<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 28, 1998
---------------------------
VISTA ENERGY RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 001-14575 75-2766114
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of incorporation) Identification Number)
550 WEST TEXAS AVENUE
SUITE 700 79701
MIDLAND, TEXAS (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (915) 570-5045
NOT APPLICABLE
(former address if changed since last report)
===============================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 28, 1998, Vista Energy Resources, Inc., a Delaware
corporation (the "Company"), acquired Midland Resources, Inc., a Texas
corporation ("Midland"). The acquisition was effected through the merger (the
"Merger") of Midland Merger Co., a Texas corporation and a wholly-owned
subsidiary of the Company ("Merger Sub"), with and into Midland, with Midland as
the surviving corporation. Pursuant to the Merger, each issued and outstanding
share of Midland common stock, par value $.001 per share ("Midland Common
Stock"), was converted into the right to receive one share of the Company's
common stock, par value $.01 per share ("Vista Common Stock"). Furthermore,
certain affiliates of Midland entered into separate exchange agreements with the
Company (collectively, the "Midland Exchange Agreement"). Pursuant to the terms
of the Midland Exchange Agreement, options for Midland Common Stock were
exchanged for a warrant (a "Vista Warrant") that is exercisable for Vista Common
Stock at an initial exercise price of $4.00 per share. In addition holders of
all of the outstanding shares of common stock, par value $.01 per share ("GP
Common Stock"), of Vista Resources I, Inc., the sole general partner of Vista
Resources Partners, L.P. (the "General Partner"), and the holders of all of the
outstanding limited partnership interests ("Partnership Interests") in Vista
Resources Partners, L.P. ("Vista L.P.")entered into separate exchange agreements
with the Company (collectively, the "Vista Exchange Agreement"). Pursuant to the
Vista Exchange Agreement, the GP Common Stock and the Partnership Interests were
exchanged for both Vista Common Stock and a Vista Warrant. In consideration of
the Merger and the Midland Exchange Agreement, Vista issued 4,470,123 shares of
Vista Common Stock to former holders of Midland Common Stock and Vista Warrants
that are exercisable for 3,248,045 shares of Vista Common Stock to former
holders of options for Midland Common Stock. In consideration of the Vista
Exchange Agreement, Vista issued 11,903,506 shares of Vista Common Stock and
Vista Warrants that are exercisable for 8,563,028 shares of Vista Common Stock
to former holders of GP Common Stock and Partnership Interests. At the close of
business on October 29, 1998, Vista Common Stock traded at $3 1/8 per share.
In connection with the Merger and the exchange under the Vista Exchange
Agreement, the outstanding senior bank indebtedness of both Midland
(approximately $9.7 million) and Vista L.P. ($18.7 million) were refinanced and
combined into a single bank facility. The new bank facility is with Union Bank
of California, N.A.
The assets of Midland, included among other things, real property and
equipment. Such real property was used by Midland in connection
with its oil and gas business. The Company intends to continue to use such
assets in the oil and gas business.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The following information is included in this Report beginning as page
F-1.
- Report of Independent Certified Public Accountants
- Report of Independent Auditors
- Consolidated Balance Sheet of Midland Resources, Inc., as of
June 30, 1998 and as of December 31, 1997 and 1996
- Consolidated Statements of Operations of Midland Resources,
Inc., for the six months ended June 30, 1998 and 1997 and for
the years ended December 31, 1997, 1996 and 1995
- Consolidated Statements of Stockholders' Equity of Midland
Resources, Inc., as of June 30, 1998 and as of December 31,
1997, 1996 and 1995
- Consolidated Statements of Cash Flows of Midland Resources,
Inc. for the six months ended June 30, 1998 and 1997 and for
the years ended December 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
2
<PAGE> 3
(B) PRO FORMA FINANCIAL INFORMATION
The following information is included in this Report beginning as page
F-21.
- Unaudited Pro Forma Combined Balance Sheet of Vista Energy
Resources, Inc. as of June 30, 1998
- Unaudited Pro Forma Combined Statements of Operations for Vista
Energy Resources, Inc. for the six months ended June 30, 1998
and for the year ended December 31, 1997
- Note to Unaudited Pro Forma Combined Financial Statements
(C) EXHIBITS
2.1 Agreement and Plan of Merger dated as of May 22, 1998, among
Vista Resources Partners, Inc., Midland Resources, Inc.,
Vista Energy Resources, Inc., and Midland Merger Co. (filed
as Appendix A to the Company's Registration Statement on Form
S-4 (File No. 333-58495) and incorporated herein by
reference).
2.2 Form of Vista Exchange Agreement (filed as Appendix B to the
Company's Registration Statement on Form S-4 (File No.
333-58495) and incorporated herein by reference).
2.3 Form of Midland Exchange Agreement (filed as Appendix C to
the Company's Registration Statement on Form S-4 (File No.
333-58495) and incorporated herein by reference).
*99.1 Press Release of Vista Energy Resources, Inc. dated October
28, 1998.
- ----------------------
*Filed herewith
3
<PAGE> 4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated balance sheets of Midland
Resources, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Midland Resources, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years ended December 31, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
March 13, 1998, except as to
Note N as to which the date is
April 9, 1998
F-1
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Midland Resources, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Midland Resources, Inc. and subsidiary
for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of their
operations and cash flows of Midland Resources, Inc. and subsidiary for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in 1995.
ERNST & YOUNG LLP
Fort Worth, Texas
March 5, 1996
F-2
<PAGE> 6
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
JUNE 30, -------------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................. $ 56,673 $ 150,890 $ 366,677
Accounts receivable:
Oil and gas sales................................. 417,062 670,093 834,269
Related parties................................... -- 60,822 360,479
Sales of properties............................... -- 563,757 --
Property operations and other..................... 271,234 296,052 359,600
Property held for sale............................... -- 200,000 1,241,515
Reimbursable merger costs and other.................. 356,616 57,531 104,180
Deferred tax asset................................... 37,000 37,000 378,000
----------- ----------- -----------
Total current assets......................... 1,138,585 2,036,145 3,644,720
Property and equipment, at cost...................... 29,787,275 29,210,699 27,889,580
Less accumulated depreciation, depletion and
amortization...................................... 16,613,114 15,975,838 14,076,100
----------- ----------- -----------
Property and equipment, net.................. 13,174,161 13,234,861 13,813,480
Deferred tax asset................................... 1,302,684 1,011,193 --
Goodwill, net of amortization of $106,754 in 1997 and
$80,067 in 1996................................... 707,240 720,584 747,271
Contracts and leases, net of amortization of $84,352
in 1997 and $78,411 in 1996....................... 188,422 199,116 414,633
Non-current note receivable.......................... 294,387 302,490 317,759
Other assets......................................... 101,553 116,094 38,783
----------- ----------- -----------
Total assets................................. $16,907,032 $17,620,483 $18,976,646
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................... $ 900,000 $ 583,481 $ 1,680,830
Accounts payable and accrued expenses................ 726,529 981,202 1,194,344
Drilling advances.................................... -- -- 393,254
----------- ----------- -----------
Total current liabilities.................... 1,626,529 1,564,683 3,268,428
Long-term debt......................................... 8,856,319 9,115,370 7,166,421
Deferred tax liability................................. -- -- 47,044
Payable for the purchase of subsidiary and other....... 205,554 221,404 317,493
----------- ----------- -----------
Total liabilities............................ 10,688,402 10,901,457 10,799,386
Stockholders' equity:
Preferred stock, $0.01 par value; 20,000,000 shares
authorized, none issued........................... -- -- --
Common stock, $0.001 par value; 80,000,000 shares
authorized; 4,463,499 and 4,401,031 shares issued
in 1997 and 1996, respectively.................... 4,468 4,463 4,401
Additional paid in capital........................... 8,497,772 8,487,801 7,898,199
Unearned compensation................................ (109,119) (164,516) --
Retained earnings (deficit).......................... (2,174,491) (1,608,722) 274,660
----------- ----------- -----------
Total stockholders' equity................... 6,218,630 6,719,026 8,177,260
----------- ----------- -----------
Total liabilities and stockholders' equity... $16,907,032 $17,620,483 $18,976,646
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 7
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas sales............. $2,182,394 $3,346,815 $ 6,396,249 $6,958,491 $5,147,033
Management income............. -- -- -- 45,000 102,000
Property operations income.... 51,855 51,150 119,012 111,862 81,036
Partnership income............ -- 99,007 72,275 -- --
Other......................... 15,497 8,655 12,951 26,372 48,105
---------- ---------- ----------- ---------- ----------
Total operating
revenue............. 2,249,746 3,505,627 6,600,487 7,141,725 5,378,174
Operating costs and expenses:
Oil and gas production........ 1,416,724 1,449,529 3,088,886 2,981,837 2,509,854
Exploration costs:
Dry holes.................. -- 332,194 796,852 416,892 --
Geological and
geophysical.............. 4,709 28,090 52,682 349,963 198,453
Depreciation, depletion and
amortization............... 678,255 634,233 1,964,658 1,306,287 1,033,905
Abandonment costs............. 39,808 -- 93,760 -- 3,000
General and administrative.... 574,837 817,183 1,451,404 1,295,298 1,049,904
Impairment of properties...... -- 356,000 1,277,342 114,904 1,020,670
---------- ---------- ----------- ---------- ----------
Total operating costs
and expenses........ 2,714,333 3,617,229 8,725,584 6,465,181 5,815,786
---------- ---------- ----------- ---------- ----------
(464,587) (111,602) (2,125,097) 676,544 (437,612)
Other income and (expenses):
Gain (loss) on sale of
property and equipment..... 10,048 376,505 462,571 36,308 (102,984)
Interest income............... 14,038 18,155 32,337 61,997 19,374
Other income.................. -- -- -- -- 19,537
Interest expense.............. (416,759) (410,832) (970,430) (722,447) (611,587)
---------- ---------- ----------- ---------- ----------
Total other income and
expenses............ (392,673) (16,172) (475,522) (624,142) (675,660)
---------- ---------- ----------- ---------- ----------
Income (loss) before income
taxes......................... (857,260) (127,774) (2,600,619) 52,402 (1,113,272)
Income taxes:
Deferred federal income tax
expense (benefit).......... (291,491) (45,291) (717,237) 30,280 (376,241)
---------- ---------- ----------- ---------- ----------
Net income (loss)............... $ (565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031)
========== ========== =========== ========== ==========
Earnings (loss) per share:
Basic......................... $ (0.13) $ (.02) $ (0.42) $ 0.01 $ (0.22)
========== ========== =========== ========== ==========
Diluted....................... $ (0.13) $ (.02) $ (0.42) $ 0.01 $ (0.22)
========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 8
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TREASURY NOTE
------------------ PAID IN EARNINGS STOCK RECEIVABLE UNEARNED
SHARES AMOUNT CAPITAL (DEFICIT) AT COST OFFICER/DIRECTOR COMPENSATION
--------- ------ ---------- ----------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994... 3,374,522 $3,375 $5,404,109 $ 989,569 $(25,465) $ -- $ --
Stock options exercised......... 22,000 22 51,072 -- -- -- --
Warrants exercised.............. 997,009 997 2,399,787 -- -- (453,641) --
Warrants redeemed............... -- -- (63,373) -- -- --
Treasury stock contributed to
ESOP (5,000 shares)........... -- -- 2,577 -- 10,412 -- --
Warrants issued to bank......... -- -- 65,622 -- -- -- --
Net loss........................ -- -- -- (737,031) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balances at December 31, 1995... 4,393,531 4,394 7,859,794 252,538 (15,053) (453,641) --
Stock options exercised......... 7,500 7 17,805 -- -- -- --
Additional proceeds from 1995
warrants exercised............ -- -- 9,191 -- -- -- --
Treasury stock contributed to
ESOP (7,300 shares)........... -- -- 11,409 -- 15,053 -- --
Reduction of note receivable
officer/director.............. -- -- -- -- -- 453,641 --
Net income...................... -- -- -- 22,122 -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balances at December 31, 1996... 4,401,031 4,401 7,898,199 274,660 -- -- --
Stock options exercised......... 36,000 36 109,276 -- -- -- --
Warrants exercised.............. 11,428 11 45,701 -- -- -- --
Stock issued for property....... 15,040 15 52,625 -- -- -- --
Stock-based compensation........ -- -- 382,000 -- -- -- (382,000)
Amortization of unearned
compensation.................. -- -- -- -- -- -- 217,484
Net loss........................ -- -- -- (1,883,382) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balances at December 31, 1997... 4,463,499 4,463 8,487,801 (1,608,722) -- -- (164,516)
Stock options exercised......... 4,200 5 9,971 -- -- -- --
Amortization of stock-based
compensation (unaudited)...... -- -- -- -- -- -- 55,397
Net loss (unaudited)............ -- -- -- (565,769) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balance at June 30, 1998
(unaudited)................... 4,467,699 $4,468 $8,497,772 $(2,174,491) $ -- $ -- $(109,119)
========= ====== ========== =========== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 9
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $(565,769) $ (82,483) $(1,883,382) $ 22,122 $ (737,031)
Depreciation, depletion and
amortization....................... 678,255 634,233 1,964,658 1,306,287 1,033,905
Abandonments and exploratory dry
holes.............................. -- 332,194 890,612 416,892 --
Impairment of properties............. -- 356,000 1,277,342 114,904 1,020,670
(Gain) loss on sale of properties and
equipment.......................... (10,048) (374,654) (462,571) (36,308) 102,984
Noncash stock-based compensation..... 55,398 117,047 217,484 -- --
Deferred income tax expense
(benefit).......................... (291,491) (45,291) (717,237) 30,280 (376,241)
Partnership distributions in excess
of income.......................... -- -- 45,875 -- --
(Increase) decrease in accounts
receivable related to operations... 338,671 111,302 166,902 (265,521) (58,418)
Decrease (increase) in other current
assets............................. (2,753) 20,277 22,610 (8,300) (62,798)
Increase (decrease) in accounts
payable and accrued expenses
related to operations.............. (254,673) 711,451 (213,142) 218,581 182,293
Decrease in note receivable.......... -- -- -- -- 28,456
Other................................ 27,922 20,774 84,310 94,704 20,963
--------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities......................... (24,488) 1,800,850 1,393,461 1,893,641 1,154,783
Cash flows from investing activities:
Additions to oil and gas
properties......................... (620,370) (1,540,045) (2,588,150) (3,714,110) (2,720,590)
Additions to other property and
equipment.......................... (2,145) (17,417) (17,765) (40,554) (159,805)
Investment in limited partnership.... -- (1,566,151) (1,536,130) -- --
Sale and salvage recoveries on oil
and gas properties................. 802,805 1,672,982 1,657,385 32,975 --
Sale of other property and
equipment.......................... -- -- 205,851 1,000 14,120
Reimbursable partnership
expenditures....................... -- 360,479 360,479 (360,479) --
Purchase of marketable securities.... -- -- -- (326,155) --
Sale of marketable securities........ -- -- -- 350,332 --
Purchase of Summit, less cash
acquired........................... (15,850) (104,792) (89,139) (1,217,280) --
Loan origination costs and other..... (309,093) -- (119,219) -- --
--------- ----------- ----------- ----------- -----------
Net cash used in investing
activities......................... (144,653) (1,194,944) (2,126,688) (5,274,271) (2,866,275)
Cash flows from financing activities:
Net proceeds from warrants
exercised.......................... 9,975 31,364 45,712 9,191 1,830,997
Collections on note receivable from
officer/director................... -- -- -- -- 95,000
Warrant redemptions.................. -- -- -- -- (63,373)
Net proceeds from options
exercised.......................... -- 83,563 109,312 29,221 51,094
Borrowings on long-term debt......... 720,000 1,056,250 2,617,250 3,770,000 1,821,000
Principal payments on long-term
debt............................... (662,532) (1,677,035) (1,876,849) (983,067) (1,826,056)
Drilling advances.................... -- (393,254) (393,254) 393,254 --
Other................................ 7,481 6,909 15,269 14,098 (9,515)
--------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities......................... 74,924 (892,203) 517,440 3,232,697 1,899,147
--------- ----------- ----------- ----------- -----------
Increase (decrease) in cash............ (94,217) (286,297) (215,787) (147,933) 187,655
Cash, beginning of year................ 150,890 366,677 366,677 514,610 326,955
--------- ----------- ----------- ----------- -----------
Cash, end of year...................... $ 56,673 $ 80,380 $ 150,890 $ 366,677 $ 514,610
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 10
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Midland Resources, Inc. ("Company"), was organized in 1990 with the issue
of common stock and warrants in exchange for oil and gas partnership interests.
The Company and its wholly owned subsidiaries are headquartered in Houston,
Texas. The Company is involved in the acquisition, exploration, development and
production of oil and gas and owns producing properties and undeveloped acreage
and royalty interests in Texas, Illinois and Colorado. The majority of its
activities are centered in the Permian Basin of West Texas. Midland Resources
Operating Company Inc. ("MRO"), a wholly owned subsidiary, is in the business of
oil and gas property operations. Summit Petroleum Corporation ("Summit") is a
wholly owned subsidiary engaged in oil and gas acquisition, exploration,
development and production. (See Note B.)
Principles of Consolidation
The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company balance
sheet accounts have been eliminated in consolidation. All significant
inter-company transactions have been eliminated from the consolidated statements
of operations and cash flows for the years ended December 31, 1997, 1996 and
1995.
Reclassifications
Certain reclassifications have been made to conform to the 1997
presentation.
Oil and Gas Operations
The Company follows the "successful efforts" method of accounting for oil
and gas properties. All costs associated with the acquisition and development of
proved oil and gas properties are capitalized.
Costs associated with exploratory drilling are capitalized pending
evaluation of drilling results. Costs of exploratory wells which do not find
proved results are expensed. Geological, geophysical and delay rental costs are
expensed as incurred.
Depreciation, depletion and amortization of oil and gas properties is
computed on a property-by-property basis using the units-of-production method
based upon estimated oil and gas reserve quantities.
Oil and gas revenues are recognized under the sales method at the point of
delivery to the purchaser. No significant over or under produced positions
between the Company and its working interest partners exist.
During the fourth quarter of 1995, the Company adopted the provisions of
the Financial Accounting Standards Board's Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"). FAS 121 requires impairment losses to be recognized on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by these assets are less than
the assets' carrying amount. It also requires assets held for sale to be valued
at the lesser of their original carrying amount or fair value. Estimated fair
value of oil and gas properties is based on estimates of future net cash flows,
discounted at appropriate rates, prepared by independent petroleum engineers.
Concurrent with the adoption and decision to market certain oil and gas
properties, the Company recognized a write-down of $1,020,670. In 1996 and 1997,
the Company recognized losses of $114,904 and $1,277,342, respectively, on its
oil and gas properties. In addition, in 1997, the Company recognized abandonment
losses of $93,760 resulting from expired and worthless leasehold acreage.
F-7
<PAGE> 11
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Property and Equipment
All other property and equipment is depreciated on the straight-line method
over lives ranging from 5 to 6 years.
Intangible Assets
Goodwill is amortized on the straight-line method over 30 years. Property
operating contracts are amortized on the straight-line method over the lives of
the respective oil and gas properties which range from 3 to 19 years. The
carrying amounts and amortization lives of goodwill and property operating
contracts are evaluated annually. These costs are combined with net capitalized
oil and gas property costs in testing for impairment.
Accounting for Stock Options
The Company accounts for employee stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, whereby compensation costs are recognized only in situations
where stock compensatory plans award intrinsic value to recipients at the date
of grant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The most
significant estimates affecting the Company's financial statements are the
determination of hydrocarbon reserves, the estimated useful lives of depreciable
and amortizable assets, and the fair value of assets held for sale.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future
tax consequences of differences between the financial statement carrying amounts
of assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates applicable to the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings (Loss) Per Common Share
Effective December 31, 1997, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 for all
periods presented. Basic earnings per share is calculated by dividing net income
by the weighted average number of common shares outstanding during each year.
Dilutive earnings per share is calculated by dividing net income by the weighted
average number of common and dilutive potential common shares. Stock options and
warrants may be potential dilutive common shares and are therefore considered in
the earnings per share calculation, if dilutive. The number of dilutive
potential common shares is determined using the treasury stock method. Shares
used to compute basic and diluted earnings (loss) per share were 4,433,113,
4,395,414 and 3,381,592 in 1997, 1996 and 1995, respectively. Dilutive potential
shares (options and warrants) not included in these computations because either
their effect was antidilutive, or dilution was immaterial, were 2,754,094,
2,726,022 and 2,572,522 in 1997, 1996 and 1995, respectively.
F-8
<PAGE> 12
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Benefits
Prior to 1995, the Company maintained a 401(k) Plan which covered
substantially all full-time employees. In 1995, the Board of Directors
authorized the restatement of the plan as the Midland Resources Operating
Company, Inc. 401(k) Employee's Stock Ownership Plan and Trust and the
contribution of 5,000 shares of treasury stock to the restated plan. An
additional 7,300 shares of treasury stock were contributed in 1996. As of
December 31, 1995 and 1996, all shares had been allocated to participants in the
plan. The Company matches employee contributions up to 3 percent of gross
salary. The expense related to the Company's contributions and plan
administration was $26,517, $50,092, and $25,985 in 1997, 1996 and 1995,
respectively.
Financial Instruments
The carrying amount of cash approximates fair value. Interest rates
associated with substantially all the Company's long-term debt are linked to
current market rates. As a result, management believes that the carrying amount
approximates the fair value of the Company's credit facilities.
Interim Financial Statements
The financial statements as of June 30, 1998 and 1997 and for the six month
periods then ended, included herein, are unaudited. These financial statements
include all adjustments, (consisting only of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair presentation of
the financial statements for these periods. The results of operations for these
three month periods are not necessarily indicative of the results for a full
year.
NOTE B. PURCHASE OF SUBSIDIARY CORPORATION
On September 18, 1996, the Company, through MRI Acquisition Corp. (a wholly
owned subsidiary), acquired 81.5% of the issued and outstanding common stock and
all outstanding stock options of Summit Petroleum Corporation (See Note F.) for
cash of $1,081,188 and cancellation of a note receivable from an
officer/stockholder of both the Company and Summit of $479,648. In December
1996, the Summit stockholders approved a plan of merger whereby Summit became a
wholly owned subsidiary of the Company. Pursuant to this plan, stockholders
possessing the remaining 18.5% interest (443,633 shares), upon tendering their
shares, receive $0.70 per share. During 1997, payments of $89,139 were made for
127,341 shares tendered. The Company's liability for the purchase of these
remaining shares, which is being funded through long-term borrowings under the
Company's revolving credit agreement (See Note C.), is included as a non-
current liability in the accompanying balance sheet. The purchase price ($0.70
per share and $0.6375 per option) was based on the fair value of Summit's net
assets as determined by the Board of Directors of each respective corporation.
The transaction was subject to a fairness opinion provided by a recognized
investment banking firm relative to these values. In addition to the purchase
price, the Company incurred $139,254 in costs directly related to this
acquisition, resulting in a total investment through December 31, 1997, of
$2,010,633. This acquisition is accounted for under the purchase method of
accounting, which provides that the results of operations are combined from the
date of acquisition (September 18, 1996). In December 1996, MRI Acquisition
Corp. was dissolved and Summit became a wholly-owned subsidiary of the Company.
F-9
<PAGE> 13
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the allocation of the cost to the assets
acquired and liabilities assumed in this acquisition:
<TABLE>
<S> <C>
Current assets, including cash of $3,162.................... $ 155,742
Current liabilities......................................... (250,701)
Oil and gas properties...................................... 2,408,259
Other assets................................................ 20,773
Contracts and leases........................................ 200,000
Deferred income tax liability (non-current)................. (279,729)
Long-term debt.............................................. (243,711)
----------
Total............................................. $2,010,633
==========
</TABLE>
The following is a summary of the pro forma results of operations as though
this transaction had occurred on January 1, 1995.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total revenue............................................... $7,749,621 $5,921,767
========== ==========
Net income (loss)........................................... $ (7,396) $ (889,623)
========== ==========
Loss per weighted average common share:
Basic..................................................... $ -- $ (0.26)
========== ==========
Diluted................................................... $ -- $ (0.26)
========== ==========
</TABLE>
NOTE C. LONG-TERM DEBT
The Company's long-term debt consisted of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$30 million revolving credit agreement with Compass Bank,
expiring December 1, 1999................................. $9,651,615 $ --
Credit facility with First Union National Bank
Principal balance......................................... -- 8,500,000
Less discount thereon..................................... -- (25,863)
Note payable to First Union National Bank................... -- 324,711
Other, primarily secured monthly installment notes.......... 47,236 48,403
---------- ----------
9,698,851 8,847,251
Less portion due within one year............................ 583,481 1,680,830
---------- ----------
Long-Term Portion........................................... $9,115,370 $7,166,421
========== ==========
</TABLE>
In December, 1997 the Company entered into a revolving credit agreement
with Compass Bank (Compass) which provides for a credit facility of $30 million
and an initial borrowing base of $10,500,000. Concurrent with the execution of
this agreement, the Company's outstanding debt to First Union National Bank
(FUNB) in the amount of $9,151,615 was paid by an advance under the Compass
agreement. Amounts borrowed under the Compass agreement are collateralized by a
first lien on substantially all of the Company's oil and gas properties.
Interest under this agreement is payable monthly at an annual rate which, at the
Company's option, is equal to either (a) the Compass prime lending rate (8.5% at
December 31, 1997) or (b) the London Interbank Offered Rate, plus 2.5%. In
addition, a commitment fee equal to 1/2% per annum on the unused portion of the
borrowing base is required. The borrowing base is reduced at the rate of
$120,000 per
F-10
<PAGE> 14
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
month beginning February 1, 1998 and is subject to redetermination on each April
1st and October 1st. This agreement also requires that the Company maintain
certain financial ratios and generally restricts the Company's ability to incur
debt, sell assets, materially change the nature of the Company's business
structure or pay dividends.
Future maturities of long term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998..................................................... $ 583,481
1999..................................................... 9,100,918
2000..................................................... 11,083
2001..................................................... 3,369
----------
$9,698,851
==========
</TABLE>
NOTE D. ISSUANCE OF COMMON STOCK AND WARRANTS
In November 1990, the Company issued 2,264,522 shares of common stock, as
discussed in Note A, based on an exchange value of $2.00 per share. For each
share of common stock issued, two warrants were issued entitling the holder to
purchase one share of common stock at $2.50 and one share at $4.00 during the
period from November 1990 to November 2002. On October 6, 1995, the 90 day
common stock market price requirement (as defined in the Warrant Agreement) was
met and the Company called its $2.50 warrants. Holders of record on December 22,
1995 received a redemption payment of $0.05 per warrant for aggregate payments
of $63,373, which was charged to additional paid in capital. 997,009 of the
$2.50 warrants were exercised. As of December 31, 1997, 11,428 of the $4.00
warrants had been exercised.
The warrants are subject to certain antidilution provisions contained in
the warrant agreement, which could cause adjustments to the exercise price and
the number of shares issuable.
The Company has two employee stock option plans which reserve an aggregate
of 700,000 shares of common stock for issuance to officers and other key
employees. As of December 31, 1997 options to acquire 260,000 shares at prices
ranging from $2.375 to $4.00 were outstanding under these plans with scheduled
expiration dates of 1998 through 2002. As of December 31, 1997, 376,500 shares
were available for future grant.
Under the Midland Resources, Inc. 1995 Directors' Stock Option Plan, 20,000
stock options with a five year term were granted to directors in 1995. As of
December 31, 1995, all 20,000 options were outstanding under this plan. In 1996,
an additional 30,000 stock options were granted to directors. Each option
entitles the holder to purchase one share of common stock for the fair market
value of common stock on the date of the grant of the option. As of December 31,
1997, 50,000 options were outstanding under this plan at exercise prices ranging
from $2.75 to $3.75 and 50,000 options were available for future grant. Options
outstanding at December 31, 1997, if not exercised, are scheduled to expire in
1999 through 2001.
In May 1997, the Stockholders ratified the Midland Resources, Inc. 1997
Board of Directors Stock Incentive Plan under which 1,000,000 options were
issued to non-employee directors, 175,000 options were issued to the advisory
director and 60,000 were issued to the corporate secretary, all to acquire
shares at $3.00 per share. These options are vested as certain stipulated
trading prices for the Company's common stock are achieved and, exercisability
is further restricted by time delay provisions which limited the number of
vested shares that may be exercised each year beginning in March 1998. As of
December 31, 1997, 247,000 of these options were vested. Upon a change of
control, as defined, all of these options became exercisable. These options, if
not exercised, expire in March, 2002. Also in February, 1997, the Company issued
a five year warrant to purchase 50,000 shares to a consultant for future
services. These options and warrants are expected to give rise to the
recognition of compensation expenses of up to $616,250 through year 2000. In
1997, stock-based compensation expense of $217,484 was recognized in connection
with these issuances.
F-11
<PAGE> 15
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1995, the Company issued 150,000 warrants to purchase common stock
at $4.00 per share for a term of seven years to FUNB. In exchange the Company's
credit facility loan agreement was amended to reduce the interest rate by 0.75%
and allow 25% of its borrowing base to be used for working capital purposes. The
fair value of the warrants at the date of grant was recorded as debt discount
and additional paid in capital. None of these warrants have been exercised as of
December 31, 1997.
Warrants to purchase an additional 70,000 shares of common stock were
issued in 1994 through 1996 in exchange for investment banking and other
services, with exercise prices ranging from $2.50 to $2.875.
Effective January 1, 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123, which provides for
an alternative method to valuation of the compensation element of stock based
compensation plans. The Company applies APB 25 and related Interpretations in
accounting for employee stock-based compensation. Had compensation costs been
determined based on the fair value at the grant dates for awards consistent with
the method of FASB Statement 123, the Company's net income (loss) and related
per share amounts would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported.................................... $(1,883,382) $ 22,122 $(737,031)
Pro forma...................................... (2,078,360) (245,366) (859,861)
Earnings (loss) per share
As reported:
Basic....................................... $ (0.42) $ 0.01 $ (0.22)
Diluted..................................... (0.42) 0.01 (0.22)
Pro forma:
Basic....................................... $ (0.47) $ (0.06) $ (0.25)
Diluted..................................... (0.47) (0.06) (0.25)
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants issued in 1997, 1996 and 1995:
<TABLE>
<S> <C>
Expected volatility.................................. 61% to 110%
Risk free rate....................................... 6.02% to 6.49%
Expected life of options............................. 3 to 5 years
Expected dividend yield.............................. 0%
</TABLE>
F-12
<PAGE> 16
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and changes therein during the years then ended is
presented below:
<TABLE>
<CAPTION>
EMPLOYEE PLANS DIRECTOR PLANS
-------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Outstanding, January 1, 1995............ -- -- -- --
Granted................................. 115,000 $2.48 20,000 $2.75
Expired................................. -- -- -- --
Exercised............................... (22,000) 2.38 -- --
Outstanding, December 31, 1995.......... 93,000 $2.48 20,000 $2.75
------- ----- --------- -----
Options exercisable at December 31,
1995................................. 93,000 $2.48 20,000 $2.75
======= ===== ========= =====
Weighted average fair value of options
granted during 1995.................. $2.15 $2.04
===== =====
Year ended December 31, 1996:
Outstanding, January 1, 1996............ 93,000 $2.48 20,000 $2.75
Granted................................. 188,000 3.45 30,000 3.75
Expired................................. (22,000) 2.92 -- --
Exercised............................... (7,500) 2.38 -- --
Outstanding, December 31, 1996.......... 251,500 $3.18 50,000 $3.35
------- ----- --------- -----
Options exercisable at December 31,
1996................................. 191,500 $3.01 50,000 $3.35
======= ===== ========= =====
Weighted average fair value of options
granted during 1996.................. $2.70 $3.01
===== =====
Year ended December 31, 1997:
Outstanding, January 1, 1997............ 251,500 $3.18 50,000 $3.35
Granted................................. 123,000 3.33 1,235,000 3.00
Expired................................. (78,500) 3.16 -- --
Exercised............................... (36,000) 3.06 -- --
Outstanding, December 31, 1997.......... 260,000 3.18 1,285,000 3.01
------- ----- --------- -----
Options exercisable at December 31,
1997................................. 181,000 $3.07 50,000 $3.00
======= ===== ========= =====
Weighted average fair value of options
granted during 1997.................. $2.05 $0.25
===== =====
</TABLE>
F-13
<PAGE> 17
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of stock purchase warrants at December 31, 1995,
1996 and 1997, and changes therein during the years then ended is presented
below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICES
---------- ----------------
<S> <C> <C>
Year ended December 31, 1995:
Outstanding, January 1, 1995............................ 4,554,044 $3.24
Issued.................................................. 170,000 3.87
Expired/redeemed........................................ (1,267,513) 2.50
Exercised............................................... (997,009) 2.50
Outstanding, December 31, 1995.......................... 2,459,522 3.97
---------- -----
Warrants exercisable at December 31, 1995............... 2,459,522 $3.97
========== =====
Weighted average fair value of warrants issued during
1995................................................. $0.44
=====
Year ended December 31, 1996:
Outstanding, January 1, 1996............................ 2,459,522 $3.97
Issued.................................................. 25,000 3.25
Expired................................................. -- --
Exercised............................................... -- --
Outstanding, December 31, 1996.......................... 2,484,522 3.97
---------- -----
Warrants exercisable at December 31, 1996............... 2,484,522 $3.97
========== =====
Weighted average fair value of warrants issued during
1996................................................. $0.45
=====
Year ended December 31, 1997:
Outstanding, January 1, 1997............................ 2,484,522 $3.97
Issued.................................................. 50,000 3.00
Expired................................................. -- --
Exercised............................................... (11,428) 4.00
Outstanding, December 31, 1997.......................... 2,523,094 3.89
---------- -----
Warrants exercisable at December 31, 1997............... 2,523,094 $3.89
========== =====
Weighted average fair value of warrants issued during
1997................................................. $0.45
=====
</TABLE>
NOTE E. MAJOR CUSTOMERS
The Company and its subsidiaries operate exclusively within the United
States and their revenues and operating income are derived predominately from
the oil and gas industry. Oil and gas production is sold to various purchasers
and the receivables are generally uncollateralized. The Company has not
experienced significant credit losses on its oil and gas accounts and management
is of the opinion that significant credit risk does not exist. Management is of
the opinion that the loss of any one purchaser would not have an adverse effect
on the ability of the Company to sell its oil and gas production.
In 1997, three purchasers accounted for 18%, 15% and 12%, respectively, of
total oil and gas revenues. In 1996, three purchasers accounted for 18%, 12% and
15%, respectively, of total oil and gas revenues. In 1995, four purchasers
accounted for 18%, 17%, 11% and 11%, respectively, of total oil and gas
revenues.
NOTE F. RELATED PARTIES
Until December 1993, MRO was owned 80% by the Company's then President and
Chairman of the Board of Directors, Mr. Deas H. Warley III and 20% by a former
Vice President and Board Member, Sal J.
F-14
<PAGE> 18
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pagano. Mr. Warley currently owns approximately 16% of the Company's outstanding
common stock and 5% of the related $4.00 warrants.
Effective November 1, 1995, the Company purchased a building and land in
Midland County, Texas, for $78,996 from Mr. Warley and another individual for
use as a district office. Mr. Warley and the other individual each financed 50%
of the purchase price less the down payment of $10,496. The two $34,250 ten year
notes bore interest at 7.5% and were payable in equal monthly installments of
$407 each. The cost to the Company was based on an independent written appraisal
and certain improvements completed before the property was purchased. This
property was sold in 1997 at a gain of $46,500.
In December 1995, Mr. Warley borrowed $582,805 from the Company under an
eighteen month term note bearing 7.5% interest, secured by 287,947 shares of the
Company's common stock. Mr. Warley used these funds to exercise his 233,122
warrants to buy common stock at $2.50 per share. The balance of the note payable
to Mr. Warley discussed above was netted against this note receivable and he
made a cash payment of $95,000 leaving a balance of $453,641 at December 31,
1995. This amount was reflected in the financial statements as a reduction of
stockholders' equity at December 31, 1995. This note was paid in full in
September 1996 by offsetting the balance of $479,648 against the payment to Mr.
Warley for his stock and options in Summit Petroleum Corporation (See Note B.).
During 1995, Summit participated with the Company in the acquisition of
certain oil and gas leases and seismic options in the Sunburst Project, Terry
County, Texas, and the Latigo and Lakota Projects, Hockley County, Texas in
exchange for a commitment from the Company and Summit to expend certain monies
in connection with acquiring an interest in certain oil and gas leases, seismic
options, conducting 3-D geological surveys, interpretation of 3-D seismic data
and the drilling of two or more test wells. Summit acquired its five percent
interest working interest in proportion to its share of the commitment.
Effective September 1, 1995, Summit participated with the Company in the
acquisition of additional working interests in certain Redfish Bay properties in
Nueces County, Texas. Summit acquired its four percent working interest on the
same basis as the Company.
The amounts due from a related party at December 31, 1996, represents
reimbursements due for certain acquisition and exploration costs from a limited
partnership, formed in January, 1997, for which the Company served as general
partner. Amounts due from a related party at December 31, 1997 represents
amounts due from this partnership for property operations and drilling costs.
The limited partnership group was initially comprised of 19 individuals of which
18 were also stockholders of the Company. In addition, two of these individuals
are directors of the Company. During 1997, the Company's interest was assigned
to the Company in the form of oil and gas property interests and, effective
December 31, 1997 the Company withdrew from the partnership.
During 1997, the Company acquired working interests from two directors and
a partnership interest from one of these directors for cash consideration of
$144,879 and 15,040 shares of common stock valued at $52,625.
NOTE G. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation arising in the ordinary course of
business. Management believes the ultimate resolution of these matters will not
have a material effect on the consolidated financial statements (see Note N.).
F-15
<PAGE> 19
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases its executive office space and a field office under
noncancellable operating leases expiring in 2002. Rental expense was $34,560 in
1995, $92,088 in 1996, and $93,988 in 1997. Future minimum rental commitments,
as of December 31, 1997, for these leases are as follows:
<TABLE>
<S> <C>
1998..................................................... $117,216
1999..................................................... 117,216
2000..................................................... 117,216
2001..................................................... 117,216
2002..................................................... 78,144
--------
$547,008
========
</TABLE>
NOTE H. INCOME TAXES
The deferred tax assets and liabilities reflected in the consolidated
balance sheets as December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Tax loss carry-forwards................................... $1,214,957 $1,193,719
Less valuation allowance............................... (146,385) --
Other..................................................... 80,579 9,405
1,149,151 1,203,124
Deferred tax liabilities:
Property and equipment.................................... 33,259 619,975
Property held for sale.................................... -- 108,317
Contracts and leases...................................... 67,699 143,876
---------- ----------
100,958 872,168
---------- ----------
Net deferred tax asset...................................... $1,048,193 $ 330,956
========== ==========
</TABLE>
For income tax purposes, the Company has net losses of approximately
$2,963,000 available for carryforward which, if not utilized, will begin to
expire in 2005. Management has determined that, based on future expectations, it
is more likely than not that the Company's future taxable income will be
sufficient to fully utilize these losses prior to their expiration. In addition,
the Company has losses of approximately $610,000 which, if not utilized, will
begin to expire in 1998. Management has determined that, based on future
expectations, it is more likely than not, that approximately $431,000 of this
amount will not be utilized and, accordingly, has established a valuation
allowance.
A reconciliation of the provision for income taxes to the income taxes
computed using the federal statutory rate for the years 1997, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- ---------
<S> <C> <C> <C>
Amount computed using statutory tax................. $(884,211) $17,817 $(378,513)
Increase (reduction) in taxes resulting from:
Valuation allowance against tax loss
carry-forwards................................. 146,385 -- --
--------- ------- ---------
Nondeductible expenses............................ 10,886 2,642 2,400
All other......................................... 9,703 9,821 (128)
Federal income tax (benefit)........................ $(717,237) $30,280 $(376,241)
</TABLE>
F-16
<PAGE> 20
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996, is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Producing oil and gas properties........................... $27,041,136 $25,809,221
Non-producing oil and gas properties....................... 1,582,364 1,127,605
Transportation equipment................................... 215,749 282,532
Computer equipment and software............................ 244,138 229,155
Office furniture and equipment............................. 96,732 94,299
Land and buildings......................................... 14,000 96,545
Leasehold improvements..................................... 1,347 9,014
Wells in progress.......................................... 15,233 241,209
----------- -----------
$29,210,699 $27,889,580
=========== ===========
</TABLE>
NOTE J. HEDGING ACTIVITIES
Effective March 1, 1995, the Company entered into a one year gas swap
agreement to hedge against a portion of the price risk associated with gas price
declines. This agreement covers approximately 50% of the Company's total
estimated gas production. The Company's price under this agreement is a minimum
of $1.50 per Mcf with a 40% participation in prices over $1.50. This swap
agreement expired in February, 1996, and the Company has not entered into
another contract. Losses under this contract were $21,109 and $25,860 for 1995
and 1996, respectively. Gains or losses relating to the swap agreement are
measured, settled and recognized at the end of each month as part of oil and gas
sales.
NOTE K. OIL AND GAS INFORMATION
Capitalized costs related to the Company's oil and gas producing activities
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Proved producing properties subject to depreciation,
depletion and amortization............................... $27,041,136 $25,809,221
Less accumulated depreciation, depletion and
amortization............................................. 15,634,206 13,769,157
----------- -----------
11,406,930 12,040,064
Wells in progress.......................................... 15,233 241,209
Non-producing properties................................... 1,582,364 1,127,605
----------- -----------
Net capitalized cost....................................... $13,004,527 $13,408,878
=========== ===========
</TABLE>
F-17
<PAGE> 21
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of costs incurred in acquisition, development and exploration of
oil and gas properties is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Incurred directly:
Acquisition costs -- Proven properties......... $ 57,116 $2,391,228 $ 510,832
Acquisition costs -- Unproven properties....... 296,928 922,607 198,124
Development costs.............................. 1,645,774 2,368,448 2,011,634
Exploration costs.............................. 849,534 766,855 198,453
Share of limited partnership expenditures:
Acquisition -- Unproven properties............. $ 539,935 $ -- $ --
Development costs.............................. 932,197 -- --
Exploration costs.............................. 2,050 -- --
</TABLE>
Depreciation, depletion and amortization per equivalent barrel of oil
produced (gas is converted to equivalent barrels at the rate of 6 Mcf per
barrel) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Depreciation, depletion and amortization:
Based on production....................................... $4.95 $2.91 $2.73
</TABLE>
NOTE L. CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................................. $896,760 $625,948 $560,456
Income taxes.............................................. -- -- 30,272
Significant non-cash activities:
Issuance of stock for property............................ 52,625 -- --
Issuance of warrants to bank.............................. -- -- 75,000
Note receivable from sale of building..................... -- -- 344,875
Note payable from purchase of district office, warehouse
and yard............................................... -- -- 68,500
Note receivable from officer/director for exercise of
warrants, net of note payable.......................... -- -- 548,641
Treasury stock contributed to ESOP........................ -- 26,462 12,989
Development costs incurred, unpaid at year end............ -- 110,700 --
Non-cash reduction in note receivable officer/director.... -- 479,648 --
Proceeds from property sales not collected at year end.... 563,757 -- --
</TABLE>
NOTE M. OIL AND GAS RESERVES (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Securities and Exchange Commission and Financial
Accounting Standards Board which require that reserve estimates be prepared
under existing economic and operating conditions, with no provision for price
and cost escalators, except by contractual agreement. These estimates as of
December 31, 1997 are based on evaluations prepared by Williamson Petroleum
Consultants, Inc., Independent Petroleum Engineers. The estimates as of December
31, 1996 and 1995 are based on evaluations prepared by E. Ralph Green and
Associates, Independent Petroleum Engineers.
F-18
<PAGE> 22
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management emphasizes that reserve estimates are inherently imprecise and
are expected to change as new information is available and as economic
conditions in the industry change.
Changes in proved reserve quantities (UNAUDITED):
<TABLE>
<CAPTION>
OIL (Bbls) GAS (Mcf)
---------- ----------
<S> <C> <C>
Proved reserves, December 31, 1994.......................... 2,177,756 17,060,521
Extensions, discoveries and improved recovery............... 298,140 370,722
Revision of previous estimates.............................. 8,285 760,412
Purchase of minerals-in-place............................... 70,080 1,545,859
Production.................................................. (166,652) (1,268,772)
--------- ----------
Proved reserves, December 31, 1995.......................... 2,387,609 18,468,742
Sales of minerals-in-place.................................. (1,521) (16,519)
Extensions, discoveries and improved recovery............... 279,444 223,243
Revision of previous estimates.............................. 171,677 (1,124,321)
Purchase of minerals-in-place............................... 44,528 327,466
Purchase of Summit.......................................... 175,656 1,418,424
Production.................................................. (215,913) (1,002,482)
--------- ----------
Proved reserves, December 31, 1996.......................... 2,841,480 18,294,553
Sales of minerals-in-place.................................. (252,087) (1,826,629)
Extensions, discoveries and improved recovery............... 549,834 349,664
Revision of previous estimates.............................. (291,648) (1,969,860)
Production.................................................. (192,580) (988,109)
--------- ----------
Proved reserves, December 31, 1997.......................... 2,654,999 13,859,619
--------- ----------
Proved developed reserves (UNAUDITED):
December 31, 1995......................................... 1,918,557 14,131,580
December 31, 1996......................................... 2,061,974 13,821,400
December 31, 1997......................................... 1,732,544 9,533,072
</TABLE>
The significant revision of estimated quantities of gas in 1997 is
attributable to lower gas prices in effect at year end, which adversely affects
the projected economic lives of the properties. The average gas price at
December 31, 1996 was $3.72 per Mcf, compared to $2.36 at December 31, 1997. In
1996, the gas revision of estimates was attributable to the results of drilling
which failed to prove the existence of previous reserve estimates in two fields.
Standardized measure of discounted future net cash flows relating to proved
reserves (UNAUDITED):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Future cash inflows.......................... $76,605,194 $139,037,425 $79,172,668
Future production costs...................... 34,210,308 51,857,027 38,818,603
Future development costs..................... 8,039,963 7,231,324 5,691,375
Future income taxes(a)....................... 5,521,700 18,372,157 7,360,573
----------- ------------ -----------
Future net cash flows........................ 28,833,223 61,576,917 27,302,117
Annual discount (10%) for estimated timing of
cash flows................................. 13,251,251 29,984,568 13,001,409
----------- ------------ -----------
Standardized measure of discounted future net
cash flows................................. $15,581,972 $ 31,592,349 $14,300,708
=========== ============ ===========
</TABLE>
F-19
<PAGE> 23
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Future income taxes are computed at current statutory rates on future net
cash flows before income taxes less the income tax bases of the oil and gas
properties, available loss carry-forwards, and statutory depletion
carry-forwards.
Changes in standardized measure of discounted future net cash flows from
proved reserves (UNAUDITED):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Sales of oil and gas produced, net of
production costs........................... $ (2,398,872) $(4,722,529) $(2,386,779)
Net changes in price and production.......... (20,928,554) 19,074,149 1,539,078
Previously estimated development costs
incurred................................... -- 35,190 120,474
Revisions of estimated future development
costs...................................... (202,755) (84,478) 124,763
Revision of quantity estimates............... (2,752,686) 167,303 722,631
Purchases of minerals-in-place............... -- 840,715 1,070,857
Acquisition of Summit........................ -- 2,875,995 --
Sales of minerals-in-place................... (2,336,161) (31,888) --
Extensions and discoveries................... 2,520,441 1,857,974 2,114,257
Net change in income taxes................... 6,042,379 (4,838,537) (514,350)
Accretion of discount........................ 3,981,784 1,768,766 1,541,954
Changes in timing of estimated cash flows and
other...................................... 64,047 348,981 (2,579,120)
------------ ----------- -----------
Changes in standardized measure.............. (16,010,377) 17,291,641 1,753,765
Standardized measure, beginning of year...... 31,592,349 14,300,708 12,546,943
------------ ----------- -----------
Standardized measure, end of year............ $ 15,581,972 $31,592,349 $14,300,708
============ =========== ===========
</TABLE>
NOTE N. SUBSEQUENT EVENT (SECOND PARAGRAPH IS UNAUDITED)
On April 9, 1998, The Board of Directors approved a plan to combine with
Vista Resources Partners, L.P., a Midland, Texas based entity engaged in oil and
gas exploration and production. Consummation of any transaction pursuant to
these negotiations depends upon the satisfaction or waiver of a number of
conditions, including, without limitation, stockholder approval, execution of a
definitive agreement and receipt of a fairness opinion.
The Company has been involved in pending litigation, the nature of which is
a claim for damages arising from the Company's actions as operator of certain
properties in which the plaintiff has an interest, and removal of the Company as
operator of the properties. The plaintiff had not specified a damage amount
until subsequent to April 1998, at which time damages of $230,000 were claimed.
The Company has filed a counterclaim against the plaintiff. Management believes
the ultimate resolution of this matter will not have a material adverse effect
on the Company.
F-20
<PAGE> 24
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
VISTA ENERGY RESOURCES, INC.
Vista Resources Partners, L.P. (the "Vista Partnership") entered into a
merger agreement (the "Merger Agreement") with Midland Resources, Inc.
("Midland") to become a subsidiary of Vista Energy Resources, Inc. ("Vista").
The Merger required Midland Merger Co. ("Merger Sub") to be merged into
Midland, resulting in Midland becoming a subsidiary of Vista (the "Merger").
The Merger was consummated on October 28, 1998. As contemplated by the Merger
Agreement, (i) each issued and outstanding share of common stock, par value
$.001 per share, of Midland ("Midland Common Stock") has been converted into
the right to receive one share of common stock, par value $.01 per share, of
Vista ("Vista Common Stock") (the "Midland Exchange"), and (ii) each of the
limited partners of the Vista Partnership and each of the stockholders of Vista
Partnership (the "General Partner") entered into separate exchange agreements
pursuant to which each such holder's partnership interest or shares of common
stock, par value $.01 per share, of the General Partner ("GP Common Stock") has
been exchanged for shares of Vista Common Stock (the "Vista Exchange"). As a
result of the Merger and the Vista Exchange, Vista, a new publicly held oil and
gas exploration and development company was created.
As of the date of the Merger, Vista had no material assets or liabilities,
other than its rights and obligations under the Merger Agreement, and has not
generated any material revenues or expenses.
The unaudited pro forma combined balance sheet and combined statements of
operations have been prepared to give effect to certain transactions as
described below.
The unaudited pro forma combined balance sheet of Vista as of June 30,
1998, has been prepared to give effect to the Merger, the Midland Exchange
and the Vista Exchange as if such transactions has occurred on June 30,
1998. In accordance with the provisions of APB No. 16, "Business
Combinations," the Merger and the Midland Exchange have been accounted for
as a purchase of Midland by the Vista Partnership.
The unaudited pro forma combined statements of operations for Vista for the
six months ended June 30, 1998, and for the year ended December 31, 1997,
have been prepared to give effect to the Merger, Midland Exchange and the
Vista Exchange and certain events described below for the Vista Partnership
and Midland as if the Merger, the Midland Exchange and the Vista Exchange
and such events has occurred on January 1, 1997.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1997, has been prepared to give effect to (i) the acquisition
of certain oil and gas properties in May and June 1997 by the Vista
Partnership (the "1997 Assets Acquired") and (ii) the sale of certain oil
and gas properties by Midland (the "1997 Assets Sold").
The unaudited pro forma combined financial statements included herein are
not necessarily indicative of the results that might have occurred had the
transactions taken place at the beginning of the period specified and are not
intended to be a projection of future results. In addition, future results may
vary significantly from the results reflected in the accompanying unaudited pro
forma combined financial statements because of normal production declines,
changes in product prices, future acquisitions and divestitures, future
development and exploration activities, and other factors.
The following unaudited pro forma combined financial statements should be
read in conjunction with the Consolidated Financial Statements (and the related
notes) of the Vista Partnership and Midland for the year ended December 31,
1997, and the Vista Partnership's and Midland's interim information for the six
months ended June 30, 1998 that are included in Vista's Registration Statement
on Form S-4 (File No. 333-58495), as amended.
F-21
<PAGE> 25
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
THE VISTA PRO FORMA
PARTNERSHIP MIDLAND ADJUSTMENTS PRO FORMA
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............... $ 67,275 $ 56,673 $ -- $ 123,948
Accounts receivable..................... 1,271,832 1,044,912 (300,000)(c) 2,016,744
Deferred tax asset...................... -- 37,000 (37,000)(b) --
Other................................... 44,321 -- -- 44,321
----------- ------------ ----------- -----------
1,383,428 1,138,585 (337,000) 2,185,013
----------- ------------ ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, successful
efforts accounting.................... 29,136,894 29,230,103 7,662,372(a) 66,029,369
Other................................... 411,883 557,172 (382,393)(a) 586,662
----------- ------------ ----------- -----------
29,548,777 29,787,275 7,279,979 66,616,031
Less accumulated depreciation, depletion
and amortization...................... (4,314,493) (16,613,114) 16,613,114(a) (4,314,493)
----------- ------------ ----------- -----------
Property and equipment, net...... 25,234,284 13,174,161 23,893,093 62,301,538
----------- ------------ ----------- -----------
OTHER ASSETS:
Deferred tax asset...................... -- 1,302,684 (1,302,684)(b) --
Goodwill, net........................... -- 707,240 (707,240)(a) --
Contracts and leases, net............... -- 188,422 (188,422)(a) --
Note receivable......................... -- 294,387 -- 294,387
Other................................... 372,081 101,553 (101,553)(a) 372,081
----------- ------------ ----------- -----------
$26,989,793 $ 16,907,032 $21,256,194 $65,153,019
=========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses... $ 1,224,651 $ 726,529 $ 740,000(c) $ 2,691,180
Current maturities of long-term debt.... -- 900,000 (900,000)(d) --
----------- ------------ ----------- -----------
1,224,651 1,626,529 (160,000) 2,691,180
----------- ------------ ----------- -----------
LONG-TERM DEBT............................ 18,400,000 8,856,319 900,000(d) 28,156,319
DEFERRED TAX LIABILITY.................... -- -- 7,093,779(b) 7,843,377
749,598(e)
OTHER..................................... -- 205,554 960,000(c) 1,165,554
STOCKHOLDER'S EQUITY:
Common stock............................ -- 4,468 157,994(a) 162,462
Additional paid-in capital.............. -- 8,497,772 17,385,953(a) 25,134,127
(749,598)(e) --
Unearned compensation................... -- (109,119) 109,119(a) --
Retained earnings (deficit)............. -- (2,174,491) 2,174,491(a) --
Owner's equity.......................... 7,365,142 -- (7,365,142)(a) --
----------- ------------ ----------- -----------
7,365,142 6,218,630 11,712,817 25,296,589
----------- ------------ ----------- -----------
$26,989,793 $ 16,907,032 $21,256,194 $65,153,019
=========== ============ =========== ===========
BOOK VALUE PER SHARE...................... $ 1.56
===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-22
<PAGE> 26
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
THE VISTA PARTNERSHIP MIDLAND ADJUSTMENTS PRO FORMA
--------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales................ $4,057,279 $2,182,394 $ -- $ 6,239,673
---------- ---------- --------- -----------
Total revenues........... 4,057,279 2,182,394 -- 6,239,673
---------- ---------- --------- -----------
COSTS AND EXPENSES:
Lease operating.................. 1,939,530 1,416,724 (233,349)(g) 3,122,905(f)
Exploration costs................ -- 4,709 4,709
Depreciation, depletion and
amortization.................. 962,026 678,255 500,613(h) 2,140,894
General and administrative,
net........................... 620,665 522,982 233,349(g) 1,376,996(f)
Amortization of unit option
awards........................ 192,177 -- 192,177
Impairment of oil and gas
properties.................... -- 39,808 (39,808)(i) --
---------- ---------- --------- -----------
Total costs and
expenses............... 3,714,398 2,662,478 460,805 6,837,681
---------- ---------- --------- -----------
Total operating income
(loss)................. 342,881 (480,084) (460,805) (598,008)
---------- ---------- --------- -----------
OTHER:
Loss on sale of property......... (192,898) -- -- (192,898)
Interest and other income........ 40,291 39,583 -- 79,874
Interest expense................. (713,961) (416,759) 57,211(j) (1,073,509)
---------- ---------- --------- -----------
Total other.............. (866,568) (377,176) 57,211 (1,186,533)
---------- ---------- --------- -----------
NET INCOME (LOSS) BEFORE TAXES..... (523,687) (857,260) (403,594) (1,784,541)
Benefit (provision) for taxes.... 183,290 291,491 149,808(e) 624,589
---------- ---------- --------- -----------
NET INCOME (LOSS).................. $ (340,397) $ (565,769) $(253,786) $(1,159,951)
========== ========== ========= ===========
BASIC NET LOSS PER SHARE........... $ (0.07)
===========
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 16,246,178
===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-23
<PAGE> 27
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
THE VISTA 1997 ASSETS 1997 ASSETS PRO FORMA
PARTNERSHIP MIDLAND ACQUIRED(l) SOLD(m) ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........... $8,874,961 $ 6,396,249 $1,390,778 $(193,041) $ -- $16,468,947
---------- ----------- ---------- --------- ----------- -----------
Total revenues....... 8,874,961 6,396,249 1,390,778 (193,041) -- 16,468,947
---------- ----------- ---------- --------- ----------- -----------
COSTS AND EXPENSES:
Lease operating............. 3,688,695 3,088,886 521,382 (117,369) (553,554)(g) 6,628,040(f)
Exploration costs........... 97,211 849,534 -- -- 946,745
Depreciation, depletion and
amortization.............. 2,169,098 1,964,658 162,856 (34,016) 592,835(h) 4,855,431
General and administrative,
net....................... 987,020 1,332,392 -- (30,718) 553,554(g) 2,842,248(f)
Amortization of unit option
awards.................... 315,518 -- -- -- -- 315,518
Impairment of oil and gas
properties................ -- 1,371,102 -- -- (1,371,102)(i) --
---------- ----------- ---------- --------- ----------- -----------
Total costs and
expenses........... 7,257,542 8,606,572 684,238 (182,103) (778,267) 15,587,982
---------- ----------- ---------- --------- ----------- -----------
Total operating
income (loss)...... 1,617,419 (2,210,323) 706,540 (10,938) 778,267 880,965
---------- ----------- ---------- --------- ----------- -----------
OTHER:
Gain on sale of property.... (87,678) 462,571 -- -- (462,571)(k) (87,678)
Interest and other income... 115,949 117,563 -- -- -- 233,512
Interest expense............ (1,048,009) (970,430) -- -- 314,405(j) (1,704,034)
---------- ----------- ---------- --------- ----------- -----------
Total other.......... (1,019,738) (390,296) -- -- (148,166) (1,558,200)
---------- ----------- ---------- --------- ----------- -----------
NET INCOME (LOSS) BEFORE
TAXES....................... 597,681 (2,600,619) 706,540 (10,938) 630,101 (677,235)
---------- ----------- ---------- --------- ----------- -----------
Benefit (provision) for
taxes..................... (211,720) 717,237 -- -- (268,485)(e) 237,032
---------- ----------- ---------- --------- ----------- -----------
NET INCOME (LOSS)............. $ 385,961 $(1,883,382) $ 706,540 $ (10,938) $ 361,616 $ (440,203)
========== =========== ========== ========= =========== ===========
BASIC NET INCOME (LOSS) PER
SHARE....................... $ (0.03)
===========
WEIGHTED AVERAGE SHARES
OUTSTANDING................. 16,246,178
===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-24
<PAGE> 28
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998, AND DECEMBER 31, 1997
1. BASIS OF PRESENTATION:
The Vista Partnership has entered into the Merger Agreement with Midland
that provides for Midland to become a subsidiary of Vista, currently a newly
created subsidiary of the Vista Partnership. The Merger will require Merger Sub
to be merged into Midland, resulting in Midland becoming a subsidiary of Vista.
As contemplated by the Merger Agreement, each of the limited partners of the
Vista Partnership and each of the stockholders of the General Partner have
entered into separate exchange agreements pursuant to which each such holder's
Partnership Interests and shares of GP Common Stock will be exchanged for shares
of Vista Common Stock contemporaneously with the Merger. As a result of the
Merger and the Vista Exchange, Vista, a new publicly held oil and gas
exploration and development company will be created.
The unaudited pro forma combined balance sheet of Vista as of June 30,
1998, has been prepared to give effect to the Merger, the Midland Exchange and
the Vista Exchange as if they had occurred on June 30, 1998. In accordance with
the provisions of APB No. 16, "Business Combinations," the Merger and the
Midland Exchange have been accounted for as a purchase of Midland by the Vista
Partnership.
The unaudited pro forma combined statements of operations of Vista for the
six months ended June 30, 1998, and for the year ended December 31, 1997, have
been presented to give effect to the Merger, the Midland Exchange and the Vista
Exchange and certain events described below for the Vista Partnership and
Midland as if the Merger, the Midland Exchange and the Vista Exchange and such
events had occurred on January 1, 1997.
The following is a description of the individual columns included in these
unaudited pro forma combined financial statements:
THE VISTA PARTNERSHIP -- Represents the consolidated balance sheet of
the Vista Partnership as of June 30, 1998, and the consolidated statements
of operations of the Vista Partnership for the six months ended June 30,
1998, and for the year ended December 31, 1997.
MIDLAND -- Represents the consolidated balance sheet of Midland as of
June 30, 1998, and the consolidated statements of operations of Midland for
the six months ended June 30, 1998, and for the year ended December 31,
1997.
1997 ASSETS ACQUIRED -- Reflects the results of operations for the
year ended December 31, 1997, from certain oil and gas properties prior to
their acquisition in 1997. In May 1997, the Partnership acquired interests
in certain oil and gas properties from Coastal Oil and Gas Corporation for
a net purchase price of $1.1 million. Also, in July 1997, the Vista
Partnership acquired interests in certain oil and gas properties from E.G.
Operating for a net purchase price of $6.1 million. Prior to their
acquisition in 1997, the oil and gas properties so acquired produced 63,864
Bbls of oil and 256,440 Mcf of gas. Average prices of $16.15 per Bbl of oil
and $1.91 per Mcf of gas were received from such production and production
costs per BOE of $3.23 were incurred.
1997 ASSETS SOLD -- Reflects the results of operations for the year
ended December 31, 1997, from certain oil and gas properties prior to their
sale in 1997. During the year ended December 31, 1997, Midland sold certain
nonstrategic oil and gas properties for aggregate proceeds of approximately
$563,000. Prior to their sale in 1997, these oil and gas properties
produced 3,326 Bbls of oil and 56,263 Mcf of gas. Midland received an
average price of $17.87 per Bbl of oil and $2.37 per Mcf of gas from such
production and incurred production costs per BOE of $5.79 and depletion
expense per BOE of $2.27 related to these properties.
F-25
<PAGE> 29
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF MIDLAND:
The aggregate Vista Common Stock, Midland and Vista warrants, Midland stock
options and Midland common stock warrants purchase consideration is computed in
accordance with the exchange ratios agreed to in the Merger Agreement, the
Midland Exchange Agreement and the Vista Exchange Agreement as follows:
<TABLE>
<CAPTION>
MIDLAND
COMMON
STOCK
-----------
<S> <C>
Midland shares outstanding.................................. 4,467,699
Exchange ratio to Vista common shares....................... 1.00
-----------
Vista shares................................................ 4,467,699
Value of Vista common stock(i).............................. $ 3.46
-----------
Vista common stock consideration............................ $15,458,239
===========
</TABLE>
<TABLE>
<CAPTION>
MIDLAND
AND VISTA
WARRANTS
-----------
<S> <C>
Midland warrants outstanding................................ 3,248,469
Exchange ratio to Vista warrants............................ 1.00
-----------
Vista warrants.............................................. 3,248,469
Value of Vista warrants(ii)................................. $ 0.76
-----------
Vista warrants consideration................................ $ 2,468,836
===========
</TABLE>
<TABLE>
<CAPTION>
MIDLAND
STOCK
OPTIONS
-----------
<S> <C>
Midland stock options outstanding........................... 268,000
Exchange ratio to employee stock options.................... 1.00
-----------
Employee stock options...................................... 268,000
Value of employee stock options(iii)........................ $ 2.29
-----------
Employee stock option consideration......................... $ 613,720
===========
</TABLE>
<TABLE>
<CAPTION>
MIDLAND
COMMON
STOCK
WARRANTS
-----------
<S> <C>
Midland common stock warrants outstanding................... 255,000
Exchange ratio to Vista common stock warrants............... 1.00
-----------
Vista common stock warrants................................. 255,000
Value of Vista common stock warrants(iv).................... $ 0.55
-----------
Vista common stock warrant consideration.................... $ 140,250
===========
Vista common stock consideration............................ $15,458,239
Vista warrant consideration................................. 2,468,836
Employee stock option consideration......................... 613,720
Vista common stock warrant consideration.................... 140,250
-----------
Aggregate purchase consideration............................ $18,681,045
===========
</TABLE>
F-26
<PAGE> 30
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(i) Vista Common Stock is valued at $3.46 per share which represents Midland's
seven-day average common stock trading price surrounding the announcement
of the Merger on May 26, 1998.
(ii) Vista warrants are valued at $0.76 per warrant which represents Midland's
seven-day average stock purchase warrant trading price surrounding the
announcement of the Merger on May 26, 1998.
(iii)Employee Stock Options are valued at $2.29 per option which represents the
fair value of outstanding Stock Options using the Black-Scholes
option-pricing model as of the announcement of the Merger on May 26, 1998,
using the following weighted-average assumptions:
<TABLE>
<S> <C>
Expected Volatility......................................... 78% to 99%
Risk Free Rate.............................................. 5.50% to 5.58%
Expected Life............................................... 3 to 5 years
Expected Dividend Yield..................................... 0%
</TABLE>
(iv) Vista common stock warrants are valued at $0.55 per warrant which
represents the average difference of the in-the-money warrant strike prices
from the value of the Vista Common Stock as defined in (a).
The following table represents the preliminary allocation of the total
purchase price of Midland to the acquired assets and liabilities. The allocation
represents the fair values assigned to each of the significant assets acquired
and liabilities assumed. Any future adjustments to the allocation of the
purchase price are not anticipated to be material to the unaudited pro forma
combined financial statements.
<TABLE>
<S> <C>
Net working capital......................................... $ 375,056
Oil and gas properties...................................... 36,892,475
Other property and equipment................................ 174,779
Note receivable............................................. 294,387
Deferred tax liability...................................... (7,093,779)
Long-term debt.............................................. (9,756,319)
Other non-current liabilities............................... (205,554)
Cash consideration for non-recurring merger expenses........ (2,000,000)
-----------
Aggregate purchase consideration.................. $18,681,045
===========
</TABLE>
In accordance with the exchange ratios agreed to in the Merger Agreement,
the former holders of Partnership Interests in the Vista Partnership and shares
of GP Common Stock will receive approximately 11,767,406 shares of Vista Common
Stock and the Midland Stockholders will receive approximately 4,463,499 shares
of Vista Common Stock.
3. PRO FORMA ENTRIES:
(a) To adjust Midland's historical balances to reflect the fair market
value of the assets acquired, liabilities assumed, and the new capital structure
using the purchase method of accounting based on the aggregate purchase
consideration as discussed in Note 2. All net working capital balances were
estimated to approximate fair market value at the time of acquisition. The
historical goodwill, contracts and leases, and other assets balances were
eliminated as it was determined that these items did not provide any continuing
value to Vista. Unearned compensation was eliminated as it related to the
unamortized portion of Midland's stock-related compensation expense that is not
applicable to Vista.
(b) To record deferred taxes related to the differences between the
historical tax basis of assets acquired and liabilities assumed and the fair
market value allocated to the assets acquired and liabilities assumed based on
the aggregate purchase consideration as discussed in Note 2.
F-27
<PAGE> 31
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) To record cash consideration for non-recurring merger expenses related
to the Warley Settlement Agreement as described on page 36 and legal,
accounting, registration, and other costs directly related to the Midland
acquisition.
(d) To record all assumed debt as long-term under Vista's Amended and
Restated Credit Agreement, dated August 15, 1997.
(e) To record the deferred tax liability and related provision for income
taxes to reflect the change in Vista's tax status from a partnership to a
corporation.
(f) The accompanying unaudited pro forma financial statements have been
prepared pursuant to regulations prescribed by the Securities and Exchange
Commission. The unaudited pro forma statements of operations do not consider the
effects of the cost reduction plans of management to be implemented after
closing. Management expects to reduce lease operating expenses by approximately
$210,000 on an annual basis for efficiencies to be realized through economies of
scale in common operating locations and reductions of certain field personnel.
In addition, management expects to reduce general and administrative expenses by
approximately $1,475,000 on an annual basis from the elimination of redundant
personnel, lease space and other corporate services. In accordance with
Securities and Exchange Commission regulation, none of these anticipated cost
reductions have been reflected in the accompanying pro forma statements of
operations.
(g) To reclassify certain COPAS overhead charges to conform with the
financial statement presentation of Vista.
(h) To adjust depreciation, depletion and amortization expense for the
additional basis allocated to the oil and gas properties acquired and accounted
for using the successful efforts methods of accounting.
(i) To adjust impairment of oil and gas properties to reflect the
restatement of the Midland properties in purchase accounting as if the Merger
had occurred on January 1, 1997. Midland's historical impairment charges were
required under SFAS No. 121 which requires a review for impairment on a property
by property basis. Although the fair value of Midland's oil and gas properties
may have exceeded its cost in total, Midland recorded an impairment because of
the property by property nature of the impairment test required by SFAS No. 121.
In accordance with APB No. 16, the purchase consideration in the Merger has been
allocated to the assets and liabilities acquired based on estimated fair values
as detailed in Note 2. This allocation results in approximately $36.9 million
recorded to oil and gas properties on a pro forma basis after the fair value of
other assets and liabilities acquired was determined. The purchase price
attributed to oil and gas properties was allocated to groups of properties based
on relative fair values. Based on estimated future cash flow, management does
not believe any impairment charge under SFAS No. 121 is required on a pro forma
basis for the Midland properties. Vista could be required to recognize an
impairment charge in the future depending on future expected prices and costs
and production estimates. Due to the significance of the write-up of Midland's
oil and gas properties, such an impairment charge could be significant, if
required.
(j) To adjust interest expense to be reflective of the weighted average
interest rate received under Vista's Amended and Restated Credit Agreement,
dated August 15, 1997. Midland's weighted average indebtedness for the six
months ended June 30, 1998 and the year ended December 31, 1997 was $9.5 million
and $8.6 million, respectively. The applicable interest rate under Vista's
Amended and Restated Credit Agreement, dated August 15, 1997, for both periods
was 7.6%.
(k) To remove gain on 1997 Assets sold as described in footnote (m).
(l) To record revenue and direct operating expenses for the 1997 Assets
Acquired based on the actual results of operations prior to their acquisition.
(m) To reduce revenue and direct operating expenses for the 1997 Assets
Sold based on the actual results of operations prior to their sale.
F-28
<PAGE> 32
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES:
Vista will account for income tax in accordance with the provisions of SFAS
109. In accordance with SFAS 109, Vista will prepare separate tax calculations
for each tax jurisdiction in which Vista will be subject to income taxes.
5. OIL AND GAS RESERVE DATA:
The estimates of Midland's proved oil and gas reserves, which are located
entirely within the United States, were prepared in accordance with the
guidelines established by the Commission and Financial Accounting Standards
Board. The estimates of December 31, 1997 are based on evaluations prepared by
Williamson Petroleum Consultants, Inc., independent petroleum engineers. The
estimates as of December 31, 1996 and 1995, are based on evaluations prepared by
E. Ralph Green and Associates, independent petroleum engineers. For information
concerning costs incurred by Midland for oil and gas operations, net revenues
from oil and gas production, estimated future net revenues attributable to
Midland's oil reserves and present value of future net revenues on a 10%
discount rate and changes therein, see Notes to Midland's consolidated financial
statements. Midland emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are subject to change as
further information becomes available.
The estimates of the Vista Partnership's proved oil and gas reserves, which
are located entirely within the United States, were prepared in accordance with
the guidelines established by the Commission and Financial Accounting Standards
Board. The estimates of December 31, 1997, 1996 and 1995 are based on
evaluations prepared by the Vista Partnership. For information concerning costs
incurred by the Vista Partnership for oil and gas operations, net revenues from
oil and gas production, estimated future net revenues attributable to the Vista
Partnership's oil reserves and present value of future net revenues on a 10%
discount rate and changes therein, see Notes to the Vista Partnership's
consolidated financial statements. The Vista Partnership emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly, the
estimates are subject to change as further information becomes available.
The following unaudited pro forma supplemental information regarding the
oil and gas activities of Vista is presented pursuant to the disclosure
requirements promulgated by the Commission and Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing Activities."
Management emphasizes that reserve estimates are inherently imprecise and
subject to revision and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available; such changes could
be significant.
Quantities of oil and gas reserves
Set forth below is a pro forma summary of the changes in the net quantities
of oil and natural gas reserves for the year ended December 31, 1997.
<TABLE>
<CAPTION>
GAS
BBLS (MCF)
--------- ----------
<S> <C> <C>
Balance, January 1, 1997.................................... 7,381,899 25,480,189
Revisions of previous estimates........................... 1,012,971 (2,939,237)
Purchase of minerals-in-place............................. 762,282 6,206,929
Sales of minerals in place................................ (400,989) (2,170,194)
New discoveries and extensions............................ 1,711,787 349,664
Production................................................ (596,392) (1,772,407)
--------- ----------
Balance, December 31, 1997.................................. 9,871,558 25,154,944
========= ==========
</TABLE>
F-29
<PAGE> 33
VISTA ENERGY RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Standardized measure of discounted future net cash flows
The pro forma combined standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and gas (with consideration
of price changes only to the extent provided by contractual arrangements) to the
estimated future production of oil and gas reserves less estimated future
expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves discounted using a rate of 10% per year to reflect
the estimated timing of the future cash flows. Future income taxes are
calculated by comparing discounted future cash flows to the tax basis of oil and
gas properties, plus available carryforwards and credits, and applying the
current tax rate to the difference.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Oil and gas producing activities:
Future cash inflows....................................... $208,526,470
Future production costs................................... (79,404,664)
Future development costs.................................. (20,411,169)
Future income tax expense................................. (19,648,988)
10% annual discount factor................................ (36,489,645)
------------
Standardized measure of discounted future net cash
flows.................................................. $ 52,572,004
============
</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,
1997, are as follows:
<TABLE>
<S> <C>
Oil and gas sales, net of production costs.................. $ (7,585,138)
Net changes in prices and production costs.................. (33,486,325)
Extensions and discoveries.................................. 4,902,792
Purchases of minerals-in-place.............................. 8,289,041
Sales of Reserves in Place.................................. (3,507,680)
Revisions of estimated future development costs............. (4,318,823)
Revisions of previous quantity estimates.................... 3,573,186
Accretion of discount....................................... 8,066,938
Changes in production rates, timing and other............... (5,330,746)
Development costs to reduce future development cost......... 5,073,000
Net change in present value of future income taxes.......... 14,403,882
Balance, beginning of year.................................. 62,491,877
------------
Balance, end of year........................................ $ 52,572,004
============
</TABLE>
F-30
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VISTA ENERGY RESOURCES, INC.
By: /s/ C. RANDALL HILL
----------------------------------------
Name: C. Randall Hill
Title: Chairman and Chief Executive
Officer
Date: November 5, 1998
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
2.1 Agreement and Plan of Merger dated as of May 22, 1998 among
Vista Resources Partners, Inc., Midland Resources, Inc., Vista
Energy Resources, Inc., and Midland Merger Co. (filed as
Appendix A to the Company's Registration Statement on Form S-4
(File No. 333-58495) and incorporated herein by reference).
2.2 Form of Vista Exchange Agreement (filed as Appendix B to the
Company's Registration Statement on Form S-4 (File No.
333-58495) and incorporated herein by reference).
2.3 Form of Midland Exchange Agreement (filed as Appendix C to the
Company's Registration Statement on Form S-4 (File No.
333-58495) and incorporated herein by reference).
99.1* Press Release of Vista Energy Resources, Inc. dated October 28,
1998.
</TABLE>
- ----------------------
*Filed herewith
<PAGE> 1
EXHIBIT 99.1
Vista and Midland Resources Complete Merger
MIDLAND, Texas, Oct. 28 / PRNewswire/ -- Vista Resources Partners, L.P.
and Midland Resources, Inc. (Amex: MLD) today announced the completion of a
merger between the two companies. The shares of common stock of the combined
company, called Vista Energy Resources, Inc., will begin trading on the
American Stock Exchange under the symbol "VEI" on Thursday, October 29, 1998.
Also as a result of the merger, Midland Resources' currently outstanding
warrants will continue to be traded on the American Stock Exchange under the
symbol "VEI.WS" and will become exercisable for shares of Vista's common stock
on a one for one basis.
At a special meeting of Midland Resources shareholders held today, holders
of 69 percent of Midland Resources common shares outstanding voted in favor
of the merger. Pursuant to the Merger Agreement. Midland Resources shareholders
will receive one share of Vista common stock for each Midland Resources share.
Record holders of Midland Resources common stock will be sent letters of
transmittal with instructions for changing their stock certificates.
Effective with the merger, Vista will have approximately 16.3 million
shares outstanding. Vista's asset base is located in the Permian Basin and in
the onshore regions of the Texas Gulf Coast. Combined daily net production is
approximately 1800 barrels of crude oil and 5300 Mcf of natural gas per day.
The combined reserve base, pro forma at December 31, 1997, totals approximately
14.1 million barrels of crude oil equivalents. The reserves are approximately
70 percent oil and over 90 percent operated by Vista.
Randy Hill, Vista's Chairman and Chief Executive Officer, said "This
merger brings numerous drilling and exploitation opportunities to increase the
size and value of Vista. Over the next 14 months we intend to drill 25 to 30
locations spending an estimated $9.0 to $12.0 million, excluding acquisitions.
Because of the complementary nature of the companies' asset bases, the
combination of Vista and Midland Resources will generate an estimated savings
of $1.6 million in annual general administrative and lease operating expenses.
Coupled with our proven acquisition, exploitation and exploration strategy we
believe this combined group of assets will help us continue to rapidly growing
Vista's equity value on a per share basis."
(more)
<PAGE> 2
-2-
This announcement includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21F of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include, without limitation, estimates with respect to reserves and growth
opportunities. Although Vista believes that the expectations reflected in such
forward-looking statements are reasonable, they can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from those in the forward-looking
statements include risks inherent in drilling activities, the timing and extent
of changes in commodity prices, unforeseen engineering and mechanical or
technological difficulties in drilling wells, and other risks more fully
described in Vista's filings with the Securities and Exchange Commission.
Vista Energy Resources, Inc. (Amex: VEI) is engaged in the acquisition,
development, production of, and exploration for, oil and natural gas. Vista
owns and operates oil and gas properties principally in the Permian Basin of
West Texas and Southeastern New Mexico and in the onshore regions of the Texas
Gulf Coast.
SOURCE Vista Resources Partners, L.P.
-0- 10/28/98
/CONTACT: C. Randall Hill of Vista Energy Resources, Inc., 915-570-5045/
(VEI MLD
-30-
