitment pursuant to the Arrangement with respect to which
US Co may now or hereafter be required to issue shares of US Co Common Stock.
(d) Notification of Certain Events. In order to assist US Co to comply with
its obligations hereunder, US Co Sub will give US Co notice of each of the
following events at the time set forth below:
(i) in the event of any determination by the Board of Directors of US
Co Sub to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to US Co Sub or to effect any other distribution
of the assets of US Co Sub among its shareholders for the purpose of
winding-up its affairs, at least 60 days prior to the proposed effective
date of such liquidation, dissolution, winding-up or other distribution;
(ii) immediately, upon the earlier of (A) receipt by US Co Sub of
notice of, and (B) US Co Sub otherwise becoming aware of, any threatened or
instituted claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding-up of US Co Sub or to
effect any other distribution of the assets of US Co Sub among its
shareholders for the purpose of winding-up its affairs;
(iii) Immediately, upon receipt by US Co Sub of a Retraction Request
(as defined in the Exchangeable Share Provisions);
(iv) at least 130 days prior to any accelerated Automatic Redemption
Date determined by the Board of Directors of US Co Sub in accordance with
the Exchangeable Share Provisions; and
(v) as soon as practicable upon the issuance by US Co Sub of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
(e) Delivery of Shares of US Co Common Stock. In furtherance of its
obligations hereunder, upon notice of any event which requires US Co Sub to
cause to be delivered shares of US Co Common Stock to any holder of Exchangeable
Shares, US Co shall forthwith issue and deliver the requisite shares of US Co
Common Stock to or to the order of the former holder of the surrendered
Exchangeable Shares, as US Co Sub shall direct. All such shares of US Co Common
Stock shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim, encumbrance, security interest or adverse claim.
(f) Qualification of Shares of US Co Common Stock. US Co covenants that if
any shares of US Co Common Stock (or other shares or securities into which US Co
Common Stock may be reclassified or changed as contemplated by section 2(g)
hereof) to be issued and delivered hereunder, including for greater certainty,
pursuant to the Exchangeable Share Provisions, or pursuant to the Exchange Right
or the Automatic Exchange Rights (both as defined in the Voting and Exchange
Trust Agreement) require registration or qualification with or approval of or
the filing of any document including any prospectus or similar document or the
taking of any proceeding with or the obtaining of any order, ruling or consent
from any governmental or regulatory authority under any Canadian or United
States federal, provincial or state law or regulation or pursuant to the rules
and regulations of any regulatory authority or the fulfillment of any other
legal requirement (collectively, the "Applicable Laws") before such shares (or
other shares or securities into which US Co Common Stock may be reclassified or
changed as contemplated by section 2(g) hereof) may be issued and delivered by
US Co to the initial holder thereof (other than US Co Sub) or in order that such
shares may be freely traded thereafter (other than any restrictions on transfer
by reason of a holder being a "control person" of US Co for purposes of Canadian
federal or provincial securities law or an "affiliate" of US Co or, prior to the
Effective Date, of Chauvco for purposes of United States federal or state
securities law), US Co will in good faith expeditiously take all such actions
and do all such things as are necessary to
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<PAGE> 460
cause such shares of US Co Common Stock (or other shares or securities into
which US Co Common Stock may be reclassified or changed as contemplated by
section 2(g) hereof) to be and remain duly registered, qualified or approved. US
Co represents and warrants that it has in good faith taken all actions and done
all things as are necessary under Applicable Laws as they exist on the date
hereof to cause the shares of US Co Common Stock (or other shares or securities
into which US Co Common Stock may be reclassified or changed as contemplated by
section 2(g) hereof) to be issued and delivered hereunder, including for greater
certainty, pursuant to the Exchangeable Share Provisions, or pursuant to the
Exchange Right and the Automatic Exchange Right to be freely tradeable
thereafter (other than restrictions on transfer by reason of a holder being a
"control person" of US Co for the purposes of Canadian federal and provincial
securities law or an "affiliate" of US Co or, prior to the Effective Date, of
Chauvco for the purposes of United States federal or state securities law). US
Co will in good faith expeditiously take all such actions and do all such things
as are necessary to cause all shares of US Co Common Stock (or other shares or
other securities into which US Co Common Stock may be reclassified or changed as
contemplated by section 2(g) hereof) to be delivered hereunder, including for
greater certainty, pursuant to the Exchangeable Share Provisions, or pursuant to
the Exchange Right or the Automatic Exchange Rights to be listed, quoted or
posted for trading on all stock exchanges and quotation systems on which such
shares are listed, quoted or posted for trading at such time. US Co will in good
faith expeditiously take all such action and do all such things as are necessary
to cause all Exchangeable Shares to be and to continue to be listed and posted
for trading on The Toronto Stock Exchange.
(g) Equivalence.
(i) US Co will not without the prior approval of US Co Sub and the
prior approval of the holders of the Exchangeable Shares given in
accordance with Section 9.2 of the Exchangeable Share Provisions:
(A) issue or distribute shares of US Co Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of US Co Common Stock) to the holders of all or substantially all
of the then outstanding US Co Common Stock by way of stock dividend or
other distribution; or
(B) issue or distribute rights, options or warrants to the holders
of all or substantially all of the then outstanding shares of US Co
Common Stock entitling them to subscribe for or to purchase shares of US
Co Common Stock (or securities exchangeable for or convertible into or
carrying rights to acquire shares of US Co Common Stock); or
(C) issue or distribute to the holders of all or substantially all
of the then outstanding shares of US Co Common Stock (I) shares or
securities of US Co of any class other than US Co Common Stock (other
than shares convertible into or exchangeable for or carrying rights to
acquire shares of US Co Common Stock), (II) rights, options or warrants
other than those referred to in subsection 2(g)(i)(B) above, (III)
evidences of indebtedness of US Co or (IV) assets of US Co;
unless
(D) US Co Sub is permitted under applicable law to issue or
distribute the economic equivalent on a per share basis of such rights,
options, securities, shares, evidences of indebtedness or other assets
to holders of the Exchangeable Shares; and
(E) US Co Sub shall issue or distribute the economic equivalent on
a per share basis of such rights, options, securities, shares, evidences
of indebtedness or other assets simultaneously to holders of the
Exchangeable Shares.
(ii) US Co will not without the prior approval of US Co Sub and the
prior approval of the holders of the Exchangeable Shares given in
accordance with Section 9.2 of the Exchangeable Share Provisions:
(A) subdivide, divide or change the then outstanding shares of US
Co Common Stock into a greater number of shares of US Co Common Stock;
or
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<PAGE> 461
(B) reduce, combine or consolidate or change the then outstanding
shares of US Co Common Stock into a lesser number of shares of US Co
Common Stock; or
(C) reclassify or otherwise change the shares of US Co Common Stock
or effect an amalgamation, merger, reorganization or other transaction
affecting the shares of US Co Common Stock;
unless (I) US Co Sub is permitted under applicable law to simultaneously
make the same or an equivalent change to, or in the rights of holders
of, the Exchangeable Shares and (II) the same or an equivalent change is
made to, or in the rights of the holders of, the Exchangeable Shares.
(iii) US Co will ensure that the record date for any event referred to
in section 2(g)(i) or 2(g)(ii) above, or (if no record date is applicable
for such event) the effective date for any such event, is not less than 10
calendar days after the date on which such event is declared or announced
by US Co (with simultaneous notice thereof to be given by US Co to US Co
Sub).
(h) Tender Offers, etc. In the event that a tender offer, share exchange
offer, issuer bid, take-over bid or similar transaction with respect to US Co
Common Stock (an "Offer") is proposed by US Co or is proposed to US Co or its
shareholders and is recommended by the Board of Directors of US Co, or is
otherwise effected or to be effected with the consent or approval of the Board
of Directors of US Co, US Co shall take all such actions and do all such things
as are necessary or desirable to enable and permit holders of Exchangeable
Shares to participate in such Offer to the same extent and on an equivalent
basis as the holders of shares of US Co Common Stock, without discrimination,
including, without limiting the generality of the foregoing, US Co will use its
good faith efforts expeditiously to (and shall, in the case of a transaction
proposed by US Co or where US Co is a participant in the negotiation thereof)
ensure that holders of Exchangeable Shares may participate in all such Offers
without being required to retract Exchangeable Shares as against US Co Sub (or,
if so required, to ensure that any such retraction shall be effective only upon,
and shall be conditional upon, the closing of the Offer and only to the extent
necessary to tender or deposit to the Offer).
(i) Ownership of Outstanding Shares. Without the prior approval of US Co
Sub and the prior approval of the holders of the Exchangeable Shares given in
accordance with Section 9.2 of the Exchangeable Share Provisions, US Co
covenants and agrees in favour of US Co Sub that, as long as any outstanding
Exchangeable Shares are owned by any person or entity other than US Co or any of
its Subsidiaries, US Co will be and remain the direct or indirect beneficial
owner of all issued and outstanding shares in the capital of US Co Sub and all
outstanding securities of US Co Sub carrying or otherwise entitled to voting
rights in any circumstances, in each case other than the Exchangeable Shares.
(j) US Co Not to Vote Exchangeable Shares. US Co covenants and agrees that
it will appoint and cause to be appointed proxyholders with respect to all
Exchangeable Shares held by US Co and its Subsidiaries for the sole purpose of
attending each meeting of holders of Exchangeable Shares in order to be counted
as part of the quorum for each such meeting. US Co further covenants and agrees
that it will not, and will cause its Subsidiaries not to, exercise any voting
rights which may be exercisable by holders of Exchangeable Shares from time to
time pursuant to the Exchangeable Share Provisions or pursuant to the provisions
of any corporate statute by which US Co Sub may be governed with respect to any
Exchangeable Shares held by it or by its Subsidiaries in respect of any matter
considered at any meeting of holders of Exchangeable Shares.
(k) Due Performance. On and after the Effective Date, US Co shall duly and
timely perform all of its obligations provided for in connection with the Plan
of Arrangement including any obligations that may arise upon the exercise of US
Co's rights under the Exchangeable Share Provisions.
(l) Appointment to US Co Board. US Co shall cause James R. Baroffio to be
appointed as a director of US Co on or prior to the date hereof as a Class II
Director to serve until US Co's 1999 annual stockholders' meeting; Guy J.
Turcotte to be nominated as a director of US Co for election at US Co's 1998
annual stockholders' meeting and Mr. Baroffio to be nominated for re-election at
US Co's 1999 annual stockholders' meeting. US Co shall put forth Messrs.
Turcotte and Baroffio for election to its board of directors as aforesaid and
will cause to be solicited proxies for its stockholder's meetings in favour of
the election of such individual.
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3. GENERAL
(a) Term. This Agreement shall come into force and be effective as of the
date hereof and shall terminate and be of no further force and effect at such
time as no Exchangeable Shares (or securities or rights convertible into or
exchangeable for or carrying rights to acquire securities Exchangeable Shares)
are held by any party other than US Co and any of its Subsidiaries.
(b) Changes in Capital of US Co and US Co Sub. Notwithstanding the
provisions of section 3(d) hereof, at all times after the occurrence of any
event effected pursuant to section 2(g) or 2(h) hereof, as a result of which
either US Co Common Stock or the Exchangeable Shares or both are in any way
changed, this Agreement shall forthwith be amended and modified as necessary in
order that it shall apply with full force and effect, mutatis mutandis, to all
new securities into which US Co Common Stock or the Exchangeable Shares or both
are so changed and the parties hereto shall execute and deliver an agreement in
writing giving effect to and evidencing such necessary amendments and
modifications.
(c) Severability. If any provision of this Agreement is held to be invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or impaired thereby
and this Agreement shall be carried out as nearly as possible in accordance with
its original terms and conditions.
(d) Amendments, Modifications, etc. This Agreement may not be amended or
modified except by an agreement in writing executed by US Co Sub and US Co and
approved by the holders of the Exchangeable Shares in accordance with Section
9.2 of the Exchangeable Share Provisions.
(e) Ministerial Amendments. Notwithstanding the provisions of section 3(d),
the parties to this Agreement may in writing, at any time and from time to time,
without the approval of the holders of the Exchangeable Shares, amend or modify
this Agreement for the purposes of:
(i) adding to the covenants of either or both parties for the
protection of the holders of the Exchangeable Shares;
(ii) making such amendments or modifications not inconsistent with
this Agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of US Co
Sub and US Co, it may be expedient to make, provided that each such boards
of directors shall be of the opinion that such amendments or modifications
will not be prejudicial to the interests of the holders of the Exchangeable
Shares; or
(iii) making such changes or corrections which, on the advice of
counsel to US Co Sub and US Co, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error, provided that the boards of
directors of each of US Co Sub and US Co shall be of the opinion that such
changes or corrections will not be prejudicial to the interests of the
holders of the Exchangeable Shares.
(f) Meeting to Consider Amendments. US Co Sub, at the request of US Co,
shall call a meeting or meetings of the holders of the Exchangeable Shares for
the purpose of considering any proposed amendment or modification requiring
approval of such shareholders. Any such meeting or meetings shall be called and
held in accordance with the by-laws of US Co Sub, the Exchangeable Share
Provisions and all applicable laws.
(g) Amendments Only in Writing. No amendment to or modification or waiver
of any of the provisions of this Agreement otherwise permitted hereunder shall
be effective unless made in writing and signed by both of the parties hereto.
(h) Inurement. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and the holders, from time to time, of
Exchangeable Shares and each of their respective heirs, successors and assigns.
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(i) Notices to Parties. All notices and other communications between the
parties shall be in writing and shall be deemed to have been given if delivered
personally or by confirmed telecopy to the parties at the following addresses
(or at such other address for either such party as shall be specified in like
notice):
(i) if to US Co at:
Pioneer Natural Resources Company
1400 Williams Square West
5205 N. O'Connor Blvd.
Irving, Texas 75039-3746
Attention: President
Telecopy: (972) 402-7057
(ii) if to US Co Sub at:
Pioneer Natural Resources (Canada) Ltd.
2900, 255 -- 5th Avenue S.W.
Calgary, Alberta
T2P 3G6
Attention: President
Telecopy: (403) 231-3247
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy
shall be deemed to have been given and received on the date of confirmed
receipt thereof unless such day is not a Business Day in which case it
shall be deemed to have been given and received upon the immediately
following Business Day.
(j) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
(k) Jurisdiction. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein.
(l) Attornment. US Co agrees that any action or proceeding arising out of
or relating to this Agreement may be instituted in the courts of Alberta, waives
any objection which it may have now or hereafter to the venue of any such action
or proceeding, irrevocably submits to the jurisdiction of the said courts in any
such action or proceeding, agrees to be bound by any judgment of the said courts
and not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and hereby appoints US Co Sub
at its registered office in the Province of Alberta as US Co's attorney for
service of process.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
PIONEER NATURAL
RESOURCES COMPANY
Per:
------------------------------------
Per:
------------------------------------
PIONEER NATURAL RESOURCES
(CANADA) LTD.
Per:
------------------------------------
Per:
------------------------------------
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ANNEX I
FORM OF VOTING AND EXCHANGE TRUST AGREEMENT
<PAGE> 466
VOTING AND EXCHANGE TRUST AGREEMENT
MEMORANDUM OF AGREEMENT made as of the day of , 1997,
AMONG:
PIONEER NATURAL RESOURCES COMPANY, a corporation incorporated
under the laws of the State of Delaware and having its head and
principal office at Irving, Texas (hereinafter referred to as "US
Co")
OF THE FIRST PART,
-and -
PIONEER NATURAL RESOURCES (CANADA) LTD., a corporation continued
under the laws of the Province of Alberta and having its head and
principal office at Calgary, Alberta (hereinafter referred to as
"US Co Sub")
OF THE SECOND PART,
-and -
MONTREAL TRUST COMPANY OF CANADA, a trust company existing under
the laws of Canada (hereinafter referred to as the "Trustee")
OF THE THIRD PART.
WHEREAS pursuant to a combination agreement dated as of September 3, 1997,
by and between US Co and Chauvco Resources Ltd. ("Chauvco") (such agreement as
it may be amended or restated is hereinafter referred to as the "Combination
Agreement"), the parties agreed that on the Effective Date (as defined in the
Combination Agreement), US Co and US Co Sub would execute and deliver a Voting
and Exchange Trust Agreement containing the terms and conditions set forth in
Exhibit C to the Combination Agreement together with such other terms and
conditions as may be agreed to by the parties to the Combination Agreement
acting reasonably;
AND WHEREAS pursuant to an arrangement (the "Arrangement") effected by
Articles of Arrangement dated , 1997 filed pursuant to the Business
Corporations Act(Alberta), certain of the issued and outstanding common shares
of Chauvco ("Chauvco Common Shares") were exchanged for, among other things,
issued and outstanding Exchangeable Shares of US Co Sub (the "Exchangeable
Shares");
AND WHEREAS the Articles of US Co Sub set forth the rights, privileges,
restrictions and conditions (collectively, the "Exchangeable Share Provisions")
attaching to the Exchangeable Shares;
AND WHEREAS US Co is to provide voting rights in US Co to each holder
(other than US Co and its Subsidiaries) from time to time of Exchangeable
Shares, such voting rights per Exchangeable Share to be equivalent to the voting
rights per share of US Co Common Stock (the "US Co Common Stock");
AND WHEREAS US Co is to grant to and in favour of the holders (other than
US Co and its Subsidiaries) from time to time of Exchangeable Shares the right,
in the circumstances set forth herein, to require US Co to purchase from each
such holder all or any part of the Exchangeable Shares held by the holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in US Co shall be exercisable by
holders (other than US Co and its Subsidiaries) from time to time of
Exchangeable Shares by and through the Trustee, which will hold legal title to
one (1) share of US Co Special Preferred Voting Stock (the "US Co Special Voting
Stock") to which voting rights attach for the benefit of such holders and
whereby the rights to require US Co to purchase Exchangeable Shares from the
holders thereof (other than US Co and its Subsidiaries) shall be exercisable by
such holders from time to time
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<PAGE> 467
of Exchangeable Shares by and through the Trustee, which will hold legal title
to such rights for the benefit of such holders;
AND WHEREAS these recitals and any statements of fact in this Agreement are
made by US Co and US Co Sub and not by the Trustee;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
1. DEFINITIONS AND INTERPRETATION
(a) Definitions. In this Agreement, the following terms shall have the
following meanings:
"Aggregate Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of US Co Common Stock are entitled
to vote, consent or otherwise act, the product of (i) the number of shares
of Exchangeable Shares issued and outstanding and held by Holders
multiplied by (ii) the Equivalent Vote Amount.
"Arrangement" has the meaning attributed thereto in the recitals
hereto.
"Automatic Exchange Rights" means the benefit of the obligation of US
Co to effect the automatic exchange of shares of US Co Common Stock for
Exchangeable Shares pursuant to Section 5(1) hereof.
"Board of Directors" means the Board of Directors of US Co Sub.
"Business Day" has the meaning attributed thereto in the Exchangeable
Share Provisions.
"Equivalent Vote Amount" means, with respect to any matter,
proposition or question on which holders of US Co Common Stock are entitled
to vote, consent or otherwise act, the number of votes to which a holder of
one share of US Co Common Stock is entitled with respect to such matter,
proposition or question.
"Exchange Right" has the meaning attributed thereto in Article 5
hereof.
"Exchangeable Share Consideration" has the meaning attributed thereto
in the Exchangeable Share Provisions.
"Exchangeable Share Price" has the meaning attributed thereto in the
Exchangeable Share Provisions.
"Exchangeable Share Provisions" has the meaning attributed thereto in
the recitals hereto.
"Exchangeable Shares" has the meaning attributed thereto in the
recitals hereto.
"Holder Votes" has the meaning attributed thereto in Section 4(b)
hereof.
"Holders" means the registered holders from time to time of
Exchangeable Shares, other than US Co and its Subsidiaries.
"Insolvency Event" means the institution by US Co Sub of any
proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or
wound-up, or the consent of US Co Sub to the institution of bankruptcy,
insolvency, dissolution or winding-up proceedings against it, or the filing
of a petition, answer or consent seeking dissolution or winding-up under
any bankruptcy, insolvency or analogous laws, including without limitation
the Companies' Creditors' Arrangement Act (Canada) and the Bankruptcy and
Insolvency Act (Canada), and the failure by US Co Sub to contest in good
faith any such proceedings commenced in respect of US Co Sub within 15 days
of becoming aware thereof, or the consent by US Co Sub to the filing of any
such petition or to the appointment of a receiver, or the making by US Co
Sub of a general assignment for the benefit of creditors, or the admission
in writing by US Co Sub of its inability to pay its debts generally as they
become due, or US Co Sub not being permitted,
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pursuant to liquidity or solvency requirements of applicable law, to redeem
any Retracted Shares pursuant to Section 6.6 of the Exchangeable Share
Provisions.
"Liquidation Call Right" has the meaning attributed thereto in the
Exchangeable Share Provisions.
"Liquidation Event" has the meaning attributed thereto in subsection
5(l)(ii) hereof.
"Liquidation Event Effective Date" has the meaning attributed thereto
in subsection 5(l)(iii) hereof.
"List" has the meaning attributed thereto in Section 4(f) hereof.
"Officers' Certificate" means, with respect to US Co or US Co Sub, as
the case may be, a certificate signed by any two of the Chairman of the
Board, the Vice-Chairman of the Board, the President, any Vice-President or
any other senior officer of US Co or US Co Sub, as the case may be.
"Person" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"Plan of Arrangement" has the meaning attributed thereto in the
Exchangeable Share Provisions.
"Redemption Call Right" has the meaning attributed thereto in the
Exchangeable Share Provisions.
"Retracted Shares" has the meaning attributed thereto in Section 5(g)
hereof.
"Retraction Call Right" has the meaning attributed thereto in the
Exchangeable Share Provisions.
"Subsidiary" has the meaning attributed thereto in the Exchangeable
Share Provisions.
"Support Agreement" means that certain support agreement made as of
even date hereof between US Co Sub and US Co.
"Trust" means the trust created by this Agreement.
"Trust Estate" means the Voting Share, any other securities, the
Exchange Right, the Automatic Exchange Rights and any money or other
property which may be held by the Trustee from time to time pursuant to
this Agreement.
"Trustee" means Montreal Trust Company of Canada and, subject to the
provisions of Article 10 hereof, includes any successor trustee or
permitted assigns.
"US Co Common Stock" has the meaning attributed thereto in the
recitals hereto.
"US Co Consent" has the meaning attributed thereto in Section 4(b)
hereof.
"US Co Meeting" has the meaning attributed thereto in Section 4(b)
hereof.
"US Co Special Voting Stock" has the meaning attributed thereto in the
recitals hereto.
"US Co Successor" has the meaning attributed thereto in subsection
11(a)(ii) hereof.
"Voting Rights" means the voting rights attached to the Voting Shares.
"Voting Share" means the one (1) share of US Co Special Voting Stock,
U.S. $0.01 par value, issued by US Co to and deposited with the Trustee,
which entitles the holder of record to a number of votes at meetings of
holders of US Co Common Stock equal to the Aggregate Equivalent Vote
Amount.
(b) Interpretation Not Affected by Headings, etc. The division of this
Agreement into articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
(c) Number, Gender, etc. Words importing the singular number only shall
include the plural and vice versa. Words importing the use of any gender shall
include all genders.
(d) Date for any Action. If any date on which any action is required to be
taken under this Agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day.
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2. PURPOSE OF AGREEMENT
The purpose of this Agreement is to create the Trust for the benefit of the
Holders, as herein provided. The Trustee will hold the Voting Share in order to
enable the Trustee to exercise the Voting Rights and will hold the Exchange
Right and the Automatic Exchange Rights in order to enable the Trustee to
exercise such rights, in each case as Trustee for and on behalf of the Holders
as provided in this Agreement.
3. VOTING SHARE
(a) Issuance and Ownership of the Voting Share. US Co hereby issues to and
deposits with the Trustee the Voting Share to be hereafter held of record by the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Holders and in accordance with the provisions of this Agreement. US Co hereby
acknowledges receipt from the Trustee as the trustee for and on behalf of the
Holders of good and valuable consideration (and the adequacy thereof) and $1 in
hand paid for the issuance of the Voting Share by US Co to the Trustee. During
the term of the Trust and subject to the terms and conditions of this Agreement,
the Trustee shall possess and be vested with full legal ownership of the Voting
Share and shall be entitled to exercise all of the rights and powers of an owner
with respect to the Voting Share, provided that the Trustee shall:
(i) hold the Voting Share and the legal title thereto as trustee
solely for the use and benefit of the Holders in accordance with the
provisions of this Agreement; and
(ii) except as specifically authorized by this Agreement, have no
power or authority to sell, transfer, vote or otherwise deal in or with the
Voting Share and the Voting Share shall not be used or disposed of by the
Trustee for any purpose other than the purposes for which this Trust is
created pursuant to this Agreement.
(b) Legended Share Certificates. US Co Sub will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Holders of their right to instruct the Trustee with respect to the exercise of
the Voting Rights with respect to the Exchangeable Shares held by a Holder.
(c) Safe Keeping of Certificate. The certificate representing the Voting
Share shall at all times be held in safe keeping by the Trustee or its agent.
4. EXERCISE OF VOTING RIGHTS
(a) Voting Rights. The Trustee, as the holder of record of the Voting
Share, shall be entitled to all of the Voting Rights, including the right to
consent to or to vote in person or by proxy the Voting Share, on any matter,
question or proposition whatsoever that may properly come before the
stockholders of US Co at a US Co Meeting or in connection with a US Co Consent
(in each case, as hereinafter defined). The Voting Rights shall be and remain
vested in and exercised by the Trustee. Subject to Section 7(o) hereof, the
Trustee shall exercise the Voting Rights only on the basis of instructions
received pursuant to this Article 4 from Holders entitled to instruct the
Trustee as to the voting thereof at the time at which a US Co Consent is sought
or a US Co Meeting is held. To the extent that no instructions are received from
a Holder with respect to the Voting Rights to which such Holder is entitled, the
Trustee shall not exercise or permit the exercise of such Holder's Vote.
(b) Number of Votes. With respect to all meetings of stockholders of US Co
at which holders of shares of US Co Common Stock are entitled to vote (a "US Co
Meeting") and with respect to all written consents sought by US Co from its
stockholders including the holders of shares of US Co Common Stock (a "US Co
Consent"), each Holder shall be entitled to instruct the Trustee to cast and
exercise, in the manner instructed, a number of votes equal to the Equivalent
Vote Amount for each Exchangeable Share owned of record by such Holder on the
record date established by US Co or by applicable law for such US Co Meeting or
US Co Consent, as the case may be (the "Holder Votes") in respect of each
matter, question or proposition to be voted on at such US Co Meeting or to be
consented to in connection with such US Co Consent.
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<PAGE> 470
(c) Mailings to Shareholders. With respect to each US Co Meeting and US Co
Consent, the Trustee will mail or cause to be mailed (or otherwise communicate
in the same manner as US Co utilizes in communications to holders of US Co
Common Stock, subject to the Trustee's ability to provide this method of
communication and upon being advised in writing of such method) to each of the
Holders named in the List on the same day as the initial mailing or notice (or
other communication) with respect thereto is given by US Co to its stockholders:
(i) a copy of such notice, together with any proxy or information
statement and related materials to be provided to stockholders of US Co;
(ii) a statement that such Holder is entitled to instruct the Trustee
as to the exercise of the Holder Votes with respect to such US Co Meeting
or US Co Consent, as the case may be, or, pursuant to Section 4(g) hereof,
to attend such US Co Meeting and to exercise personally the Holder Votes
thereat;
(iii) a statement as to the manner in which such instructions may be
given to the Trustee, including an express indication that instructions may
be given to the Trustee to give:
(A) a proxy to such Holder or his designee to exercise personally
the Holder Votes; or
(B) a proxy to a designated agent or other representative of the
management of US Co to exercise such Holder Votes;
(iv) a statement that if no such instructions are received from the
Holder, the Holder Votes to which such Holder is entitled will not be
exercised;
(v) a form of direction whereby the Holder may so direct and instruct
the Trustee as contemplated herein; and
(vi) a statement of (A) the time and date by which such instructions
must be received by the Trustee in order to be binding upon it, which in the
case of a US Co Meeting shall not be later than the close of business on the
Business Day prior to such meeting, and (B) the method for revoking or amending
such instructions.
The materials referred to above are to be provided by US Co to the Trustee,
but shall be subject to review and comment by the Trustee.
For the purpose of determining Holder Votes to which a Holder is entitled
in respect of any such US Co Meeting or US Co Consent, the number of
Exchangeable Shares owned of record by the Holder shall be determined at the
close of business on the record date established by US Co or by applicable law
for purposes of determining stockholders entitled to vote at such US Co Meeting
or to give written consent in connection with such US Co Consent. US Co will
notify the Trustee in writing of any decision of the board of directors of US Co
with respect to the calling of any such US Co Meeting or the seeking of any such
US Co Consent and shall provide all necessary information and materials to the
Trustee in each case promptly and in any event in sufficient time to enable the
Trustee to perform its obligations contemplated by this Section 4(c).
(d) Copies of Stockholder Information. US Co will deliver to the Trustee
copies of all proxy materials (including notices of US Co Meetings but excluding
proxies to vote shares of US Co Common Stock), information statements, reports
(including without limitation all interim and annual financial statements) and
other written communications that are to be distributed from time to time to
holders of US Co Common Stock in sufficient quantities and in sufficient time so
as to enable the Trustee to send those materials to each Holder at the same time
as such materials are first sent to holders of US Co Common Stock. The Trustee
will mail or otherwise send to each Holder, at the expense of US Co, copies of
all such materials (and all materials specifically directed to the Holders or to
the Trustee for the benefit of the Holders by US Co) received by the Trustee
from US Co at the same time as such materials are first sent to holders of US Co
Common Stock. The Trustee will make copies of all such materials available for
inspection by any Holder at the Trustee's principal office in the cities of
Calgary and Toronto.
(e) Other Materials. Immediately after receipt by US Co or any stockholder
of US Co of any material sent or given generally to the holders of US Co Common
Stock by or on behalf of a third party, including
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without limitation dissident proxy and information circulars (and related
information and material) and tender and exchange offer circulars (and related
information and material), US Co shall use its best efforts to obtain and
deliver to the Trustee copies thereof in sufficient quantities so as to enable
the Trustee to forward such material (unless the same has been provided directly
to Holders by such third party) to each Holder as soon as possible thereafter.
As soon as practicable after receipt thereof, the Trustee will mail or otherwise
send to each Holder, at the expense of US Co, copies of all such materials
received by the Trustee from US Co. The Trustee will also make copies of all
such materials available for inspection by any Holder at the Trustee's principal
office in the cities of Toronto and Calgary.
(f) List of Persons Entitled to Vote. US Co Sub shall, (i) prior to each
annual, general and special US Co Meeting or the seeking of any US Co Consent
and (ii) forthwith upon each request made at any time by the Trustee in writing,
prepare or cause to be prepared a list (a "List") of the names and addresses of
the Holders arranged in alphabetical order and showing the number of
Exchangeable Shares held of record by each such Holder, in each case at the
close of business on the date specified by the Trustee in such request or, in
the case of a List prepared in connection with a US Co Meeting or a US Co
Consent, at the close of business on the record date established by US Co or
pursuant to applicable law for determining the holders of US Co Common Stock
entitled to receive notice of and/or to vote at such US Co Meeting or to give
consent in connection with such US Co Consent. Each such List shall be delivered
to the Trustee promptly after receipt by US Co Sub of such request or the record
date for such meeting or seeking of consent, as the case may be, and in any
event within sufficient time as to enable the Trustee to perform its obligations
under this Agreement. US Co agrees to give US Co Sub written notice (with a copy
to the Trustee) of the calling of any US Co Meeting or the seeking of any US Co
Consent together with the record dates therefor, sufficiently prior to the date
of the calling of such meeting or seeking of such consent so as to enable US Co
Sub to perform its obligations under this Section 4(f).
(g) Entitlement to Direct Votes. Any Holder named in a List prepared in
connection with any US Co Meeting or any US Co Consent will be entitled (i) to
instruct the Trustee in the manner described in Section 4(c) hereof with respect
to the exercise of the Holder Votes to which such Holder is entitled or (ii) to
attend such meeting and personally to exercise thereat (or to exercise with
respect to any written consent), as the proxy of the Trustee, the Holder Votes
to which such Holder is entitled.
(h) Voting by Trustee, and Attendance of Trustee Representative, at
Meeting.
(i) In connection with each US Co Meeting and US Co Consent, the
Trustee shall exercise, either in person or by proxy, in accordance with
the instructions received from a Holder pursuant to Section 4(c) hereof,
the Holder Votes as to which such Holder is entitled to direct the vote (or
any lesser number thereof as may be set forth in the instructions);
provided, however, that such written instructions are received by the
Trustee from the Holder prior to the time and date fixed by it for receipt
of such instructions in the notice given by the Trustee to the Holder
pursuant to Section 4(c) hereof.
(ii) The Trustee shall cause such representatives as are empowered by
it to sign and deliver, on behalf of the Trustee, proxies for Voting Rights
to attend each US Co Meeting. Upon submission by a Holder (or its designee)
of identification satisfactory to the Trustee's representatives, and at the
Holder's request, such representatives shall sign and deliver to such
Holder (or its designee) a proxy to exercise personally the Holder Votes as
to which such Holder is otherwise entitled hereunder to direct the vote, if
such Holder either (A) has not previously given the Trustee instructions
pursuant to Section 4(c) hereof in respect of such meeting, or (B) submits
to the Trustee's representatives written revocation of any such previous
instructions. At such meeting, the Holder exercising such Holder Votes
shall have the same rights as the Trustee to speak at the meeting in
respect of any matter, question or proposition, to vote by way of ballot at
the meeting in respect of any matter, question or proposition and to vote
at such meeting by way of a show of hands in respect of any matter,
question or proposition.
(i) Distribution of Written Materials. Any written materials to be
distributed by the Trustee to the Holders pursuant to this Agreement shall be
delivered or sent by mail (or otherwise communicated in the same manner as US Co
utilizes in communications to holders of US Co Common Stock) to each Holder at
its
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<PAGE> 472
address as shown on the books of US Co Sub. US Co Sub shall provide or cause to
be provided to the Trustee for this purpose, on a timely basis and without
charge or other expense:
(A) current lists of the Holders; and
(B) upon the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this Agreement.
The materials referred to above are to be provided by US Co to the Trustee,
but shall be subject to review and comment by the Trustee.
(j) Termination of Voting Right. Except as otherwise provided herein or in
the Exchangeable Share Provisions, all of the rights of a Holder with respect to
the Holder Votes exercisable in respect of the Exchangeable Shares held by such
Holder, including the right to instruct the Trustee as to the voting of or to
vote personally such Holder Votes, shall be deemed to be surrendered by the
Holder to US Co and such Holder Votes and the Voting Rights represented thereby
shall cease immediately upon the delivery by such Holder to the Trustee of the
certificates representing such Exchangeable Shares in connection with the
exercise by the Holder of the Exchange Right or the occurrence of the automatic
exchange of Exchangeable Shares for shares of US Co Common Stock, as specified
in Article 5 hereof (unless in either case US Co shall not have delivered the
Exchangeable Share Consideration deliverable in exchange therefor to the Trustee
for delivery to the Holders), or upon the redemption of Exchangeable Shares
pursuant to Article 6 or Article 7 of the Exchangeable Share Provisions, or upon
the effective date of the liquidation, dissolution or winding-up of US Co Sub
pursuant to Article 5 of the Exchangeable Share Provisions, or upon the purchase
of Exchangeable Shares from the holder thereof by US Co pursuant to the exercise
by US Co of the Retraction Call Right, the Redemption Call Right or the
Liquidation Call Right.
5. EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
(a) Grant and Ownership of the Exchange Right. US Co hereby grants to the
Trustee as trustee for and on behalf of, and for the use and benefit of, the
Holders (i) the right (the "Exchange Right"), upon the occurrence and during the
continuance of an Insolvency Event, to require US Co to purchase from each or
any Holder all or any part of the Exchangeable Shares held by such Holders, and
(ii) the Automatic Exchange Rights, all in accordance with the provisions of
this Agreement.
US Co hereby acknowledges receipt from the Trustee as trustee for and on
behalf of the Holders of good and valuable consideration (and the
adequacy thereof) for the grant of the Exchange Right and the Automatic
Exchange Rights by US Co to the Trustee. During the term of the Trust
and subject to the terms and conditions of this Agreement, the Trustee
shall possess and be vested with full legal ownership of the Exchange
Right and the Automatic Exchange Rights and shall be entitled to
exercise all of the rights and powers of an owner with respect to the
Exchange Right and the Automatic Exchange Rights, provided that the
Trustee shall:
(i) hold the Exchange Right and the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of the
Holders in accordance with the provisions of this Agreement; and
(ii) except as specifically authorized by this Agreement, have no
power or authority to exercise or otherwise deal in or with the Exchange
Right or the Automatic Exchange Rights, and the Trustee shall not exercise
any such rights for any purpose other than the purposes for which this
Trust is created pursuant to this Agreement.
(b) Legended Share Certificates. US Co Sub will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Holders of:
(i) their right to instruct the Trustee with respect to the exercise
of the Exchange Right in respect of the Exchangeable Shares held by a
Holder; and
(ii) the Automatic Exchange Rights.
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<PAGE> 473
(c) General Exercise of Exchange Right. The Exchange Right shall be and
remain vested in and exercised by the Trustee. Subject to Section 7(o) hereof,
the Trustee shall exercise the Exchange Right only on the basis of instructions
received pursuant to this Article 5 from Holders entitled to instruct the
Trustee as to the exercise thereof To the extent that no instructions are
received from a Holder with respect to the Exchange Right, the Trustee shall not
exercise or permit the exercise of the Exchange Right.
(d) Purchase Price. The purchase price payable by US Co for each
Exchangeable Share to be purchased by US Co under the Exchange Right shall be an
amount equal to the Exchangeable Share Price on the last Business Day prior to
the day of closing of the purchase and sale of such Exchangeable Share under the
Exchange Right. In connection with each exercise of the Exchange Right, US Co
will provide to the Trustee an Officer's Certificate setting forth the
calculation of the Exchangeable Share Price for each Exchangeable Share. The
Exchangeable Share Price for each such Exchangeable Share so purchased may be
satisfied only by US Co issuing and delivering or causing to be delivered to the
Trustee, on behalf of the relevant Holder, the Exchangeable Share Consideration
representing the total Exchangeable Share Price.
(e) Exercise Instructions. Subject to the terms and conditions herein set
forth, a Holder shall be entitled, upon the occurrence and during the
continuance of an Insolvency Event, to instruct the Trustee to exercise the
Exchange Right with respect to all or any part of the Exchangeable Shares
registered in the name of such Holder on the books of US Co Sub. To cause the
exercise of the Exchange Right by the Trustee, the Holder shall deliver to the
Trustee, in person or by certified or registered mail, at its principal offices
in Calgary, Alberta or Toronto, Ontario or at such other places in Canada as the
Trustee may from time to time designate by written notice to the Holders, the
certificates representing the Exchangeable Shares which such Holder desires US
Co to purchase, duly endorsed in blank, and accompanied by such other documents
and instruments as may be required to effect a transfer of Exchangeable Shares
under applicable law and the by-laws of US Co Sub and such additional documents
and instruments as the Trustee may reasonably require together with (i) a duly
completed form of notice of exercise of the Exchange Right, contained on the
reverse of or attached to the Exchangeable Share certificates, stating (A) that
the Holder thereby instructs the Trustee to exercise the Exchange Right so as to
require US Co to purchase from the Holder the number of Exchangeable Shares
specified therein, (B) that such Holder has good title to and owns all such
Exchangeable Shares to be acquired by US Co free and clear of all liens, claims
and encumbrances, (C) the names in which the certificates representing US Co
Common Stock issuable in connection with the exercise of the Exchange Right are
to be issued and (D) the names and addresses of the persons to whom the
Exchangeable Share Consideration should be delivered and (ii) payment (or
evidence satisfactory to the Trustee, US Co Sub and US Co of payment) of the
taxes (if any) payable as contemplated by Section 5(h) of this Agreement. If
only a part of the Exchangeable Shares represented by any certificate or
certificates delivered to the Trustee are to be purchased by US Co under the
Exchange Right, a new certificate for the balance of such Exchangeable Shares
shall be issued to the Holder at the expense of US Co Sub.
(f) Delivery of Exchangeable Share Consideration; Effect of Exercise.
Promptly after receipt of the certificates representing the Exchangeable Shares
which the Holder desires US Co to purchase under the Exchange Right (together
with such documents and instruments of transfer and a duly completed form of
notice of exercise of the Exchange Right), duly endorsed for transfer to US Co
the Trustee shall notify US Co and US Co Sub of its receipt of the same, which
notice to US Co and US Co Sub shall constitute exercise of the Exchange Right by
the Trustee on behalf of the Holder of such Exchangeable Shares, and US Co shall
immediately thereafter deliver or cause to be delivered to the Trustee, for
delivery to the Holder of such Exchangeable Shares (or to such other persons, if
Any, properly designated by such Holder), the Exchangeable Share Consideration
deliverable in connection with the exercise of the Exchange Right; provided,
however, that no such delivery shall be made unless and until the Holder
requesting the same shall have paid (or provided evidence satisfactory to the
Trustee, US Co Sub and US Co of the payment of) the taxes (if any) payable as
contemplated by Section 5(h) of this Agreement. Immediately upon the giving of
notice by the Trustee to US Co and US Co Sub of the exercise of the Exchange
Right, as provided in this Section 5(f), the closing of the transaction of
purchase and sale contemplated by the Exchange Right shall be deemed to have
occurred, and the Holder of such Exchangeable Shares shall be deemed to have
transferred to US Co all of its right, title and interest in and to such
Exchangeable Shares and in the related interest in the Trust Estate and
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<PAGE> 474
shall cease to be a holder of such Exchangeable Shares and shall not be entitled
to exercise any of the rights of a holder in respect thereof, other than the
right to receive his proportionate part of the total purchase price therefor,
unless such Exchangeable Share Consideration is not delivered by US Co to the
Trustee, for delivery to such Holder (or to such other persons, if any, properly
designated by such Holder), within three Business Days of the date of the giving
of such notice by the Trustee, in which case the rights of the Holder shall
remain unaffected until such Exchangeable Share Consideration is delivered by US
Co and any cheque included therein is paid. Concurrently with such Holder
ceasing to be a holder of Exchangeable Shares, the Holder shall be considered
and deemed for all purposes to be the holder of the shares of US Co Common Stock
delivered to it pursuant to the Exchange Right.
(g) Exercise of Exchange Right Subsequent to Retraction. In the event that
a Holder has exercised its right under Article 6 of the Exchangeable Share
Provisions to require US Co Sub to redeem any or all of the Exchangeable Shares
held by the Holder (the "Retracted Shares") and is notified by US Co Sub
pursuant to Section 6.6 of the Exchangeable Share Provisions that US Co Sub will
not be permitted as a result of liquidity or solvency requirements of applicable
law to redeem all such Retracted Shares, subject to receipt by the Trustee of
written notice to that effect from US Co Sub and provided that US Co shall not
have exercised the Retraction Call Right with respect to the Retracted Shares
and that the Holder has not revoked the retraction request delivered by the
Holder to US Co Sub pursuant to Section 6.1 of the Exchangeable Share
Provisions, the retraction request will constitute and will be deemed to
constitute notice from the Holder to the Trustee instructing the Trustee to
exercise the Exchange Right with respect to those Retracted Shares which US Co
Sub is unable to redeem. In any such event, US Co Sub hereby agrees with the
Trustee and in favour of the Holder immediately to notify the Trustee of such
prohibition against US Co Sub redeeming all of the Retracted Shares and
immediately to forward or cause to be forwarded to the Trustee all relevant
materials delivered by the Holder to US Co Sub or to the transfer agent of the
Exchangeable Shares (including without limitation a copy of the retraction
request delivered pursuant to Section 6.1 of the Exchangeable Share Provisions)
in connection with such proposed redemption of the Retracted Shares and the
Trustee will thereupon exercise the Exchange Right with respect to the Retracted
Shares that US Co Sub is not permitted to redeem and will require US Co to
purchase such shares in accordance with the provisions of this Article 5.
(h) Stamp or Other Transfer Taxes. Upon any sale of Exchangeable Shares to
US Co pursuant to the Exchange Right or the Automatic Exchange Rights, the share
certificate or certificates representing US Co Common Stock to be delivered in
connection with the payment of the total purchase price therefor shall be issued
in the name of the Holder of the Exchangeable Shares so sold or in such names as
such Holder may otherwise direct in writing without charge to the holder of the
Exchangeable Shares so sold, provided, however, that such Holder (i) shall pay
(and neither US Co, US Co Sub nor the Trustee shall be required to pay) any
documentary, stamp, transfer or other similar taxes that may be payable in
respect of any transfer involved in the issuance or delivery of such shares to a
person other than such Holder or (ii) shall have established to the satisfaction
of the Trustee, US Co and US Co Sub that such taxes, if any, have been paid.
(i) Notice of Insolvency Event. Immediately upon the occurrence of an
Insolvency Event or any event which with the giving of notice or the passage of
time or both would be an Insolvency Event US Co Sub and US Co shall give written
notice thereof to the Trustee. As soon as practicable after receiving notice
from US Co Sub and US Co or from any other Person of the occurrence of an
Insolvency Event, the Trustee will mail to each Holder, at the expense of US Co,
a notice of such Insolvency Event in the form provided by US Co, which notice
shall contain a brief statement of the right of the Holders with respect to the
Exchange Right.
(j) Qualification of US Co Common Stock. US Co covenants that if any shares
of US Co Common Stock to be issued and delivered pursuant to the Exchange Right
or the Automatic Exchange Rights require registration or qualification with or
approval of or the filing of document including any prospectus or similar
document or the taking of any proceeding with or the obtaining of any order,
ruling or consent from any governmental or regulatory authority under any
Canadian or United States federal, provincial or state law or regulation or
pursuant to the rules and regulations of any regulatory authority or the
fulfillment of any other legal requirement (collectively, the "Applicable Laws")
before such shares may be issued and delivered by US Co to the initial holder
thereof (other than US Co Sub) or in order that such shares may be freely traded
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thereafter (other than any restrictions on transfer by reason of a holder being
a "control person" of US Co for purposes of Canadian federal or provincial
securities law or an "affiliate" of US Co or, prior to the date hereof, of
Chauvco for purposes of United States federal or state securities law), US Co
will in good faith expeditiously take all such actions and do all such things as
are necessary to cause such shares of US Co Common Stock to be and remain duly
registered, qualified or approved. US Co represents and warrants that it has in
good faith taken all actions and done all things as are necessary under
Applicable Laws as they exist on the date hereof to cause the shares of US Co
Common Stock to be issued and delivered pursuant to the Exchange Right and the
Automatic Exchange Rights and to be freely tradeable thereafter (other than
restrictions on transfer by reason of a holder being a "control person" of US Co
for the purposes of Canadian federal and provincial securities law or an
"affiliate" of US Co or, prior to the date hereof, of Chauvco for the purposes
of United States federal or state securities law). US Co will in good faith
expeditiously take all such actions and do all such things as are necessary to
cause all shares of US Co Common Stock to be delivered pursuant to the Exchange
Right or the Automatic Exchange Rights to be listed, quoted or posted for
trading on all stock exchanges and quotation systems on which such shares are
listed, quoted or posted for trading at such time.
(k) Reservation of Shares of US Co Common Stock. US Co hereby represents,
warrants and covenants that it has irrevocably reserved for issuance and will at
all times keep available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of shares of US Co Common
Stock (i) as is equal to the sum of (A) the number of Exchangeable Shares issued
and outstanding from time to time and (B) the number of Exchangeable Shares
issuable upon the exercise of all rights to acquire Exchangeable Shares
outstanding from time to time and (ii) as are now and may hereafter be required
to enable and permit US Co Sub and US Co to meet their respective obligations
hereunder, under the Support Agreement, under the Exchangeable Share Provisions
and under any other security or commitment pursuant to the Arrangement with
respect to which US Co may now or hereafter be required to issue shares of US Co
Common Stock.
(l) Automatic Exchange on Liquidation of US Co.
(i) US Co will give the Trustee written notice of each of the
following events at the time set forth below:
(A) in the event of any determination by the board of directors of
US Co to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to US Co or to effect any other distribution of
assets of US Co among its stockholders for the purpose of winding-up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution; and
(B) immediately, upon the earlier of (I) receipt by US Co of notice
of and (II) US Co otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with respect to
the involuntary liquidation, dissolution or winding-up of US Co or to
effect any other distribution of assets of US Co among its stockholders
for the purpose of winding-up its affairs.
(ii) Immediately following receipt by the Trustee from US Co of notice
of any event (a "Liquidation Event") contemplated by Section 5(l)(i) above,
the Trustee will give notice thereof to the Holders. Such notice will be
provided by US Co to the Trustee and shall include a brief description of
the automatic exchange of Exchangeable Shares for shares of US Co Common
Stock provided for in Section 5(l)(iii) below.
(iii) In order that the Holders will be able to participate on a PRO
RATA basis with the holders of US Co Common Stock in the distribution of
assets of US Co in connection with a Liquidation Event, immediately prior
to the effective time (the "Liquidation Event Effective Time") of a
Liquidation Event all of the then outstanding Exchangeable Shares shall be
automatically exchanged for shares of US Co Common Stock. To effect such
automatic exchange, US Co shall be deemed to have purchased each
Exchangeable Share outstanding immediately prior to the Liquidation Event
Effective Time and held by Holders, and each Holder shall be deemed to have
sold the Exchangeable Shares held by it at such time,
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for a purchase price per share equal to the Exchangeable Share Price
applicable at such time. In connection with such automatic exchange, US Co
will provide to the Trustee an Officers' Certificate setting forth the
calculation of the purchase price for each Exchangeable Share.
(iv) The closing of the transaction of purchase and sale contemplated
by Section 5(l)(iii) above shall be deemed to have occurred immediately
prior to the Liquidation Event Effective Time, and each Holder of
Exchangeable Shares shall be deemed to have transferred to US Co all of the
Holder's right, title and interest in and to such Exchangeable Shares and
the related interest in the Trust Estate and shall cease to be a holder of
such Exchangeable Shares and US Co shall deliver to the Holder the
Exchangeable Share Consideration deliverable upon the automatic exchange of
Exchangeable Shares. Concurrently with such Holder ceasing to be a holder
of Exchangeable Shares, the Holder shall be considered and deemed for all
purposes to be the holder of the shares of US Co Common Stock issued to it
pursuant to the automatic exchange of Exchangeable Shares for US Co Common
Stock and the certificates held by the Holder previously representing the
Exchangeable Shares exchanged by the Holder with US Co pursuant to such
automatic exchange shall thereafter be deemed to represent the shares of US
Co Common Stock issued to the Holder by US Co pursuant to such automatic
exchange. Upon the request of a Holder and the surrender by the Holder of
Exchangeable Share certificates deemed to represent shares of US Co Common
Stock, duly endorsed in blank and accompanied by such instruments of
transfer as US Co may reasonably require, US Co shall deliver or cause to
be delivered to the Holder certificates representing the shares of US Co
Common Stock of which the Holder is the holder.
6. RESTRICTIONS ON ISSUANCE OF US CO SPECIAL VOTING STOCK
During the term of this Agreement, US Co will not issue any shares of US Co
Special Voting Stock in addition to the Voting Share.
7. CONCERNING THE TRUSTEE
(a) Powers and Duties of the Trustee. The rights, powers and authorities of
the Trustee under this Agreement, in its capacity as trustee of the Trust, shall
include:
(i) receipt and deposit of the Voting Share from US Co as trustee for
and on behalf of the Holders in accordance with the provisions of this
Agreement;
(ii) granting proxies and distributing materials to Holders as
provided in this Agreement;
(iii) voting the Holder Votes in accordance with the provisions of
this Agreement;
(iv) receiving the grant of the Exchange Right and the Automatic
Exchange Rights from US Co as trustee for and on behalf of the Holders in
accordance with the provisions of this Agreement;
(v) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the provisions
of this Agreement, and in connection therewith receiving from Holders
Exchangeable Shares and other requisite documents and distributing to such
Holders the shares of US Co Common Stock and cheques, if any, to which such
Holders are entitled upon the exercise of the Exchange Right or pursuant to
the Automatic Exchange Rights, as the case may be;
(vi) holding title to the Trust Estate;
(vii) investing any monies forming, from time to time, a part of the
Trust Estate as provided in this Agreement;
(viii) taking action at the direction of a Holder or Holders to
enforce the obligations of US Co under this Agreement; and
(ix) taking such other actions and doing such other things as are
specifically provided in this Agreement.
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In the exercise of such rights, powers and authorities the Trustee shall
have (and is granted) such incidental and additional rights, powers and
authority not in conflict with any of the provisions of this Agreement as the
Trustee, acting in good faith and in the reasonable exercise of its discretion,
may deem necessary, appropriate or desirable to effect the purpose of the Trust.
Any exercise of such discretionary rights, powers and authorities by the Trustee
shall be final, conclusive and binding upon all persons. For greater certainty,
the Trustee shall have only those duties as are set out specifically in this
Agreement.
The Trustee in exercising its rights, powers, duties and authorities
hereunder shall act honestly and in good faith with a view to the best interests
of the Holders and shall exercise the care, diligence and skill that a
reasonably prudent trustee would exercise in comparable circumstances.
The Trustee shall not be bound to give any notice or do or take any act,
action or proceeding by virtue of the powers conferred on it hereby unless and
until it shall be specifically required to do so under the terms hereof; nor
shall the Trustee be required to take any notice of, or to do or to take any
act, action or proceeding as a result of any default or breach of any provision
hereunder, unless and until notified in writing of such default or breach, which
notices shall distinctly specify the default or breach desired to be brought to
the attention of the Trustee and in the absence of such notice the Trustee may
for all purposes of this Agreement conclusively assume that no default or breach
has been made in the observance or performance of any of the representations,
warranties, covenants, agreements or conditions contained herein.
(b) No Conflict of Interest. The Trustee represents to US Co Sub and US Co
that at the date of execution and delivery of this Agreement there exists no
material conflict of interest in the role of the Trustee as a fiduciary
hereunder and the role of the Trustee in any other capacity. The Trustee shall,
within 90 days after it becomes aware that such a material conflict of interest
exists, either eliminate such material conflict of interest or resign in the
manner and with the effect specified in Article 10 hereof. If, notwithstanding
the foregoing provisions of this Section 7(b), the Trustee has such a material
conflict of interest, the validity and enforceability of this Agreement shall
not be affected in any manner whatsoever by reason only of the existence of such
material conflict of interest. If the Trustee contravenes the foregoing
provisions of this Section 7(b), any interested party may apply to the Alberta
Court of Queen's Bench for an order that the Trustee be replaced as trustee
hereunder.
(c) Dealings with Transfer Agents, Registrars, etc. US Co Sub and US Co
irrevocably authorize the Trustee, from time to time, to:
(i) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent registrar or
transfer agent, of the Exchangeable Shares and US Co Common Stock; and
(ii) requisition, from time to time, (A) from any such registrar or
transfer agent any information readily available from the records
maintained by it which the Trustee may reasonably require for the discharge
of its duties and responsibilities under this Agreement and (B) from the
transfer agent of US Co Common Stock, and any subsequent transfer agent of
such shares, the share certificates issuable upon the exercise from time to
time of the Exchange Right and pursuant to the Automatic Exchange Rights in
the manner specified in Article 5 hereof.
US Co Sub and US Co irrevocably authorize their respective registrars and
transfer agents to comply with all such requests. US Co covenants that it will
supply its transfer agent with duly executed share certificates for the purpose
of completing the exercise from time to time of the Exchange Right and the
Automatic Exchange Rights, in each case pursuant to Article 5 hereof.
(d) Books and Records. The Trustee shall keep available for inspection by
US Co and US Co Sub, at the Trustee's principal office in Calgary, Alberta,
correct and complete books and records of account relating to the Trustee's
actions under this Agreement, including without limitation all information
relating to mailings and instructions to and from Holders and all transactions
pursuant to the Voting Rights, the Exchange Right and the Automatic Exchange
Rights for the term of this Agreement. On or before March 31, 1998, and on or
before March 31 in every year thereafter, so long as the Voting Share is on
deposit with the Trustee, the
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Trustee shall transmit to US Co and US Co Sub a brief report, dated as of the
preceding December 31, with respect to:
(i) the property and funds comprising the Trust Estate as of that
date;
(ii) the number of exercises of the Exchange Right, if any, and the
aggregate number of Exchangeable Shares received by the Trustee on behalf
of Holders in consideration of the issue and delivery by US Co of shares of
US Co Common Stock in connection with the Exchange Right, during the
calendar year ended on such date; and
(iii) all other actions taken by the Trustee in the performance of its
duties under this Agreement which it had not previously reported.
(e) Income Tax Returns and Reports. The Trustee shall, to the extent
necessary, prepare and file on behalf of the Trust appropriate United States and
Canadian income tax returns and any other returns or reports as may be required
by applicable law or pursuant to the rules and regulations of any securities
exchange or other trading system through which the Exchangeable Shares are
traded and, in connection therewith, may obtain the advice and assistance of
such experts as the Trustee may consider necessary or advisable. If requested by
the Trustee, US Co shall retain such experts for purposes of providing such
advice and assistance.
(f) Indemnification Prior to Certain Actions by Trustee. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it by
this Agreement at the request, order or direction of any Holder upon such Holder
furnishing to the Trustee reasonable funding, security and indemnity against the
costs, expenses and liabilities which may be incurred by the Trustee therein or
thereby, provided that no Holder shall be obligated to furnish to the Trustee
any such funding, security or indemnity in connection with the exercise by the
Trustee of any of its rights, duties, powers and authorities with respect to the
Voting Share pursuant to Article 4 hereof, subject to Section 7(o) hereof, and
with respect to the Exchange Right pursuant to Article 5 hereof, subject to
Section 7(o) hereof, and with respect to the Automatic Exchange Rights pursuant
to Article 5 hereof.
None of the provisions contained in this Agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the exercise of any of its rights, powers, duties or authorities unless
funded, given funds, security and indemnified as aforesaid.
(g) Actions by Holders. No Holder shall have the right to institute any
action, suit or proceeding or to exercise any other remedy authorized by this
Agreement for the purpose of enforcing any of its rights or for the execution of
any trust or power hereunder unless the Holder has requested the Trustee to take
or institute such action, suit or proceeding and furnished the Trustee with the
funding, security and indemnity referred to in Section 7(f) hereof and the
Trustee shall have failed to act within a reasonable time thereafter. In such
case, but not otherwise, the Holder shall be entitled to take proceedings in any
court of competent jurisdiction such as the Trustee might have taken; it being
understood and intended that no one or more Holders shall have any right in any
manner whatsoever to affect, disturb or prejudice the rights hereby created by
any such action, or to enforce any right hereunder or under the Voting Rights,
the Exchange Right or the Automatic Exchange Rights, except subject to the
conditions and in the manner herein provided, and that all powers and trusts
hereunder shall be exercised and all proceedings at law shall be instituted, had
and maintained by the Trustee, except only as herein provided, and in any event
for the equal benefit of all Holders.
(h) Reliance upon Declarations. The Trustee shall not be considered to be
in contravention of any of its rights, powers, duties and authorities hereunder
if, when required, it acts and relies in good faith upon lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other papers
or documents furnished pursuant to the provisions hereof or required by the
Trustee to be furnished to it in the exercise of its rights, powers, duties and
authorities hereunder and such lists, mailing labels, notices, statutory
declarations, certificates, opinions, reports or other papers or documents
comply with the provisions of Section 7(i) hereof, if applicable, and with any
other applicable provisions of this Agreement.
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(i) Evidence and Authority to Trustee. US Co Sub and/or US Co shall furnish
to the Trustee evidence of compliance with the conditions provided for in this
Agreement relating to any action or step required or permitted to be taken by US
Co Sub and/or US Co or the Trustee under this Agreement or as a result of any
obligation imposed under this Agreement, including, without limitation, in
respect of the Voting Rights or the Exchange Right or the Automatic Exchange
Rights and the taking of any other action to be taken by the Trustee at the
request of or on the application of US Co Sub and/or US Co forthwith if and
when:
(i) such evidence is required by any other section of this Agreement
to be furnished to the Trustee in accordance with the terms of this Section
7(i); or
(ii) the Trustee, in the exercise of its rights, powers, duties and
authorities under this Agreement, gives US Co Sub and/or US Co written
notice requiring it to furnish such evidence in relation to any particular
action or obligation specified in such notice.
Such evidence shall consist of an Officers' Certificate of US Co Sub and/or
US Co or a statutory declaration or a certificate made by persons entitled to
sign an Officer's Certificate stating that any such condition has been complied
with in accordance with the terms of this Agreement.
Whenever such evidence relates to a matter other than the Voting Rights or
the Exchange Right or the Automatic Exchange Rights, and except as otherwise
specifically provided herein, such evidence may consist of a report or opinion
of any solicitor, auditor, accountant, appraiser, valuer, engineer or other
expert or any other person whose qualifications give authority to a statement
made by him provided that if such report or opinion is furnished by a director,
officer or employee of US Co Sub and/or US Co it shall be in the form of an
Officers' Certificate or a statutory declaration.
Each statutory declaration, certificate, opinion or report furnished to the
Trustee as evidence of compliance with a condition provided for in this
Agreement shall include a statement by the person giving the evidence:
(iii) declaring that he has read and understands the provisions of
this Agreement relating to the condition in question;
(iv) describing the nature and scope of the examination or
investigation upon which he based the statutory declaration, certificate,
statement or opinion; and
(v) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give the
opinions contained or expressed therein.
(j) Experts, Advisors and Agents. The Trustee may:
(i) in relation to these presents act and rely on the opinion or
advice of or information obtained from or prepared by any solicitor,
auditor, accountant, appraiser, valuer, engineer or other expert, whether
retained by the Trustee or by US Co Sub and/or US Co or otherwise, and may
employ such assistants as may be necessary to the proper determination and
discharge of its powers and duties and determination of its rights
hereunder and may pay proper and reasonable compensation for all such legal
and other advice or assistance as aforesaid; and
(ii) employ such agents and other assistants as it may reasonably
require for the proper determination and discharge of its powers and duties
hereunder, and may pay reasonable remuneration for all services performed
for it (and shall be entitled to receive reasonable remuneration for all
services performed by it) in the discharge of the trusts hereof and
compensation for all disbursements, costs and expenses made or incurred by
it in the determination and discharge of its duties hereunder and in the
management of the Trust.
(k) Investment of Monies Held by Trustee. Unless otherwise provided in this
Agreement, any monies held by or on behalf of the Trustee which under the terms
of this Agreement may or ought to be invested or which may be on deposit with
the Trustee or which may be in the hands of the Trustee may be invested and
reinvested in the name or under the control of the Trustee in securities in
which, under the laws of the Province of Alberta trustees are authorized to
invest trust unit monies, provided that such securities are stated to mature
within two years after their purchase by the Trustee, and the Trustee shall so
invest such monies on the written direction of US Co Sub. Pending the investment
of any monies as hereinbefore provided, such monies may be deposited in the name
of the Trustee in any chartered bank in Canada or, with the consent of
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US Co Sub, in the deposit department of the Trustee or any other loan or company
authorized to accept deposits under the laws of Canada or any province thereof
at the rate of interest then current on similar deposits.
(l) Trustee Not Required to Give Security. The Trustee shall not be
required to give any bond or security in respect of the execution of the trusts,
rights, duties, powers and authorities of this Agreement or otherwise in respect
of the premises.
(m) Trustee Not Bound to Act on Request. Except as in this Agreement
otherwise specifically provided, the Trustee shall not be bound to act in
accordance with any direction or request of US Co Sub and/or US Co or of the
directors thereof until a duly authenticated copy of the instrument or
resolution containing such direction or request shall have been delivered to the
Trustee, and the Trustee shall be empowered to act and rely upon any such copy
purporting to be authenticated and believed by the Trustee to be genuine.
(n) Authority to Carry on Business. The Trustee represents to US Co Sub and
US Co that at the date of execution and delivery by it of this Agreement it is
authorized to carry on the business of a trust company in the Province of
Alberta but if, notwithstanding the provisions of this Section 7(n), it ceases
to be so authorized to carry on business, the validity and enforceability of
this Agreement and the Voting Rights, the Exchange Right and the Automatic
Exchange Rights shall not be affected in any manner whatsoever by reason only of
such event but the Trustee shall, within 90 days after ceasing to be authorized
to carry on the business of a trust company in the Province of Alberta, either
become so authorized or resign in the manner and with the effect specified in
Article 10 hereof.
(o) Conflicting Claims. If conflicting claims or demands are made or
asserted with respect to any interest of any Holder in any Exchangeable Shares,
including any disagreement between the heirs, representatives, successors or
assigns succeeding to all or any part of the interest of any Holder in any
Exchangeable Shares resulting in conflicting claims or demands being made in
connection with such interest, then the Trustee shall be entitled, at its sole
discretion, to refuse to recognize or to comply with any such claim or demand.
In so refusing, the Trustee may elect not to exercise any Voting Rights,
Exchange Right or Automatic Exchange Rights subject to such conflicting claims
or demands and, in so doing, the Trustee shall not be or become liable to any
person on account of such election or its failure or refusal to comply with any
such conflicting claims or demands. The Trustee shall be entitled to continue to
refrain from acting and to refuse to act until:
(i) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands have been adjudicated by a final judgment of
a court of competent jurisdiction; or
(ii) all differences with respect to the Voting Rights, Exchange Right
or Automatic Exchange Right subject to such conflicting claims or demands
have been conclusively settled by a valid written agreement binding on all
such adverse claimants, and the Trustee shall have been furnished with an
executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made
by any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
(p) Acceptance of Trust. The Trustee hereby accepts the Trust created and
provided for by and in this Agreement and agrees to perform the same upon the
terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who shall
from time to time be Holders, subject to all the terms and conditions herein set
forth.
8. COMPENSATION
US Co and US Co Sub jointly and severally agree to pay to the Trustee
reasonable compensation for all of the services rendered by it under this
Agreement and will reimburse the Trustee for all reasonable expenses
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(including but not limited to taxes, compensation paid to experts, agents and
advisors and travel expenses) and disbursements, including the cost and expense
of any suit or litigation of any character and any proceedings before any
governmental agency reasonably incurred by the Trustee in connection with its
rights and duties under this Agreement; provided that US Co and US Co Sub shall
have no obligation to reimburse the Trustee for any expenses or disbursements
paid, incurred or suffered by the Trustee in any suit or litigation in which the
Trustee is determined to have acted in bad faith or with negligence or willful
misconduct.
9. INDEMNIFICATION AND LIMITATION OF LIABILITY
(a) Indemnification of the Trustee. US Co and US Co Sub jointly and
severally agree to indemnify and hold harmless the Trustee and each of its
directors, officers, employees and agents appointed and acting in accordance
with this Agreement (collectively, the "Indemnified Parties") against all
claims, losses, damages, costs, penalties, fines and reasonable expenses
(including reasonable expenses of the Trustee's legal counsel on a solicitor and
his own client basis) which, without fraud, negligence, willful misconduct or
bad faith on the part of such Indemnified Party, may be paid, incurred or
suffered by the Indemnified Party by reason of or as a result of the Trustee's
acceptance or administration of the Trust, its compliance with its duties set
forth in this Agreement, or any written or oral instructions delivered to the
Trustee by US Co or US Co Sub pursuant hereto. In no case shall US Co or US Co
Sub be liable under this indemnity for any claim against any of the Indemnified
Parties unless US Co and US Co Sub shall be notified by the Trustee of the
written assertion of a claim or of any action commenced against the Indemnified
Parties, promptly after any of the Indemnified Parties shall have received any
such written assertion of a claim or shall have been served with a summons or
other first legal process giving information as to the nature and basis of the
claim. Subject to (ii), below, US Co and US Co Sub shall be entitled to
participate at their own expense in the defense and, if US Co or US Co Sub so
elect at any time after receipt of such notice, either of them may assume the
defense of any suit brought to enforce any such claim. The Trustee shall have
the right to employ separate counsel in any such suit and participate in the
defense thereof but the fees and expenses of such counsel shall be at the
expense of the Trustee unless: (i) the employment of such counsel has been
authorized by US Co or US Co Sub, such authorization not to be unreasonably
withheld; or (ii) the named parties to any such suit include both the Trustee
and US Co or US Co Sub and the Trustee shall have been advised by counsel
acceptable to US Co or US Co Sub that there may be one or more legal defenses
available to the Trustee that are different from or in addition to those
available to US Co or US Co Sub and that an actual or potential conflict exists
(in which case US Co and US Co Sub shall not have the right to assume the
defense of such suit on behalf of the Trustee but shall be liable to pay the
reasonable fees and expenses of counsel for the Trustee).
(b) Limitation of Liability. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
Agreement except to the extent that such loss is attributable to the fraud,
negligence, willful misconduct or bad faith on the part of the Trustee.
10. CHANGE OF TRUSTEE
(a) Resignation. The Trustee, or any trustee hereafter appointed, may at
any time resign by giving written notice of such resignation to US Co and US Co
Sub specifying the date on which it desires to resign, provided that such notice
shall never be given less than 60 days before such desired resignation date
unless US Co and US Co Sub otherwise agree and provided further that such
resignation shall not take effect until the date of the appointment of a
successor trustee and the acceptance of such appointment by the successor
trustee. Upon receiving such notice of resignation, US Co and US Co Sub shall
promptly appoint a successor trustee by written instrument in duplicate, one
copy of which shall be delivered to the resigning trustee and one copy to the
successor trustee. Failing acceptance by a successor trustee, a successor
trustee may be appointed by an order of the Alberta Court of Queen's Bench upon
application of one or more of the parties hereto.
(b) Removal. The Trustee, or any Trustee hereafter appointed, may be
removed with or without cause, at any time on 60 days' prior notice by written
instrument executed by US Co and US Co Sub, in duplicate, one copy of which
shall be delivered to the trustee so removed and one copy to the successor
trustee, provided
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<PAGE> 482
that, in connection with such removal, provision is made for a replacement
trustee similar to that contemplated in Section 10(a).
(c) Successor Trustee. Any successor trustee appointed as provided under
this Agreement shall execute, acknowledge and deliver to US Co and US Co Sub and
to its predecessor trustee an instrument accepting such appointment. Thereupon
the resignation or removal of the predecessor trustee shall become effective and
such successor trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, duties and obligations of its
predecessor under this Agreement, with like effect as if originally named as
trustee in this Agreement. However, on the written request of US Co and US Co
Sub or of the successor trustee, the trustee ceasing to act shall, upon payment
of any amounts then due it pursuant to the provisions of this Agreement, execute
and deliver an instrument transferring to such successor Trustee all the rights
and powers of the trustee so ceasing to act. Upon the request of any such
successor trustee, US Co, US Co Sub and such predecessor trustee shall execute
any and all instruments in writing for more fully and certainly vesting in and
confirming to such successor trustee all such rights and powers.
(d) Notice of Successor Trustee. Upon acceptance of appointment by a
successor trustee as provided herein, US Co and US Co Sub shall cause to be
mailed notice of the succession of such trustee hereunder to each Holder
specified in a List. If US Co or US Co Sub shall fail to cause such notice to be
mailed within 10 days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at the expense of US
Co and US Co Sub.
11. US CO SUCCESSORS
(a) Certain Requirements in Respect of Combination, etc. US Co shall not
enter into any transaction (whether by way of reconstruction, reorganization,
consolidation, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other Person or, in the case of a merger, of the continuing
corporation resulting therefrom unless:
(i) such other Person or continuing corporation (the "US Co
Successor"), by operation of law, becomes, without further action, bound by
the terms and provisions of this Agreement or, if not so bound, executes,
prior to or contemporaneously with the consummation of such transaction an
agreement supplemental hereto and such other instruments (if any) as are
satisfactory to the Trustee and in the opinion of legal counsel to the
Trustee are necessary or advisable to evidence the assumption by the US Co
Successor of liability for all monies payable and property deliverable
hereunder and the covenant of such US Co Successor to pay and deliver or
cause to be delivered the same and its agreement to observe and perform all
the covenants and obligations of US Co under this Agreement; and
(ii) such transaction shall, to the satisfaction of the Trustee and in
the opinion of legal counsel to the Trustee, be upon such terms as
substantially to preserve and not to impair in any material respect any of
the rights, duties, powers and authorities of the Trustee or of the Holders
hereunder.
(b) Vesting of Powers in Successor. Whenever the conditions of Section
11(a) hereof have been duly observed and performed, the Trustee, if required, by
Section 11(a) hereof, the US Co Successor and US Co Sub shall execute and
deliver the supplemental agreement provided for in Article 12 hereof and
thereupon the US Co Successor shall possess and from time to time may exercise
each and every right and power of US Co under this Agreement in the name of US
Co or otherwise and any act or proceeding by any provision of this Agreement
required to be done or performed by the board of directors of US Co or any
officers of US Co may be done and performed with like force and effect by the
directors or officers of such US Co Successor.
(c) Wholly-Owned Subsidiaries. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of US Co
with or into US Co or the winding-up, liquidation or dissolution of any
wholly-owned subsidiary of US Co provided that all of the assets of such
subsidiary are transferred to US Co or another wholly-owned subsidiary of US Co,
and any such transactions are expressly permitted by this Article 11.
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12. AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
(a) Amendments, Modifications, etc. This Agreement may not be amended or
modified except by an agreement in writing executed by US Co Sub, US Co and the
Trustee and approved by the Holders in accordance with Section 9.2 of the
Exchangeable Share Provisions.
(b) Ministerial Amendments. Notwithstanding the provisions of Section 12(a)
hereof, the parties to that agreement may in writing, at any time and from time
to time, without the approval of the Holders, amend or modify this Agreement for
the purposes of;
(i) adding to the covenants of any or all of the parties hereto for
the protection of the Holders hereunder;
(ii) making such amendments or modifications not inconsistent with
this Agreement as may be necessary or desirable with respect to matters or
questions which, in the opinion of the board of directors of each of US Co
and US Co Sub and in the opinion of the Trustee and its counsel having in
mind the best interests of the Holders as a whole, it may be expedient to
make, provided that such boards of directors and the Trustee and its
counsel shall be of the opinion that such amendments and modifications will
not be prejudicial to the interests of the Holders as a whole; or
(iii) making such changes or corrections which, on the advice of
counsel to US Co Sub, US Co and the Trustee, are required for the purpose
of curing or correcting any ambiguity or defect or inconsistent provision
or clerical omission or mistake or manifest error, provided that the
Trustee and its counsel and the board of directors of each of US Co Sub and
US Co shall be of the opinion that such changes or corrections will not be
prejudicial to the interests of the Holders as a whole.
(c) Meeting to Consider Amendments. US Co Sub, at the request of US Co,
shall call a meeting or meetings of the Holders for the purpose of considering
any proposed amendment or modification requiring approval pursuant hereto. Any
such meeting or meetings shall be called and held in accordance with the by-laws
of US Co Sub, the Exchangeable Share Provisions and all applicable laws.
(d) Changes in Capital of US Co and US Co Sub. At all times after the
occurrence of any event effected pursuant to Section 2(g) or Section 2(h) of the
Support Agreement, as a result of which either US Co Common Stock or the
Exchangeable Shares or both are in any way changed, this Agreement shall
forthwith be amended and modified as necessary in order that it shall apply with
full force and effect, mutatis mutandis, to all new securities into which US Co
Common Stock or the Exchangeable Shares or both are so changed and the parties
hereto shall execute and deliver a supplemental agreement giving effect to and
evidencing such necessary amendments and modifications.
(e) Execution of Supplemental Agreements. No amendment to or modification
or waiver of any of the provisions of this Agreement otherwise permitted
hereunder shall be effective unless made in writing and signed by all of the
parties hereto. From time to time US Co Sub (when authorized by a resolution of
its Board of Directors), US Co (when authorized by a resolution of its board of
directors) and the Trustee may, subject to the provisions of these presents, and
they shall, when so directed by these presents, execute and deliver by their
proper officers, agreements or other instruments supplemental hereto, which
thereafter shall form part hereof, for any one or more of the following
purposes:
(i) evidencing the succession of any US Co Successors to US Co and the
covenants of and obligations assumed by each such US Co Successors in
accordance with the provisions of Article 11, and the successor of any
successor trustee in accordance with the provisions of Article 10;
(ii) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange Right or
the Automatic Exchange Rights which, in the opinion of the Trustee and its
counsel, will not be prejudicial to the interests of the Holders as a whole
or are in the opinion of counsel to the Trustee necessary or advisable in
order to incorporate, reflect or comply with any legislation the provisions
of which apply to US Co, US Co Sub, the Trustee or this Agreement; and
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<PAGE> 484
(iii) for any other purposes not inconsistent with the provisions of
this Agreement, including without limitation to make or evidence any
amendment or modification to this Agreement as contemplated hereby,
provided that, in the opinion of the Trustee and its counsel, the rights of
the Trustee and the Holders as a whole will not be prejudiced thereby.
13. TERMINATION
(a) Term. The Trust created by this Agreement shall continue until the
earliest to occur of the following events:
(i) no outstanding Exchangeable Shares are held by a Holder;
(ii) each of US Co Sub and US Co elects in writing to terminate the
Trust and such termination is approved by the Holders of the Exchangeable
Shares in accordance with Section 9.2 of the Exchangeable Share Provisions;
and
(iii) twenty-one (21) years after the death of the last survivor of
the descendants of His Majesty King George VI of the United Kingdom of
Great Britain and Northern Ireland living on the date of the creation of
the Trust.
(b) Survival of Agreement. This Agreement shall survive any termination of
the Trust and shall continue until there are no Exchangeable Shares outstanding
held by a Holder; provided, however, that the provisions of Articles 8 and 9
hereof shall survive any such termination of this Agreement.
14. GENERAL
(a) Severability. If any provision of this Agreement is held to be invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or impaired thereby
and the agreement shall be carried out as nearly as possible in accordance with
its original terms and conditions.
(b) Inurement. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Holders.
(c) Notices to Parties. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in like
notice):
(i) if to US Co at:
Pioneer Natural Resources Company
1400 Williams Square West
5205 N. O'Connor Blvd.
Irving, Texas 75039-3746
Attention: President
Telecopy: (972) 402-7057
(ii) if to US Co Sub at:
Pioneer Natural Resources (Canada) Ltd.
2900, 255 -- 5th Avenue S.W.
Calgary, Alberta
T2P 3G6
Attention: President
Telecopy: (403) 231-3247
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<PAGE> 485
(iii) if to the Trustee at:
if by mail or delivery:
Montreal Trust Company of Canada
710, 530 -- 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
Attention:
Telecopy: (403) 267-6598
Any notice or other communication given personally shall be deemed to have
been given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
(d) Notice of Holders. Any and all notices to be given and any documents to
be sent to any Holders may be given or sent to the address of such Holder shown
on the register of Holders of Exchangeable Shares in any manner permitted by the
Exchangeable Share Provisions and shall be deemed to be received (if given or
sent in such manner) at the time specified in such Exchangeable Share
Provisions, the provisions of which the Exchangeable Share Provisions shall
apply mutatis mutandis to notices or documents as aforesaid sent to such
Holders.
(e) Risk of Payments by Post. Whenever payments are to be made or documents
are to be sent to any Holder by the Trustee, by US Co Sub or by US Co or by such
Holder to the Trustee or to US Co or US Co Sub, the making of such payment or
sending of such document sent through the post shall be at the risk of US Co Sub
or US Co, in the case of payments made or documents sent by the Trustee or US Co
Sub or US Co, and the Holder, in the case of payments made or documents sent by
the Holder.
(f) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
(g) Jurisdiction. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein.
(h) Attornment. US Co agrees that any action or proceeding arising out of
or relating to this Agreement may be instituted in the courts of Alberta, waives
any objection which it may have now or hereafter to the venue of any such action
or proceeding, irrevocably submits to the jurisdiction of the said courts in any
such action or proceeding, agrees to be bound by any judgment of the said courts
and agrees not to seek, and hereby waives, any review of the merits of any such
judgment by the courts of any other jurisdiction and hereby appoints US Co Sub
at its registered office in the Province of Alberta as US Co's attorney for
service of process.
I-20
<PAGE> 486
IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be
duly executed as of the date first above written.
PIONEER NATURAL
RESOURCES COMPANY
Per:
----------------------------------
Per:
----------------------------------
PIONEER NATURAL RESOURCES
(CANADA) LTD.
Per:
----------------------------------
Per:
----------------------------------
MONTREAL TRUST COMPANY
OF CANADA
Per:
----------------------------------
Per:
----------------------------------
I-21
<PAGE> 487
ANNEX J
GOLDMAN SACHS FAIRNESS OPINION
<PAGE> 488
PERSONAL AND CONFIDENTIAL
September 3, 1997
Board of Directors
Pioneer Natural Resources Company
1400 William Square West
5205 North O'Connor Boulevard
Irving, TX 75039
Gentlemen:
You have requested our opinion as to the fairness to Pioneer Natural
Resources Company (the "Company") of the Consideration (as defined below) to be
paid for all of the outstanding Common Shares, no par value (the "Chauvco Common
Stock"), of Chauvco Resources Ltd. ("Chauvco") pursuant to the acquisition (the
"Acquisition") contemplated by the Combination Agreement dated as of September
3, 1997 between the Company and Chauvco (the "Agreement"). We understand that
pursuant to the Agreement and the Plan of Arrangement (as defined in the
Agreement), prior to or concurrent with the closing of the Acquisition, Chauvco
will distribute to the holders of Chauvco Common Stock the Gabon Securities (as
defined in the Agreement) and the rights and assets of Chauvco relating to the
Alliance pipeline project. We further understand that pursuant to the Agreement,
each issued and outstanding share of Chauvco Common Stock and each Chauvco
Option (as defined in the Agreement) will be exchanged for a fraction of a
share, determined in accordance with the Agreement based upon the average of the
closing sales prices for the Common Shares for the ten consecutive trading days
ending on the third trading day next preceding the date of the Chauvco meeting
of shareholders relating to the Plan of Arrangement (the "Common Shares Price"),
which fraction will be not less than .451467 or greater than .493827 (the
"Exchange Ratio"), of either (i) Common Stock, par value $.01 per share (the
"Common Shares") of the Company, or (ii) an Exchangeable Share (as defined in
the Agreement) of a newly organized Canadian subsidiary of the Company that is
designed to be the economic equivalent of the Common Shares and are exchangeable
on a one-for-one basis for Common Shares (the Common Shares and Exchangeable
Shares together being the "Stock Consideration"). In the event the Exchange
Ratio calculated pursuant to the Agreement is .465116 or greater, the Company
may elect to utilize an Exchange Ratio of .465116 and also pay an amount of cash
(the "Cash Consideration" and, together with the Stock Consideration, the
"Consideration") per share of Chauvco Common Stock equal to the difference
between the Exchange Ratio calculated in accordance with the Agreement and
.465116 multiplied by the Common Shares Price.
Goldman, Sachs & Co., 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 estate, corporate and other purposes. We are
familiar with the Company having provided certain investment banking services to
predecessors of the Company from time to time, including having acted as
financial advisor to Parker & Parsley Petroleum Company ("Parker & Parsley") in
its August 1997 merger with Mesa Inc. ("Mesa"); having acted as underwriters of
public offerings of $150,000,000 of 8 7/8% Senior Notes due 2005 of Parker &
Parsley in 1995 and common stock of Parker & Parsley in 1994; and having acted
as managing underwriters of a private offering of 3,776,400 Parker & Parsley
Capital LLC 6 1/4% Convertible Monthly Income Preferred Shares, guaranteed by
and convertible into common stock of Parker & Parsley in 1994. We have also
provided certain investment banking services to Mesa from time to time.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Joint Proxy Statement/Prospectus dated June 27, 1997 of the
Company, Parker & Parsley and Mesa; Annual Reports to Stockholders and Annual
Reports on Form 10-K of Parker & Parsley and Mesa, for the five years ended
December 31, 1996; Annual Reports to Shareholders and Annual Information Forms
of Chauvco for the five years ended December 31, 1996; certain interim reports
to stockholders and Quarterly Reports on Form 10-Q
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<PAGE> 489
of the Company, Parker & Parsley and Mesa; certain unaudited interim reports of
Chauvco; certain other communications from the Company and Chauvco to their
respective stockholders; certain internal financial analyses and forecasts for
the Company and Chauvco prepared by their respective managements; and certain
internal financial forecasts for the Company and Chauvco on a combined basis,
after giving effect to the Acquisition, prepared by the management of the
Company. We also have held discussions with members of the senior management of
the Company and Chauvco regarding the strategic rationale for, and potential
benefits of, the Acquisition and the past and current business operations,
financial condition and future prospects of their respective companies. We have
reviewed certain information provided by Chauvco relating to its oil and gas
reserves and by the Company relating to the oil and gas reserves of the Company
and Chauvco (the "Reserve Information"), including, but not limited to, (i)
year-end reserve reports for Parker & Parsley prepared by its management and
audited by independent petroleum engineers, (ii) year-end reserve reports for
Mesa prepared by independent petroleum engineers, (iii) year-end reserve reports
for the North American properties of Chauvco prepared by its management and
audited by independent petroleum engineers, (iv) year-end reserve reports for
the Argentine properties of Chauvco prepared by independent petroleum engineers,
and (v) reserve estimates for Chauvco prepared by the management of the Company.
In addition, we have discussed the Reserve Information with the respective
managements of the Company and Chauvco and have held discussions with members of
senior management of the Company regarding its due diligence examination of such
Reserve Information for Chauvco. In addition, we have reviewed the reported
price and trading activity for the Common Shares and Chauvco Common Stock,
compared certain financial and stock market information for the Company and
Chauvco with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the oil and gas industry specifically and in other
industries generally and performed such other studies and analyses as we
considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In addition, we have not
made an independent evaluation or appraisal of the assets and liabilities of the
Company or Chauvco or any of their subsidiaries and, except for the Reserve
Information, we have not been furnished with any such evaluation or appraisal.
With respect to such Reserve Information, we are not experts in the evaluation
of oil and gas properties and, we have assumed with your consent that the
reserve estimates for Chauvco prepared by the management of the Company have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company and that such estimates
approximate the actual reserves of Chauvco. We have also assumed with your
consent that such information and the financial forecasts, including estimates
of liabilities of Chauvco after giving effect to the transactions contemplated
by the Plan of Arrangement, provided to us and discussed with us with respect to
the Company and Chauvco after giving effect to the transactions contemplated by
the Plan of Arrangement have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the management of the
Company and that such forecasts will be realized in the amounts and at the times
contemplated thereby. Our advisory services and the opinion expressed herein are
provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
the Agreement and such opinion does not constitute a recommendation as to how
any holder of the Company's securities should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Consideration to be paid by the Company pursuant to the Agreement is fair to the
Company.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
------------------------------------
(GOLDMAN, SACHS & CO.)
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<PAGE> 490
ANNEX K
SALOMON BROTHERS FAIRNESS OPINION
<PAGE> 491
SALOMON BROTHERS INC
Seven World Trade Center
New York, New York 10048
Telephone: (212) 783-7000
Salomon Brothers logo
September 3, 1997
Board of Directors
Chauvco Resources Ltd.
2900, 255 - 5th Avenue S.W.
Calgary, Alberta
T2P 3G6
Members of the Board:
We understand that Chauvco Resources Ltd., an Alberta corporation (the
"Company"), proposes to engage in a series of transactions (collectively, the
"Transactions") with Pioneer Natural Resources Company, a Delaware corporation
("Pioneer"), pursuant to which (i) the Company will transfer to Chauvco
Resources International Ltd., a wholly owned subsidiary of the Company ("CRI"),
all of the assets and liabilities relating to the Company's operations outside
of North America and Argentina, as well as certain of the Company's trademarks,
trade names and similar rights, (ii) all of the issued and outstanding shares of
CRI will be distributed to holders of the common shares of the Company ("Company
Common Shares") and options to purchase Company Common Shares ("Company
Options") upon exchange of the Company Common Shares and Company Options (the
"CRI Share Transfer") and (iii) holders of Company Common Shares will also
receive, upon exchange of each Company Common Share, a number of shares of
common stock, $0.1 par value, of Pioneer ("Pioneer Common Stock") equal to the
Exchange Ratio, as hereinafter described (the "Pioneer Stock Consideration"). At
the option of the holders of Company Common Shares, such holders may receive in
lieu of the Pioneer Stock Consideration exchangeable shares of Pioneer Natural
Resources (Canada) Ltd., a British Columbia corporation, all of the common
shares of which are to be indirectly held by Pioneer ("Pioneer Sub"), which are
exchangeable at the option of the holder for the Pioneer Stock Consideration.
Holders of Company Options will also have the right to receive the Pioneer Stock
Consideration upon payment of the applicable option exercise price. The
"Exchange Ratio" means (i) if the average trading price of the Pioneer Common
Stock, determined as provided in the Combination Agreement (the "Pioneer Stock
Price"), is less than US$33.50, 0.493827, (ii) if the Pioneer Stock Price is at
least US$33.50 but less than US$39.01, (A) 0.493827 less (B) the amount obtained
by (1) multiplying (A) 0.042360 and (B) the Pioneer Stock Price less $33.50, and
(2) dividing the result by 5.51, and (iii) if the Pioneer Stock Price is equal
to or greater than $39.01, 0.451467. The Transactions are to be effected in
accordance with a Combination Agreement to be entered into between the Company
and Pioneer (the "Combination Agreement"). Prior to the effective time of the
Arrangement and without regard to the transactions contemplated by the
Arrangement, Chauvco will enter into a transaction causing all of its rights and
assets relating to the Alliance pipeline project to be spun off from Chauvco
into a newly-created public entity (the "Alliance Entity"), through a rights
offering in Canada or by other means (the "Alliance Distribution").
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the Company Common Shares, of
the Pioneer Stock Consideration as consideration for the Company Common Shares
after giving effect to the CRI Share Transfer and the Alliance Distribution.
As you are aware, Salomon Brothers Inc has acted as financial advisor to
the Company in connection with the Transactions and will receive a fee for
services, a substantial portion of which is contingent upon consummation of the
Transactions. Salomon Brothers Inc has previously provided a variety of
investment
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<PAGE> 492
SALOMON BROTHERS INC
SALOMON BROTHERS LOGO
banking services for the predecessor companies of Pioneer, including serving as
an underwriter in equity and debt offerings by Parker & Parsley Petroleum
Company. In addition, in the ordinary course of our business, we actively trade
the equity and debt securities of Pioneer for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) a draft version of the Combination
Agreement, including the exhibits thereto and the disclosures made in connection
therewith; (ii) certain publicly available information concerning the Company,
including the Annual Information Forms of the Company for each of the years in
the five year period ended December 31, 1996 and the quarterly reports of the
Company for each of the quarters ended March 31, 1997 and June 30, 1997; (iii)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of the Company furnished to
us by the Company for purposes of our analysis; (iv) certain publicly available
information concerning the trading of, and the trading market for, the Company
Common Shares; (v) certain publicly available information concerning Pioneer,
including the Annual Reports on Form 10-K of the predecessor companies of
Pioneer for each of the years in the five year period ended December 31, 1996,
the Quarterly Reports on Form 10-Q of the predecessor companies of Pioneer for
the quarters ended March 31, 1997 and June 30, 1997, the Joint Proxy
Statement/Prospectus, dated June 23, 1997, with respect to the merger of the
predecessor companies of Pioneer, and the Current Report on Form 8-K of Pioneer
dated August 7, 1997; (vi) certain other internal information, primarily
financial in nature, including projections and estimates of reserves, concerning
the business and operations of Pioneer furnished to us by Pioneer for purposes
of our analysis; (vii) certain publicly available information concerning the
trading of, and the trading market for, the Pioneer Common Stock and the common
stock of the predecessor companies of Pioneer; (viii) certain publicly available
information with respect to certain other companies that we believe to be
comparable to the Company or Pioneer and the trading markets for certain of such
other companies' securities; and (ix) certain publicly available information
concerning the nature and terms of certain other transactions that we consider
relevant to our inquiry. We have also considered such other information,
financial studies, analyses, investigations and financial, economic and market
criteria that we deemed relevant. We have also met with certain officers and
employees of the Company and Pioneer to discuss the foregoing as well as other
matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted a physical inspection of any of the
properties, assets or facilities of the Company or Pioneer, nor have we made or
obtained or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties, assets or facilities. With
respect to projections, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
managements of the Company and Pioneer as to the respective future financial
performance of the Company and Pioneer and we express no view with respect to
such projections or the assumptions on which they were based. We further have
assumed that each of the Combination Agreement and the other agreements which
are attached as exhibits to the Combination Agreement (including, without
limitation, the Support Agreement to be entered into by Pioneer), when executed
and delivered, will not differ materially from the drafts which we have
reviewed.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of the
Company and Pioneer (and its predecessor companies); (ii) the business prospects
of the Company and Pioneer; (iii) the historical and current market for the
Company Common Shares, the Pioneer Common Stock (and the common stock of its
predecessor companies) and the equity securities of certain other companies that
we
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<PAGE> 493
SALOMON BROTHERS INC
SALOMON BROTHERS LOGO
believe to be comparable to the Company or Pioneer; and (iv) the nature and
terms of certain other transactions that we believe to be relevant. We have also
taken into account our assessment of general economic, market and financial
conditions and our knowledge of the oil and gas industry as well as our
experience in connection with similar transactions and securities valuation
generally. Our opinion necessarily is based upon conditions as they exist and
can be evaluated on the date hereof and we assume no responsibility to update or
revise our opinion based upon circumstances or events occurring after the date
hereof. Our opinion as expressed below does not constitute an opinion or imply
any conclusions as to the likely trading range for the Pioneer Common Stock
following consummation of the Transactions. Our opinion is, in any event,
limited to the fairness, from a financial point of view, of the Pioneer Stock
Consideration as consideration for the Company Common Shares after giving effect
to the CRI Share Transfer and the Alliance Distribution, and does not address
the fairness of any other aspect of the Transactions, including the fairness of
the CRI Share Transfer, the fairness of the Alliance Distribution, the financial
viability of CRI or the Alliance Entity following consummation of the
Transactions, or the Company's underlying business decision to effect the
Transactions. In addition, our opinion does not constitute a recommendation to
any holder of Company Common Shares as to how such holder should vote with
respect to the Transactions.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that the Pioneer Stock Consideration is fair, from a
financial point of view, to the holders of Company Common Shares, as
consideration for the Company Common Shares after giving effect to the CRI Share
Transfer and the Alliance Distribution.
Very truly yours,
/s/ SALOMON BROTHERS INC
SALOMON BROTHERS INC
K-3
<PAGE> 494
ANNEX L
RBC DS FAIRNESS OPINION
<PAGE> 495
September 3, 1997
The Board of Directors
Chauvco Resources Ltd.
2900, 255 - 5 Avenue S.W.
Calgary, Alberta
T2P 3G6
Dear Sirs:
RBC Dominion Securities Inc. ("RBC DS") understands that Chauvco Resources
Ltd. ("Chauvco" or the "Company") and Pioneer Natural Resources Company
("Pioneer") have executed an agreement dated as of September 3, 1997 (the
"Combination Agreement"), which contemplates an arrangement (the "Arrangement")
whereby each outstanding Chauvco common share (the "Common Shares") will be
exchanged for between 0.45 and 0.49 common shares of Pioneer Natural Resources
Company ("Pioneer") or a new class of exchangeable shares (the "Exchangeable
Shares") of Pioneer Natural Resources (Canada) Ltd. (a wholly owned subsidiary
of Pioneer) which are exchangeable on a one-for-one basis into Pioneer common
shares. In addition, the holder of each outstanding Common Share will receive
one common share in Chauvco Resources International Ltd. ("CRI"), a newly formed
Bermuda company which will indirectly own Chauvco's Gabon properties and its
other international interests (other than in North America and Argentina). Prior
to the effective date of the Arrangement and without regard to the transactions
contemplated by the Arrangement, Chauvco will enter into a transaction causing
all of its rights and assets relating to the Alliance pipeline project to be
spun off from Chauvco into a newly created public entity ("Alliance"), through a
rights offering in Canada or by other means. The terms of the Arrangement will
be more fully described in a joint management information circular which RBC DS
understands will be mailed to shareholders of the Company in connection with the
Arrangement.
The board of directors (the "Board") of the Company has retained RBC DS to
provide advice and assistance to the Board in evaluating the Arrangement,
including the preparation and delivery to the Board of its opinion as to the
fairness of the Arrangement from a financial point of view to the shareholders
of the Company (the "Fairness Opinion"). The Fairness Opinion has been prepared
in accordance with the guidelines of the Investment Dealers Association of
Canada.
ENGAGEMENT
The Board initially contacted RBC DS regarding a potential advisory
assignment in February, 1997, and RBC DS was formally engaged by the Board on
February 28, 1997, through an agreement between the Company and RBC DS (the
"Engagement Agreement") dated February 28, 1997. RBC DS was retained to render
financial advisory and investment banking services to the Company in connection
with a possible sale of the Company or an interest in the Company to one or more
parties. The terms of the Engagement Agreement provide that RBC DS is to be paid
a fee for its services, the vast majority of which is contingent upon the
consummation of the Arrangement. The fee is variable based on the consideration
received by Chauvco shareholders. Based on RBC DS's estimate of the value of the
consideration on the date hereof, the fee payable would be approximately $5.2
million. In addition, RBC DS is to be reimbursed for its reasonable out-
of-pocket expenses and to be indemnified by the Company in certain
circumstances. RBC DS consents to the inclusion of the Fairness Opinion in its
entirety and a summary thereof in the Circular and to the filing thereof, as
necessary, by the Company with the securities commissions or similar regulatory
authorities in each province of Canada and in the United States.
RELATIONSHIP WITH INTERESTED PARTIES
Neither RBC DS, nor any of its affiliates is an insider, associate or
affiliate (as those terms are defined in the Securities Act (Alberta) (the
"Act")) of the Company, Pioneer or any of their respective associates or
affiliates. RBC DS has not been engaged to provide any financial advisory
services nor has it participated in any financing involving the Company, Pioneer
or any of their respective associates or affiliates, within the past
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<PAGE> 496
two years, other than the services provided under the Engagement Agreement.
There are no understandings, agreements or commitments between RBC DS and the
Company, Pioneer or any of their respective associates or affiliates with
respect to any future business dealings. RBC DS may, in the future, in the
ordinary course of its business, perform financial advisory or investment
banking services for the Company, Pioneer or any of their respective associates
or affiliates. The Royal Bank of Canada, controlling shareholder of RBC DS,
provides banking services to the Company in the normal course of business.
RBC DS acts as a trader and dealer, both as principal and agent, in major
financial markets and, as such, may have had and may in the future have
positions in the securities of the Company, Pioneer or any of their respective
associates or affiliates and, from time to time, may have executed or may
execute transactions on behalf of such companies or clients for which it
received or may receive compensation. As an investment dealer, RBC DS conducts
research on securities and may, in the ordinary course of its business, provide
research reports and investment advice to its clients on investment matters,
including with respect to the Company, Pioneer or the Arrangement.
CREDENTIALS OF RBC DOMINION SECURITIES
RBC DS is one of Canada's largest investment banking firms, with operations
in all facets of corporate and government finance, mergers and acquisitions,
equity and fixed income sales and trading and investment research. The Fairness
Opinion expressed herein represents the opinion of RBC DS and the form and
content herein have been approved for release by a committee of its directors,
each of whom is experienced in merger, acquisition, divestiture and valuation
matters.
BACKGROUND TO THE OFFER
On May 5, 1997, Chauvco announced its intention to conduct a review of
strategic alternatives, including the consideration of a sale of all or part of
the Company. Salomon Brothers Inc ("Salomon Brothers") and RBC DS were retained
to manage a review of strategic alternatives to maximize shareholder value,
including commencing a dialogue with prospective purchasers. During this
process, Salomon Brothers and RBC DS made contact with a large number of parties
who expressed interest in acquiring the Common Shares or parts of the Company.
The Company made certain information available to selected parties, subject to
confidentiality agreements. Thereafter, the Company and its advisors held
discussions with and invited offers from these interested parties. The offer
from Pioneer was forthcoming as a direct result of this initiative.
SCOPE OF REVIEW
In connection with our Fairness Opinion, we have reviewed and relied upon
or carried out, among other things, the following:
1. the Combination Agreement executed by Chauvco and Pioneer and dated
September 3, 1997;
2. the shareholders' agreements dated September 3, 1997 between Pioneer,
Gendis Inc. and Trimac Corporation, between Pioneer and Guy J.
Turcotte, and between Pioneer, Chauvco, DNR-MESA Holdings L.P., Scott
D. Sheffield and I. Jon Brumley;
3. audited financial statements of the Company for each of the five
years ended December 31, 1996;
4. the unaudited interim reports of the Company for the two quarters
ended June 30, 1997;
5. annual reports of the Company for each of the five years ended
December 31, 1996;
6. the Notice of Annual Meeting of Shareholders and Management
Information Circulars of the Company for each of the two years ended
December 31,1996;
7. annual information forms of the Company for each of the two years
ended December 31, 1996;
8. historical segmented financial statements of the Company by
geographic division for the five years ended December, 31, 1996;
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9. internal management budget of the Company on a consolidated basis and
segmented by geographic division for the year ending December 31,
1997;
10. unaudited projected financial statements for the Company on a
consolidated basis and segmented by geographic division, prepared by
management of the Company, for the years ending December 31, 1997
through December 31, 2001;
11. internal management information, including forecasts and
projections, provided by the Company;
12. discussions with senior management of the Company;
13. discussions with the Company's auditors and legal counsel;
14. the executed merger agreement between Parker and Parsley Petroleum
Company ("Parker and Parsley") and Mesa Inc. ("Mesa"), the
predecessor companies to Pioneer;
15. annual reports and forms 10K of Parker and Parsley and Mesa for the
two years ended December 31, 1996;
16. the unaudited interim reports for Parker and Parsley and Mesa for
the two quarters ended June 30, 1997;
17. audited financial statements of Parker and Parsley and Mesa, for
each of the five years ended December 31, 1996;
18. the prospectus supplement dated August 17,1995 relating to
$150,000,000 of 8 1/4% senior notes due 2007 of Parker and Parsley;
19. the prospectus supplement dated April 5, 1995 relating to
$150,000,000 of 8 7/8% senior notes due 2005 of Parker and Parsley;
20. the registration statement and prospectus dated June 25, 1996
relating to $325,000,000 of 10 5/8% senior subordinated notes due
2006 of Mesa and $264,000,000 of 11 5/8% senior subordinated
discount notes due 2006 of Mesa;
21. the Mesa proxy statement filed on Schedule 14A dated May 24, 1996;
22. the statement of resolution with respect to the Mesa series A and
series B preferred stock;
23. public information relating to the business, operations, financial
performance and stock trading history of the Company, Pioneer, and
other selected public companies considered by us to be relevant;
24. public information with respect to other transactions of a
comparable nature considered by us to be relevant;
25. public information regarding the oil and gas industry;
26. the independent engineering reports of Chauvco from Gilbert Laustsen
Jung Associates Ltd. dated December 31, 1996, January 1, 1997 and
August 1, 1997, (the "GLJ Reports");
27. the independent engineering report of Chauvco provided by Martin
Petroleum & Associates (the "Martin Report") dated January 1, 1997;
28. representations contained in certificates addressed to us, dated as
of the date hereof, from senior officers of the Company as to the
completeness and accuracy of the information upon which the Fairness
Opinion is based; and
29. such other corporate, industry and financial market information,
investigations and analyses as RBC DS considered necessary or
appropriate in the circumstances.
RBC DS has not been provided with any drafts of the joint management
information circular to be mailed to shareholders or any information included
therein, as of the date hereof.
RBC DS has not, to the best of its knowledge, been denied access by the
Company to any information requested by RBC DS.
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PRIOR VALUATIONS
The Company has represented to RBC DS that there have not been any prior
valuations (as defined in OSC Policy 9.1) of the Company or its material assets
or its securities in the past twenty-four month period.
ASSUMPTIONS AND LIMITATIONS
With the Company's approval and as provided for in the Engagement
Agreement, RBC DS has relied upon the completeness, accuracy and fair
presentation of all of the financial and other information, data, advice,
opinions or representations obtained by it from public sources, senior
management of the Company and Pioneer, and their respective consultants and
advisors (collectively, the "Information"). The Fairness Opinion is conditional
upon such completeness, accuracy and fair presentation of such Information.
Subject to the exercise of professional judgment and except as expressly
described herein, we have not attempted to verify independently the
completeness, accuracy or fair presentation of any of the Information.
Senior officers of the Company have represented to RBC DS in a certificate
delivered as of the date hereof, among other things, that (i) the Information
(as defined above) provided orally by, or in the presence of, an officer of the
Company or in writing by the Company or any of its subsidiaries or their
respective agents to RBC DS relating to the Company or any of its subsidiaries
or to the Arrangement, for the purpose of preparing the Fairness Opinion was, at
the date the Information was provided to RBC DS, and is, except as has been
disclosed in writing to RBC DS, complete, true and correct in all material
respects, and did not, and does not, contain any untrue statement of a material
fact in respect of the Company, its subsidiaries or the Arrangement, and did
not, and does not, omit to state a material fact in respect of the Company, its
subsidiaries or the Arrangement necessary to make the Information not misleading
in light of the circumstances under which the Information was made or provided;
and that (ii) since the dates on which the Information was provided to RBC DS,
except as disclosed in writing to RBC DS, or as publicly disclosed by the
Company, there has been no material change, financial or otherwise, in the
financial condition, assets, liabilities (contingent or otherwise), business,
operations or prospects of the Company or any if its subsidiaries and no
material change has occurred in the Information or any part thereof which would
have, or which would reasonably be expected to have, a material effect on the
Fairness Opinion.
In preparing the Fairness Opinion, RBC DS has made a number of assumptions,
one of which is that all of the conditions required to implement the Arrangement
will be met.
The Fairness Opinion is rendered on the basis of securities markets,
economic, financial and general business conditions prevailing as at the date
hereof and the condition and prospects, financial and otherwise, of the Company,
Pioneer and their respective subsidiaries and affiliates, as they were reflected
in the Information and as they have been represented to RBC DS in discussions
with management of the Company and Pioneer respectively. In its analyses and in
preparing the Fairness Opinion, RBC DS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of RBC DS or any party involved in
the Arrangement.
The Fairness Opinion has been provided for the use of the Board and may not
be used by any other person or relied upon by any other person other than the
Board without the express prior written consent of RBC DS. The Fairness Opinion
is given as of the date hereof and RBC DS disclaims any undertaking or
obligation to advise any person of any change in any fact or matter affecting
its Fairness Opinion which may come or be brought to RBC DS' attention after the
date hereof. Without limiting the foregoing, in the event that there is any
material change in any fact or matter affecting the Fairness Opinion after the
date hereof, RBC DS reserves the right to change, modify or withdraw its
Fairness Opinion.
RBC DS believes that its analyses must be considered as a whole and that
selecting portions of the analyses or the factors considered by it, without
considering all factors and analyses together, could create a misleading view of
the process underlying the Fairness Opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Any attempt to do so could lead to undue
emphasis on any particular factor or analysis. The Fairness Opinion is not to be
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construed as a recommendation to any holder of Common Shares as to whether to
vote in favour of the Arrangement.
OVERVIEW OF THE COMPANY
The principal business of Chauvco is the exploration, development and
production of petroleum and natural gas in Western Canada, South America
(Argentina) and West Africa (Gabon). Through acquisitions (Tripet Resources Inc.
in 1987, Ultramar Canada Inc. in 1990 and Tideal Resources Ltd. in 1997) and
successful exploration and development activities, Chauvco has grown to become
an intermediate-sized Canadian oil and gas company.
The following table summarizes Chauvco's daily production and proven
reserves of crude oil, natural gas liquids and natural gas for the periods
indicated. These figures are consistent with those represented during the
strategic alternative review process:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1996 (ACT.) 1997 (EST.) 1998 (EST.)
----------- ------------ ------------
<S> <C> <C> <C>
WESTERN CANADA
Production (boe/d)(1).......................... 19,096 20,956 21,551
Reserves (mmboe)(2)............................ 52.0 n/a n/a
ARGENTINA
Production (boe/d)(1).......................... 8,829 16,107 21,562
Reserves (mmboe)(2)............................ 52.6 n/a n/a
GABON
Production (boe/d)............................. 0 2,534 9,284
Reserves (mmboe)(2)............................ 9.1 n/a n/a
TOTAL
Production (boe/d)(1).......................... 27,924 39,597 52,487
Reserves (mmboe)(2)............................ 113.7 n/a n/a
</TABLE>
- ---------------
(1) natural gas converted to boe at a 10:1, production averaged over calendar
year.
(2) proven reserves only, converted to boe at 10:1, as available as of March 31,
1997.
The following summarizes Chauvco's financial information for the period
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 (ACT.) 1997 (EST.) 1998 (EST.)
------------ ------------ ------------
<S> <C> <C> <C>
WESTERN CANADA
EBITDA ($million)............................... 91.2 93.7 99.0
Cashflow ($million)............................. 61.7 66.7 75.9
ARGENTINA
EBITDA ($million)............................... 39.7 82.6 126.0
Cashflow ($million)............................. 39.0 80.3 105.2
GABON
EBITDA ($million)............................... 0 15.6 56.9
Cashflow ($million)............................. 0 14.3 52.2
TOTAL
EBITDA ($million)............................... 130.7 192.0 281.7
Cashflow ($million)............................. 100.6 161.2 233.1
</TABLE>
FAIRNESS ANALYSIS
APPROACH TO FAIRNESS
RBC DS has assessed the fairness, from a financial point of view, of the
Arrangement to the shareholders of Chauvco based upon a number of factors. These
factors include (i) an analysis of multiples paid in recent
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comparable acquisition transactions in the Canadian oil and gas industry; (ii) a
net asset value analysis which incorporates a discounted cash flow approach;
(iii) a comparison of the value offered to holders of Common Shares under the
Arrangement to recent trading levels for the Common Shares and (iv) a review of
the strategic alternatives review process which included the solicitation of a
wide range of parties concerning their potential interest in making an
acquisition of the Common Shares or the assets of Chauvco or reorganizing or
recapitalizing the Company. RBC DS also reviewed the trading multiples of
publicly traded Canadian oil and gas companies comparable to Chauvco, from the
perspective of whether a public market value analysis might exceed the precedent
transaction values. However, RBC DS concluded that public company multiples
implied values that were below the precedent transaction values. Given the
foregoing and that public company values generally reflect minority discount
values rather than "en bloc" values, RBC DS did not rely on this methodology.
In considering the value of the consideration being offered to holders of
Common Shares under the Arrangement, RBC DS considered the aggregate of; the
value derived from the Exchangeable Shares or Pioneer common shares, determined
through a review of recent trading levels for the Pioneer common shares and the
estimated market price of the Pioneer common shares post the Arrangement; and
the estimated value of the common shares of CRI and opportunity to participate
in Alliance. RBC did not consider the specific circumstances, particularly with
respect to income tax consequences, of any particular Chauvco shareholder.
VALUE OF CONSIDERATION
In assessing the value of the Exchangeable Shares or the Pioneer common
shares being offered, RBC DS relied on the market trading value approach. Since
holders of Common Shares will be receiving a minority interest in Pioneer and
will not be able to effect a sale of 100 percent of Pioneer, we concluded it was
not appropriate to consider methodologies that are based on the assumption of a
change of control transaction.
We believe the market price of the Pioneer common shares is an appropriate
indicator of the value of the Exchangeable Shares being offered to the
shareholders of Chauvco under the Arrangement, in view of the following: (i)
Pioneer is well followed by equity market analysts and trades on a comparable
basis and in a manner consistent with other comparable, publicly traded oil and
gas producers in the United States; (ii) based upon a composite of research
analysts' forecasts of 1998 cash flow for each of Chauvco and Pioneer, the
Arrangement, if completed, will be accretive to Pioneer's forecast cash flow per
share; and (iii) Pioneer common shares have a reasonably high degree of
liquidity as evidenced by the average daily volume of 733,672 shares through the
period since trading in Pioneer stock commenced on August 8, 1997 to September
3, 1997, the last trading day prior to the announcement of the Arrangement.
RBC DS also reviewed the trading history of other exchangeable shares
traded on the Toronto Stock Exchange (the review included the exchangeable
shares of Battle Mountain Gold, Xerox Canada, Delrina, and Veritas DGC Canada
Inc.) versus the shares of their respective US parents. RBC DS concluded that
the exchangeable shares generally track the underlying security on a currency
exchange rate adjusted basis and, as such, did not apply a discount or premium
to the Exchangeable Shares versus the underlying trading value of Pioneer common
shares.
During our review of Pioneer, including meetings with Pioneer management,
we were not made aware of any material information regarding Pioneer which has
not been publicly disclosed which would reasonably be expected to materially
adversely affect the market price of the Pioneer common shares.
Based upon the closing price of Pioneer common shares on the New York Stock
Exchange on September 3, 1997, the last trading day prior to the announcement of
the Arrangement, the value to be received per Common Share under the Arrangement
in the form of Pioneer common shares or Exchangeable Shares would be $26.48. In
addition to the Pioneer common shares or Exchangeable Shares, Chauvco common
shareholders will receive a distribution of common shares in a new Bermuda
company, CRI, on a 1 for 1 basis and an opportunity to participate in Alliance.
In assessing the value of CRI, RBC DS relied on the market trading value
approach. Since holders of Common Shares will be receiving a minority interest
in CRI and will not be able to effect a sale of 100 percent
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<PAGE> 501
of CRI, we concluded it was not appropriate to consider methodologies that are
based on the assumption of a change of control transaction. RBC DS considered
various multiples of selected, publicly-traded companies which were deemed to be
most comparable to CRI. RBC DS particularly relied upon the capitalization of
discretionary cash flow approach which ascribes a common equity value based on a
capitalization of estimated 1997 and forecast 1998 discretionary cash flow. In
addition, RBC DS considered the capitalization of earnings before depreciation,
depletion, amortization, interest and income taxes ("EBITDA") approach, which
ascribes a value to total assets (the "Enterprise Value") before giving effect
to the manner in which they have been financed. The Enterprise Value plus excess
working capital, less actual debt and preferred shares, yields a common equity
value. In considering the value of the CRI common shares, RBC DS reviewed
management's forecasts and determined them to be reasonable. These forecasts for
the Gabon operations for the remainder of 1997 and for 1998 were utilized in our
calculations.
A summary of the companies considered to be comparable to CRI with relevant
multiples is provided below:
CRI COMPARABLE TRADING ANALYSIS
<TABLE>
<CAPTION>
ENTERPRISE
PRICE/ VALUE/PRODUCTION(3)
------------------------- ------------------- TOTAL VALUE/
COMPANY EQUITY VALUE (1) 1997E CF(2) 1998 CF(2) 1997E 1998E PROVEN RESERVES
------- ---------------- ----------- ----------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gulfstream Resources Canada
Limited............................ 696.7 21.3x 6.5x n/a n/a n/a
Vermillion Resources Ltd............. 294.0 8.3x 5.3x 38,260 $23,381 $10.83
Abacan Resource Corporation.......... 469.5 12.6x 4.6x n/a n/a $22.20
Pacalta Resources Ltd................ 1,023.8 19.3x 8.8x 55,393 $27,849 $30.06
Carmanah Resources Ltd............... 209.5 11.8x 3.2x 86,800 $18,590 $31.55
Hurricane Hydrocarbons Ltd........... 392.8 5.9x 4.1x $ 8,786 $ 7,369 $ 3.05
Mean............................. 514.4 13.2x 5.4x 47,310 $19,297 $19.54
Median........................... 431.2 12.2x 5.0x 46,826 $20,985 $22.20
</TABLE>
NOTES:
(1) Based on the closing share price on September 3, 1997.
(2) CF estimates are equity research analysts' forecasted cash flows per share
as compiled by I/B/E/S.
(3) Enterprise Value is equity value plus long-term debt plus preferred share
capital less net working capital.
As a check on the reasonableness of this analysis, RBC DS considered the
offers received for the Company's assets in Gabon and the net present value of
fields in Gabon included in the GLJ Reports.
In assessing the value of the opportunity to participate in Alliance, RBC
DS considered: (i) the net investment by Chauvco in the Alliance project to
date; and (ii) an option value approach based on a review of the underlying
business opportunity. Given the relatively early stage of development of the
project, RBC DS relied primarily on the net investment to date in determining an
approximate value to the holders of Common Shares.
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<PAGE> 502
Summary
RBC DS concluded that the elements of consideration received in the form of
the common shares of CRI and the opportunity to participate in Alliance, implied
that the total consideration per Common Share under the Arrangement would be in
the region of $3.00 to $4.50 per Common Share above the price implied by the
Exchangeable Share.
These values imply the following multiples:
<TABLE>
<CAPTION>
BASED UPON
SEPTEMBER 3,
1997 CLOSING
PRICE FOR
PIONEER
COMMON
SHARES
------------
<S> <C>
Enterprise Value/Estimated 1997 EBITDA...................... 8.8x -- 9.3x
Enterprise Value/Estimated 1998 EBITDA...................... 6.0x -- 6.4x
Price/1997 Estimated Discretionary Cash Flow................ 8.7x -- 9.3x
Price/1998 Estimated Discretionary Cash Flow................ 6.1x -- 6.5x
</TABLE>
PRECEDENT TRANSACTION ANALYSIS
As part of our review of the fairness of the Arrangement from a financial
point of view to the holders of Common Shares, we reviewed precedent
transactions in the Canadian oil and gas industry in order to compare the
multiples paid under such transactions to the multiples implied by the
Arrangement. In the past two years, there have been ten transactions of a
comparable nature to the Arrangement and these are listed below:
<TABLE>
<CAPTION>
PRICE/ ENTERPRISE
EQUITY FORECASTED VALUE/
EQUITY(1) PREMIUM TO LTM 1 YR LTM 1 YR FORECAST
DATE ACQUIROR TARGET VALUE MARKET CF(2) CF(3) EBITDA(2)(4) EBITDA(3)(4)
---- -------- ------ --------- ---------- ----- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aug 97 Gulf Stampeder $ 497 39 % 7.4x 6.4x 8.8x 7.4x
July 97 Crestar Energy Grad & Walker $ 234 43 % 9.0x 6.4x 5.0x n/a
July 97 PanCanadian CS Resources $ 305 40 % 9.3x 9.1x 8.9x 9.2?
Apr. 97 CanOxy Wascana Energy $1,360 25 % 7.9x 5.8x 7.7x 6.2x
Apr. 97 Renata Intensity $ 100 17 % n/a 3.5x n/a 3.8x
Mar. 97 Newport Cimarron $ 272 34 % 9.5x 7.0x 10.1x 7.7x
Mar. 97 Northstar Energy Morrison Petroleum $ 599 16 % 7.0x 5.7x 5.4x 6.3x
Oct. 96 Stampeder Morgan Hydrocarbons $ 322 24 % n/a 5.0x n/a 5.9x
Oct. 96 Poco Petroleums Gardiner Oil & Gas $ 159 33 % 8.2x 5.3x 8.5x n/a
Aug. 96 Cdn. Natural Sceptre Resources $ 490 8 % 5.1x 5.6x 6.0x 6.8x
MEAN n/a 26 % 7.9x 6.0x 7.6x 6.3x
MEDIAN n/a 29 % 8.1x 5.8x 8.1x 6.3x
</TABLE>
NOTES:
(1) Based on the closing share price on September 3, 1997.
(2) LTM is the last twelve months of reported financial information.
(3) CF estimates are equity research analysts' forecasted cash flows per share
as compiled by I/B/E/S. EBITDA forecasts from RBC DS research
(4) Enterprise Value is equity value plus long-term debt plus preferred share
capital less net working capital.
The implied transaction multiples for Chauvco under the Arrangement are
consistent with multiples paid in precedent transactions.
NET ASSET VALUE APPROACH
The net asset value ("NAV") approach ascribes a separate value for each
category of asset and liability utilizing the methodology appropriate in each
case; the sum of total assets less total liabilities yields the NAV. This
approach ascribes value to the proved and probable reserves existing at the time
of valuation on the basis
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of discounted future before-tax and after-tax cash flows, and does not
anticipate the future addition of reserves through an ongoing exploration and
development program. This approach is known as a "depletion" or "blowdown"
evaluation and is a common method of evaluation of petroleum interests (reserves
and related production facilities) in the oil and gas industry. Capital
expenditures required to develop existing reserves are deducted from reserve
values. Provision is made for costs associated with future well abandonment and
reclamation of sites related to such wells and associated plant and facility
equipment. In addition, a value is ascribed for other material assets, including
undeveloped land, utilizing the methodology appropriate in each case.
The consideration offered by Pioneer for the Common Shares represents a
premium to the range of our estimates of NAV.
RECENT TRADING LEVELS OF COMMON SHARES
The closing price of the Common Shares on the Toronto Stock Exchange on
September 3, 1997, the last trading day prior to the announcement of the
Arrangement, was $22.00 per Common Share. The consideration offered under the
Arrangement represents a premium of 34.0% to 40.8%. This range of premiums is
consistent with premiums for recent takeover transactions in the oil and gas
sector in Canada.
SOLICITATION PROCESS
At the direction of the Board, RBC DS and Salomon Brothers undertook a
broad solicitation of interest from a wide range of parties concerning their
willingness to propose some form of transaction with Chauvco. In addition, RBC
DS received expressions of interest from parties who had become aware of the
solicitation process through the public announcement made by the Board (see
"Background"). Upon executing a confidentiality agreement, interested parties
were provided access to the management, technical staff and confidential
information of Chauvco. RBC DS has no reason to believe that any party with an
interest in acquiring Chauvco was not provided the opportunity to ascertain the
value of the Company and to make a proposal. The Arrangement offers the highest
consideration to holders of the Common Shares of the various proposals received
during the solicitation process.
FAIRNESS CONCLUSION
Based upon and subject to the foregoing, RBC DS is of the opinion that, as
of the date hereof, the Arrangement is fair from a financial point of view to
the holders of Common Shares.
Yours very truly,
/s/ RBC DOMINION SECURITIES INC.
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<PAGE> 504
ANNEX M
SECTION 184 OF THE ABCA
<PAGE> 505
SECTION 184 OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
184(1) Subject to sections 185 and 234, a holder of shares of any class of
a corporation may dissent if the corporation resolves to
(a) amend its articles under section 167 and 168 to add, change or remove
any provisions restricting or constraining the issue or transfer of
shares of that class,
(b) amend its articles under section 167 to add, change or remove any
restrictions on the business or businesses that the corporation may
carry on,
(c) amalgamate with another corporation, otherwise than under section 178
or 180.1,
(d) be continued under the laws of another jurisdiction under section 182,
or
(e) sell, lease or exchange all or substantially all its property under
section 183.
(2) A holder of shares of any class of series of shares entitled to vote
under section 170, other than section 170(1)(a), may dissent if the corporation
resolves to amend its articles in a manner described in that section.
(3) In addition to any other right he may have, but subject to subsection
(20), a shareholder entitled to dissent under this section and who complies with
this section is entitled to be paid by the corporation the fair value of the
shares held by him in respect of which he dissents, determined as of the close
of business on the last business day before the day on which the resolution from
which he dissents was adopted.
(4) A dissenting shareholder may only claim under this section with respect
to all the shares of a class held by him or on behalf of any one beneficial
owner and registered in the name of the dissenting shareholder.
(5) A dissenting shareholder shall send to the corporation a written
objection to a resolution referred to in subsection (1) or (2)
(a) at or before any meeting of shareholders at which the resolution is to
be voted on, or
(b) if the corporation did not send notice to the shareholder of the
purpose of the meeting or of his right to dissent, within a reasonable
time after he learns that the resolution was adopted and of his right
to dissent.
(6) An application may be made to the Court by originating notice after the
adoption of a resolution referred to in subsection (1) or (2),
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the corporation under
subsection (5),
to fix the fair value in accordance with subsection (3) of the shares of a
shareholder who dissents under this section.
(7) If an application is made under subsection (6), the corporation shall,
unless the Court otherwise orders, send to each dissenting shareholder a written
offer to pay him an amount considered by the directors to be the fair value of
the shares.
(8) Unless the Court otherwise orders, an offer referred to in subsection
(7) shall be sent to each dissenting shareholder
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of the
originating notice, if a shareholder is the applicant.
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<PAGE> 506
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair value was
determined.
(10) A dissenting shareholder may make an agreement with the corporation
for the purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before the
Court pronounces an order fixing the fair value of the shares.
(11) A dissenting shareholder
(a) is not required to give security for costs in respect of an application
under subsection (6), and
(b) except in special circumstances shall not be required to pay the costs
of the application or appraisal.
(12) In connection with an application under subsection (6), the Court may
give directions for
(a) joining as parties all dissenting shareholders whose shares have not
been purchased by the corporation and for the representation of
dissenting shareholders who, in the opinion of the Court, are in need
of representation,
(b) the trial of issues and interlocutory matters, including pleadings and
examination for discovery,
(c) the payment to the shareholder of all or part of the sum offered by the
corporation for the shares,
(d) the deposit of the share certificates with the Court or with the
corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and the
procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection (3)
of all dissenting shareholders who are parties to the application,
(b) giving judgment in that amount against the corporation and in favour of
each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that amount to a
shareholder.
(14) On
(a) the action approved by the resolution from which the shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting shareholder as to the payment to be made
by the corporation for his shares, whether by the acceptance of the
corporation's offer under subsection (7) or otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of his shares in the
amount agreed to between the corporation and the shareholder or in the amount of
the judgment, as the case may be,
(15) Subsection (14)(a) does not apply to a shareholder referred to in
subsection (5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
M-2
<PAGE> 507
(a) the shareholder may withdraw his dissent, or
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest on
the amount payable to each dissenting shareholder, from the date on which the
shareholder ceases to have any rights as a shareholder by reason of subsection
(14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days
after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the corporation
as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favour of a
dissenting shareholder under subsection (13)(b), if subsection (20) applies, the
dissenting shareholder, by written notice delivered to the corporation within 30
days after receiving the notice under subsection (18), may withdraw his notice
of objection, in which case the corporation is deemed to consent to the
withdrawal and the shareholder is reinstated to his full rights as a
shareholder, failing which he retains a status as a claimant against the
corporation, to be paid as soon as the corporation is lawfully able to do so or,
in a liquidation, to be ranked subordinate to the rights of the creditors of the
corporation but in priority to its shareholders.
(20) A corporation shall not make a payment to a dissenting shareholder
under this section if there are reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
M-3
<PAGE> 508
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Pioneer Natural Resources Company ("Pioneer") on December , 1997. At this
meeting, stockholders will be asked to approve a Combination Agreement and the
transactions contemplated thereby and by a plan of arrangement attached as an
exhibit to the Combination Agreement, whereby a wholly-owned subsidiary of
Pioneer will acquire all of the outstanding common shares of Chauvco Resources
Ltd., an Alberta, Canada, corporation for which certain securities, including
Pioneer Common Stock, will be issued.
The meeting will begin at at
, Dallas, Texas.
After reviewing the enclosed material, please take a moment to sign, date
and mark your votes on the proxy card below and return it in the enclosed
postage-paid envelope. While the Pioneer Board of Directors is recommending a
vote "FOR" the issue outlined on the reverse side and would appreciate your
support, we urge your careful review of the enclosed material so that you can
make your own determination on how to vote. We believe all stockholders should
have a voice in Pioneer's direction, so we ask that you return the proxy card
whether or not you plan to attend the Special Meeting.
If you have any questions or require additional information with respect to
the proposed transaction, please contact Pioneer's information agent, D.F. King
& Co., Inc. at 1-800-769-5414.
I look forward to seeing you on December .
I. Jon Brumley
Chairman of the Board
DETACH HERE
<TABLE>
<S> <C>
PIONEER NATURAL RESOURCES COMPANY
P PROXY SOLICITED BY THE BOARD OF DIRECTORS
R FOR THE SPECIAL MEETING OF STOCKHOLDERS
O TO BE HELD DECEMBER , 1997
X
Y The undersigned stockholder hereby appoints I. Jon Brumley, Scott D. Sheffield and Mark L. Withrow, jointly and
severally, as proxies, with full power of substitution, to vote, as specified on the reverse side, all shares of
Common Stock, par value $0.01 per share ("Common Stock"), of Pioneer Natural Resources Company ("Pioneer") that
the undersigned is entitled to vote at the Special Meeting of Stockholders of Pioneer to be held at
, Dallas, Texas, at on December , 1997, or any adjournment or
postponement thereof (the "Special Meeting"), and directs said proxies to vote as instructed on the matter set
forth on the reverse side AND OTHERWISE AT THEIR DISCRETION. Receipt of a copy of the Notice of said Special
Meeting and the accompanying Joint Management Information Circular and Proxy Statement is hereby acknowledged.
This proxy revokes all prior proxies given by
the undersigned with respect to the Common Stock.
---------------------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
---------------------
</TABLE>
<PAGE> 509
MEETING LOCATION
DALLAS, TEXAS
The Special Meeting will be held at , Dallas, Texas.
FOR FURTHER INFORMATION CALL:
D.F. KING & CO., INC.
INFORMATION AGENT
(800) 769-5414
RETURN SIGNED/VOTED PROXY CARD TO:
PROXY SERVICES
BOSTON EQUISERVE
P.O. BOX 9376
BOSTON, MA 02205-9951
(POSTAGE-PAID ENVELOPE ENCLOSED)
YOUR PROMPT ATTENTION IS APPRECIATED!
DETACH HERE
<TABLE>
<S> <C> <C>
[X] PLEASE MARK -------
VOTES AS IN
THIS EXAMPLE.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL SET FORTH BELOW.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Approve the Combination Agreement dated September 3, 1997 [ ] [ ] [ ]
between Pioneer and Chauvco Resources Ltd., an Alberta
corporation and the transactions contemplated thereby and by
a plan of arrangement attached as an exhibit to the
Combination Agreement (the "Plan of Arrangement"), which
transactions include, without limitation, the issuance of
shares of Common Stock upon consummation of the arrangement
set forth in the Plan of Arrangement (the "Arrangement") and
from time to time thereafter upon the exchange of the
exchangeable shares of Pioneer Natural Resources (Canada)
Ltd., a newly-formed indirectly owned subsidiary of Pioneer,
being issued pursuant to the Arrangement.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN. WHERE NO
VOTE IS SPECIFIED FOR THE PROPOSAL, THIS PROXY WILL BE VOTED "FOR" SUCH PROPOSAL. THE
INDIVIDUALS NAMED HEREIN ARE AUTHORIZED TO VOTE IN THEIR DISCRETION ON ANY OTHER MATTERS
THAT PROPERLY COME BEFORE THE SPECIAL MEETING.
MARK HERE [ ] MARK HERE [ ]
IF YOU PLAN FOR ADDRESS
TO ATTEND CHANGE AND
THE MEETING NOTE AT LEFT
</TABLE>
USE THIS CARD ONLY TO VOTE SHARES OF
PIONEER NATURAL RESOURCES COMPANY
COMMON STOCK.
Please sign EXACTLY as name(s) appears
hereon, and in signing as Attorney,
Administrator, Guardian, Trustee or
Corporate Officer, please add your
title as such.
Signature: Date:
------------------------------ ---------------
Signature: Date:
------------------------------ ---------------
<PAGE> 510
INSTRUMENT OF PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1997
THIS PROXY IS SOLICITED ON BEHALF OF
THE MANAGEMENT OF CHAUVCO RESOURCES LTD.
The undersigned shareholder of Chauvco Resources Ltd.("Chauvco") hereby
appoints Guy J. Turcotte, Chairman & C.E.O. and a Director, or failing him, W.
Glen Russell, President & C.O.O. and a Director, both of the City of Calgary, in
the Province of Alberta, Canada or instead of either of them
- --------------------------------------------------------------- as proxyholder,
with full power of substitution, to attend and act for or on behalf of the
undersigned at the Special Meeting (the "Meeting") of the shareholders of
Chauvco to be held at a.m. (Calgary time) on December , 1997 at Calgary,
Alberta, Canada and at any adjournment thereof and, without limiting the power
granted hereby directs that the shares registered in the name of the undersigned
be voted as follows:
1. FOR [ ] OR AGAINST [ ] the special resolution to approve an arrangement
under section 186 of the Business Corporations Act (Alberta), all as more
particularly described in the Joint Management Information Circular and
Proxy Statement of Chauvco and Pioneer Natural Resources Company dated
, 1997.
2. At the discretion of the said proxyholder, to vote upon any amendment or
variation of the above matters or any other matter which may properly come
before the Meeting or any adjournment thereof.
I hereby remove any proxies previously given.
<TABLE>
<S> <C>
Dated this day of , 1997. The shares represented by this Proxy will be
----------------------------------------------- voted as directed in the spaces provided above.
(Signature of Shareholder) If no direction is given, this Proxy shall vote
- ----------------------------------------------- "FOR", as more particularly described in the
(Name of Shareholder -- Please Print) Joint Management Information Circular and Proxy
Statement of Chauvco and Pioneer Natural
Resources Company dated , 1997.
Each shareholder has the right to appoint a
person, who need not be a shareholder of Chauvco,
to attend and act for him and on his behalf at
the Meeting, other than the persons designated
above. To exercise such rights, the names of the
persons designated by the management to act
should be crossed out and the name of the
shareholder's appointee should be legibly printed
in the blank space provided.
</TABLE>
Notes:
1. If the shareholder is a corporation, its corporate seal must be affixed and
it must be signed by an officer or attorney thereof duly authorized.
2. This Proxy must be dated and the signature of the shareholder should be
exactly the same as the name to which the shares are duly registered.
3. Persons signing as executors, administrators, trustees, etc., should so
indicate. Only holders of shares of record at the close of business on
, 1997 are entitled to vote at the Meeting.
4. This Proxy must be deposited at the office of Corporate Shareholder
Services, Inc., Suite 1485, 550 Sixth Avenue S.W., Calgary, Alberta T2P OS2
not later than the close of business on the day preceding the date of the
Meeting.
