<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 2000
REGISTRATION STATEMENT NO. 333-92561
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
VISTA ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2766114
(State of Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Corporation) Classification Code Number) Identification No.)
</TABLE>
550 WEST TEXAS AVENUE
SUITE 700
MIDLAND, TEXAS 79701
(915) 570-5045
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
C. RANDALL HILL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
VISTA ENERGY RESOURCES, INC.
550 WEST TEXAS AVENUE
SUITE 700
MIDLAND, TEXAS 79701
(915) 570-5045
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
A. WINSTON OXLEY ROBERT A. CURRY
VINSON & ELKINS L.L.P. CONNER & WINTERS,
3700 TRAMMELL CROW CENTER A PROFESSIONAL CORPORATION
2001 ROSS AVENUE 3700 FIRST PLACE TOWER
DALLAS, TEXAS 75201 15 EAST FIFTH STREET
(214) 220-7700 TULSA, OKLAHOMA 74103
(918) 586-5725
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED OFFERING PRICE REGISTRATION FEE(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock issuable in the merger............ 8,291,299 $84,857,014(2) $22,403(2)
- --------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock issuable in the 4,000,000 (2) (2)
merger.......................................
- --------------------------------------------------------------------------------------------------------------
Common Stock issuable upon conversion of the 4,000,000 N/A $0
Convertible Preferred Stock(1)...............
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) No additional fee is required to be paid for these securities in accordance
with Rule 457(i) under the Securities Act.
(2) Calculated in accordance with Rule 457(f)(2) under the Securities Act based
on the book value of all of the issued and outstanding shares of common
stock and convertible preferred stock of Prize Energy Corp. at September 30,
1999.
(3) All of the registration fee has been previously paid in connection with the
preliminary proxy statement filed by the registrant on October 22, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on the date as the Securities and Exchange Commission, acting pursuant
to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION CONTAINED IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT ISSUE THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS DOCUMENT IS NOT AN OFFER TO SELL THESE SECURITIES OR AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<TABLE>
<S> <C>
VISTA ENERGY PRIZE ENERGY
RESOURCES, INC. CORP.
</TABLE>
PROPOSED MERGER -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of Vista Energy Resources, Inc. and Prize Energy
Corp. have agreed to merge the two companies. The merger is intended to create a
larger, financially stronger and more cost efficient enterprise. In connection
with the merger, Vista will be renamed "Prize Energy Corp.," creating "New
Prize."
The Vista common stock trades on the American Stock Exchange under the
symbol "VEI." Application has been made for the continued listing of the common
stock of New Prize on the American Stock Exchange after the merger is completed
under the symbol "PRZ."
We can only complete the merger if a majority of the Vista stockholders and
a majority of the Prize stockholders approve the merger agreement.
Additionally, we are asking the Vista stockholders to approve:
- a one-for-seven reverse stock split of all issued and outstanding shares
of Vista common stock; and
- a change of the company's name to "Prize Energy Corp." upon completion of
the merger.
We have scheduled special meetings for the Vista stockholders and the Prize
stockholders to vote on these matters.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF RISKS THAT YOU
SHOULD CONSIDER IN EVALUATING THE MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, THE COMMON STOCK AND
CONVERTIBLE PREFERRED STOCK TO BE ISSUED IN THE MERGER OR THE FAIRNESS OR THE
MERITS OF THE MERGER OR HAS DETERMINED WHETHER THE INFORMATION CONTAINED IN THIS
DOCUMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This document is dated January , 2000, and is first being mailed to Vista
stockholders and Prize stockholders on January , 2000.
<PAGE> 3
VISTA ENERGY RESOURCES, INC.
550 WEST TEXAS AVENUE, SUITE 700
MIDLAND, TEXAS 79701
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 8, 2000
To the Stockholders of Vista Energy Resources, Inc.:
A special meeting of the holders of common stock of Vista Energy Resources,
Inc., a Delaware corporation, will be held at 10:00 a.m., local time, on
Tuesday, February 8, 2000, at The Midland Room, Fasken Center, Tower II, 2nd
Floor, 550 West Texas Avenue, Midland, Texas 79701. At the special meeting, the
holders of Vista common stock will:
1. Consider and vote upon a proposal to:
- approve and adopt the Agreement and Plan of Merger, dated as of
October 8, 1999, between Vista and Prize Energy Corp., a Delaware
corporation, relating to the merger of a wholly-owned subsidiary of
Vista with and into Prize, with Prize surviving the merger and
becoming a wholly-owned subsidiary of New Prize; based on the number
of outstanding shares of Prize common and convertible preferred stock
and Vista common stock as of the date of this notice and assuming the
merger closes on February 8, 2000, each share of common stock of
Prize will be converted into 1,665.187 shares of New Prize common
stock, reflecting the one-for-seven reverse stock split, and each
share of Prize convertible preferred stock will be converted into
1,665.187 shares of New Prize convertible preferred stock, reflecting
the one-for-seven reverse stock split, in each case other than
dissenting shares; a description of the merger and the merger
agreement is contained in the accompanying document, which includes a
copy of the merger agreement; and
- effect a one-for-seven reverse stock split of all issued and
outstanding shares of Vista common stock.
2. Consider and vote upon a proposal, contingent upon the passing of
the proposal described in paragraph 1., to change the company's name to
"Prize Energy Corp."
3. Transact other business as may properly come before the special
meeting or any adjournment or postponement of the meeting.
The board of directors of Vista has fixed the close of business on December
30, 1999, as the record date for determining which stockholders are entitled to
notice of, and to vote at, the special meeting or any adjournment or
postponement of the meeting. Complete lists of these stockholders will be
available for examination at the offices of Vista during normal business hours
by any holder of Vista common stock, for any purpose relevant to the special
meeting, for a period of 10 days prior to the special meeting.
THE BOARD OF DIRECTORS OF VISTA UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, INCLUDING THE RELATED
ONE-FOR-SEVEN REVERSE STOCK SPLIT, AND FOR THE CHANGE OF THE COMPANY'S NAME TO
"PRIZE ENERGY CORP." The affirmative vote of the holders of a majority of the
outstanding shares of Vista common stock is required to approve and adopt the
merger agreement, the reverse stock split and the change of the company's name.
Each member of Vista's board of directors intends to vote his shares of Vista
common stock for both of these proposals.
IF YOU DO NOT SEND IN YOUR PROXY OR VOTE AT THE SPECIAL MEETING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER AGREEMENT.
Even if you expect to be present at the special meeting, we request that
you sign, vote and date the enclosed proxy and return it promptly in the
enclosed envelope. If you give a proxy, you have the power to revoke it at any
time prior to the special meeting. If you are present at the special meeting,
you may withdraw your proxy and vote in person.
By Order of the Board of Directors,
R. Cory Richards
Secretary
,
<PAGE> 4
PRIZE ENERGY CORP.
3500 WILLIAM D. TATE, SUITE 200
GRAPEVINE, TEXAS 76051
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 8, 2000
To the Stockholders of Prize Energy Corp.:
A special meeting of the holders of common stock and convertible preferred
stock of Prize Energy Corp., a Delaware corporation, will be held at 10:00 a.m.,
local time, on Tuesday, February 8, 2000, at 3500 William D. Tate, Suite 200,
Grapevine, Texas 76501. At the special meeting, the holders of Prize common
stock and Prize convertible preferred stock will:
1. Consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of October 8, 1999, between Prize
and Vista Energy Resources, Inc., a Delaware corporation, relating to the
merger of a wholly-owned subsidiary of Vista with and into Prize, with
Prize surviving the merger and becoming a wholly-owned subsidiary of New
Prize; based on the number of outstanding shares of Prize common and
convertible preferred stock and Vista common stock as of the date of this
notice and assuming the merger closes on February 8, 2000, each share of
common stock of Prize will be converted into 1,665.187 shares of New Prize
common stock, reflecting the one-for-seven reverse stock split, and each
share of convertible preferred stock of Prize will be converted into
1,665.187 shares of New Prize convertible preferred stock, reflecting the
one-for-seven reverse stock split, in each case other than dissenting
shares. A description of the merger and the merger agreement is contained
in the accompanying document, which includes a copy of the merger
agreement.
2. Transact other business as may properly come before the special
meeting or any adjournment or postponement of the meeting.
The board of directors of Prize has fixed the close of business on December
30, 1999, as the record date for determining which stockholders are entitled to
notice of, and to vote at, the special meeting or any adjournments or
postponements of the meeting. Complete lists of these stockholders will be
available for examination at the offices of Prize during normal business hours
by any holder of Prize common stock or convertible preferred stock, for any
purpose relevant to the special meeting, for a period of 10 days prior to the
special meeting.
THE BOARD OF DIRECTORS OF PRIZE UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Under the terms of the merger
agreement, the affirmative vote of the holders of a majority of the outstanding
shares of Prize common stock and Prize convertible preferred stock is required
to approve and adopt the merger agreement. Each member of Prize's board of
directors intends to vote his shares of Prize common stock or convertible
preferred stock FOR the merger proposal.
IF YOU DO NOT SEND IN YOUR PROXY OR VOTE AT THE SPECIAL MEETING, IT WILL
HAVE THE SAME EFFECT AS IF YOU VOTED AGAINST THE MERGER AGREEMENT.
Even if you expect to be present at the special meeting, we request that
you sign, vote and date the enclosed proxy and return it promptly in the
enclosed envelope. If you give a proxy, you have the power to revoke it at any
time prior to the special meeting. If you are present at the special meeting,
you may withdraw your proxy and vote in person.
By Order of the Board of Directors,
Monica L. Griffin
Secretary
,
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE
MERGER................................ Q-1
SUMMARY............................... 1
The Companies....................... 1
Reasons for the Merger.............. 2
Business Strategy of New Prize...... 2
Directors and Officers of New Prize
Following the Merger............. 2
Material U.S. Federal Income Tax
Consequences..................... 2
Dissenters' Appraisal Rights........ 3
Risks Associated with the Merger.... 3
Interests of Officers and Directors
in the Merger that Differ from
Your Interests................... 3
The Special Meetings................ 4
Record Date; Voting Power........... 4
Stockholder Vote Required to Approve
the Merger Agreement............. 4
Our Recommendations to
Stockholders..................... 4
Opinion of Vista's Financial
Advisor.......................... 5
Voting Agreement.................... 5
Officers and Directors of Vista and
Prize Will Vote in Favor of the
Merger........................... 5
Market Price Data................... 5
Accounting Treatment................ 5
Conditions to the Merger............ 5
Termination of the Merger
Agreement........................ 6
Termination Fee..................... 6
Summary Historical and Pro Forma
Consolidated Financial Data for
Vista............................ 7
Summary Historical and Pro Forma
Consolidated Financial Data for
Prize............................ 9
Summary of Oil and Gas Reserve and
Production Information........... 11
Summary Unaudited Pro Forma Combined
Financial Data For New Prize..... 12
RISK FACTORS.......................... 13
Risk Factors Relating to the
Merger........................... 13
Risk Factors Relating to New
Prize............................ 14
FORWARD LOOKING STATEMENTS............ 18
VISTA SPECIAL MEETING................. 19
Time and Place; Purpose............. 19
Record Date; Voting Rights and
Proxies.......................... 19
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Solicitation of Proxies............. 20
Information Agent................... 20
Quorum.............................. 20
Required Vote; Failure to Vote and
Broker Non-Votes................. 20
PRIZE SPECIAL MEETING................. 21
Time and Place; Purpose............. 21
Record Date; Voting Rights and
Proxies.......................... 21
Solicitation of Proxies............. 21
Quorum.............................. 21
Required Vote; Failure to Vote...... 22
MARKET PRICE DATA..................... 23
Dividend Policies................... 23
THE MERGER............................ 24
General............................. 24
Consideration....................... 24
Amendment to Vista's Certificate of
Incorporation.................... 24
Appointment of New Directors and
Executive Management............. 24
Ownership of New Prize Following the
Merger........................... 24
Background of the Merger............ 24
Vista's Reasons for the Merger...... 30
Prize's Reasons for the Merger...... 31
Opinion of Vista's Financial
Advisor.......................... 32
Dain Rauscher Wessels' Engagement
Agreement........................ 37
The Reverse Stock Split of Vista
Common Stock..................... 37
Interests of Vista Directors and
Officers and Significant
Stockholders of Vista and
Prize............................ 40
Other Agreements.................... 40
Material U.S. Federal Income Tax
Consequences of the Merger....... 42
Material U.S. Federal Income Tax
Consequences of the Reverse Stock
Split............................ 43
Accounting Treatment................ 44
Rights of Dissenting Stockholders... 44
Federal Securities Laws
Consequences; Resale
Restrictions..................... 46
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VISTA................................. 47
Selected Historical and Pro Forma
Consolidated Financial Data for
Vista............................ 47
Management's Discussion and Analysis
of Financial Condition and
Results of Operations of Vista... 49
Business of Vista................... 59
Properties of Vista................. 64
PRIZE................................. 71
Selected Historical and Pro Forma
Consolidated Financial Data for
Prize............................ 71
Management's Discussion and Analysis
of Financial Condition and
Results of Operations of Prize... 72
Business of Prize................... 81
Properties of Prize................. 86
NEW PRIZE............................. 88
General............................. 88
Business Strategy................... 88
Strengths........................... 88
New Credit Facility................. 89
Management.......................... 89
Related Party Transactions.......... 92
THE MERGER AGREEMENT.................. 94
Structure; Effective Time........... 94
Conversion or Cancellation of Prize
Securities in the Merger......... 94
Directors and Officers of New Prize
Following the Merger............. 94
Conversion of Shares................ 94
Conduct of Business Prior to
Merger........................... 94
Covenants and Agreements............ 95
Representations and Warranties of
Vista and Prize.................. 96
Conditions to the Merger............ 97
Termination of the Merger
Agreement........................ 99
Termination Fee and Expenses........ 100
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Merger Expenses..................... 100
Amendments.......................... 100
OWNERSHIP OF VISTA, PRIZE AND NEW
PRIZE STOCK......................... 101
COMPARISON OF STOCKHOLDER RIGHTS...... 105
General............................. 105
Summary Comparison of Terms of Vista
Securities and Prize
Securities....................... 105
DESCRIPTION OF VISTA CAPITAL STOCK.... 109
Authorized Capital Stock............ 109
Common Stock........................ 109
Series A 6% Convertible Preferred
Stock............................ 109
Warrants............................ 114
Transfer Agent and Registrar........ 115
Stock Exchange Listing.............. 115
LEGAL MATTERS......................... 115
EXPERTS............................... 115
FUTURE STOCKHOLDER PROPOSALS.......... 116
WHERE YOU CAN FIND MORE INFORMATION... 116
COMMONLY USED OIL AND GAS TERMS....... 117
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
LIST OF ANNEXES
Annex A -- Agreement and Plan of
Merger
Annex B -- Opinion of Dain Rauscher
Wessels
Annex C -- Section 262 of the
Delaware General Corporation Law
</TABLE>
ii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: HOW DO I VOTE?
A: After reading this document, please fill out and
sign your proxy card. Then mail your signed proxy card in the enclosed
return envelope as soon as possible so that your shares will be represented
at your special meeting.
Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD?
A: The failure to return your proxy card will have
the same effect as voting against the merger agreement.
Q: MAY I VOTE IN PERSON?
A: Yes. You may attend your special meeting and
vote your shares in person, rather than signing and mailing your proxy
card.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY
SIGNED PROXY CARD?
A: Yes. You may change your vote at any time
before your proxy is voted at your special meeting by following the
instructions on page 19 or page 21. You then may either change your vote by
sending in a new proxy or attending your special meeting and voting in
person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A: No. Your broker will not be able to vote your
shares without instructions from you. You should instruct your broker to
vote your shares, following the directions provided by your broker.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, Prize
stockholders will exchange their stock certificates at the closing. Vista
stockholders will exchange their stock certificates by following
instructions in a letter of transmittal sent to them by New Prize's transfer
agent after the merger is completed.
Q: WHAT WILL PRIZE STOCKHOLDERS RECEIVE IN THE
MERGER?
A: Assuming the merger closes on February 8,
2000, each share of Prize common stock will be converted into 1,665.187
shares of New Prize common stock and each share of Prize convertible
preferred stock will be converted into 1,665.187 shares of New Prize
convertible preferred stock, in each case other than dissenting shares. The
above conversion ratio is based on the number of outstanding shares of
Prize common and convertible preferred stock and Vista common stock as of
the date of this document and reflects the one-for-seven reverse stock
split. After the merger, Prize stockholders will collectively own
approximately 84% of the common stock, on a fully converted basis, of New
Prize.
Q: WHAT ARE THE CONVERSION TERMS OF THE NEW
PRIZE CONVERTIBLE PREFERRED STOCK?
A: Each share of the convertible preferred stock of
New Prize may be initially converted at any time into one share of New
Prize common stock.
Q: WHAT ARE THE REDEMPTION TERMS OF THE NEW
PRIZE CONVERTIBLE PREFERRED STOCK?
A: The convertible preferred stock may be
redeemed by New Prize, if not converted by the holders into shares of New Prize
common stock, if the New Prize common stock price for 30 consecutive
trading days exceeds approximately $9.37 per share, as adjusted for the
one-for-seven reverse stock split.
Q: WILL VISTA STOCKHOLDERS RECEIVE ANY SHARES IN
THE MERGER?
A: No. Each share of Vista common stock will
remain outstanding, as adjusted to reflect the one-for-seven reverse stock
split. After the merger, New Prize's transfer agent will distribute a
letter of transmittal to all Vista stockholders. You should follow the
instructions in the letter of transmittal regarding the surrender of your
Vista stock certificates to the transfer agent, after which time you will
receive new stock certificates representing your shares of New Prize common
stock and reflecting the one-for-seven reverse stock split. After the
merger, Vista stockholders will own approximately 16% of the common stock,
on a fully converted basis, of New Prize.
Q-1
<PAGE> 8
Q: HOW WILL THE ONE-FOR-SEVEN REVERSE STOCK SPLIT
AFFECT THE OUTSTANDING SHARES OF VISTA COMMON STOCK?
A: Each seven shares of Vista common stock will
represent one share of New Prize common stock.
Q: WILL VISTA STOCKHOLDERS RECEIVE FRACTIONAL
SHARES OF NEW PRIZE COMMON STOCK AS A RESULT OF THE ONE-FOR-SEVEN REVERSE
STOCK SPLIT?
A: No. Vista stockholders who would be entitled
to receive fractional shares of New Prize common stock as a result of the
one-for-seven reverse stock split will receive instead a cash distribution.
Q: WHAT WILL HAPPEN TO MY VISTA WARRANTS?
A: Your Vista warrants will remain outstanding in
accordance with their terms. Under their terms, the number of outstanding
warrants and the exercise prices of the outstanding warrants will be
automatically adjusted as a result of the one-for-seven reverse stock split
of all issued and outstanding shares of Vista common stock. Approximately
98% of the outstanding warrants have an exercise price of $4.00 per share,
or $28.00 per share following the one-for-seven reverse stock split. All of
these warrants will expire on November 1, 2002.
Q: WHEN DO YOU EXPECT THE MERGER TO BE
COMPLETED?
A: We are working to complete the merger in
February of 2000.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have additional questions about the
merger, please call Vista Investor Relations at (915) 570-5045 or Prize
Investor Relations at (817) 416-4206. In addition, you may call Vista's
information agent, American Stock Transfer & Trust Company, at (800)
937-5449.
Q-2
<PAGE> 9
SUMMARY
This summary, together with the preceding questions and answers section,
highlights selected information from this document and may not contain all of
the information that is important to you. To understand the merger fully and to
obtain a more detailed description of the legal terms of the merger, you should
carefully read this entire document and the documents described in "Where You
Can Find More Information" on page 116. For definitions of oil and gas terms
used in this document, see "Commonly Used Oil and Gas Terms" on page 117.
The merger agreement is included as Annex A to this document. It is the
legal document that governs the merger. We have included page references
parenthetically to direct you to a more complete description of the topics
presented in this summary.
THE COMPANIES
VISTA ENERGY RESOURCES, INC.
550 West Texas Avenue, Suite 700
Midland, Texas 79701
(915) 570-5045
In this document, we call this company "Vista." Vista is an independent oil
and gas company engaged in the acquisition, exploration, production and
development of oil and natural gas primarily in the Permian Basin of West Texas
and Southeastern New Mexico and the onshore Gulf Coast region of South Texas.
Its common stock is traded on the American Stock Exchange under the symbol
"VEI." After the merger, Vista is sometimes referred to in this document as "New
Prize."
As of September 30, 1999, Vista had estimated net proved reserves of
approximately 15 million barrels, or MMBbls, of oil and 38 billion cubic feet,
or Bcf, of natural gas, or an aggregate of 21 million barrels of oil equivalent,
or MMBOE. Those estimated net proved reserves had a PV-10 value of $153 million
at September 30, 1999. The PV-10 valuation is a present value calculation of
estimated future net revenues before income taxes using a 10% discount rate and
constant prices. On a barrels of oil equivalent basis, approximately 70% of
Vista's proved reserves are oil and approximately 67% of Vista's proved reserves
are proved developed reserves. As of September 30, 1999, Vista operated 552
gross, 509.3 net, oil and gas wells. Vista's operated properties represent
approximately 93% of its proved reserve base at September 30, 1999. Vista's
emphasis on controlling the operation of its properties enables it to better
manage expenses, capital allocation and other aspects of development and
exploration.
PRIZE ENERGY CORP.
3500 William D. Tate, Suite 200
Grapevine, Texas 76051
(817) 416-4206
In this document, we call this company "Prize." Prize, which commenced
operations in January 1999, is a privately held, independent oil and gas company
focused on the acquisition, enhancement and exploitation of producing oil and
gas properties. All of Prize's properties are located in the United States, with
principal operations conducted in portions of the Permian Basin, the onshore
Gulf Coast and the Mid-Continent regions.
As of September 30, 1999, Prize's estimated net proved reserves totaled
35.8 MMBbls of oil and natural gas liquids and 251.8 Bcf of natural gas, or an
aggregate of 77.7 MMBOE. Those estimated net proved reserves had a PV-10 value
of $450.4 million at September 30, 1999. On a barrels of oil equivalent basis,
approximately 54% of Prize's proved reserves are natural gas and approximately
79% of Prize's proved reserves are proved developed reserves. At September 30,
1999, Prize owned interests in 970 gross, 658 net, operated and 1,076 gross, 221
net, non-operated oil and gas wells. Prize's operated properties represent
approximately 75% of its proved reserve base at September 30, 1999. Prize's
emphasis on controlling the operation of its properties enables it to better
manage expenses, capital allocation and other aspects of enhancement and
exploitation.
1
<PAGE> 10
REASONS FOR THE MERGER
(SEE PAGES 30 AND 31)
VISTA. Based on the recommendation of a special committee of the Vista
board of directors, the Vista board determined that the terms of the merger are
fair to, advisable and in the best interests of Vista's stockholders. In
reaching its recommendation, the Vista special committee considered, among other
things, the following factors:
- financial condition, assets, results of operations, business and
prospects of each of Vista and Prize and the risks inherent in achieving
the respective prospects;
- reduction in general and administrative costs;
- opportunity to create a combined company with a larger market
capitalization, greater liquidity and enhanced visibility in the capital
markets;
- reduction in Vista's overall debt ratios;
- the fairness opinion of Dain Rauscher Wessels;
- terms and conditions of the merger agreement;
- trading history of Vista common stock; and
- the structure of the merger as a "tax-free" reorganization.
PRIZE. The board of directors of Prize believes that the merger is
desirable for a number of reasons, including the following:
- the merger allows Prize to become a public company which the board of
directors of Prize believes will improve the liquidity and market
valuation of the common stock of Prize, provide access to the public
capital markets for future financing needs and increase the likelihood
that the Prize convertible preferred stock will be converted to common
stock of New Prize;
- the merger creates a combined company with greater financial resources,
competitive strength and business opportunities than would be possible
for Prize alone;
- the Vista properties are concentrated and are primarily operated by
Vista; and
- the Vista properties offer additional enhancement and exploitation
opportunities.
BUSINESS STRATEGY OF NEW PRIZE
(SEE PAGE 88)
New Prize's business strategy will be to increase its reserves, cash flow
and net income on a per share basis by acquiring, enhancing and exploiting
producing oil and gas properties in its core operating areas and by maintaining
a low operating and corporate cost structure.
DIRECTORS AND OFFICERS OF NEW PRIZE FOLLOWING
THE MERGER (SEE PAGE 89)
As a condition to the merger agreement, Prize will receive the resignations
of each of the executive officers and directors of Vista, except those directors
designated by Prize to remain on the board of New Prize. Prize has designated
David R. Albin and Kenneth A. Hersh, current Vista directors, to remain on the
board of New Prize. It is anticipated that Prize will designate, and the
existing directors will appoint, Philip B. Smith, Lon C. Kile, Scott D.
Sheffield and Mark L. Withrow to fill the vacancies on the board.
After completion of the merger, it is anticipated that the board of
directors of New Prize will appoint the current executive officers of Prize to
serve as the new executive officers of New Prize.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
(SEE PAGES 42 AND 43)
We have structured the merger so that the Prize security holders will not
recognize any gain or loss for U.S. federal income tax purposes as a result of
the merger.
Prize has received an opinion from its tax counsel that the merger will
constitute a "tax-free" reorganization.
Vista stockholders will not recognize any gain or loss for U.S. federal
income tax purposes as a result of either the merger or the reverse stock split
except to the extent that cash is received in lieu of fractional shares as a
result of the reverse stock split.
TAX MATTERS ARE COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER AND THE
REVERSE STOCK
2
<PAGE> 11
SPLIT TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD SEEK TAX
ADVICE FOR A FULL UNDERSTANDING OF THE PARTICULAR TAX CONSEQUENCES TO YOU.
DISSENTERS' APPRAISAL RIGHTS
(SEE PAGE 44)
If you own shares of Prize common or convertible preferred stock, you do
not vote in favor of the proposal to approve and adopt the merger agreement and
you comply strictly with the applicable provisions of Section 262 of the
Delaware General Corporation Law, you have the right to dissent and be paid cash
for the "fair value" of your shares of Prize common or convertible preferred
stock. This payment may be more than, the same as, or less than the merger
consideration you will receive in the merger. To perfect these appraisal rights
with respect to the merger, you must follow the required procedures precisely.
The applicable provisions of Section 262 of the Delaware General Corporation Law
are attached to this document as Annex C.
Vista stockholders have no appraisal rights under Delaware law or under
Vista's certificate of incorporation or bylaws in connection with the merger or
the one-for-seven reverse stock split.
RISKS ASSOCIATED WITH THE MERGER
(SEE PAGE 13)
You should be aware of and carefully consider the risks relating to the
merger described under "Risk Factors." These risks include:
- the possible difficulties in combining two companies that have previously
operated independently;
- the merger consideration is fixed and will not be adjusted for changes in
the stock price of Vista before the merger is completed;
- three members of the Vista board of directors and two members of the
Prize board of directors had conflicts of interests in evaluating the
merger because they are affiliated with related investment partnerships
that hold a majority of the common stock of both companies;
- two members of the Prize board of directors had conflicts of interest in
evaluating the merger because they are executive officers of the holder
of the Prize convertible preferred stock;
- two other members of the Vista board of directors had additional
conflicts of interest because as executive officers of Vista, these
members will receive severance payments if the merger is completed; and
- the one-for-seven reverse stock split will not guarantee that the common
stock of New Prize will trade at seven times the current market price of
the common stock of Vista.
INTERESTS OF OFFICERS AND DIRECTORS
IN THE MERGER THAT DIFFER FROM YOUR INTERESTS
(SEE PAGE 40)
You should be aware that Vista's executive officers, two of whom are
members of the Vista board of directors, have agreements that may provide them
with interests in the merger that are different from yours. Generally, the
merger would result in severance payments being made to these officers and
directors. The Vista and Prize boards were aware of these interests and
considered them in approving the merger.
In addition, three directors of Vista manage and own interests in Natural
Gas Partners II, L.P. and Natural Gas Partners III, L.P. These partnerships
collectively own approximately 52% of Vista's outstanding common stock. Two of
the individuals serving as Vista directors also serve as directors of Prize.
These individuals also manage and own interests in Natural Gas Partners V, L.P.
This partnership owns common stock constituting approximately 60% of Prize's
outstanding voting shares, including both common stock and convertible preferred
stock. Assuming completion of the merger on February 8, 2000, Natural Gas
Partners II, L.P., Natural Gas Partners III, L.P. and Natural Gas Partners V,
L.P. will own, collectively, approximately 58% of the outstanding voting shares
of common stock of New Prize, assuming conversion of the New Prize convertible
preferred stock, and will have three seats on New Prize's board of directors.
In addition, two directors of Prize are also executive officers of Pioneer
Natural Resources
3
<PAGE> 12
USA, Inc., which owns all of the shares of outstanding Prize convertible
preferred stock. Under the merger agreement, shares of Prize convertible
preferred stock will be converted into shares of New Prize convertible preferred
stock. Assuming completion of the merger on February 8, 2000, and conversion of
the New Prize convertible preferred stock to New Prize common stock, Pioneer
will own approximately 27% of the outstanding shares of common stock of New
Prize and will have two seats on New Prize's board of directors.
THE SPECIAL MEETINGS
(SEE PAGES 19 AND 21)
VISTA. At the Vista special meeting, holders of Vista common stock will be
asked to:
- approve and adopt the merger agreement and the one-for-seven reverse
stock split; and
- approve the change of the company's name to "Prize Energy Corp."
PRIZE. At the Prize special meeting, holders of Prize common and
convertible preferred stock will be asked to approve and adopt the merger
agreement.
RECORD DATE; VOTING POWER
(SEE PAGES 19 AND 21)
VISTA. You may vote at the Vista special meeting if you owned Vista common
stock as of the close of business on December 30, 1999, the Vista record date.
You may cast one vote for each share you own.
PRIZE. You may vote at the Prize special meeting if you owned Prize common
or convertible preferred stock as of the close of business on December 30, 1999,
the Prize record date. You may cast one vote for each share of Prize common
stock and one vote for each share of Prize convertible preferred stock you own.
STOCKHOLDER VOTE REQUIRED TO APPROVE THE
MERGER AGREEMENT
(SEE PAGES 20 AND 22)
VISTA. The favorable vote of the holders of a majority of the outstanding
shares of Vista common stock is required to approve:
- the merger agreement and the one-for-seven reverse stock split; and
- the change of the company's name to "Prize Energy Corp."
PRIZE. The favorable vote of the holders of a majority of the outstanding
shares of Prize common stock and a majority of the outstanding shares of Prize
convertible preferred stock is required to approve the merger agreement.
NATURAL GAS PARTNERS. If the Natural Gas Partners partnerships vote in
favor of the merger agreement, it will be approved by the common stockholders of
Vista and Prize without regard to the vote of any other Vista or Prize common
stockholders. Similarly, if the Natural Gas Partners partnerships vote against
the merger agreement, it will not be approved and the merger will not close.
Each of the Natural Gas Partners partnerships has indicated that it will vote in
favor of the merger.
OUR RECOMMENDATIONS TO STOCKHOLDERS
VISTA STOCKHOLDERS. The Vista board, after receiving the recommendation of
a special committee of its board of directors, believes that the merger is fair
to you, advisable and in your best interests and unanimously recommends that you
vote FOR:
- approval of the merger agreement and the one-for-seven reverse stock
split; and
- the change of the company's name to "Prize Energy Corp."
PRIZE STOCKHOLDERS. The Prize board believes that the merger is fair to
you, advisable and in your best interests and unanimously recommends that you
vote FOR approval of the merger agreement.
4
<PAGE> 13
OPINION OF VISTA'S FINANCIAL ADVISOR
(SEE PAGE 32)
In deciding to approve the merger, the Vista board considered the opinion
from its financial advisor as to the fairness, from a financial point of view,
to the holders of Vista common stock of the consideration to be issued by Vista
in the merger of Vista with Prize.
The special committee and the Vista board received an oral opinion on
October 8, 1999, of its financial advisor, Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, that, as of that date, the consideration to be
issued by Vista in the merger is fair, from a financial point of view, to the
holders of Vista common stock. Subsequent to the delivery of the above oral
opinion, Dain Rauscher Wessels delivered a confirming written opinion dated the
same date.
The full text of the Dain Rauscher Wessels opinion, which sets forth the
principal assumptions made, matters considered and qualifications and
limitations on the review undertaken by Dain Rauscher Wessels in rendering its
opinion, is attached to this document as Annex B. We encourage you to read this
opinion thoroughly before voting on the merger.
VOTING AGREEMENT
(SEE PAGE 40)
Pioneer Natural Resources USA, Inc. owns all of the outstanding Prize
convertible preferred stock.
In connection with the signing of the merger agreement, Prize and Pioneer
entered into a voting agreement in which Pioneer agreed to vote all of its
shares of Prize convertible preferred stock in favor of the merger agreement.
OFFICERS AND DIRECTORS OF VISTA AND PRIZE WILL VOTE IN FAVOR OF THE MERGER
(SEE PAGE 101)
VISTA. As of the record date for the Vista special meeting, Vista directors
and executive officers owned approximately 15% of the outstanding shares of
Vista common stock. These shares do not include shares that may be deemed owned
by directors who manage and own interests in Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P. Each of the directors and executive officers of
Vista has advised Vista that he plans to vote his shares FOR approval of the
merger agreement, the one-for-seven reverse stock split and the change of the
company's name to "Prize Energy Corp."
PRIZE. As of the record date for the Prize special meeting, Prize directors
and executive officers owned approximately 8% of the outstanding voting shares
of Prize, including both common stock and convertible preferred stock. These
shares do not include shares that may be deemed owned by directors who manage
and own interests in Natural Gas Partners V, L.P. Each of the directors and
executive officers of Prize has advised Prize that he plans to vote his shares
FOR approval of the merger agreement.
MARKET PRICE DATA
(SEE PAGE 23)
VISTA. On October 8, 1999, the last full trading day before the public
announcement of the proposed merger, Vista common stock closed at $2 1/4 per
share. On January 4, 2000, Vista common stock closed at $1 13/16 per share.
PRIZE. There is no established trading market for the common or convertible
preferred stock of Prize.
ACCOUNTING TREATMENT
(SEE PAGE 44)
As a result of the merger, Prize stockholders will own approximately 84% of
the common stock of New Prize, assuming conversion of the New Prize convertible
preferred stock. Accordingly, the merger will be accounted for as a reverse
acquisition, in which Prize is the purchaser of Vista. Therefore, following the
merger, the historical financial statements of New Prize will be the historical
financial statements of Prize.
CONDITIONS TO THE MERGER
(SEE PAGE 97)
We will complete the merger only if the conditions of the merger agreement
are satisfied or, if permitted, waived. These conditions include:
- the adoption and approval of the merger agreement by the stockholders of
Vista and Prize; and
5
<PAGE> 14
- the absence of any law or court order that prohibits the merger.
Either of us may choose to complete the merger even though a condition has
not been satisfied if the stockholders have approved the merger and the law
allows us to do so.
TERMINATION OF THE MERGER AGREEMENT
(SEE PAGE 99)
We may jointly agree to terminate the merger agreement at any time, even
after stockholder approval.
In addition, either of us may terminate the merger agreement in other
circumstances, including the following:
- the merger is not completed by February 29, 2000;
- the stockholders of either company fail to approve the merger agreement;
or
- Vista's board of directors accepts a merger or business combination with
or acquisition by another company after concluding that the action is
necessary for the board to act in a manner consistent with its fiduciary
duties.
TERMINATION FEE (SEE PAGE 100)
Vista must pay Prize a $1,100,000 termination fee and reimburse Prize's
expenses in the amount of $400,000 if Vista accepts a merger or business
combination with or acquisition by another company.
6
<PAGE> 15
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA FOR VISTA
The following table sets forth selected pro forma financial information for
Vista and its predecessor, Vista Resources Partners, L.P., for the year ended
December 31, 1998, which statement of income data assumes that Vista completed
the acquisitions of IP Petroleum Company, Inc. and Midland Resources, Inc. on
January 1, 1998. The following table also sets forth selected financial
information for Vista and Vista Resources Partners, L.P. for the nine months
ended September 30, 1999 and 1998, for the years ended December 31, 1998, 1997
and 1996, and for the period from inception, September 21, 1995, through
December 31, 1995. This financial information was derived from the consolidated
financial statements of Vista. This data should be read in conjunction with the
consolidated financial statements of Vista and the related notes and
"Vista -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of Vista."
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
INCEPTION
(SEPT. 21,
PRO FORMA NINE MONTHS ENDED 1995)
YEAR ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, THROUGH
DECEMBER 31, ------------------------- ----------------------------------------- DECEMBER 31,
1998 1999 1998 1998 1997 1996 1995
------------ ----------- ----------- ------------ ------------ ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........ $ 17,201,844 $12,856,692 $ 5,984,676 $ 8,737,056 $ 8,874,961 $ 5,537,720 $ 1,348,647
------------ ----------- ----------- ------------ ------------ ----------- -----------
Total revenues..... 17,201,844 12,856,692 5,984,676 8,737,056 8,874,961 5,537,720 1,348,647
------------ ----------- ----------- ------------ ------------ ----------- -----------
COSTS AND EXPENSES:
Lease operating.......... 8,076,400 4,655,601 2,777,877 4,398,384 3,688,695 2,544,567 728,540
Exploration costs........ 161,301 52,850 25,458 32,077 97,211 273,843 --
Depreciation, depletion
and amortization....... 6,541,676 3,593,750 1,229,601 3,014,707 2,169,098 1,272,316 308,132
Impairment of oil and gas
properties............. 24,849,632 -- -- 24,849,632 -- -- --
General and
administrative......... 2,331,875 1,480,879 1,184,641 1,743,814 987,020 581,048 208,509
Amortization of unit
option awards.......... 4,262,089 -- 214,303 4,262,089 315,518 -- --
------------ ----------- ----------- ------------ ------------ ----------- -----------
Total costs and
expenses......... 46,222,973 9,783,080 5,431,880 38,300,703 7,257,542 4,671,774 1,245,181
------------ ----------- ----------- ------------ ------------ ----------- -----------
Operating income
(loss)........... (29,021,129) 3,073,612 552,796 (29,563,647) 1,617,419 865,946 103,466
Gain (loss) on sale of
property............... (366,246) 147,141 (339,362) (317,293) (87,678) (56,738) --
Interest income.......... 5,833 8,172 -- 5,833 -- -- --
Interest expense......... (3,413,423) (3,047,674) (1,070,123) (1,597,350) (1,048,009) (476,363) (77,093)
Other income, net........ 229,165 50,512 60,907 111,745 115,949 61,437 33,684
------------ ----------- ----------- ------------ ------------ ----------- -----------
NET INCOME (LOSS) BEFORE
TAXES(1)................. (32,565,800) 231,763 (795,782) (31,360,712) 597,681 394,282 60,057
------------ ----------- ----------- ------------ ------------ ----------- -----------
Deferred federal income
tax expense
(benefit).............. (6,982,132) 81,117 N/A (6,560,351) N/A N/A N/A
------------ ----------- ----------- ------------ ------------ ----------- -----------
NET INCOME (LOSS)......... $(25,583,668) $ 150,646 $ (795,782) $(24,800,361) $ 597,681 $ 394,282 $ 60,057
============ =========== =========== ============ ============ =========== ===========
NET INCOME (LOSS) PER
SHARE.................... $ (1.57) $ .01 $ (.07) $ (1.95) $ .05 $ .03 $ .01
============ =========== =========== ============ ============ =========== ===========
Pro forma benefit
(provision) for
taxes(1)................. N/A N/A 278,524 N/A (211,720) (139,284) (21,190)
------------ ----------- ----------- ------------ ------------ ----------- -----------
PRO FORMA NET INCOME
(LOSS)................... $(25,583,668) $ 150,646 $ (517,258) $(24,800,361) $ 385,961 $ 254,998 $ 38,867
============ =========== =========== ============ ============ =========== ===========
PRO FORMA NET INCOME
(LOSS) PER SHARE......... $ (1.57) $ .01 $ (.04) $ (1.95) $ .03 $ .02 --
============ =========== =========== ============ ============ =========== ===========
CASH FLOW DATA:
EBITDAEX(2).............. N/A $ 6,926,037 $ 1,743,703 $ 2,395,143 $ 4,227,517 $ 2,415,804 $ 445,282
Cash flows from operating
activities............. N/A 3,047,773 439,525 (655,633) 3,469,638 2,072,649 195,878
Cash flows from investing
activities............. N/A (4,929,996) (1,883,563) (22,256,996) (12,648,815) (7,046,720) (7,948,840)
Cash flows from financing
activities............. N/A 1,902,846 1,000,000 22,385,500 9,189,095 5,015,077 8,265,167
Capital expenditures..... N/A 5,265,215 2,427,927 22,805,360 13,038,815 7,417,091 7,720,478
Ratio of earnings to
fixed charges(3)....... N/A 1.1x -- -- 1.6x 1.8x 1.8x
BALANCE SHEET DATA (end of
period):
Working capital.......... N/A $ (227,090) $ 80,627 $ (427,266) $ 421,132 $ 613,666 $ 648,130
Property, plant, and
equipment, net......... N/A 58,114,797 25,228,259 56,543,988 24,870,766 14,523,202 9,076,679
Total assets............. N/A 63,362,463 27,471,499 59,743,317 27,036,103 16,259,340 10,364,620
Long-term debt........... N/A 52,633,740 18,900,000 50,730,894 17,900,000 8,615,077 3,600,000
Stockholders' equity..... N/A 5,519,341 7,115,173 5,368,695 7,696,652 6,783,453 6,389,171
</TABLE>
- ---------------
(1) The pro forma benefit (provision) for taxes is the amount that would have
been recorded in the financial statements had Vista been a taxable entity
during the relevant period. Vista became a taxable entity in connection with
the Midland Resources merger on October 28, 1998.
7
<PAGE> 16
(2) Vista believes that EBITDAEX may provide additional information about
Vista's discretionary cash flow and its ability to meet its future
requirements for debt service, capital expenditures and working capital.
EBITDAEX is a financial measure commonly used in the oil and gas industry
and should not be considered in isolation or as a substitute for net income,
operating income, cash flows from operating activities or any other measures
of financial performance presented in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Because EBITDAEX excludes some, but not all, items that affect
net income and these measures may vary among companies, the EBITDAEX data
presented above may not be comparable to similarly titled measures of other
companies. EBITDAEX, as used in this document, is calculated by adding
depletion, depreciation and amortization, impairment of oil and gas
properties and exploration costs to net income before taxes. Exploration
costs represent discretionary cost items. Therefore, exploration costs have
been added back in order to present a discretionary cash flow for Vista.
Discretionary cash flow is cash flow that is available to meet future debt
service and other cash requirements. However, Vista's business may require
that these funds be devoted to uses other than debt service.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before taxes plus fixed charges. Fixed charges
consist of interest expense, which includes amortization of deferred loan
costs and the portion of rental expense deemed to be interest. Earnings were
insufficient to cover fixed charges by $0.8 million and $29.8 million for
the nine months ended September 30, 1998 and the year ended December 31,
1998, respectively.
8
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL
DATA FOR PRIZE
The following table presents for the periods indicated the revenues and
direct operating expenses from the producing oil and gas properties acquired by
Prize from Pioneer Natural Resources USA, Inc., which we refer to in this
document as the acquired properties. The acquisition of the acquired properties
from Pioneer was effective July 1, 1999. As a result of the limited operating
history of Prize, which commenced operations in January 1999, the management of
Prize believes that the following presentation of revenues and direct operating
expenses is indicative of the historical performance of Prize prior to the
properties being acquired from Pioneer. The data for the nine months ended
September 30, 1998, is presented for comparative purposes, versus the data for
the nine months ended September 30, 1999. To arrive at the data for the nine
months ended September 30, 1999, the data for the six months ended June 30, 1999
of the acquired properties prior to the purchase must be added to the historical
operating results of Prize for the three months ended September 30, 1999 after
the purchase. The table should be read in conjunction with the Statements of
Revenues and Direct Operating Expenses of the Producing Properties Acquired by
Prize from Pioneer included elsewhere in this document.
<TABLE>
<CAPTION>
ACQUIRED PRIZE - ACQUIRED
PROPERTIES - THREE COMBINED PROPERTIES -
SIX MONTHS MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999(1) 1999(2) 1999 1998(3)
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales........ $33,206,914 $22,692,680 $55,899,594 $62,748,095
Direct operating expenses:
Lease operating
expenses............... 7,255,141 3,740,714 10,995,855 14,138,312
Oil and gas production
taxes.................. 3,612,153 2,277,453 5,889,606 5,435,932
----------- ----------- ----------- -----------
Total direct
operating
expenses......... 10,867,294 6,018,167 16,885,461 19,574,244
----------- ----------- ----------- -----------
Revenues in excess of
direct operating
expenses................. $22,339,620 $16,674,513 $39,014,133 $43,173,851
=========== =========== =========== ===========
<CAPTION>
ACQUIRED PROPERTIES -
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998(4) 1997(4) 1996(4)
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales........ $79,418,094 $120,820,981 $109,265,962
Direct operating expenses:
Lease operating
expenses............... 18,114,389 22,289,235 15,012,345
Oil and gas production
taxes.................. 8,096,670 10,450,116 9,221,071
----------- ------------ ------------
Total direct
operating
expenses......... 26,211,059 32,739,351 24,233,416
----------- ------------ ------------
Revenues in excess of
direct operating
expenses................. $53,207,035 $ 88,081,630 $ 85,032,546
=========== ============ ============
</TABLE>
- ---------------
(1) Data for the six months ended June 30, 1999, excludes revenues of $1,911,604
and direct operating expenses of $259,018 associated with the mineral
interest properties, which were sold subsequent to the acquisition of the
acquired properties.
(2) These amounts represent the revenues and direct operating expenses of Prize
for the three months ended September 30, 1999, and include results of the
acquired properties as operated by Prize for that period.
(3) Data for the nine months ended September 30, 1998, excludes revenues of
$4,007,254 and direct operating expenses of $600,493 associated with the
mineral interest properties, which were sold subsequent to the acquisition
of the acquired properties.
(4) These amounts are derived from the audited statements of revenues and direct
operating expenses. The data for the years ended December 31, 1998, 1997 and
1996, excludes revenues of $5,136,967, $7,189,442 and $8,578,608,
respectively, as well as direct operating expense of $793,131, $1,115,379
and $1,037,518, respectively, associated with the mineral interest
properties, which were sold subsequent to the acquisition of the acquired
properties.
9
<PAGE> 18
The following table presents unaudited historical and pro forma financial
information for Prize for the periods indicated. The table should be read in
conjunction with the unaudited historical and pro forma condensed financial
statements for Prize included elsewhere in this document. The unaudited pro
forma statement of operations data for the nine months ended September 30, 1999,
and the year ended December 31, 1998, assumes that the purchase of properties
from Pioneer, the subsequent sale of the mineral interests and the acquisition
of Sunterra Petroleum LLC occurred on January 1, 1998.
<TABLE>
<CAPTION>
HISTORICAL PRIZE
PRO FORMA PRIZE -------------------
-------------------------------------- JANUARY 15, 1999
NINE MONTHS ENDED YEAR ENDED (INCEPTION) THROUGH
SEPTEMBER 30, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Oil and gas sales........................ $57,218 $81,760 $ 22,693
Costs and expenses:
Lease operating expenses................. 17,406 27,001 6,019
Depreciation, depletion and
amortization.......................... 12,493 19,535 4,646
General and administrative............... 3,972 6,500 722
------- ------- ---------
Total costs and expenses......... 33,871 53,036 11,387
------- ------- ---------
Operating income (loss).......... 23,347 28,724 11,306
Other
Interest (income) expense................ 8,085 10,797 3,101
Other.................................... (116) -- (204)
------- ------- ---------
Total other...................... 7,969 10,797 2,897
------- ------- ---------
Income before tax.......................... 15,378 17,927 8,409
Provision for income tax................... 5,685 6,628 2,745
------- ------- ---------
Net income....................... 9,693 11,299 5,664
Less preferred dividends................... (1,454) (1,841) (450)
------- ------- ---------
Income available to common stockholders.... $ 8,239 $ 9,458 $ 5,214
======= ======= =========
Balance sheet data (end of period):
Working capital.......................... N/A N/A $ 9,024
Property, plant and equipment, net....... N/A N/A $ 212,486
Total assets............................. N/A N/A $ 247,103
Long-term debt........................... N/A N/A $ 139,000
Preferred stock.......................... N/A N/A $ 30,450
Stockholders' equity..................... N/A N/A $ 84,857
</TABLE>
10
<PAGE> 19
SUMMARY OF OIL AND GAS RESERVE AND PRODUCTION INFORMATION
The following table sets forth summary information with respect to the
historical proved oil and gas reserves of Prize and Vista and the pro forma
proved oil and gas reserves of New Prize as of September 30, 1999.
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
PRIZE VISTA NEW PRIZE
---------- ---------- ---------
<S> <C> <C> <C>
TOTAL PROVED RESERVES:
Oil/liquids (MBbls)......................................... 35,752 14,839 50,591
Natural gas (MMcf).......................................... 251,806 38,410 290,216
Total (MBOE)................................................ 77,720 21,241 98,961
Percent proved developed.................................... 79% 67% 77%
PV-10 (in thousands)........................................ $450,419 $153,344 $603,763
TOTAL PROVED RESERVES (MBOE) BY CORE OPERATING AREAS:
Permian Basin............................................... 27,551 19,284 46,835
Onshore Gulf Coast.......................................... 30,675 1,845 32,520
Mid-Continent............................................... 19,494 112 19,606
-------- -------- --------
77,720 21,241 98,961
======== ======== ========
</TABLE>
The following table summarizes production, revenue and cost data for Vista
and pro forma production, revenue and cost data for Prize and New Prize for the
nine months ended September 30, 1999.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA
PRIZE VISTA NEW PRIZE
--------- ---------- ---------
<S> <C> <C> <C>
Average Daily Production:
Oil/liquids (Bbls)........................................ 6,808 2,519 9,327
Natural gas (Mcf)......................................... 57,797 8,219 66,016
Total (BOE)............................................... 16,441 3,889 20,330
Oil and gas sales (in thousands)............................ $ 57,218 $12,857 $ 70,075
Direct operating expenses (in thousands).................... (17,406) (4,656) (22,062)
-------- ------- --------
Revenues in excess of direct operating expenses (in
thousands)................................................ $ 39,812 $ 8,201 $ 48,013
</TABLE>
11
<PAGE> 20
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA FOR NEW PRIZE
The following table sets forth summary unaudited pro forma combined
financial data that is presented to give effect to the merger. The information
was prepared based on the following assumptions:
- The merger will be accounted for as a purchase business combination under
generally accepted accounting principles.
- The income statement data is presented as if the merger had been
consummated on January 1, 1998.
- The balance sheet data is presented as if the merger had been consummated
on September 30, 1999.
You should consider the following:
- The unaudited pro forma combined financial data are not necessarily
indicative of the results of operations or the financial position that
would have occurred had the merger been consummated on January 1, 1998,
nor are they necessarily indicative of future results of operations or
financial position.
The unaudited pro forma combined financial data should be read together
with the historical consolidated financial statements of Vista and Prize and the
unaudited pro forma combined financial statements contained elsewhere in this
document.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................. $ 70,075 $ 98,962
Lease operating expenses.................................. 22,062 35,077
Exploration costs......................................... 53 161
General and administrative................................ 5,453 8,832
Depreciation, depletion and amortization.................. 17,898 27,281
Amortization of unit awards............................... -- 4,262
Operating income.......................................... 24,609 23,349
Interest expense, net..................................... 11,125 13,976
Net income................................................ 8,697 5,677
Income available to common stockholders................... 7,243 3,836
EARNINGS PER SHARE:
Basic..................................................... $ .68 $ .36
Diluted................................................... .59 .36
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic..................................................... 10,650,584 10,650,584
Diluted................................................... 14,860,097 10,650,584
BALANCE SHEET DATA (at September 30, 1999):
Properties and equipment, net............................. $ 315,829 N/A
Total assets.............................................. 355,365 N/A
Long-term debt............................................ 191,634 N/A
Convertible voting preferred.............................. 30,450 N/A
Stockholders' equity...................................... 109,450 N/A
</TABLE>
12
<PAGE> 21
RISK FACTORS
You should carefully consider the following risk factors in determining
whether to vote to approve the merger agreement and, in the case of Vista
stockholders, the reverse stock split and the change of the company's name to
"Prize Energy Corp."
RISK FACTORS RELATING TO THE MERGER
THE VALUE OF NEW PRIZE SECURITIES THAT THE PRIZE STOCKHOLDERS WILL RECEIVE MAY
DECREASE BETWEEN THE DATE OF THIS DOCUMENT AND COMPLETION OF THE MERGER.
The number of shares of New Prize common stock to be received in the merger
for each share of Prize common stock is fixed and the number of shares of New
Prize convertible preferred stock to be received in the merger for each share of
Prize convertible preferred stock is fixed. Therefore, because the market price
of Vista common stock is subject to fluctuation, the value at the time of the
merger of the consideration to be received by the Prize stockholders will depend
on the market price of Vista common stock at that time and may be lower than the
market price of Vista common stock on the date of this document. For historical
and current market prices of Vista common stock, see "Market Price Data" on page
23.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE VISTA AND PRIZE AND MAY NOT REALIZE
EXPECTED BENEFITS.
Vista and Prize have entered into the merger agreement with the expectation
that the merger will result in cost savings, operating efficiencies, revenue
enhancements and other synergies. However, achieving the anticipated benefits of
the merger will depend in part upon the integration of the businesses of Vista
and Prize in an efficient manner, and there can be no assurance that this will
occur. For a discussion of other factors and assumptions related to the
anticipated benefits of the merger, see "The Merger -- Vista's Reasons for the
Merger" on page 30 and "The Merger -- Prize's Reasons for the Merger" on page
31.
IF THE MERGER DOES NOT OCCUR, THE COMPANIES WILL NOT BENEFIT FROM THE EXPENSES
THEY HAVE INCURRED IN THE PURSUIT OF THE MERGER.
The merger may not be completed. If the merger is not completed, Vista and
Prize will have incurred substantial expenses for which no ultimate benefit will
have been received by either Vista or Prize. Additionally, if the merger
agreement is terminated, Vista may be required to pay Prize a $1,100,000
termination fee and to reimburse Prize for expenses in the amount of $400,000.
See "The Merger Agreement -- Termination Fee and Expenses" on page 100.
NATURAL GAS PARTNERS HAS THE POWER TO DETERMINE THE OUTCOME OF THE VOTE OF BOTH
THE VISTA COMMON STOCKHOLDERS AND THE PRIZE COMMON STOCKHOLDERS.
Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
collectively own approximately 52% of the outstanding shares of Vista common
stock, and Natural Gas Partners V, L.P. owns common stock constituting
approximately 60% of the outstanding voting shares of Prize, including both
common stock and convertible preferred stock. If these Natural Gas Partners
investment partnerships vote in favor of the merger agreement, it will be
approved by the common stockholders of Vista and Prize, despite the vote of any
other Vista or Prize common stockholders. Similarly, if these Natural Gas
Partners investment partnerships vote against the merger agreement, it will not
be approved and the merger will not close. Each of the Natural Gas Partners
partnerships has indicated that it will vote in favor of the merger.
THE REVERSE STOCK SPLIT MAY NOT HAVE THE ANTICIPATED BENEFICIAL EFFECT ON THE
NEW PRIZE COMMON STOCK.
There can be no assurance that the market price of the New Prize common
stock immediately after implementation of the one-for-seven reverse stock split
will increase and, if it increases, no assurance that
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<PAGE> 22
the increase can be maintained for any period of time, or that the market price
will approximate seven times the market price before the reverse stock split. In
addition, there can be no assurance that any increase in the market price of the
New Prize common stock will increase investment in the stock by brokerage firms
or individual investors, or otherwise facilitate New Prize's access to the
equity markets, especially since there are many other factors that affect demand
for stock. Finally, the liquidity of the New Prize common stock could be
adversely affected by the reduced number of shares that will be outstanding
after the reverse stock split.
THE INTERESTS OF DIRECTORS AND OFFICERS OF VISTA AND PRIZE MAY DIFFER FROM YOUR
INTERESTS BECAUSE THE MERGER WILL RESULT IN DIRECT OR INDIRECT ECONOMIC GAIN.
Vista's principal stockholders are Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P. David R. Albin, John S. Foster and Kenneth A.
Hersh, who serve as directors of Vista, are the principal managers of, and own
interests in, both Natural Gas Partners partnerships. In addition, each of C.
Randall Hill, Vista's chairman and chief executive officer, Steven D. Gray,
Vista's president, and R. Cory Richards, Vista's executive vice president, will
be entitled to receive a cash severance payment in the amount of $333,333
following completion of the merger. Messrs. Hill and Gray also serve as
directors of Vista. Consequently, these Vista directors have a conflicting
interest because of the resulting direct or indirect economic benefit to them.
Prize's principal stockholder is Natural Gas Partners V, L.P. Messrs. Albin
and Hersh, who serve as directors of Prize, are the principal managers of, and
own interests in, Natural Gas Partners V, L.P. In addition, Pioneer Natural
Resources USA, Inc. owns all of Prize's preferred stock. Scott D. Sheffield and
Mark L. Withrow, who serve as directors of Prize, are executive officers of
Pioneer. Consequently, these Prize directors have a conflicting interest because
of the resulting indirect economic benefit to them.
RISK FACTORS RELATING TO NEW PRIZE
A DECREASE IN OIL AND NATURAL GAS PRICES WILL ADVERSELY AFFECT OUR FINANCIAL
RESULTS.
Our success will depend on the market prices of oil and gas. These prices
tend to fluctuate significantly. A decrease in oil and gas prices will not only
reduce revenues and profits, but will also reduce the quantities of reserves
that are commercially recoverable and may result in charges to earnings for
impairment of the value of these assets. If oil and gas pricing conditions
decline in the future, we might not be able to generate enough cash flow from
operations to meet our obligations and make planned capital expenditures.
ESTIMATES OF PROVED RESERVES MAY CHANGE.
The calculations of proved reserves of crude oil and natural gas included
in this document have been prepared by Vista and Prize, respectively. The
accuracy of any reserve estimate is a function of the quality of available data,
engineering and geological interpretations and judgment and the assumptions used
regarding quantities of recoverable oil and natural gas reserves and prices for
crude oil and natural gas. Actual prices, production, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves
will vary from those assumed in our estimates, and these variances may be
significant. Any significant variance from the assumptions used could result in
the actual quantity of our reserves and future net cash flow being materially
different from the estimates in our reserve reports. In addition, results of
drilling, testing and production and changes in crude oil and natural gas prices
after the date of the estimate may result in substantial upward or downward
revisions.
PRIZE HAS A LIMITED OPERATING HISTORY AND NEW PRIZE MAY NOT BE PROFITABLE.
Prize, which began operations in January 1999, has a brief operating
history upon which stockholders may base their evaluation of its performance. As
a result of its brief operating history and rapid growth, the operating results
from historical periods are not readily comparable and may not be indicative of
future
14
<PAGE> 23
results. There can be no assurance that New Prize will continue to experience
growth in, or maintain its current level of, revenues, oil and gas reserves or
production. Prize's rapid growth has placed significant demands on its
administrative, operational and financial resources. Any future growth of New
Prize's oil and gas reserves, production and operations would place significant
further demands on Prize's financial, operational and administrative resources.
New Prize's future performance and profitability will depend in part on its
ability to successfully integrate the administrative and financial functions of
acquired properties, like the Pioneer properties, and companies, like Vista,
into New Prize's operations and to implement necessary enhancements to its
management systems to respond to changes in its business. There can be no
assurance that New Prize will be successful in these efforts.
THE SUCCESS OF FUTURE ACQUISITIONS BY NEW PRIZE IS UNCERTAIN.
Prize's rapid growth since its inception in January 1999 has been the
result of acquisitions of producing properties. New Prize expects to continue to
evaluate and pursue acquisition opportunities available on terms management
considers favorable to New Prize. The successful acquisition of producing
properties involves an assessment of recoverable reserves, future oil and gas
prices, operating costs, potential environmental and other liabilities and other
factors beyond New Prize's control. This assessment is necessarily inexact and
its accuracy is inherently uncertain. In connection with this assessment, New
Prize will perform a review of the subject properties it believes to be
generally consistent with industry practices. This review, however, will not
reveal all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection is
undertaken. New Prize may in many cases assume pre-closing liabilities,
including environmental liabilities, and will likely acquire interests in
properties on an "as is" basis. There can be no assurance that New Prize's
acquisitions will be successful. The failure of New Prize to successfully
complete acquisitions could have a material adverse effect on New Prize.
NEW PRIZE MAY NOT BE ABLE TO MEET ITS CAPITAL REQUIREMENTS.
New Prize will need to continue to make substantial capital expenditures
for the acquisition, enhancement, exploitation and production of reserves. At
September 30, 1999, on a pro forma basis, the companies had cash reserves of
$9.8 million and working capital of $2.3 million. Without successful
enhancement, exploitation or acquisition activities, our reserves and revenues
will decline over time. New Prize anticipates that its oil and gas capital
expenditures will be between $50 million and $60 million for drilling and
recompletion activity in 2000. New Prize intends to finance its capital
expenditures primarily with funds provided by operations and borrowings under
its credit agreement, to be supplemented from time to time with funds obtained
from additional equity offerings. New Prize's ability to obtain additional debt
and equity financing upon acceptable terms will be dependent upon a number of
economic factors that are beyond the control of New Prize, such as the
prevailing price of commodities and the general condition of the economy. If New
Prize's cash flow from operations and availability under existing credit
facilities are not sufficient to satisfy capital expenditure requirements, there
can be no assurance that additional debt or equity financing will be available
to allow it to fund its continued growth. See "Prize -- Management's Discussion
and Analysis of Financial Condition and Results of Operations of Prize --
Liquidity and Capital Resources -- Capital Sources" on page 77.
HEDGING ACTIVITIES COULD RESULT IN LOSSES TO NEW PRIZE.
Prize and Vista currently use, and it is expected that New Prize will
continue to use, energy swap arrangements and financial futures to reduce
sensitivity to oil and gas price volatility. If New Prize's reserves are not
produced at the rates estimated by New Prize due to inaccuracies in the reserve
estimation process, operational difficulties or regulatory limitations, New
Prize will be required to satisfy obligations it may have under fixed price
sales and hedging contracts on potentially unfavorable terms without the ability
to hedge that risk through sales of comparable quantities of its own production.
Further, the terms under which New Prize enters into fixed price sales and
hedging contracts are based on
15
<PAGE> 24
assumptions and estimates of numerous factors such as cost of production and
pipeline and other transportation costs to delivery points. Substantial
variations between the assumptions and estimates used and actual results
experienced could materially adversely affect anticipated profit margins and New
Prize's ability to manage the risk associated with fluctuations in oil and gas
prices. Additionally, fixed price sales and hedging contracts limit the benefits
New Prize will realize if actual prices rise above the contract prices. Based
upon prices in effect at September 30, 1999, the fair value (loss) of the crude
oil and natural gas hedging instruments were $(5.5) million for Vista and $(8.9)
million for Prize. In addition, fixed price sales and hedging contracts are
subject to the risk that the counter-party may prove unable or unwilling to
perform its obligations under these contracts. Any significant nonperformance
could have a material adverse financial effect on New Prize.
NEW PRIZE'S SIGNIFICANT INDEBTEDNESS COULD HAVE IMPORTANT CONSEQUENCES TO YOU.
After the merger New Prize will have a substantial amount of indebtedness.
At September 30, 1999, on a pro forma basis, New Prize's total long term debt
outstanding was approximately $193 million and New Prize had a long term debt to
total capitalization ratio of 64 percent. New Prize may incur additional
indebtedness under New Prize's credit facility. Our significant indebtedness
could have important consequences to you. For example:
- New Prize's ability to obtain any necessary financing in the future for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes may be limited;
- a portion of New Prize's cash flow from operations must be utilized for
the payment of interest on New Prize's indebtedness and will not be
available for financing capital expenditures or other purposes;
- New Prize's level of indebtedness and the covenants governing New Prize's
current indebtedness could limit New Prize's flexibility in planning for,
or reacting to, changes in New Prize's business because financing options
may be limited or prohibited;
- New Prize's level of indebtedness may make New Prize more vulnerable
during periods of low oil and gas prices or in the event of a downturn in
New Prize's business because of New Prize's fixed debt service
obligations;
- it is anticipated that the terms of New Prize's credit facility will
require New Prize to make interest and principal payments and to maintain
stated financial covenants; and
- if the requirements of Prize's new credit facility are not satisfied, the
lenders under this facility would be entitled to accelerate the payment
of all outstanding indebtedness under this facility and, in such event,
New Prize cannot assure you that it would have sufficient funds available
or could obtain the financing required to meet its obligations.
COSTS TO COMPLY WITH ENVIRONMENTAL LAWS ARE SIGNIFICANT.
Environmental and other governmental laws have increased the costs to plan,
design, drill, install, operate and abandon oil and natural gas wells and
related facilities. New Prize may expend significant financial and managerial
resources to comply with environmental laws although, to date, the expenditures
for environmental compliance made by both Vista and Prize have been immaterial.
Increasingly strict environmental laws and enforcement policies, and claims for
damages to property, employees, other persons and the environment resulting from
our operations, could cause us to incur substantial costs and liabilities. See
"Vista -- Business of Vista -- Governmental Regulation" on page 62 and
"Prize -- Business of Prize -- Governmental Regulation" on page 84.
MARKETABILITY OF NEW PRIZE'S PRODUCTION MAY BE AFFECTED BY FACTORS BEYOND ITS
CONTROL.
The marketability of New Prize's production depends in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. Most of New Prize's natural gas will be delivered
through gathering systems and pipelines that are not owned by New Prize. Federal
16
<PAGE> 25
and state regulation of oil and gas production and transportation, tax and
energy policies, changes in supply and demand and general economic conditions
all could adversely affect New Prize's ability to produce and market its oil and
gas.
OUR SUCCESS DEPENDS ON KEY MEMBERS OF OUR MANAGEMENT.
New Prize's success will be highly dependent on a limited number of senior
management personnel, none of whom will be subject to employment contracts. Loss
of the services of any of these individuals could have a material adverse effect
on New Prize's operations.
A SMALL NUMBER OF STOCKHOLDERS WILL CONTROL NEW PRIZE.
Upon completion of the merger, directors, executive officers and principal
stockholders of New Prize, and their affiliates, will beneficially own
approximately 92% of New Prize's outstanding common stock, assuming conversion
of New Prize's convertible preferred stock. Accordingly, these stockholders, as
a group, will be able to control the outcome of stockholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in New Prize's certificate of incorporation or bylaws and the
approval of mergers and other significant corporate transactions. The existence
of these levels of ownership concentrated in a few persons makes it unlikely
that any other holder of New Prize common stock will be able to affect the
management or direction of New Prize. These factors may also have the effect of
delaying or preventing a change in the management or voting control of New
Prize, including transactions that otherwise could involve payment of a premium
over prevailing market prices to holders of New Prize common stock.
FUTURE SALES OF NEW PRIZE COMMON STOCK MAY RESULT IN A DECREASE IN VALUE TO
EXISTING STOCKHOLDERS.
After the merger, assuming the merger closes on February 8, 2000, New Prize
will have 10,629,488 shares of common stock and 3,984,197 shares of convertible
preferred stock outstanding. Of those shares, 816,865 shares of common stock
will be freely transferable without restriction, and all of the shares of
convertible preferred stock and 9,812,623 shares of common stock will be
currently eligible for sale subject to compliance with the requirements of Rule
144 or Rule 145. Future sales of substantial amounts of common stock, or the
perception that these sales could occur, may affect the market price of our
common stock.
THE NEW PRIZE BOARD OF DIRECTORS WILL BE AUTHORIZED TO ISSUE NEW SHARES OF
PREFERRED STOCK.
New Prize's certificate of incorporation will authorize its board of
directors to issue up to 10 million shares of preferred stock without
stockholder approval and to set the rights, preferences and other designations,
including voting rights, of those shares as the board of directors may
determine. These provisions, alone or in combination with each other may
discourage transactions involving actual or potential changes of control of New
Prize, including transactions that otherwise could involve payment of a premium
over prevailing market prices to holders of New Prize common stock. New Prize
also is subject to provisions of the Delaware General Corporation Law that may
make some business combinations more difficult.
17
<PAGE> 26
FORWARD LOOKING STATEMENTS
This document includes "forward looking statements" as defined by the
Securities and Exchange Commission. These statements concern the companies'
plans, expectations and objectives for future operations. All statements, other
than statements of historical facts, included in this document that address
activities, events or developments that the companies expect, believe or
anticipate will or may occur in the future are forward looking statements and
include the following:
- completion of the proposed merger;
- reserve estimates;
- future production of oil and gas;
- future acquisition of oil and gas producing properties;
- future drilling activity and other capital expenditures; and
- future financial performance.
These forward looking statements are based on assumptions, which the
companies believe are reasonable, but which are open to a wide range of
uncertainties and business risks. Factors that could cause actual results to
differ materially from those anticipated are discussed in the discussion of risk
factors in this document and in Vista's periodic filings with the Securities and
Exchange Commission, including its annual report on Form 10-K for the year ended
December 31, 1998. For a discussion of some of these risks and uncertainties,
which could cause actual results to differ from those contained in the forward
looking statements, see "Risk Factors" on page 13 of this document.
18
<PAGE> 27
VISTA SPECIAL MEETING
This document is furnished in connection with the solicitation of proxies
from the holders of Vista common stock by the Vista board of directors for use
at the Vista special meeting. This document and accompanying form of proxy are
first being mailed to the stockholders of Vista on or about January , 2000.
TIME AND PLACE; PURPOSE
The Vista special meeting will be held at 10:00 a.m., local time, on
Tuesday, February 8, 2000, at The Midland Room, Fasken Center, Tower II, 2nd
Floor, 550 West Texas Avenue, Midland, Texas 79701. At the Vista special meeting
and any adjournment or postponement of the Vista special meeting, the
stockholders of Vista will be asked to consider and vote upon:
- the approval and adoption of the merger agreement and a one-for-seven
reverse stock split of all issued and outstanding shares of Vista common
stock;
- the change of the company's name to "Prize Energy Corp."; and
- any other matters as may properly come before the Vista special meeting.
Vista stockholder approval and adoption of the merger agreement, the
reverse stock split and the change of name is required by the Delaware General
Corporation Law and the rules of the American Stock Exchange.
THE VISTA BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT,
THE MERGER, THE REVERSE STOCK SPLIT AND THE CHANGE OF NAME. AFTER RECEIVING THE
RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF VISTA, THE
VISTA BOARD HAS DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE MERGER
ARE FAIR TO, ADVISABLE AND IN THE BEST INTERESTS OF, VISTA AND ITS STOCKHOLDERS,
AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF VISTA COMMON STOCK VOTE FOR:
- APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE ONE-FOR-SEVEN
REVERSE STOCK SPLIT; AND
- THE CHANGE OF THE COMPANY'S NAME TO "PRIZE ENERGY CORP."
One or more representatives of Arthur Andersen LLP are expected to be
present at the special meeting to answer questions of Vista stockholders and to
make a statement if so desired.
RECORD DATE; VOTING RIGHTS AND PROXIES
Only holders of record of Vista common stock at the close of business on
December 30, 1999, are entitled to notice of and to vote at the Vista special
meeting. As of the record date, there were 16,367,328 shares of Vista common
stock outstanding, each of which entitles its holder to one vote. There were
approximately 598 holders of record on the record date.
All shares of Vista common stock represented by properly executed proxies
will, unless these proxies have been previously revoked, be voted in accordance
with the instructions indicated in these proxies. If no instructions are
indicated, these shares of Vista common stock will be voted FOR approval and
adoption of the merger agreement and the one-for-seven reverse stock split and
FOR approval of the change of the company's name to "Prize Energy Corp." Vista
does not know of any matters other than the approval of the merger agreement and
the reverse stock split and the change of the company's name that are to come
before the Vista special meeting. If any other matter or matters are properly
presented for action at the Vista special meeting, the persons named in the
enclosed form of proxy and acting under the proxy will have the discretion to
vote on those matters in accordance with their best judgment. A stockholder who
has given a proxy may revoke it at any time prior to its exercise by giving
written notice of revocation to Vista, by signing and returning a later dated
proxy, or by voting in person at the Vista special meeting.
19
<PAGE> 28
SOLICITATION OF PROXIES
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers and employees of Vista in person or by telephone,
telegram or other means of communication. Those directors, officers and
employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with the solicitation.
Arrangements have also been made with brokerage firms, banks, custodians,
nominees and fiduciaries for the forwarding of proxy solicitation materials to
owners of Vista common stock held of record by those persons. Those firms will
be reimbursed for reasonable expenses incurred in forwarding those materials.
INFORMATION AGENT
Vista has appointed American Stock Transfer & Trust Company as its
information agent with respect to the merger. Any questions or requests for
additional copies of this document or a proxy card may be directed to the
information agent at the following address and telephone number:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Shareholder Relations
(800) 937-5449
Any stockholder of Vista whose shares are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee may also receive
copies of this document or a proxy card by contacting such nominee.
Vista will pay the fees and expenses of the information agent and has also
agreed to indemnify the information agent from liabilities that it may incur in
connection with the merger.
QUORUM
The presence in person or by properly executed proxy of the holders of a
majority of the issued and outstanding shares of Vista common stock entitled to
vote is necessary to constitute a quorum at the Vista special meeting.
REQUIRED VOTE; FAILURE TO VOTE AND BROKER NON-VOTES
Approval and adoption of the merger agreement, including the reverse stock
split, and the change of the company's name requires the affirmative vote of a
majority of the outstanding shares of Vista common stock.
Any failure to vote, or a vote to abstain, will have the effect of a vote
against the merger agreement, including the reverse stock split, and the name
change.
Under American Stock Exchange rules, brokers who hold shares in street name
for customers have the authority to vote on "routine" proposals when they have
not received instructions from beneficial owners. However, these brokers are
precluded from exercising their voting discretion with respect to the approval
and adoption of non-routine matters such as those being presented at the Vista
special meeting and, thus, absent specific instructions from the beneficial
owner of the shares, brokers are not empowered to vote the shares with respect
to the merger agreement, including the reverse stock split, and the name change.
These "broker non-votes" will have the effect of a vote against the merger
agreement, including the reverse stock split, and the name change.
20
<PAGE> 29
PRIZE SPECIAL MEETING
This document is furnished in connection with the solicitation of proxies
from the holders of Prize common and convertible preferred stock by the Prize
board of directors for use at the Prize special meeting. This document and
accompanying form of proxy are first being mailed to the stockholders of Prize
on or about January , 2000.
TIME AND PLACE; PURPOSE
The Prize special meeting will be held at 10:00 a.m., local time, on
Tuesday, February 8, 2000, at 3500 William D. Tate, Suite 200, Grapevine, Texas
76051. At the Prize special meeting and any adjournment or postponement of the
Prize special meeting, the stockholders of Prize will be asked to consider and
vote upon the approval and adoption of the merger agreement and any other
matters as may properly come before the Prize special meeting.
Prize common and convertible preferred stockholder approval and adoption of
the merger agreement is required by the Delaware General Corporation Law.
THE PRIZE BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT
AND THE MERGER, UNANIMOUSLY BELIEVES THAT THE TERMS OF THE MERGER AND THE MERGER
AGREEMENT ARE FAIR TO, ADVISABLE AND IN THE BEST INTERESTS OF, PRIZE AND ITS
COMMON AND CONVERTIBLE PREFERRED STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF PRIZE COMMON STOCK AND CONVERTIBLE PREFERRED STOCK VOTE FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE; VOTING RIGHTS AND PROXIES
Only holders of record of Prize common stock and convertible preferred
stock at the close of business on December 30, 1999, are entitled to notice of
and to vote at the Prize special meeting. As of the record date, there were
4,979.201 shares of Prize common stock outstanding, each of which entitles its
holder to one vote, and 2,342.308 shares of Prize convertible preferred stock
outstanding, each of which entitles its holder to one vote. There were seven
holders of record of common stock and one holder of record of convertible
preferred stock on the record date.
All shares of Prize common stock and convertible preferred stock
represented by properly executed proxies will, unless these proxies have been
previously revoked, be voted in accordance with the instructions indicated in
the proxies. If no instructions are indicated, the shares of Prize common stock
and convertible preferred stock will be voted FOR approval and adoption of the
merger agreement. Prize does not know of any matters other than the approval of
the merger agreement that are to come before the Prize special meeting. If any
other matter or matters are properly presented for action at the Prize special
meeting, the persons named in the enclosed form of proxy and acting under the
proxy will have the discretion to vote on those matters in accordance with their
best judgment. A stockholder who has given a proxy may revoke it at any time
prior to its exercise by giving written notice of revocation to Prize by signing
and returning a later dated proxy, or by voting in person at the Prize special
meeting.
SOLICITATION OF PROXIES
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers and employees of Prize in person or by telephone,
telegram or other means of communication. Those directors, officers and
employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with the solicitation.
QUORUM
The presence in person or by properly executed proxy of a majority of the
issued and outstanding shares of Prize common stock and convertible preferred
stock entitled to vote is necessary to constitute a quorum at the Prize special
meeting.
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REQUIRED VOTE; FAILURE TO VOTE
It is a condition to the obligation of Vista to close under the merger
agreement that the merger agreement be approved and adopted by the affirmative
vote of a majority of the outstanding shares of Prize common stock and the
affirmative vote of a majority of the outstanding shares of Prize convertible
preferred stock. Pioneer has agreed to vote its shares of Prize convertible
preferred stock FOR approval of the merger agreement.
Any failure to vote, or a vote to abstain, will have the effect of a vote
against the merger agreement.
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<PAGE> 31
MARKET PRICE DATA
There is no established public trading market for the common stock or
convertible preferred stock of Prize. Application has been made for the
continued listing of the outstanding shares of Vista common stock, as shares of
New Prize common stock, and for the shares of New Prize common stock to be
issued in the merger and issuable upon conversion of shares of New Prize
convertible preferred stock received in the merger to be listed, on the American
Stock Exchange under the symbol "PRZ."
Vista common stock was first traded on the American Stock Exchange under
the symbol "VEI" on October 29, 1998. The following table sets forth the high
and low sales prices of Vista common stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
Quarter ended December 31 (from October 29)............... $3 3/8 $1 5/8
1999
Quarter ended March 31.................................... 2 1/8 1 1/8
Quarter ended June 30..................................... 2 1/2 1 1/4
Quarter ended September 30................................ 2 3/4 1 3/4
Quarter ended December 31................................. 2 11/16 1 1/2
2000
Quarter ending March 31 (through January 4)............... 1 15/16 1 1/2
</TABLE>
On October 8, 1999, the last full trading day prior to the public
announcement by Vista and Prize of the proposed merger, the last reported sales
price on the American Stock Exchange of the Vista common stock was $2 1/4 and
the high and low sales prices were $2 1/4 and $1 3/4, respectively. As of the
last trading date immediately before the date of this document, the last
reported sales price on the American Stock Exchange of the Vista common stock
was $ and the high and low sales prices were $ and $ , respectively.
On December 30, 1999, there were 16,367,328 shares of Vista common stock
outstanding held of record by 598 stockholders and there were 4,979.201 shares
of Prize common stock outstanding held of record by seven stockholders and
2,342.308 shares of Prize convertible preferred stock outstanding held of record
by one stockholder.
DIVIDEND POLICIES
Neither Vista nor Prize has paid cash dividends on its common stock. Prize
is currently prohibited from paying cash dividends on its common stock under its
existing bank credit facility and this prohibition is expected to be continued
in any amendment to this facility which is required as a result of the merger.
It is New Prize's intention to retain earnings to fund future growth and,
therefore, New Prize will not pay dividends in the foreseeable future.
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<PAGE> 32
THE MERGER
GENERAL
The merger agreement provides that, following the satisfaction or waiver of
the conditions contained in the merger agreement, a wholly-owned subsidiary of
Vista will be merged into Prize, with Prize surviving the merger as a
wholly-owned subsidiary of New Prize.
CONSIDERATION
Assuming the merger closes on February 8, 2000, each outstanding share of
Prize common stock, other than dissenting shares, will automatically be
converted into 1,665.187 shares of New Prize common stock and each share of
Prize convertible preferred stock, other than dissenting shares, will
automatically be converted into 1,665.187 shares of New Prize convertible
preferred stock. The above conversion ratio is based on the number of
outstanding shares of Prize and Vista stock as of the date of this document and
reflects the one-for-seven reverse stock split.
As a part of the merger, New Prize will assume each outstanding Prize
option to purchase shares of Prize common stock. These options will be
exercisable on the same terms as existed immediately before the merger, subject
to adjustment to reflect the merger and the one-for-seven reverse stock split.
AMENDMENT TO VISTA'S CERTIFICATE OF INCORPORATION
The merger agreement provides that, at the effective time of the merger,
Vista's certificate of incorporation will be amended to effect a one-for-seven
reverse stock split of all issued and outstanding shares of Vista common stock
and a change in its corporate name to "Prize Energy Corp." This amendment will
occur if it is approved by the requisite vote of Vista's stockholders and if the
merger is completed. If the merger is not completed, the certificate of
incorporation will not be amended.
APPOINTMENT OF NEW DIRECTORS AND EXECUTIVE MANAGEMENT
The merger agreement provides for the resignation of all of Vista's
executive officers and directors, except for Messrs. Albin and Hersh, who shall
continue to serve as directors of New Prize after completion of the merger.
After completion of the merger, the remaining members of New Prize's board of
directors will appoint Prize designees to fill the vacancies on the board. It is
anticipated that Prize will designate Philip B. Smith, Lon C. Kile, Scott D.
Sheffield and Mark L. Withrow to fill vacancies on the board.
After the merger, it is anticipated that the board of directors of New
Prize will subsequently appoint the current executive officers of Prize to serve
as executive officers of New Prize. See "The Merger Agreement -- Directors and
Officers of New Prize Following the Merger" on page 94.
OWNERSHIP OF NEW PRIZE FOLLOWING THE MERGER
The shares of New Prize common stock to be issued to holders of Prize
common stock in the merger, and the shares of New Prize common stock issuable on
the conversion of the shares of New Prize convertible preferred stock to be
issued to holders of Prize convertible preferred stock in the merger, will
constitute approximately 84% of New Prize common stock immediately after the
merger, assuming conversion of the New Prize convertible preferred stock. The
existing stockholders of Vista will hold approximately 16% of all the New Prize
common stock immediately after the merger, assuming conversion of the New Prize
convertible preferred stock.
BACKGROUND OF THE MERGER
GENERAL. Vista became a publicly traded company through its acquisition of
Midland Resources, Inc. on October 28, 1998. Vista's objectives as a public
company remained very similar to its objectives as a private company, which were
to rapidly grow its oil and gas reserves, production, cash flow and net asset
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<PAGE> 33
value. In addition, as a new public company, Vista also sought to increase the
share price and liquidity of its common stock. Vista's strategy to accomplish
these objectives had been through the acquisition and exploitation of proved oil
and gas reserves and the implementation and maintenance of a low cost operating
structure. Vista believed that it could implement its strategy and achieve its
objectives either by acquiring assets or by acquiring other oil and gas
companies, through mergers or otherwise.
On January 25, 1999, Prize Energy Corp. was organized by Natural Gas
Partners V, L.P. and Philip B. Smith. The initial board of directors of Prize
consisted of Kenneth A. Hersh, David R. Albin and Philip B. Smith. Prize was
formed to acquire and exploit producing oil and gas properties located in the
mid-continent area of the United States and to acquire oil and gas companies.
The staff of Prize immediately began evaluating various acquisition
opportunities and companies.
VISTA'S REVIEW OF POSSIBLE TRANSACTIONS. In accordance with its objectives
and strategy, Vista acquired a group of producing oil and gas properties from IP
Petroleum Company, Inc. in December 1998 for a purchase price of approximately
$19.1 million. Vista financed this acquisition through borrowings under its bank
credit facility with BankBoston, N.A. After the closing of the IP acquisition,
Vista began looking for additional acquisition opportunities. However, during
the first quarter of 1999, there were a limited number of asset acquisition
opportunities available within the entire industry. The industry was in a
severely depressed state due to the continued drop in oil prices from over
$20.00 per barrel in December 1997 to near $10.00 per barrel in December 1998.
Because of this prolonged and steep decline in oil prices, few companies elected
to sell oil and gas properties at the prevailing prices.
Given the scarcity of acquisition opportunities, Vista turned its attention
to finding and evaluating potential merger candidates within the industry.
Throughout January, February and March 1999, Vista analyzed and had discussions
with four oil and gas companies of similar size to Vista concerning a potential
merger with Vista. After discussions and evaluation, Vista concluded that a
merger with any of these potential merger candidates would not be in the best
interests of Vista's stockholders. Similar to Vista, each of these potential
merger candidates was a small, micro-cap company with less than $100 million of
market equity capitalization, a highly-leveraged balance sheet and little
liquidity in its stock.
In March and April 1999, Vista began analyzing and having discussions with
companies larger than Vista concerning potential merger opportunities.
Throughout this process, Vista had discussions with five companies that were
larger or significantly larger than Vista about a potential merger. Of these
companies, only two were seriously interested in evaluating a potential merger
with Vista. Throughout May, June and early July 1999, Vista had discussions with
each of these two companies. Vista and each of these two companies also
conducted substantial due diligence regarding each other to determine if a
merger with either company was feasible and in the best interests of their
respective stockholders. In early July, executive management of Vista had
discussions with the presidents of each of these two companies to determine
their respective interests in merging with Vista. In each case Vista was told
that, while the other company was interested in acquiring Vista through a
merger, its best offer would have consisted of an amount of its own stock,
having a market value substantially less than the then current market value of
Vista's common stock. Vista decided not to pursue further merger discussions
with either company unless and until the time it would be willing to offer
merger consideration that was at least equal to the value of Vista's market
equity capitalization.
PRIZE'S ACQUISITION OF PIONEER PROPERTIES. On April 15, 1999, Costilla
Energy, Inc. announced that it had been unable to consummate the acquisition of
oil and gas properties from affiliates of Pioneer Natural Resources Company.
Within a few days, Lon C. Kile, who at that time was an executive officer of
Pioneer, and Mr. Smith, who at that time was a member of the board of directors
of Pioneer, began a joint evaluation of those same properties to determine if
Prize would be interested in making an offer to acquire the properties. During
the following month, Prize submitted an offer to purchase properties from
Pioneer, located primarily in Texas and Oklahoma. In response to this offer,
Pioneer initiated a new auction process for the properties under the supervision
of a special committee of Pioneer's board of directors, which excluded Mr. Smith
and Mr. Hersh, who at that time was a member of the board of
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<PAGE> 34
directors of Pioneer. After evaluating a number of competing offers received by
Pioneer, the special committee ultimately determined to sell the properties to
Prize. On May 16, 1999, Prize and affiliates of Pioneer signed a purchase and
sale agreement for the purchase of Pioneer properties located primarily in Texas
and Oklahoma. Also on May 16, 1999, Mr. Kile resigned from Pioneer and Messrs.
Hersh and Smith resigned from the board of directors of Pioneer. The purchase of
the Pioneer properties by Prize was completed on June 29, 1999. As a part of the
Pioneer acquisition, Pioneer received convertible preferred stock of Prize
valued at $30 million. Following the Pioneer acquisition, Mr. Kile joined Prize
as president and chief operating officer and Scott D. Sheffield and Mark L.
Withrow, senior executives of Pioneer, were added to the board of directors of
Prize. The business plan of Prize was to exploit and develop the Pioneer
properties and to acquire other producing properties. During June, July and
August 1999, Prize completed its staffing and commenced these exploitation
efforts.
VISTA AND PRIZE BEGIN DISCUSSIONS WITH EACH OTHER. On May 17, 1999, while
Mr. Smith was in Midland, Texas, acquiring due diligence data pertaining to the
Pioneer properties, he met with C. Randall Hill, chairman and chief executive
officer of Vista, and discussed the pending purchase of the Pioneer properties
by Prize. As part of that discussion, it was noted that many of Vista's
properties were in the vicinity of the Pioneer properties, and that Vista
currently was in the process of evaluating its strategic alternatives. Mr. Hill
advised Mr. Smith that Vista had engaged in discussions with other companies
over the prior several months to assess its strategic alternatives.
In early June 1999, Messrs. Hill and Smith had further discussions about
Prize's pending acquisition of producing properties from Pioneer. During these
discussions, Messrs. Hill and Smith discussed the oil and gas business in
general and the possibility of combining Vista and Prize in the future to create
a mid-sized independent public oil and gas company with more potential growth
prospects and access to public capital markets. Mr. Hill and Mr. Smith agreed to
consider the idea further after Prize had closed its acquisition of the Pioneer
properties.
Prize closed its acquisition of the Pioneer properties on June 29, 1999. On
that day, Mr. Hill and Steven D. Gray, president of Vista, met in Vista's
offices in Midland with Mr. Smith and Mr. Kile concerning each company's
interest in pursuing further discussions about a potential merger of Vista and
Prize. The parties agreed to explore the possibility of such a transaction and
agreed to exchange limited information with each other.
During an industry conference hosted by Natural Gas Partners in Santa Fe,
New Mexico, in mid-July, members of Vista's executive management met with Prize
executives about a potential Vista and Prize merger. The parties discussed in
detail their respective companies' properties, financial position, goals,
objectives and operating philosophies and determined that further discussions
were desirable. The parties agreed to enter into detailed discussions about the
proposed merger and to conduct due diligence investigations during the next 30
days, including the exchange of summary reserve data for each company.
During the final two weeks of July and the first two weeks of August, the
parties exchanged due diligence information and had several due diligence
meetings concerning each other's properties, reserves, production and financial
position.
On August 4, 1999, Mr. Smith and Mr. Kile met with Mr. Hersh to discuss
possible acquisition possibilities and business alternatives for Prize. The
meeting included discussions about several publicly traded companies that could
be potential merger candidates for Prize based on publicly available
information. Vista was included among these candidates. Messrs. Hersh, Smith and
Kile concluded that discussions with Vista management should continue, but that
representatives of Natural Gas Partners should not be involved in any detailed
discussions or negotiations with Vista in light of the Natural Gas Partners
partnerships' ownership interests in Vista.
On August 5, 1999, a meeting was held in the Midland, Texas, office of
Vista between executive management of Vista and executive management of Prize.
At the meeting, detailed reservoir engineering, geological and accounting data
concerning Vista was reviewed and discussed. It was agreed at this meeting
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<PAGE> 35
that Vista and Prize should exchange additional engineering reports and
accounting data. During the next several days this data was exchanged and
analyzed by the respective parties.
On August 17, 1999, meetings between representatives of Prize and Vista
were held in the Fort Worth office of Natural Gas Partners. In the first
meeting, technical representatives from Prize explained various aspects of the
Prize reserves to technical representatives from Vista. In subsequent meetings,
the executive management of Prize and Vista met to discuss aspects of valuations
of Prize and Vista and the relative merits of different valuation measures. It
was determined that, among other factors, Vista had a higher amount of financial
leverage than Prize, a higher percentage of oil to total reserves than Prize, a
higher percentage of non-producing reserves than Prize, and had scheduled
development of its non-producing reserves on a very fast time table. The effect
of this scheduling on different financial measurements was discussed in detail.
On August 18, 1999, additional discussions were held via telephone
conferences between executive management of Vista and executive management of
Prize. Late in the day, Prize made a proposal to Vista regarding the basic terms
of a proposed merger which included a proposed split of the equity of the
combined company to be held 16% by Vista stockholders and 84% by Prize
stockholders, inclusive of the Prize convertible preferred stock. Vista promptly
notified its board of directors of the status of the management teams'
discussions. These notifications took place by telephone calls made during the
evening of August 18 and the morning of August 19.
THE BOARDS REVIEW THE PROPOSED TRANSACTION. A meeting of the full board of
directors of Vista was held on August 25, 1999. At that board meeting, which was
held telephonically, each Vista board member was presented with management
analyses of the proposed transaction along with detailed information concerning
the background of Vista's discussions with Prize, the proposed terms of the
merger and the potential effects of the proposed merger on Vista. The role of
the Natural Gas Partners partnerships as owners of a majority of the outstanding
voting securities of Vista and of Prize was also discussed along with the
conflict of interest presented by its ownership position in each company. The
potential for conflicts of interest involving members of Vista executive
management as a result of proposed severance payments to be made to Vista
executive management were also disclosed and discussed in detail.
As a result of these discussions, the Vista board of directors unanimously
voted to establish a special committee of the Vista board of directors
consisting of John Q. Adams, Sr. and authorized and empowered the special
committee to evaluate the merits of the proposed merger, to make recommendations
to the full board of directors of Vista regarding the advisability of the
proposed merger and to engage legal counsel and a financial advisor to
represent, assist and advise the special committee. The Vista board of directors
appointed Mr. Adams as the sole member of the special committee because he is
the only director without a conflicting interest in the merger. Messrs. Hill and
Gray will receive severance benefits if the merger is completed and Messrs.
Hersh, Albin and Foster have indirect economic interests in both Vista and Prize
because of their affiliation with Natural Gas Partners. The board of directors
also unanimously voted to establish a negotiating committee of Vista for the
purpose of negotiating the terms of the proposed merger with Prize. The
negotiating committee was established to consist solely of the member of the
special committee, Mr. Adams. Subject to the control and direction of the
negotiating committee, Messrs. Hill, Gray and Richards, as members of the
executive management of Vista, were instructed to assist the negotiating
committee in the performance of its duties. Subsequently on October 5, 1999, the
Vista board of directors approved a payment of $10,000 to Mr. Adams as
compensation for his significant time commitment in connection with his duties.
On August 25, 1999, Messrs. Smith and Kile met with representatives of
Pioneer, the sole holder of the Prize convertible preferred stock. Also present
at this meeting were Messrs. Sheffield and Withrow, both of whom are senior
executives of Pioneer and members of the board of directors of Prize. The
purpose of the meeting was to describe the proposed merger and to discuss and
review the rights of the convertible preferred stockholder under its agreements
with Prize. Discussions concerning these rights continued until October 6, 1999.
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On August 31, 1999, the Vista special committee determined to retain Haynes
and Boone, LLP as its legal advisors in connection with the proposed
transaction. At this meeting, Haynes and Boone discussed with the Vista special
committee the scope of its duties and obligations in connection with the
evaluation and negotiation of a potential transaction with Prize.
From August 31 through September 3, 1999, the Vista special committee
discussed with five investment banking firms their possible engagement as
financial advisor to the Vista special committee. In the course of these
discussions, the Vista special committee considered each firm's expertise as an
investment bank in transactions similar to the proposed transaction with Prize.
After consultation with its legal advisors and after disclosure by each
investment bank of its prior engagements with Prize's affiliates and
predecessors, on September 3, 1999, the Vista special committee retained Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, to serve as the
financial advisor to the Vista special committee.
On September 8 and September 16, 1999, the Vista special committee met and
discussed with its advisors various drafts of the merger agreement and related
documentation. In these meetings, Mr. Adams consulted with Haynes and Boone and
coordinated negotiations regarding substantive provisions in the documents.
During this period and through early October 1999, the financial and legal
advisors to the Vista special committee also conducted a financial and legal due
diligence review of both Vista and Prize and reviewed public and non-public
information regarding Vista and Prize. They also conducted meetings and
discussions with members of senior management of Vista and Prize relating to the
business and financial condition of Vista and Prize and their respective plans
and prospects. Throughout this period, the Vista special committee and its
advisors met frequently to discuss the information that had been reviewed and
the progress of the investigations.
On September 10, 1999, a meeting of the board of directors of Prize was
held in which all members attended. The board of directors unanimously agreed
that Messrs. Smith and Kile should continue to try to negotiate a merger
agreement with Vista based upon Prize's proposed equity split of the combined
company, and that, if the documentation could be satisfactorily completed, the
members of the Prize board of directors would vote in favor of the proposed
transaction. Further, it was unanimously agreed that if the holder of the
convertible preferred stock of Prize would agree to vote in favor of the
proposed transaction, the terms of the registration rights of the convertible
preferred stock of Prize would be amended to provide that holder a preferred
right to include registrable securities in the first underwritten offering of
New Prize common stock commenced after the merger to the extent of the lesser
of:
- shares with a value of $50 million; or
- 50% of the total number of shares to be sold in the offering.
The changes were subsequently made and are reflected in the registration
rights agreement attached to the merger agreement.
On October 4, 1999, at a meeting of the Vista special committee, Dain
Rauscher Wessels presented the preliminary results of its financial review of
the proposed transaction. The presentation included a financial review of each
of Vista and Prize, together with valuations of Vista and Prize, applying
various methodologies. The Vista special committee directed a number of
questions to its financial advisor regarding industry conditions, the financial
condition of the combined company and the consideration proposed to be paid in
the proposed transaction. Based upon the factors discussed and subject to the
completion of their review, the representatives of Dain Rauscher Wessels advised
the Vista special committee of their preliminary conclusion that the
consideration to be issued by Vista in the merger was fair, from a financial
point of view, to the holders of Vista common stock. At the same meeting,
representatives of Haynes and Boone presented legal due diligence findings and
answered related questions raised by the Vista special committee.
On October 5, 1999, Mr. Adams, acting in his capacity as both the Vista
special committee and the Vista negotiating committee, contacted Mr. Smith to
discuss several items that had not yet been resolved in the negotiation of the
merger agreement and related documentation. In particular, Mr. Adams argued that
Prize's proposed equity split of the combined company should be adjusted
slightly in favor of Vista
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<PAGE> 37
stockholders based on financial arguments. Additionally, Mr. Adams argued that
the amount of the termination fee set forth in the then current draft of the
merger agreement should be reduced and that the triggers relating to the
required payment of the fee should be narrowed. Mr. Smith telephoned Mr. Adams
back later in the day to respond to the items raised and made various arguments
in support of Prize's proposed equity split of the combined company. As a
compromise, Mr. Smith agreed to reduce the termination fee and to narrow the
triggers relating to the fee, as proposed by Mr. Adams, but was not willing to
make any adjustment to Prize's proposed equity split of the combined company.
After further discussion and consideration, taking into consideration the advice
of the financial and legal advisors to the Vista special committee, Mr. Adams
determined that the terms proposed by Mr. Smith were acceptable and in the best
interests of the Vista stockholders.
On the evening of October 6, 1999, the board of directors of Prize
unanimously:
- approved the merger and the proposed form of merger agreement, as revised
to reflect the negotiations earlier in the day;
- determined that the terms of the merger are fair to, advisable and in the
best interests of Prize's stockholders; and
- determined to recommend to Prize's stockholders that they vote to approve
and adopt the merger and the merger agreement.
On October 7, 1999, the Vista special committee and its legal advisors
worked with representatives of Vista and Prize to finalize negotiations relating
to the merger agreement. Final drafts of the merger agreement and ancillary
documents were delivered to the Vista special committee, as well as to the
members of the Vista board of directors. Dain Rauscher Wessels also delivered a
final copy of its financial analysis of the proposed transaction to Mr. Adams
and the other members of the Vista board of directors.
On October 8, 1999, the Vista special committee and its legal and financial
advisors held a telephonic meeting for the purpose of discussing the final copy
of the financial analysis of the proposed transaction prepared by Dain Rauscher
Wessels. At this time, representatives of Dain Rauscher Wessels updated their
preliminary analysis presented to Mr. Adams earlier in the week and advised the
Vista special committee that it had concluded that the proposed transaction, as
negotiated by Mr. Adams, was fair, from a financial point of view, to the
holders of Vista common stock. Dain Rauscher Wessels also confirmed that it was
prepared to deliver a written fairness opinion setting forth this conclusion.
Mr. Adams then confirmed that he had concluded that the proposed transaction was
fair and in the best interests of Vista's stockholders and that he would
recommend that the Vista board of directors approve the execution of the merger
agreement and the consummation of the merger.
Later in the morning of October 8, 1999, a full meeting of the board of
directors of Vista was held telephonically with all members in attendance. The
Vista special committee led the directors through a detailed review of its
activities over the immediately preceding six weeks of merger negotiations and
discussions. Dain Rauscher Wessels then discussed in detail its analysis of the
proposed transaction and its fairness, from a financial point of view, to the
holders of Vista common stock. Following discussion by members of the Vista
board of directors, the Vista special committee described various factors that
it had considered in its review of the proposed transaction and stated that it
had concluded that the proposed transaction was fair and in the best interests
of Vista's stockholders and that it recommended that the Vista board of
directors approve the execution of the merger agreement and the consummation of
the merger. See "-- Vista's Reasons for the Merger" at page 30. Based on the
recommendation of the Vista special committee, the Vista board of directors then
unanimously:
- approved the merger and the merger agreement;
- determined that the terms of the merger are fair to, advisable and in the
best interests of Vista's stockholders; and
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<PAGE> 38
- determined to recommend to Vista's stockholders that they vote to approve
and adopt the merger and the merger agreement.
Later in the evening on October 8, 1999, the merger agreement and all
related documentation were completed, executed and delivered by all parties. On
Monday, October 11, 1999, Vista and Prize publicly announced the proposed
transaction.
VISTA'S REASONS FOR THE MERGER
At a meeting held on October 8, 1999, the Vista special committee
determined that the terms of the merger agreement and the merger are fair to and
in the best interests of Vista's stockholders and voted to recommend that the
merger agreement and the merger be approved by the full Vista board of
directors. See "Background of the Merger" at page 24.
The Vista Special Committee. In determining to recommend to the Vista board
of directors that it approve the merger and the merger agreement and in
determining the fairness of the terms of the merger, the Vista special committee
considered, among other items, the following factors, each of which, in the
Vista special committee's view, supported the Vista special committee's
determination to recommend the merger:
- the financial condition, assets, results of operations, business and
prospects of each of Vista and Prize and the risks inherent in achieving
those prospects;
- the reduction in general and administrative costs that should result from
the combination of Vista and Prize into a single company;
- the opportunity to create a combined company with a larger market
capitalization, greater liquidity and enhanced visibility in the capital
markets;
- the reduction in Vista's overall debt ratios that will result in the
combined entity;
- the opinion of Dain Rauscher Wessels that the consideration to be issued
by Vista in the merger was fair, from a financial point of view, to the
holders of Vista common stock, and the various analyses presented to the
Vista special committee and the Vista board of directors by Dain Rauscher
Wessels. See "-- Opinion of Vista's Financial Advisor" at page 32;
- the terms and conditions of the merger agreement, including the amount
and form of consideration, the nature of the parties' representations,
warranties, covenants and agreements, and the fact that the conditions to
Prize's obligation to consummate the merger are reasonably limited and
thus the risk that the merger would not be consummated was reasonably
small;
- the trading history of Vista common stock; and
- the structure of the merger, which causes the Prize common stock and
Prize convertible preferred stock to be converted into Vista common stock
and Vista convertible preferred stock, respectively, in a transaction
that is intended to be a tax-free reorganization for federal income tax
purposes. See "-- Material U.S. Federal Income Tax Consequences of the
Merger" at page 42.
In light of the number and variety of factors the Vista special committee
considered in connection with its evaluation of the merger, the Vista special
committee did not find it practical to assign relative weights to the foregoing
factors, and accordingly, it did not do so.
The Vista special committee consulted with Dain Rauscher Wessels during the
course of its work and took into consideration the work and analysis of Dain
Rauscher Wessels in the course of its engagement. The Vista special committee
believed that Dain Rauscher Wessels' analysis was reasonable.
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The Vista special committee believes that the merger is procedurally fair
because:
- the Vista special committee was comprised of a disinterested director
appointed to represent the interests of, and to negotiate on an
arm's-length basis with Prize on behalf of, the Vista stockholders;
- the special committee retained and was advised by independent legal
counsel; and
- the Vista special committee retained Dain Rauscher Wessels as its
financial advisor to assist it in evaluating the fairness, from a
financial point of view, of the proposed merger.
PRIZE'S REASONS FOR THE MERGER
The board of directors of Prize has determined that the merger is fair to,
advisable and in the best interests of, Prize and its stockholders. Accordingly,
the Prize board of directors has unanimously approved the merger and the merger
agreement, and recommends that Prize stockholders vote for approval and adoption
of the merger and the merger agreement. The Prize board of directors believes
that the merger is desirable for the following principal reasons:
- the merger allows Prize to become a public company, which the Prize board
of directors believes will be beneficial in a number of respects,
including improving the liquidity and market valuation of the common
stock of New Prize, providing access to the public capital markets for
future financing needs, and increasing the likelihood that the Prize
convertible preferred stock will ultimately be converted to New Prize
common stock;
- the merger offers the opportunity to create a combined company with
greater financial resources, competitive strength and business
opportunities than would be possible for Prize alone;
- the Vista properties are concentrated and are primarily operated by
Vista; and
- the Vista properties offer additional enhancement and exploitation
opportunities.
Each of these factors is discussed in more detail below.
PUBLIC COMPANY, STOCK LIQUIDITY, SIMPLIFICATION OF CAPITAL STRUCTURE. While
it remains difficult for any independent oil and gas company to market an
initial public offering of securities, the Prize board of directors believes the
merger is attractive because it will allow Prize to become a public company
without having to wait for the return of the initial public offering market.
Having access to the public markets offers a number of benefits to Prize. As a
public company, New Prize would be in the group of mid-sized independent oil and
gas companies. This group historically has a higher market valuation than
companies grouped in the small independent oil and gas companies, and also has a
much larger market followed by institutions and analysts. This will provide
liquidity for the Prize common stock and improve the market valuation and
trading characteristics of the common stock of New Prize over that of Vista. In
addition, New Prize will be afforded access to the public capital markets for
future financing needs. Although the market for initial public offerings of
securities is weak at the current time, the market for follow-on and secondary
equity offerings is currently viable. Finally, the existence of a public market
for the common stock of New Prize may provide New Prize with an opportunity to
simplify its capital structure by exercising its right to redeem the convertible
preferred stock of New Prize. Under the terms of the convertible preferred stock
of New Prize, New Prize will have the right to redeem the convertible preferred
stock if the average of the closing prices of the common stock of New Prize
exceeds a stated level, which the Prize board of directors believes is likely to
be achieved, during a period of 30 trading days. In order to avoid a potential
redemption, the Prize board of directors believes that the merger will likely
result in the convertible preferred stock of New Prize being converted into
common stock of New Prize.
FINANCIAL ASPECTS. After the merger, New Prize will be much larger than
either Vista or Prize and the financial leverage of Vista will be substantially
lower. The Prize board of directors believes that this increase in size and
decrease in financial leverage will enable New Prize to obtain better access to
capital
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<PAGE> 40
at a lower cost. The increase in size should also result in exposure to a
greater number of business opportunities, and should facilitate its ability to
take advantage of capturing these opportunities.
OPERATIONS AND CONCENTRATION. Vista's operations are concentrated in the
Permian Basin, which is already a core area for Prize. Since both Vista and
Prize operate most of their wells in the Permian Basin, economies of scale
should be realized through operational efficiency and control.
EXPLOITATION AND DEVELOPMENT POTENTIAL. The Prize board of directors
believes that there are extensive exploitation and development opportunities to
be pursued on the Vista properties. In the process of acquiring proved developed
producing properties, Vista has assembled a substantial inventory of
exploitation opportunities, ranging from low risk proved undeveloped drillsites
to attractive probable locations. In addition, because Vista has focused
primarily on acquisitions, it has not attempted to develop any potential for
expanding development ideas to offset leases which could be excellent
acquisition targets.
In making its determination, the Prize board of directors considered the
above factors as a whole and did not assign specific or relative weights to
these factors. In addition, individual members of the Prize board of directors
may have given different weights to different factors. Moreover, the foregoing
discussion of the factors considered by the Prize board of directors is not
intended to be exhaustive. However, the discussion is believed to include all
material factors considered by the Prize board of directors.
OPINION OF VISTA'S FINANCIAL ADVISOR
On September 16, 1999, the special committee of the Vista board of
directors formally retained Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, to render an opinion to the special committee and the Vista board
relating to the fairness, from a financial point of view, to the holders of
Vista common stock of the consideration to be issued by Vista in the merger of
Vista with Prize. On October 8, 1999, Dain Rauscher Wessels rendered to the
Vista special committee and the Vista board an oral opinion, which was
subsequently confirmed in writing on October 8, 1999, stating that, as of that
date and based upon and subject to the factors and assumptions set forth in the
opinion, the consideration to be issued by Vista in the merger is fair, from a
financial point of view, to the holders of Vista common stock.
The full text of the Dain Rauscher Wessels opinion, which sets forth the
principal assumptions made, matters considered and qualifications and
limitations on the review undertaken by Dain Rauscher Wessels in rendering its
opinion, is attached to this document as Annex B and is incorporated by
reference. This summary of the Dain Rauscher Wessels opinion addresses the
material items on which Dain Rauscher Wessels based its opinion. Dain Rauscher
Wessels has given consent to the inclusion of its opinion in this document.
Holders of Vista common stock are urged to thoroughly read the Dain Rauscher
Wessels opinion.
The Dain Rauscher Wessels opinion was provided to the Vista special
committee and the Vista board for their information and is directed only to the
fairness, from a financial point of view, to the holders of Vista common stock
of the consideration to be issued by Vista in the merger. The Dain Rauscher
Wessels opinion does not address the merits of the underlying decision by Vista
to engage in the merger and does not constitute a recommendation to any holder
of Vista common stock as to how that holder should vote on the approval and
adoption of the merger agreement or any matter related to the merger agreement.
The summary set forth below describes material aspects of the analyses
underlying the Dain Rauscher Wessels opinion and the presentation made by Dain
Rauscher Wessels to the Vista special committee and the Vista board. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. Therefore, the Dain Rauscher Wessels opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Dain Rauscher Wessels did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Dain
Rauscher Wessels believes that its analyses must be considered as a whole and
that selecting portions of
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<PAGE> 41
its analyses, without considering all of its analyses, would create an
incomplete view of the process underlying the Dain Rauscher Wessels opinion.
In performing its analyses, Dain Rauscher Wessels made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Dain Rauscher Wessels, Vista and Prize. Any estimates contained in the analyses
performed by Dain Rauscher Wessels are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by the analyses. Additionally, estimates of the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which the
businesses or securities might actually be sold. Accordingly, the analyses and
estimates are inherently subject to substantial uncertainty. The Dain Rauscher
Wessels opinion and Dain Rauscher Wessels' presentation to the Vista special
committee and the Vista board were among several factors taken into
consideration by the Vista board in making its determination to approve the
merger agreement. Consequently, the Dain Rauscher Wessels' analyses described
below should not be viewed as determinative of the decision of the Vista board
or Vista's executive management to engage in the merger.
In arriving at its opinion, Dain Rauscher Wessels met with the executive
managements of Vista and Prize to discuss the businesses, operations and
prospects of Vista and Prize. Dain Rauscher Wessels also considered certain
long-term strategic benefits of the merger, both operational and financial, that
were described to Dain Rauscher Wessels by the executive managements of Vista
and Prize. In addition, Dain Rauscher Wessels reviewed:
- the merger agreement and related documents;
- the annual report on Form 10-K for the year ended December 31, 1998, and
the quarterly reports on Form 10-Q and related unaudited financial
information for interim periods, including the six months ended June 30,
1999, for Vista;
- the proxy statement filed on Schedule 14A dated May 3, 1999, for Vista;
- the audited statements of revenues and direct operating expenses of
producing properties acquired by Prize from affiliates of Pioneer for the
years ended December 31, 1996, 1997 and 1998, prepared by Prize and
audited by Ernst & Young LLP, independent public accountants;
- the unaudited statements of revenues and direct operating expenses of
producing properties acquired by Prize from affiliates of Pioneer for the
six months ended June 30, 1998 and 1999, prepared by Prize;
- the unaudited consolidated balance sheet of Prize at June 30, 1999,
prepared by Prize;
- Vista's proved oil and gas reserves and the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves
as of January 1, 1999, estimated by Williamson Petroleum Consultants,
Inc., independent petroleum engineers, and adjusted by Vista management
to July 1, 1999;
- Prize's proved oil and gas reserves and the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves
as of July 1, 1999, estimated by Prize management;
- the projected consolidated financial statements for Vista, Prize and the
pro forma combined company for the years ending December 31, 1999 and
2000, as prepared by Vista's and Prize's management;
- the projected consolidated balance sheet for Vista, Prize and the pro
forma combined company at December 31, 1999, as prepared by Vista's and
Prize's management;
- the capitalization and financial condition of Vista and Prize;
- pro forma financial effects which could result from the merger;
- historical market prices and trading volumes for Vista's common stock;
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<PAGE> 42
- publicly available financial data and stock market performance data of
publicly held companies that Dain Rauscher Wessels deemed reasonably
comparable to Prize and the pro forma combined company;
- the financial terms of business combinations of comparable exploration
and production companies;
- the relative ownership of Vista common stock after the merger by the
current holders of Vista common stock and the current holders of Prize
common and convertible preferred stock; and
- other information, financial studies, analyses and investigations and
financial, economic and market criteria as Dain Rauscher Wessels deemed
relevant in arriving at the Dain Rauscher Wessels opinion.
In preparing its opinion, Dain Rauscher Wessels did not independently
verify any of the foregoing information, and relied upon the information being
complete and accurate in all material respects. Dain Rauscher Wessels assumed,
with Vista's consent, that the financial estimates provided to Dain Rauscher
Wessels and discussed with Dain Rauscher Wessels were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
executive managements of Vista and Prize as to the expected future performance
of Vista and Prize, and of the combined companies subsequent to the proposed
merger. In addition, Dain Rauscher Wessels did not conduct a physical inspection
or make an independent evaluation or appraisal of the assets of Vista or Prize,
nor was Dain Rauscher Wessels furnished with any evaluation or appraisal. Dain
Rauscher Wessels assumed that the Prize convertible preferred stock held by
Pioneer Natural Resources USA, Inc. would convert into common stock of Vista
shortly after the closing of the merger. In rendering its opinion, Dain Rauscher
Wessels assumed that, in the course of obtaining the necessary regulatory and
governmental approvals for the proposed merger, no restriction will be imposed
that will have a material adverse effect on the contemplated benefits of the
proposed merger. The Dain Rauscher Wessels opinion is based on circumstances as
they existed and could be evaluated on, and the information made available to
Dain Rauscher Wessels at the date of, the Dain Rauscher Wessels opinion.
For purposes of rendering its opinion, Dain Rauscher Wessels assumed, in
all respects material to its analyses, that the representations and warranties
of each party to the merger agreement and all related documents and instruments
contemplated by the merger agreement were true and correct in all material
respects, that each party to these documents will perform all of the covenants
and agreements required to be performed by each party under the documents, and
that all conditions to the consummation of the merger will be satisfied without
waiver.
The following is a brief summary of the material aspects of the analyses
performed by Dain Rauscher Wessels in preparing the Dain Rauscher Wessels
opinion.
PRO FORMA ANALYSIS
Dain Rauscher Wessels analyzed the expected pro forma impact which could
result from the merger on cash flow per share, which is defined as net income
from continuing operations plus depreciation, depletion and amortization,
deferred taxes and other non-cash items before changes in working capital,
divided by diluted shares outstanding, for the projected years ending December
31, 1999 and 2000. Dain Rauscher Wessels also analyzed the expected pro forma
impact which could result from the merger on net asset value per share. Net
asset value per share is defined as the standardized measure of discounted cash
flow value at July 1, 1999, plus the value of undeveloped acreage, valued at
$50.00 per acre, less the discounted effect of hedging contracts, plus other
assets at book value, less total debt and other long-term liabilities projected
at December 31, 1999 and less estimated transaction costs, divided by diluted
shares outstanding. In addition, the standardized measure of discounted cash
flow value was assigned reserve category risk weightings as follows: proved
developed producing reserves, 100% of present value; proved developed
non-producing reserves, 75% of present value; and proved undeveloped reserves,
50% of present value. Dain Rauscher Wessels noted that the merger would be
approximately 7% accretive to 1999 cash
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<PAGE> 43
flow per share, 5% dilutive to 2000 cash flow per share and 11% dilutive to net
asset value per share, assuming diluted shares outstanding.
In addition, Dain Rauscher Wessels analyzed the expected pro forma impact
which could result from the merger on a projected consolidated pro forma balance
sheet at December 31, 1999. Dain Rauscher Wessels noted that the ratio of total
debt, including short-term debt, to total capitalization decreased approximately
25%.
COMPARABLE COMPANY ANALYSIS
Dain Rauscher Wessels used publicly available information to compare
valuation criteria for companies, which in Dain Rauscher Wessels' judgment, were
reasonably comparable to Prize and the pro forma combined company for purposes
of this analysis. Valuation criteria considered included enterprise value,
defined as market value of equity plus book value of debt and liquidation value
of preferred stock, less excess cash and equivalents, to projected EBITDA,
defined as earnings before interest expense, taxes and depreciation, depletion
and amortization, for the projected year ending December 31, 1999. In addition,
Dain Rauscher Wessels compared adjusted enterprise value, defined as enterprise
value less book value of non-oil and gas assets and undeveloped acreage, valued
at $50.00 per acre, to proved reserve volume and the standardized measure of
discounted cash flow value. Dain Rauscher Wessels considered a number of factors
in selecting companies for comparison, including size, financial condition and
geographic scope of operations. The group of companies used in the comparison
included:
- Belco Oil & Gas Corp.;
- Cross Timbers Oil Company;
- HS Resources, Inc.;
- Louis Dreyfus Natural Gas Corp.;
- Magnum Hunter Resources, Inc.;
- Swift Energy Company;
- Titan Exploration, Inc.; and
- Tom Brown, Inc.
The mean and median results for the comparable companies are compared to
the implied transaction multiples of Prize below.
<TABLE>
<CAPTION>
COMPARABLE
COMPANIES
---------------
MEAN MEDIAN PRIZE
------ ------ ------
<S> <C> <C> <C>
ADJUSTED ENTERPRISE VALUE TO:
Proved Reserve Volume (MMBOE).............................. $ 5.47 $ 5.66 $ 4.28
Standardized Measure of Discounted Cash Flow Value......... 150.5% 133.8% 103.6%
ENTERPRISE VALUE TO:
1999 EBITDA................................................ 7.5x 7.2x 6.3x
</TABLE>
No public company utilized as a comparison is identical to the pro forma
combined company or the business segment for which a comparison is being made.
An analysis of the results of this comparison is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
to which Vista and the pro forma combined company were being compared.
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<PAGE> 44
RELATIVE CONTRIBUTION ANALYSIS
Dain Rauscher Wessels performed a relative contribution analysis to examine
the relationship between the percentage ownership of the combined company that
the Vista and Prize stockholders would receive in the merger, and the relative
contributions of Vista and Prize to cash flow for the projected years ending
December 31, 1999 and 2000 and net asset value of the pro forma combined
company. Cash flow is defined as net income from continuing operations plus
depreciation, depletion and amortization, deferred taxes and other non-cash
items before changes in working capital. Net asset value is defined as the
standardized measure of discounted cash flow value at July 1, 1999, plus the
value of undeveloped acreage, valued at $50.00 per acre, less the discounted
effect of hedging contracts, plus other assets at book value, less total debt
and other long-term liabilities projected at December 31, 1999 and less
estimated transaction costs. In addition, the standardized measure of discounted
cash flow value was assigned reserve category risk weightings as follows: proved
developed producing reserves, 100% of present value; proved developed
non-producing reserves, 75% of present value; and proved undeveloped reserves,
50% of present value.
Dain Rauscher Wessels calculated that the ownership of the pro forma
combined company by the Vista stockholders, based on basic shares outstanding,
would be approximately 16% and, based on diluted shares outstanding, would be
approximately 15%. Vista and Prize contributions to 1999 and 2000 cash flow and
net asset value are compared to these ownership percentages below.
<TABLE>
<CAPTION>
IMPLIED PRO
FORMA
CASH FLOW OWNERSHIP
----------- NET ASSET ---------------
1999 2000 VALUE BASIC DILUTED
---- ---- --------- ----- -------
<S> <C> <C> <C> <C> <C>
Vista.......................................... 14.0% 15.8% 16.7% 16.0% 15.0%
Prize.......................................... 86.0% 84.2% 83.3% 84.0% 85.0%
</TABLE>
COMPARABLE TRANSACTIONS ANALYSIS
Dain Rauscher Wessels conducted a comparable transactions analysis by
examining the terms of publicly disclosed acquisitions of businesses and assets
related to the exploration and production industry from 1996 through 1999,
having transaction enterprise values of less than $500 million. Transaction
enterprise value is defined as shares outstanding multiplied by the acquisition
price per share plus book value of debt and liquidation value of preferred
stock, less excess cash and equivalents. With respect to the significant
majority of these transactions, public disclosure regarding acquisition price
and target financial results was insufficient to permit Dain Rauscher Wessels to
draw conclusions regarding value. Sufficient data did exist with respect to 14
transactions, which Dain Rauscher Wessels considered reasonably comparable to
the merger. These transactions are listed below (Acquiror/Target):
- Santa Fe Energy Resources Inc./Snyder Oil Corp.
- Pogo Producing Company/Arch Petroleum Inc.
- Midland Resources, Inc./Vista Resources Partners, L.P.
- Southern Mineral Corporation/Amerac Energy Corporation
- Chesapeake Energy Corporation/Hugoton Energy Corp.
- Titan Exploration, Inc./Carrollton Resources, LLC
- Belco Oil & Gas Corp./Coda Energy, Inc.
- Chesapeake Energy Corporation/DLB Oil & Gas, Inc.
- Louis Dreyfus Natural Gas Corp./American Exploration Company
- Monterey Resources, Inc./McFarland Energy, Inc.
- Columbia Natural Resources, Inc./Alamco, Inc.
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<PAGE> 45
- Texas Pacific Group, Inc./Belden & Blake Corporation
- HS Resources, Inc./Tide West Oil Company
- National Energy Group, Inc./Alexander Energy Corporation
Dain Rauscher Wessels compared transaction enterprise value to latest
twelve months, or LTM, EBITDA, defined as earnings before interest expense,
taxes and depreciation, depletion and amortization for the target companies. In
addition, Dain Rauscher Wessels compared adjusted transaction enterprise value,
defined as transaction enterprise value less book value of non-oil and gas
assets and undeveloped acreage, valued at $50.00 per domestic onshore acre,
$100.00 per domestic offshore acre and $25.00 per international acre, to proved
reserve volume and the standardized measure of discounted cash flow value for
the target companies. The mean and median results for the comparable
transactions are compared to the implied transaction multiples of Prize below.
"NA" in the Prize column indicates that data is not available due to a lack of
operating history for Prize.
<TABLE>
<CAPTION>
COMPARABLE
TRANSACTIONS
--------------
MEAN MEDIAN PRIZE
----- ------ ------
<S> <C> <C> <C>
ADJUSTED TRANSACTION ENTERPRISE VALUE TO:
Proved Reserve Volume (MMBOE)............................... $5.26 $5.64 $ 4.28
Standardized Measure of Discounted Cash Flow Value.......... 96.4% 89.4% 103.6%
TRANSACTION ENTERPRISE VALUE TO:
LTM EBITDA.................................................. 8.3x 8.2x NA
</TABLE>
DAIN RAUSCHER WESSELS' ENGAGEMENT AGREEMENT
Dain Rauscher Wessels was retained to render the Dain Rauscher Wessels
opinion on the basis of its experience with mergers and acquisitions in the
energy industry in general, and on the basis of its experience with companies in
the exploration and production sector of the energy industry. Dain Rauscher
Wessels is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the ordinary course of its
business, Dain Rauscher Wessels and its affiliates may actively trade the equity
securities of Vista for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in the securities.
Under the terms of the engagement agreement between the Vista special
committee and Dain Rauscher Wessels, Vista paid Dain Rauscher Wessels a fee of
$50,000 upon the execution of the engagement agreement and $125,000 upon the
initial delivery of the Dain Rauscher Wessels opinion to the Vista special
committee and the Vista board. Vista has agreed to reimburse Dain Rauscher
Wessels for its out-of-pocket expenses not to exceed $25,000, and to indemnify
Dain Rauscher Wessels and its controlling persons against liabilities and
expenses relating to or arising out of the consummation of the merger, including
liabilities under federal securities laws. To the extent that the
indemnification includes liabilities arising under federal securities laws, it
may not be enforceable as it may be determined to be against public policy. No
portion of Dain Rauscher Wessels' fee was contingent upon the closing of the
merger or whether Dain Rauscher Wessels rendered a favorable opinion with
respect to the proposed merger. The terms of Dain Rauscher Wessels' engagement
agreement with the Vista special committee, which are customary for transactions
of this nature, were negotiated at arm's length between the Vista special
committee and Dain Rauscher Wessels, and the Vista board was aware of these
terms at the time of its approval of the merger agreement.
THE REVERSE STOCK SPLIT OF VISTA COMMON STOCK
REASONS FOR THE REVERSE STOCK SPLIT. Many investors look upon low priced
stock as unduly speculative in nature and, as a matter of policy, avoid
investment in these stocks. Investors may believe that low stock
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<PAGE> 46
prices reflect companies that are of low quality or poor performers.
Accordingly, the Vista board believes that the current per share price of the
Vista common stock may reduce the effective marketability of the shares because
of the reluctance of many leading brokerage firms to recommend low priced stocks
to their clients. Brokerage firm policies and practices tend to discourage
individual brokers from dealing in low priced stocks for various reasons,
including the perception that those stocks are unduly speculative. Some of those
policies and practices pertain to the payment of brokers' commissions and to
time-consuming procedures that function to make the handling of low priced
stocks unattractive to brokers from an economic standpoint. Additionally, many
institutional investors have policies prohibiting them from holding low priced
stock in their own portfolios. In addition, the structure of trading commissions
tends to have an adverse impact upon holders of low priced stock because the
brokerage commission on a purchase or sale of low priced stock generally
represents a higher percentage of the sales price than the commission on higher
priced stocks. Moreover, the analysts at many brokerage firms will not monitor
the trading activity of lower priced stocks.
The Vista board believes that the reverse stock split should result in a
stock price of seven times the current price range, putting the New Prize common
stock in a price range that will enhance its marketability to the financial
community and investing public and will mitigate any reluctance on the part of
brokers and investors to trade in the New Prize common stock.
Dissenting Vista stockholders have no appraisal rights under Delaware law
or under the Vista certificate of incorporation or bylaws in connection with the
one-for-seven reverse stock split.
EFFECTIVENESS OF THE REVERSE STOCK SPLIT. If the Vista stockholders approve
and adopt the merger agreement, the one-for-seven reverse stock split would
become effective when Vista files its amended and restated certificate of
incorporation with the Secretary of State of Delaware, which is anticipated to
occur as soon as practicable following the Vista special meeting. Even if the
reverse stock split is approved by the Vista stockholders, it is within the
discretion of the Vista board not to carry out the reverse stock split. Upon the
filing of the Vista amended and restated certificate of incorporation, all of
the Vista common stock will evidence the effect of the one-for-seven reverse
stock split. No fractional shares will be issued in the reverse stock split. In
lieu of any fractional shares, each Vista stockholder who is entitled to a
fractional share of New Prize common stock will instead receive an amount of
cash, without interest, determined by multiplying:
- the fractional interest to which the Vista stockholder would otherwise be
entitled, after taking into account all shares of Vista common stock then
held by the stockholder; and
- the average of the closing prices of Vista common stock on the American
Stock Exchange for the five successive trading days immediately preceding
the date on which the merger closes.
EFFECTS OF THE REVERSE STOCK SPLIT. If the Vista stockholders approve and
adopt the merger agreement, the principal effect of the one-for-seven reverse
stock split will be to decrease the number of outstanding shares of Vista common
stock from 16,367,328 to approximately 2,338,189 shares of New Prize common
stock, based on share information as of the Vista record date. The reverse stock
split would not affect the proportionate equity interest in New Prize of any
holder of Vista common stock, except as may result from the provisions for the
elimination of fractional shares, as described below. In addition, the New Prize
board will take appropriate action to adjust proportionately the number of
shares of New Prize common stock issuable upon exercise of outstanding warrants,
options and other convertible securities, and to adjust the related exercise and
conversion prices, to reflect the reverse stock split. The reverse stock split
will not affect the registration of the New Prize common stock under the
Securities Exchange Act of 1934 or the listing of the New Prize common stock on
the American Stock Exchange. The relative rights and preferences of the New
Prize common stock will be identical to the relative rights and preferences of
the Vista common stock.
The reverse stock split may leave some Vista stockholders with one or more
"odd lots" of New Prize common stock, which means stock in amounts of less than
100 shares. These odd lots may be more difficult to sell or require greater
transaction costs per share to sell, than shares in even multiples of 100.
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<PAGE> 47
Each Vista stockholder's percentage ownership of the New Prize common stock
will not be altered except for the effect of the elimination of fractional
shares. Vista estimates that it will cost less than $8,000 to pay for fractional
shares. While the authorized common stock of New Prize will remain unchanged
from that of Vista, the reverse stock split will greatly reduce the number of
shares of New Prize common stock outstanding from the number of shares of Vista
common stock currently outstanding, and the overall effect will be an increase
in authorized but unissued shares of New Prize common stock as a result of the
reverse stock split. Vista has authorized, and New Prize will continue to have
after the reverse stock split, authorized capital consisting of 50,000,000
shares of common stock and 10,000,000 shares of preferred stock.
As of the Vista record date, Vista had 33,626,371 shares of authorized but
unissued common stock, 6,300 shares of issued common stock held in treasury, and
10,000,000 shares of authorized but unissued preferred stock. As a result of the
reverse stock split and the merger, assuming the merger closes on February 8,
2000, New Prize will have approximately 39,364,788 shares of authorized but
unissued common stock, 900 shares of issued common stock held in treasury, and
6,015,803 shares of authorized but unissued convertible preferred stock. Those
shares may be issued by the New Prize board in its discretion. Any future
issuance will have the effect of diluting the percentage of stock ownership and
voting rights of all the holders of New Prize common stock, including the
present holders of Vista common stock.
EXCHANGE OF VISTA STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES. If
the Vista stockholders approve and adopt the merger agreement, Vista
stockholders will be required to exchange their stock certificates for new
certificates representing the shares of New Prize common stock and which will
evidence the effect of the one-for-seven reverse stock split. Vista stockholders
of record on the date that the merger closes will be furnished the necessary
materials and instructions for the surrender and exchange of share certificates
at the appropriate time by New Prize's transfer agent, American Stock Transfer &
Trust Company. Vista stockholders will not have to pay a transfer fee or other
fee in connection with the exchange of certificates. Vista stockholders should
not submit any certificates until requested to do so.
As soon as practicable after the date that the merger closes, New Prize
will request all Vista stockholders to return their stock certificates
representing issued shares of Vista common stock outstanding on the date that
the merger closes in exchange for certificates representing the number of whole
shares of New Prize common stock after giving effect to the reverse stock split.
Each Vista stockholder will receive a letter of transmittal from American Stock
Transfer & Trust Company containing instructions on how to exchange
certificates. VISTA STOCKHOLDERS SHOULD NOT SUBMIT THEIR OLD CERTIFICATES TO THE
TRANSFER AGENT UNTIL THEY RECEIVE THESE INSTRUCTIONS. In order to receive
certificates representing shares of New Prize common stock, Vista stockholders
must surrender their Vista common stock certificates according to the transfer
agent's instructions, together with the properly executed and completed letter
of transmittal and evidence of ownership of the shares that New Prize may
require.
Beginning with the date on which the merger closes, each certificate
representing shares of Vista common stock, until surrendered and exchanged as
described above, will be deemed for all corporate purposes to evidence ownership
of the whole number of shares of New Prize common stock after giving effect to
the one-for-seven reverse stock split.
No fractional shares of New Prize common stock will be issued as a result
of the reverse stock split. Instead of receiving fractional shares, Vista
stockholders who hold a number of shares not evenly divisible by seven
immediately prior to the date that the merger closes will be entitled to receive
cash for any fractional share as described above.
Any Vista stockholder whose certificate for Vista common stock has been
lost, destroyed or stolen will be entitled to issuance of a certificate
representing the shares of New Prize common stock after giving effect to the
one-for-seven reverse stock split upon compliance with the requirements of New
Prize and the transfer agent.
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<PAGE> 48
INTERESTS OF VISTA DIRECTORS AND OFFICERS AND SIGNIFICANT STOCKHOLDERS OF VISTA
AND PRIZE
TERMINATION AND CONSULTING AGREEMENTS. In connection with the merger, Vista
has entered into termination and consulting agreements with each of C. Randall
Hill, Vista's chairman and chief executive officer, Steven D. Gray, Vista's
president, and R. Cory Richards, Vista's executive vice president. Under these
agreements, each executive officer will be entitled to receive a cash severance
payment in the amount of $333,333 following completion of the merger and, as may
be requested by New Prize, will provide consulting services to New Prize at a
monthly compensation equal to their respective current monthly compensation.
Each of Messrs. Hill and Gray currently receives monthly compensation of
$13,750. Mr. Richards currently receives monthly compensation of $11,459. The
consulting services may be terminated at any time by New Prize and in no event
will the consulting services extend beyond February 28, 2000.
AMENDMENT TO CONFIDENTIALITY AND NON-COMPETE AGREEMENTS. In connection with
the merger, Vista has amended its confidentiality and non-compete agreements
with each of C. Randall Hill and Steven D. Gray to terminate the non-competition
provisions of those agreements, effective upon completion of the merger.
NATURAL GAS PARTNERS' EQUITY OWNERSHIP IN NEW PRIZE. Each of David R.
Albin, John S. Foster and Kenneth A. Hersh, who serve as directors of Vista, are
principal managers of, and own interests in, Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P., which entities own a majority of the outstanding
shares of Vista common stock. In addition, each of Messrs. Albin and Hersh, who
serve as directors of Prize, are principal managers of, and own interests in,
Natural Gas Partners V, L.P., which owns a majority of the outstanding shares of
Prize common stock. Assuming the merger closes on February 8, 2000, Natural Gas
Partners II, L.P., Natural Gas Partners III, L.P. and Natural Gas Partners V,
L.P. will own, collectively, assuming conversion of the New Prize convertible
preferred stock, approximately 58% of the outstanding shares of common stock of
New Prize.
PIONEER'S EQUITY OWNERSHIP IN NEW PRIZE. Each of Scott D. Sheffield and
Mark L. Withrow, who serve as directors of Prize, are executive officers of
Pioneer Natural Resources USA, Inc., which owns all of the outstanding shares of
Prize convertible preferred stock. Assuming the merger closes on February 8,
2000, and conversion of the New Prize convertible preferred stock to New Prize
common stock, Pioneer will own approximately 27% of the outstanding shares of
common stock of New Prize.
OTHER AGREEMENTS
REGISTRATION RIGHTS AGREEMENT. The merger agreement provides that, at the
effective time of the merger, Vista and Prize will enter into a registration
rights agreement with all holders of shares of Prize common stock and Prize
convertible preferred stock and various holders of Vista common stock and Vista
warrants.
The registration rights granted under the registration rights agreement
entitle the parties to numerous demand, piggyback and shelf registration rights.
In addition, the registration rights agreement grants Pioneer the right to
include registrable securities in the first underwritten offering of New Prize
common stock commenced after the merger to the extent of the lesser of:
- shares with a value of $50 million; or
- 50% of the total number of shares to be sold in the offering, plus 50% of
any over-allotment for that offering.
The registration rights agreement also contains customary provisions
regarding the payment of expenses by New Prize and mutual indemnification
agreements between New Prize and the securityholders who are parties to the
registration rights agreement for securities law violations.
AGREEMENT TO VOTE. Concurrently with the execution of the merger agreement,
Prize and Pioneer entered into an agreement to vote that requires Pioneer to
vote all shares of Prize convertible preferred
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<PAGE> 49
stock in favor of the merger. The voting agreement terminates upon the earlier
of the termination of the merger agreement, the effective time of the merger or
April 8, 2000.
VOTING AND SHAREHOLDERS AGREEMENT. The merger agreement provides that, at
the effective time of the merger, the existing voting and shareholders agreement
between Prize, Natural Gas Partners V, L.P., Pioneer Natural Resources USA, Inc.
and the other stockholders of Prize will be terminated and New Prize will enter
into an agreement with the holders of Prize common stock and Prize convertible
preferred stock having substantially the same terms and conditions as the prior
agreement.
It is anticipated that, under the terms of the voting and shareholders
agreement, the parties to the agreement will have the following rights to
nominate and elect directors to the New Prize board:
- Stockholders who are members of Prize management may designate one
member;
- Natural Gas Partners V, L.P. may designate three members; and
- Pioneer may designate two members.
However, on the date on which Pioneer no longer owns at least 60% of the shares
of New Prize convertible preferred stock initially issued to it in the merger,
or the equivalent number of shares of New Prize common stock obtained upon
conversion, Pioneer shall have the right to nominate and elect one director to
the New Prize board and Natural Gas Partners V, L.P. shall have the right to
nominate and elect four directors to the New Prize board.
The provisions of the voting and shareholders agreement described above
regarding election of directors terminates as to:
- any single Prize management member on the first to occur of the
termination of that person's employment by New Prize, the death of that
person and the date on which that person transfers New Prize securities
in violation of the transfer restrictions provided for in the agreement;
- Pioneer on the date on which Pioneer no longer owns shares of New Prize
common stock and shares of New Prize convertible preferred stock, which
are convertible into shares of New Prize common stock, that constitute,
on an as converted basis, at least 16.7% of the New Prize common stock
outstanding; and
- all parties to the agreement on June 29, 2009.
JOINT PARTICIPATION AGREEMENT. The merger agreement provides that, at the
effective time of the merger, Prize shall assign to New Prize all of its rights
and obligations under a joint participation agreement between Prize and Pioneer.
Under the joint participation agreement, New Prize will be obligated to notify
Pioneer of any opportunity to acquire oil and gas interests or securities of a
company that is engaged in the acquisition, exploitation, exploration and
development of oil and gas if:
- the opportunity has been disclosed to the New Prize board of directors;
and
- the consideration to be paid by New Prize is at least $50 million.
In addition, New Prize will be obligated to notify Pioneer of any decision by
the New Prize board of directors to sell to any unaffiliated third party direct
property interests in a New Prize exploration project or equity ownership
interests in an entity owned or controlled by Prize that owns an exploration
project, in either case, for the purpose of financing the exploration project.
Under the terms of the joint participation agreement, Pioneer shall have
the right to participate, up to 50%, in any acquisition or investment
opportunity or exploration project described above.
The joint participation agreement terminates upon the earlier of the date
on which Pioneer no longer owns at least 80% of its shares of New Prize
convertible preferred stock, or the equivalent number of common shares obtained
upon conversion, and June 29, 2009.
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<PAGE> 50
SEVERANCE BENEFIT PLAN. Under the terms of the merger agreement, after the
closing of the merger, New Prize will promptly pay severance payments due under
the New Prize severance benefit plan. Under the terms of the severance benefit
plan, if New Prize terminates the employment of New Prize employees within six
months after the closing of the merger, each employee so terminated shall
receive from New Prize one month's salary plus an additional month's salary for
each year of service with Vista rounded up to the nearest month.
New Prize may not terminate the severance benefit plan for six months
following the closing of the merger.
AMENDMENT OF VISTA BYLAWS. Immediately after the closing of the merger, the
New Prize board of directors will replace the existing Vista bylaws with bylaws
that are substantially the same as the Prize bylaws. The primary difference
between the Vista and Prize bylaws is that the Prize bylaws contain special
authorization requirements that prohibit Prize from taking specified actions
without the approval of at least a majority of all of the directors. In
addition, amendment to the special authorization provisions requires approval of
70% of all directors then serving on the board of directors or by the unanimous
written consent of all the directors. See "Comparison of Stockholder Rights" on
page 105 for a more detailed discussion of the terms of the Prize bylaws.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the opinion of Conner & Winters, A
Professional Corporation, as to the material U.S. federal income tax
consequences of the merger. We have filed this opinion with the Securities and
Exchange Commission as an exhibit to the registration statement related to this
document. This discussion is based upon the Internal Revenue Code of 1986, as
amended, the regulations under the Code, Internal Revenue Service rulings, and
judicial and administrative rulings in effect as of the date of this document,
all of which are subject to change, possibly with retroactive effect. This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to a stockholder in light of the stockholder's particular
circumstances, such as stockholders who are not citizens or residents of the
United States, financial institutions, tax-exempt organizations, insurance
companies, dealers in securities, stockholders who acquired their Prize common
stock by exercising options or similar derivative securities or otherwise as
compensation or stockholders who hold their Prize common stock or convertible
preferred stock as part of a straddle or conversion transaction. This discussion
assumes that Prize stockholders hold their respective shares of Prize common
stock and Prize convertible preferred stock as capital assets within the meaning
of Section 1221 of the Code.
It is a condition to the obligation of Prize to complete the merger that
Prize receive a legal opinion from its counsel that the merger constitutes a
"tax-free" reorganization, within the meaning of Section 368 of the Code, for
U.S. federal income tax purposes. That legal opinion will assume the absence of
changes in the existing facts and will rely on assumptions, representations and
covenants made by Vista, Prize and the Vista subsidiary, including those
contained in certificates of officers of Vista, Prize and the Vista subsidiary.
If any of those factual assumptions is inaccurate, the tax consequences of the
merger could differ from those described here. The opinion regarding the tax
consequences of the merger neither binds the IRS nor precludes the IRS from
adopting a contrary position. Neither Prize nor Vista intends to obtain a ruling
from the IRS with respect to the tax consequences of the merger.
TREATMENT OF PRIZE, VISTA AND THE VISTA SUBSIDIARY. Prize, Vista and the
Vista subsidiary will each be "a party to a reorganization" within the meaning
of Section 368(b) of the Code, and for federal income tax purposes, none of
Prize, Vista or the Vista subsidiary will recognize any gain or loss as a result
of the merger.
TREATMENT OF HOLDERS OF PRIZE COMMON STOCK AND PRIZE CONVERTIBLE PREFERRED
STOCK. A Prize stockholder whose Prize common stock is converted into New Prize
common stock or whose Prize convertible preferred stock is converted into New
Prize convertible preferred stock in the merger generally will not recognize any
gain or loss upon the conversion. A Prize stockholder's aggregate tax basis in
New Prize common stock or New Prize convertible preferred stock into which the
stockholder's Prize common
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<PAGE> 51
stock or Prize convertible preferred stock is converted in the merger will equal
the holder's aggregate tax basis in the Prize common stock or Prize convertible
preferred stock, respectively, which is converted. The holding period of the
shares of New Prize common stock or New Prize convertible preferred stock into
which a Prize stockholder's Prize common stock or Prize convertible preferred
stock is converted in the merger will include the holding period of the Prize
common stock or Prize convertible preferred stock, respectively, which is
converted.
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. WE DO NOT INTEND THAT IT BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. IN
ADDITION, WE DO NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY WITH, OR ARE
CONTINGENT UPON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, WE DO NOT ADDRESS ANY
NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER.
ACCORDINGLY, WE STRONGLY URGE YOU TO CONSULT YOUR TAX ADVISOR TO DETERMINE YOUR
PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES RESULTING FROM THE MERGER, WITH RESPECT TO YOUR INDIVIDUAL
CIRCUMSTANCES.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following discussion summarizes the material federal income tax
consequences of the one-for-seven reverse stock split on Vista stockholders and
is based upon the Internal Revenue Code of 1986, as amended, the regulations
under the Code, Internal Revenue Service rulings, and judicial and
administrative rulings in effect as of the date of this document, all of which
are subject to change, possibly with retroactive effect. This discussion does
not address all aspects of U.S. federal income taxation that may be relevant to
a Vista stockholder in light of the stockholder's particular circumstances, such
as stockholders who are not citizens or residents of the United States,
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, stockholders who acquired their Vista common stock by the
exercise of options or similar derivative securities or otherwise as
compensation or stockholders who hold their Vista common stock as part of a
straddle or conversion transaction. This discussion assumes that Vista
stockholders hold their shares of Vista common stock as capital assets within
the meaning of Section 1221 of the Code.
The one-for-seven reverse stock split will qualify as a recapitalization
described in Section 386(a)(1)(E) of the Code, and no gain or loss will be
recognized by Vista in connection with the reverse stock split. The receipt by a
Vista stockholder of shares of New Prize common stock, except to the extent that
cash is received in lieu of fractional shares, in the reverse stock split will
be a nontaxable transaction for federal income tax purposes. Consequently,
except with respect to cash received in lieu of fractional shares of New Prize
common stock, a Vista stockholder will not recognize taxable gain or loss with
respect to shares of New Prize common stock received as a result of the reverse
stock split. In addition, the aggregate tax basis of the stockholder's shares of
Vista common stock prior to the reverse stock split, excluding the portion of
the basis allocable to fractional shares of New Prize common stock, will carry
over as the tax basis of the stockholder's shares of New Prize common stock
received as a result of the reverse stock split. Each Vista stockholder will be
required to allocate his or her basis in the shares of Vista common stock
ratably among the total number of shares of New Prize common stock received as a
result of the reverse stock split. The holding period of the shares of New Prize
common stock will include the holding period during which the stockholder held
the Vista common stock, provided that the Vista common stock is held by the
stockholder as a capital asset when the merger is completed.
The receipt by a Vista stockholder of cash in lieu of a fractional share of
New Prize common stock as a result of the reverse stock split will be a taxable
transaction for federal income tax purposes. The receipt of cash in lieu of a
fractional share of New Prize common stock will generally result in taxable gain
or loss to the Vista stockholder measured by the difference between the amount
of cash received and the adjusted basis of the fractional share. However, a
Vista stockholder should consult his or her tax advisor as to the possibility of
dividend treatment upon the receipt of cash in lieu of a fractional share under
Section 302 of the Code. Assuming that the receipt of cash in lieu of a
fractional share is not treated as a dividend and that the Vista common stock
was held by the stockholder as a capital asset when the merger is completed, any
gain or loss will be a capital gain or loss, and will be a long-term capital
gain or loss if, when the
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<PAGE> 52
merger is completed, the Vista stockholder has held the shares of Vista common
stock for more than one year.
The payment of cash in lieu of a fractional share of New Prize common stock
to a Vista stockholder, other than exempt persons or entities, will be subject
to "backup withholding" for federal income tax purposes, unless specified
requirements are met. New Prize or a third-party paying agent, as the case may
be, must withhold 31% of the cash paid to that stockholder, unless that
stockholder:
- is a corporation or comes within other exempt categories and, when
required, demonstrates this fact; or
- provides New Prize or the third-party paying agent, as the case may be,
with his or her taxpayer identification number and completes a form in
which he or she certifies that he or she has not been notified by the
Internal Revenue Service that he or she is subject to backup withholding
as a result of a failure to report interest and dividends.
The taxpayer identification number of an individual is his or her Social
Security number. Any amount paid as backup withholding will be credited against
the stockholder's federal income tax liability.
THIS DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE REVERSE STOCK SPLIT. WE DO NOT INTEND THAT IT BE A COMPLETE
ANALYSIS OR DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
REVERSE STOCK SPLIT. IN ADDITION, WE DO NOT ADDRESS TAX CONSEQUENCES WHICH MAY
VARY WITH, OR ARE CONTINGENT UPON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, WE DO NOT
ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF
THE REVERSE STOCK SPLIT. ACCORDINGLY, WE STRONGLY URGE YOU TO CONSULT YOUR TAX
ADVISOR TO DETERMINE YOUR PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR
FOREIGN INCOME OR OTHER TAX CONSEQUENCES RESULTING FROM THE REVERSE STOCK SPLIT,
WITH RESPECT TO YOUR INDIVIDUAL CIRCUMSTANCES.
ACCOUNTING TREATMENT
As a result of the merger, Prize stockholders will own approximately 84% of
the common stock of New Prize, assuming conversion of the New Prize convertible
preferred stock. Accordingly, the merger will be accounted for as a reverse
acquisition, in which Prize is the purchaser of Vista. Therefore, following the
merger, the historical financial statements of New Prize will be the historical
financial statements of Prize. For a presentation of the anticipated effects of
the accounting treatment on the consolidated financial position and results of
operations of New Prize after giving effect to the merger, see "Unaudited Pro
Forma Combined Condensed Financial Statements" for New Prize.
RIGHTS OF DISSENTING STOCKHOLDERS
ELIGIBLE STOCKHOLDERS. Prize stockholders are entitled to dissent and be
paid cash for the "fair value" of their shares of Prize common or convertible
preferred stock. This payment may be more than, the same as, or less than the
merger consideration Prize stockholders will receive in the merger. These
appraisal rights arise under Section 262 of the Delaware General Corporation
Law, or DGCL. Section 262 of the DGCL is reprinted in its entirety as Annex C to
this document. All references in Section 262 of the DGCL and in this summary to
a "stockholder" are to the record holder of shares of Prize common stock or
convertible preferred stock as to which appraisal rights are asserted. Vista
stockholders have no appraisal rights under Delaware law or under Vista's
certificate of incorporation or bylaws in connection with the one-for-seven
reverse stock split.
EXERCISING PROCEDURES. The following discussion addresses the material
provisions of Section 262 of the DGCL. If you wish to exercise statutory
appraisal rights or preserve your right to do so, you should review this
discussion and Annex C carefully to comply strictly with the procedures set
forth below and in Annex C, or you may lose your appraisal rights.
If you elect to demand the appraisal of your shares, you must deliver to
Prize a written demand for appraisal of your shares of Prize common stock or
convertible preferred stock before the vote on the
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<PAGE> 53
merger is taken at the Prize special meeting. Your demand is in addition to and
separate from your proxy or vote against the merger agreement. Voting against,
abstaining from voting, or failing to vote on the merger agreement will not
constitute a demand for appraisal. If you elect to demand appraisal rights, you
will not be granted appraisal rights if you have either voted in favor of, or
consented in writing to, the merger agreement, including by granting the proxy
solicited by this proxy statement or by returning a signed proxy without
specifying a vote against the merger agreement or a direction to abstain from
the vote. Additionally, appraisal rights will not be granted if you do not
continuously hold your shares of Prize common stock or convertible preferred
stock for which you demand appraisal through the effective time of the merger.
You must fully and correctly sign your demand for appraisal as your name
appears on the certificate or certificates representing your shares of Prize
common stock or convertible preferred stock. If your shares of Prize common
stock or convertible preferred stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the fiduciary must
execute the demand. If the shares of Prize common stock or convertible preferred
stock are owned of record by more than one person, as in a joint tenancy or
tenancy in common, all joint owners must execute the demand. An authorized
agent, including an agent for two or more joint owners, may execute your demand
for appraisal. However, the agent must identify you as the record owner and
expressly disclose the fact that, in exercising the demand, that person is
acting as your agent.
If you elect to exercise your appraisal rights, you must mail or deliver
your written demand to the Secretary of Prize at 3500 William D. Tate, Suite
200, Grapevine, Texas 76051. Your written demand for appraisal must specify:
- your name and mailing address;
- the number of shares of Prize common stock or convertible preferred stock
that you own; and
- that you are demanding appraisal of your shares.
Within 10 days after the effective time of the merger, New Prize, as the
surviving corporation, must provide notice of the effective time to all
stockholders who have complied with Section 262 and who have not voted for or
consented to the merger agreement.
FAIR VALUE DETERMINATION. Within 120 days after the effective time of the
merger, either New Prize or any stockholder who has complied with Section 262
may file a petition in the Delaware Court of Chancery demanding a determination
of the value of the shares of Prize common stock or convertible preferred stock
of the dissenting stockholders. If a petition for an appraisal is timely filed,
after a hearing on the petition, the Delaware Court of Chancery will determine
which stockholders are entitled to appraisal rights and will appraise the shares
of Prize common stock and convertible preferred stock owned by those
stockholders. The Delaware Court of Chancery will determine the fair value of
those shares of Prize common stock or convertible preferred stock, exclusive of
any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be the fair value. In determining fair value, the Delaware
Court of Chancery is to take into account all relevant factors including:
- market value;
- asset value;
- dividends;
- earning prospects;
- the nature of Prize's enterprise;
- the discounted cash flows of Prize; and
- any other factors that the court deems relevant.
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<PAGE> 54
The court is required to determine the amount necessary to compensate the
stockholder for the loss of the stockholder's interest in Prize as a going
concern rather than in a liquidation context.
If you seek appraisal, you should know that the "fair value" of your shares
of Prize common stock or convertible preferred stock determined under Section
262 could be more than, the same as, or less than the merger consideration you
will receive in the merger, and that the fairness opinion of Dain Rauscher
Wessels is not an opinion as to fair value under Section 262.
COSTS. The cost of the appraisal proceeding may be determined by the
Delaware Court of Chancery and assessed against the parties as the Delaware
Court of Chancery deems equitable in the circumstances. Upon application of a
dissenting stockholder, the Delaware Court of Chancery may order that all or a
portion of the expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding, including reasonable attorneys' fees and the fees
and expenses of experts, be charged pro rata against the value of all shares of
Prize common stock and convertible preferred stock entitled to appraisal.
VOTING RIGHTS; DIVIDENDS. If you have demanded appraisal in compliance with
Section 262, you will not, from and after the effective time of the merger, be
entitled to:
- vote for any purpose the shares of Prize common stock or convertible
preferred stock subject to your demand; or
- receive payment of dividends or other distributions on your shares of
Prize common stock or convertible preferred stock, except for dividends
or distributions payable to stockholders of record at a date prior to the
effective time.
WITHDRAWAL; LOSS OF APPRAISAL RIGHTS. At any time within 60 days after the
effective time of the merger, you will have the right to withdraw your demand
for appraisal and to accept the terms offered in the merger. After this period,
you may withdraw your demand for appraisal only with the consent of New Prize.
If no petition for appraisal is filed with the Delaware Court of Chancery within
120 days after the effective time of the merger, stockholders' rights to
appraisal will cease, and all holders of shares of Prize common stock or
convertible preferred stock will be entitled to receive New Prize common stock
or convertible preferred stock as provided for in the merger agreement. Since
New Prize has no obligation to file any petition for appraisal, and has no
present intention to do so, any dissenting Prize stockholder is advised to file
a petition for appraisal on a timely basis. However, no petition timely filed by
a Prize stockholder in the Delaware Court of Chancery demanding appraisal will
be dismissed without the approval of the Delaware Court of Chancery, and that
approval may be conditioned upon any terms that the Delaware Court of Chancery
deems just.
FEDERAL SECURITIES LAWS CONSEQUENCES; RESALE RESTRICTIONS
This document does not cover resales of the New Prize common stock or
convertible preferred stock to be received by the stockholders of Prize upon
consummation of the merger, and no person is authorized to make any use of this
document in connection with those resales.
Except as noted below, all shares of New Prize common stock received by
Prize stockholders in the merger, all shares of New Prize convertible preferred
stock received by Prize stockholders in the merger and all shares of New Prize
common stock into which the shares of New Prize convertible preferred stock are
convertible will be freely transferable. Shares of New Prize common stock
received by persons who are deemed to be "affiliates" of Prize as defined under
the Securities Act of 1933 may be resold by them only in transactions permitted
by the resale provisions of Rule 145 or Rule 144 in the case of persons who
become affiliates of New Prize or as otherwise permitted under the Securities
Act of 1933. Persons who may be deemed to be affiliates of Vista, New Prize or
Prize generally include individuals or entities that control, are controlled by,
or are under common control with, Vista, New Prize or Prize and may include
officers and directors of Vista, New Prize or Prize as well as significant
stockholders. The merger agreement requires Prize to use its reasonable efforts
to cause each of its affiliates to execute a written agreement to the effect
that the affiliate will not offer or sell or otherwise dispose of any of the
shares of New Prize common stock or convertible preferred stock issued to the
affiliate in the merger in violation of the Securities Act of 1933 or the rules
and regulations of the Securities and Exchange Commission.
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VISTA
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA FOR VISTA
The following table sets forth selected pro forma financial information for
Vista and its predecessor, Vista Resources Partners, L.P., for the year ended
December 31, 1998, which statement of income data assumes that Vista completed
the acquisitions of IP Petroleum Company, Inc. and Midland Resources, Inc. on
January 1, 1998. The following table also sets forth selected financial
information for Vista and Vista Resources Partners, L.P. for the nine months
ended September 30, 1999 and 1998, for the years ended December 31, 1998, 1997
and 1996, and for the period from inception, September 21, 1995, through
December 31, 1995. This financial information was derived from the consolidated
financial statements of Vista. This data should be read in conjunction with the
consolidated financial statements of Vista and the related notes and
"Vista -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of Vista."
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------- -----------------------------------------
1998 1999 1998 1998 1997 1996
------------ ----------- ----------- ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales.................... $17,201,844 $12,856,692 $ 5,984,676 $ 8,737,056 $ 8,874,961 $ 5,537,720
------------ ----------- ----------- ------------ ------------ -----------
Total revenues................. 17,201,844 12,856,692 5,984,676 8,737,056 8,874,961 5,537,720
------------ ----------- ----------- ------------ ------------ -----------
COSTS AND EXPENSES:
Lease operating...................... 8,076,400 4,655,601 2,777,877 4,398,384 3,688,695 2,544,567
Exploration costs.................... 161,301 52,850 25,458 32,077 97,211 273,843
Depreciation, depletion and
amortization....................... 6,541,676 3,593,750 1,229,601 3,014,707 2,169,098 1,272,316
Impairment of oil and gas
properties......................... 24,849,632 -- -- 24,849,632 -- --
General and administrative........... 2,331,875 1,480,879 1,184,641 1,743,814 987,020 581,048
Amortization of unit option awards... 4,262,089 -- 214,303 4,262,089 315,518 --
------------ ----------- ----------- ------------ ------------ -----------
Total costs and expenses....... 46,222,973 9,783,080 5,431,880 38,300,703 7,257,542 4,671,774
------------ ----------- ----------- ------------ ------------ -----------
Operating income (loss).............. (29,021,129) 3,073,612 552,796 (29,563,647) 1,617,419 865,946
Gain (loss) on sale of property...... (366,246) 147,141 (339,362) (317,293) (87,678) (56,738)
Interest income...................... 5,833 8,172 -- 5,833 -- --
Interest expense..................... (3,413,423) (3,047,674) (1,070,123) (1,597,350) (1,048,009) (476,363)
Other income, net.................... 229,165 50,512 60,907 111,745 115,949 61,437
------------ ----------- ----------- ------------ ------------ -----------
NET INCOME (LOSS) BEFORE TAXES(1)...... (32,565,800) 231,763 (795,782) (31,360,712) 597,681 394,282
------------ ----------- ----------- ------------ ------------ -----------
Deferred federal income tax expense
(benefit).......................... (6,982,132) 81,117 N/A (6,560,351) N/A N/A
------------ ----------- ----------- ------------ ------------ -----------
NET INCOME (LOSS)...................... $(25,583,668) $ 150,646 $ (795,782) $(24,800,361) $ 597,681 $ 394,282
============ =========== =========== ============ ============ ===========
NET INCOME (LOSS) PER SHARE............ $ (1.57) $ .01 $ (.07) $ (1.95) $ .05 $ .03
============ =========== =========== ============ ============ ===========
Pro forma benefit (provision) for
taxes(1)............................. N/A N/A 278,524 N/A (211,720) (139,284)
------------ ----------- ----------- ------------ ------------ -----------
PRO FORMA NET INCOME (LOSS)............ $(25,583,668) $ 150,646 $ (517,258) $(24,800,361) $ 385,961 $ 254,998
============ =========== =========== ============ ============ ===========
PRO FORMA NET INCOME (LOSS) PER
SHARE................................ $ (1.57) $ .01 $ (.04) $ (1.95) $ .03 $ .02
============ =========== =========== ============ ============ ===========
CASH FLOW DATA:
EBITDAEX(2).......................... N/A $ 6,926,037 $ 1,743,703 $ 2,395,143 $ 4,227,517 $ 2,415,804
Cash flows from operating
activities......................... N/A 3,047,773 439,525 (655,633) 3,469,638 2,072,649
Cash flows from investing
activities......................... N/A (4,929,996) (1,883,563) (22,256,996) (12,648,815) (7,046,720)
Cash flows from financing
activities......................... N/A 1,902,846 1,000,000 22,385,500 9,189,095 5,015,077
Capital expenditures................. N/A 5,265,215 2,427,927 22,805,360 13,038,815 7,417,091
Ratio of earnings to fixed
charges(3)......................... N/A 1.1x -- -- 1.6x 1.8x
BALANCE SHEET DATA (end of period):....
Working capital...................... N/A $ (227,090) $ 80,627 $ (427,266) $ 421,132 $ 613,666
Property, plant, and equipment,
net................................ N/A 58,114,797 25,228,259 56,543,988 24,870,766 14,523,202
Total assets......................... N/A 63,362,463 27,471,499 59,743,317 27,036,103 16,259,340
Long-term debt....................... N/A 52,633,740 18,900,000 50,730,894 17,900,000 8,615,077
Stockholders' equity................. N/A 5,519,341 7,115,173 5,368,695 7,696,652 6,783,453
</TABLE>
47
<PAGE> 56
- ---------------
(1) The pro forma benefit (provision) for taxes is the amount that would have
been recorded in the financial statements had Vista been a taxable entity
during the relevant period. Vista became a taxable entity in connection with
the Midland Resources merger on October 28, 1998.
(2) Vista believes that EBITDAEX may provide additional information about
Vista's discretionary cash flow and its ability to meet its future
requirements for debt service, capital expenditures and working capital.
EBITDAEX is a financial measure commonly used in the oil and gas industry
and should not be considered in isolation or as a substitute for net income,
operating income, cash flows from operating activities or any other measures
of financial performance presented in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Because EBITDAEX excludes some, but not all, items that affect
net income and these measures may vary among companies, the EBITDAEX data
presented above may not be comparable to similarly titled measures of other
companies. EBITDAEX, as used in this document, is calculated by adding
depletion, depreciation and amortization, impairment of oil and gas
properties and exploration costs to net income before taxes. Exploration
costs represent discretionary cost items. Therefore, exploration costs have
been added back in order to present a discretionary cash flow for Vista.
Discretionary cash flow is cash flow that is available to meet future debt
service and other cash requirements. However, Vista's business may require
that these funds be devoted to uses other than debt service.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as income (loss) before taxes plus fixed charges. Fixed charges
consist of interest expense, which includes amortization of deferred loan
costs and the portion of rental expense deemed to be interest. Earnings were
insufficient to cover fixed charges by $0.8 million and $29.8 million for
the nine months ended September 30, 1998 and the year ended December 31,
1998, respectively.
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<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF VISTA
THE FORMATION OF VISTA
Vista is a Delaware corporation whose common stock is listed and traded on
the American Stock Exchange. The company was formed in May 1998 for the purpose
of merging Vista Resources Partners, L.P., a Texas limited partnership, and
Midland Resources, Inc., a publicly traded Texas corporation. The merger
occurred on October 28, 1998. Vista is an oil and gas exploration and production
company with ownership interests in oil and gas properties located principally
in the Permian Basin of West Texas and Southeastern New Mexico and the onshore
Gulf Coast region of Texas.
On October 28, 1998, under the terms of an exchange agreement dated June
15, 1998, Vista acquired all of the outstanding limited partnership interests of
Vista Resources Partners, L.P., as well as all of the common stock of its
general partner, in exchange for common stock of Vista. This conversion was
accounted for as a transfer of assets and liabilities between affiliates under
common control and resulted in no change in carrying values of these assets and
liabilities. The conversion and related transactions were completed immediately
prior to the closing of the merger with Midland Resources, Inc.
In accordance with the provisions of Accounting Principles Board No. 16
Business Combinations, Vista accounted for the merger of Vista Resources
Partners and Midland Resources as a purchase by Vista, which was formerly Vista
Resources Partners. As a result, the historical financial statements for Vista
are those of Vista Resources Partners.
FINANCIAL PERFORMANCE
Vista reported a net income or (loss) of $0.2 million, or $0.01 per share,
for the nine months ended September 30, 1999, as compared to a net loss of
($0.8) million, or ($0.07) per share, for the same period in 1998. As discussed
more fully in "Results of Operations for the Nine Months Ended September 30,
1999 and 1998" below, Vista's financial performance for the nine months ended
September 30, 1999, was positively impacted by a substantial increase in
production and related oil and gas revenues, which were reduced by associated
increases in gross production costs and interest expense, in each case due to
the addition of properties acquired in the 1998 acquisitions described below.
Net cash provided by operating activities was $3.0 million during the nine
months ended September 30, 1999, as compared to net cash provided by operating
activities of $0.4 million for the same period in 1998. This increase was
primarily attributable to increases in production from the properties acquired
in the 1998 acquisitions and production increases from Vista's success in its
1998 and 1999 drilling and recompletion program. However, this increase was
offset by increased gross production costs and interest expense as a result of
the additional properties acquired and indebtedness incurred in respect of the
1998 acquisitions.
Vista strives to maintain its outstanding indebtedness at a moderate level
in order to provide sufficient financial flexibility to fund future
opportunities. Vista's total book capitalization at September 30, 1999, was
$58.1 million, consisting of total long-term debt of $52.6 million and owners'
equity of $5.5 million. Debt as a percentage of total book capitalization was
90% at September 30, 1999, which was essentially the same as at December 31,
1998.
DRILLING RESULTS
During the first nine months of 1999, Vista continued its emphasis on
development, exploration and production activities, with a primary focus on the
exploitation of its current portfolio of drilling locations. During the first
nine months of 1999, Vista participated in the drilling and completion of 11
gross development wells and four gross exploration wells. None of these wells
were in progress at December 31, 1998. Of the 15 wells drilled during the nine
months ended September 30, 1999, 13 were completed successfully, which resulted
in an 87% success rate. In addition to the wells completed in the first nine
months of 1999, Vista had four wells in progress at September 30, 1999.
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<PAGE> 58
ACQUISITION ACTIVITIES
1999 Acquisitions. Although various acquisition candidates were evaluated
during the first nine months of 1999, no material asset acquisitions were made
during that time period.
On October 8, 1999, Vista and Prize Energy Corp. entered into a definitive
agreement to merge the two companies. The transaction will create a mid-sized
independent oil and gas company with assets valued in excess of $450 million.
The combined company's focused growth strategy is concentrated on the
acquisition and exploitation of oil and gas properties in its core operating
areas of the Permian Basin of West Texas and Southeastern New Mexico, onshore
Gulf Coast area of Texas and Louisiana and the Mid-Continent area of Western
Oklahoma and the Texas Panhandle.
Under the terms and conditions of the merger agreement between Vista and
Prize, Prize would become a wholly-owned subsidiary of Vista in exchange for
58.2 million shares of common stock of Vista, with the number of shares being
subject to adjustment in order to reflect a proposed reverse stock split, and
27.7 million shares of a to be created series A 6% convertible preferred stock
of Vista, with the number of shares being subject to adjustment in order to
reflect a proposed reverse stock split. Vista's outstanding warrants will remain
outstanding in accordance with their terms. The merger is to be structured as a
reorganization for tax purposes. The merger will result in the current holders
of common stock of Vista owning approximately 16% of the outstanding common
stock of the combined company and the holders of common stock and preferred
stock of Prize collectively owning, on a fully converted basis, approximately
84% of the outstanding common stock of the combined company upon completion of
the merger.
The combined company will be headquartered in the Dallas, Texas, area with
operating offices in Midland and Victoria, Texas, and Elmore City, Oklahoma. The
combined company will have a capital structure consisting of approximately 74.6
million shares of common stock outstanding, with the number of shares being
subject to adjustment in order to reflect a proposed reverse stock split,
approximately $30 million of convertible preferred securities and approximately
$195 million of net long-term debt.
1998 Acquisitions. On October 28, 1998, the Midland Resources merger
between Vista Resources Partners and Midland Resources was completed, resulting
in the formation of Vista. As a result of the Midland Resources merger, Midland
Resources' security holders acquired 27.3% of the outstanding common stock of
Vista and security holders of Vista Resources Partners acquired the remaining
72.7% of the outstanding common stock of Vista. In addition, upon consummation
of the Midland Resources merger, the common stock of Vista, the newly merged
company, became publicly traded on the American Stock Exchange effective October
29, 1998.
Effective as of October 1, 1998, Vista acquired working interests ranging
from 65% to 85% in a group of oil and gas producing leases from IP Petroleum
Company, Inc. and a number of its co-working interest owners. These leases are
located primarily in the War-Wink Area of Ward and Winkler Counties, Texas, and
the interests were acquired for a purchase price of $19.1 million. The IP
Petroleum acquisition closed on December 18, 1998. The Midland Resources merger
and the IP Petroleum acquisition are sometimes collectively referred to in this
document as the 1998 acquisitions.
1997 Acquisitions. In addition to acquiring various additional small
working interests and overriding royalty interests in properties already owned
and operated by Vista, Vista closed two significant producing property
acquisitions in 1997, which are referred to in this document as the 1997
acquisitions. In May 1997, but effective September 1, 1996, Vista acquired all
of the interests of Coastal Oil and Gas Corporation in three producing leases
located in the Howard Glasscock Field, Howard County, Texas, for a net purchase
price of $1.1 million. The interests acquired were attributable to leases in
which Vista already owned interests and were operated by Vista. Effective as of
July 1, 1997, Vista closed the acquisition in which it acquired substantially
all of the producing oil and gas properties from E.G. Operating, a division of
FGL, Inc., for a net purchase price of $6.1 million.
1996 Acquisitions. In addition to acquiring various additional small
working interests in oil and gas properties already owned and operated by Vista,
Vista closed two significant producing property
50
<PAGE> 59
acquisitions in 1996, which are referred to in this document as the 1996
acquisitions. Effective as of June 1, 1996, Vista acquired a 100% working
interest in two producing leases, consisting of 14 wells, located in the Sharon
Ridge field, Scurry County, Texas, for a net purchase price of $0.5 million.
Effective as of July 1, 1996, Vista acquired producing oil and gas properties
from Merit Energy Company and its partnership affiliates for a net purchase
price of $4.1 million. All of Vista's 1996 acquisitions were funded through a
combination of proceeds from long-term borrowings and cash provided by operating
activities.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Oil and Gas Production.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Revenues.................................................... $12,856,692 $5,984,676
Costs and expenses:
Production costs.......................................... 4,655,601 2,777,877
Depletion, depreciation and amortization.................. 3,593,750 1,229,601
Exploration costs......................................... 52,850 25,458
----------- ----------
Total costs and expenses.......................... 8,302,201 4,032,936
----------- ----------
Operating profit (excluding general and administrative
expenses, interest expense and income taxes).............. $ 4,554,491 $1,951,740
=========== ==========
Production:
Oil (Bbls)................................................ 687,731 342,234
Gas (Mcf)................................................. 2,243,836 701,346
Total (BOE)............................................... 1,061,704 459,125
Average daily production:
Oil (Bbls)................................................ 2,519 1,254
Gas (Mcf)................................................. 8,219 2,569
----------- ----------
Total (BOE)....................................... 3,889 1,682
Average oil price (per Bbl)................................. $ 12.84 $ 13.50
Average gas price (per Mcf)................................. $ 1.80 $ 1.94
Costs (per BOE):
Lease operating expense................................... $ 3.66 $ 5.03
Production taxes.......................................... $ .73 $ 1.02
----------- ----------
Total production costs............................ $ 4.39 $ 6.05
Depletion, depreciation and amortization.................. $ 3.38 $ 2.68
</TABLE>
Oil and Gas Revenues. Revenues from oil and gas operations totaled $12.9
million for the nine months ended September 30, 1999, compared to $6.0 million
for the same period in 1998, representing an increase of 115%. The increase is
primarily attributable to the 1998 acquisitions and increases in production due
to Vista's successful exploitation activities in 1998 and 1999, offset by
decreased average prices being received for the nine-month period for both oil
and gas production, as a result of the oil and gas price hedges Vista had in
place during the first nine months of 1999. The average oil price received,
inclusive of hedging activities, for the nine months ended September 30, 1999,
was $12.84, compared to $13.50 for the nine months ended September 30, 1998. The
average gas price received, inclusive of hedging activities, was $1.80 for the
nine months ended September 30, 1999, compared to $1.94 for the same period in
1998.
Average daily oil production increased 101% to 2,519 Bbls for the first
nine months of 1999 from 1,254 Bbls for the same period of 1998; and average
daily gas production increased 220% to 8,219 Mcf from 2,569 Mcf for the same
period. Approximately 51% of this period to period increase in oil and gas
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<PAGE> 60
production is attributable to properties acquired in the 1998 acquisitions and
49% is attributable to existing properties.
Significant production increases were made in late 1998 and early 1999 by
drilling the Simon Littman #2 well in Andrews County, Texas, resulting in
initial production of 100 barrels per day, the re-entry of the Peters #3 well in
Jackson County, Texas, resulting in initial production of 70 barrels per day,
and the recompletion of the Webb #1X well in Yoakum County, Texas, resulting in
initial production of 150 barrels per day. In 1999, successful recompletions
were also made in the Warwink field, including the University 7-2 well and
University 45-A5 wells among others.
Production Costs. Total production costs on an aggregate basis increased
substantially in the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998, primarily because Vista acquired a
substantial number of properties from Midland Resources, Inc. as a result of the
merger with Midland in October 1998. Vista acquired another large group of
properties from IP Petroleum Company, Inc. in December 1998. See
"Vista -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of Vista -- Acquisition Activities -- 1998 Acquisitions."
However, total production costs, inclusive of all lease operating expenses and
production taxes per BOE, decreased 28% to $4.39 during the nine months ended
September 30, 1999, as compared to production costs per BOE of $6.05 during the
same period of 1998. These reductions are primarily due to Vista's continued and
concentrated efforts to evaluate and reduce all operating costs and the addition
of higher margin properties acquired by Vista in the 1998 acquisitions.
Exploration Costs. Exploration costs, which include abandonments, dry hole
costs, and geological and geophysical costs, were $52,850 during the first nine
months of 1999, as compared to $25,458 during the same period in 1998 because
Vista incurred additional costs relating to consulting geologists who were
reviewing potential prospects during the first nine months of 1999.
General and Administrative Expense. General and administrative expense was
$1.5 million for the nine months ended September 30, 1999, as compared to $1.2
million for the same period ended September 30, 1998, representing an increase
of 25% for the same period. This increase was primarily due to the costs
associated with the hiring of additional employees in late 1998 and early 1999
as Vista's business has grown and due to Vista becoming a publicly traded
company in late 1998. However, on a BOE basis, Vista's general and
administrative expense was $1.40 per BOE for the nine months ended September 30,
1999, compared to $2.58 per BOE for the nine months ended September 30, 1998.
Interest Expense. Interest expense was $3.0 million and $1.1 million for
the nine months ended September 30, 1999 and 1998, respectively. This increase
is primarily due to additional borrowings made in connection with the 1998
acquisitions.
Depletion, Depreciation and Amortization Expense. Depletion, depreciation
and amortization expense per BOE increased to $3.38 during the nine months ended
September 30, 1999, as compared to $2.68 during the same period in 1998. The
increase in depletion, depreciation and amortization expense per BOE is
primarily related to the additional properties acquired in the 1998
acquisitions.
52
<PAGE> 61
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Oil and Gas Production.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues......................................... $8,737,056 $8,874,961 $5,537,720
Costs and expenses:
Production costs............................... 4,398,384 3,688,695 2,544,567
Depletion, depreciation and amortization....... 3,014,707 2,169,098 1,272,316
Exploration costs.............................. 32,077 97,211 273,843
---------- ---------- ----------
Total costs and expenses............... 7,445,168 5,955,004 4,090,726
---------- ---------- ----------
Operating profit (excluding general and
administrative expenses, interest expense and
income taxes).................................. $1,291,888 $2,919,957 $1,446,994
========== ========== ==========
Production:
Oil (Bbls)..................................... 529,426 403,812 253,321
Gas (Mcf)...................................... 1,250,490 784,298 458,278
Total (BOE)............................ 737,841 534,528 329,701
Average daily production:
Oil (Bbls)..................................... 1,450 1,107 693
Gas (Mcf)...................................... 3,426 2,148 1,255
---------- ---------- ----------
Total (BOE)............................ 2,021 1,465 902
Average oil price (including hedging effects)
(per Bbl)...................................... $ 12.25 $ 17.63 $ 18.04
Average gas price (including hedging effects)
(per Mcf)...................................... $ 1.80 $ 2.22 $ 2.19
Costs (per BOE):
Lease operating expense........................ $ 5.24 $ 5.62 $ 6.35
Production taxes............................... $ .72 $ 1.28 $ 1.37
---------- ---------- ----------
Total production costs................. $ 5.96 $ 6.90 $ 7.72
Depletion, depreciation and amortization....... $ 4.09 $ 4.06 $ 3.86
</TABLE>
Comparison of 1998 Results to 1997. Vista reported a net loss of $24.8
million for 1998, as compared to net income of $0.6 million for the year ended
December 31, 1997. As discussed more fully below, Vista's financial performance
for the year ended December 31, 1998 was negatively impacted by the following
items:
- significant reduction in the prices received for oil and gas sales of 31%
and 19%, respectively, from 1997 levels;
- significant impairment of its oil and gas properties, resulting from
historically low oil and gas prices at year end, together with the
effects of purchase accounting rules applied to the Midland Resources
merger, which required Vista to book the Midland Resources oil and gas
assets at $37.0 million, then subsequently write down such assets to
$14.8 million at year end;
- the compensation expense associated with the option plan;
- an increase in gross production costs due to the addition of properties
acquired in 1997 and 1998 from E.G. Operating, a division of FGL, Inc.,
Midland Resources, Inc. and IP Petroleum Company, Inc.; and
- an increase in interest expense as a result of the additional
indebtedness incurred in respect of the acquisition of properties from
E.G. Operating and IP Petroleum and the Midland Resources merger.
Net cash used in operating activities was $0.7 million for the year ended
December 31, 1998, as compared to net cash provided by operating activities of
$3.5 million for the same period in 1997. This
53
<PAGE> 62
decrease was primarily attributable to significantly lower commodity prices for
oil and gas and increased production costs and interest expense as a result of
the additional properties acquired and indebtedness incurred in respect of the
acquisition of properties from E.G. Operating and IP Petroleum and the Midland
Resources merger.
For the year ended December 31, 1998, Vista's oil and gas revenues,
including the effects of hedging activities, decreased to $8.7 million from $8.9
million in 1997, representing a decrease of 2% from the prior year. This
decrease was attributable to the significant reduction in oil and gas prices
received offset by increases in production of both oil and gas.
During 1998, Vista produced 529 MBbls of oil and 1,250 MMcf of gas, which
collectively consists of 738 MBOE and represents increases of 31% and 59%,
respectively, over 1997. The production increases resulted primarily from the
1998 acquisitions, as well as Vista's successful drilling and exploitation
activities. The average daily production of oil and gas was 1,450 BOPD and 3,426
Mcfd, representing increases of 31% and 59%, respectively, over 1997. Production
increases from 1997 to 1998 are attributable approximately 13% to properties
acquired in acquisitions and 87% to existing properties.
Average oil prices decreased significantly from $17.63 per barrel in 1997
to $12.25 per barrel in 1998. Average natural gas prices decreased from $2.22
per Mcf in 1997 to $1.80 per Mcf in 1998. The average oil price includes hedging
gains in 1998 of $0.8 million or $1.64 per barrel. The average natural gas price
includes hedging gains in 1998 of $0.1 million or $0.07 per Mcf.
Oil and gas production costs, including production and ad valorem taxes,
increased to $4.4 million, or $5.96 per BOE, for the year ended December 31,
1998, compared to $3.7 million, or $6.90 per BOE, in 1997. The increase in oil
and gas production costs was primarily attributable to the properties acquired
in the 1998 acquisitions and having a full year of production costs related to
the 1997 acquisitions.
Exploration and abandonment costs decreased from $0.1 million in 1997 to
$32,077 in 1998, resulting from Vista's drilling of no dry holes in 1998, and a
decreased write-down of expired acreage.
General and administrative expenses, net of third party reimbursements, for
1998 totaled $1.7 million, or $2.36 per BOE, a 77% increase from 1997. The
increase resulted primarily from the 1998 acquisitions, which resulted in the
hiring of additional personnel to handle Vista's expanded operations.
Depletion, depreciation and amortization expense for 1998 totaled $3.0
million, or $4.09 per BOE, an increase of $0.8 million, or 39%, from 1997. This
increase relates to a full year of depletion relating to production attributable
to the 1997 acquisitions and depletion relating to production attributable to
the 1998 acquisitions.
Impairment of oil and gas properties for 1998 totaled $24.8 million. The
impairment was the result of applying Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." In applying this statement, Vista
determined that the estimated future net cash flows, undiscounted and without
interest charges, expected to result from the use of these assets was less than
the carrying amount, or book value, of these assets and, accordingly, recorded
an impairment based on the fair value of the assets. In 1998, the impairment
primarily resulted from substantially lower oil and natural gas prices at year
end coupled with the effects of applying the purchase accounting method to the
properties acquired in the Midland Resources merger. Under purchase accounting
rules, Vista recorded the oil and gas assets acquired in the Midland Resources
merger at the purchase price of $37.0 million, then subsequently recognized an
impairment on those assets of $22.2 million at December 31, 1998 due to the
significant drop in oil and gas prices from May 1998, when the Midland Resources
merger was announced, until December 1998. Accordingly, the impairment
associated with the properties acquired in the Midland Resources merger
accounted for 90% of the total impairment recognized by Vista in 1998. The
remaining $2.6 million impairment in 1998 was related to several operated fields
in the Permian Basin and was the result of the substantial reduction of oil and
gas prices. Vista recognized no impairment in 1997.
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<PAGE> 63
Vista estimated its future net cash flows for the impairment test using
prices determined based upon an initial reference price of $14 per Bbl for oil
(WTI) and $2.00 per Mcf for gas (Henry Hub) for 1999, as adjusted for quality
and location differentials of Vista's production. These prices were then
escalated until 2002 when they were held flat for the remainder of the economic
lives of the properties. The resulting prices were higher than the year-end
prices which are required to be used for the SFAS No. 69 disclosures in Vista's
financial statements. In estimating the future net revenues, Vista assumed
future oil and gas prices would return to more historical levels over a period
of time. Due to the volatility of oil and gas prices, it is possible that
Vista's assumptions regarding oil and gas prices may change in the future. Vista
used only proved reserves in estimating its expected future cash flows for the
impairment test.
Interest expense was $1.6 million in 1998, compared to $1.0 million in
1997, an increase of 52%. Interest expense was primarily attributable to
increased debt levels relating to the financing of the 1997 and 1998
acquisitions.
Comparison of 1997 Results to 1996. For the year ended December 31, 1997,
Vista's oil and gas revenues, including the effects of hedging activities,
increased to $8.9 million from $5.5 million in 1996, representing an increase of
62% from the prior year. The revenue increase was due to additional production
from the 1997 acquisitions, as well as Vista's successful drilling and
exploitation activities.
During 1997, Vista produced 404 MBbls and 784 MMcf of gas, which is 535
MBOE, representing increases of 59% and 71%, respectively, over 1996. The
production increases resulted primarily from the 1997 acquisitions, as well as
Vista's successful drilling and exploitation activities. The average daily
production of oil and gas was 1,107 BOPD and 2,148 Mcfd representing increases
of 60% and 71%, respectively, over 1996. Production increases from 1996 to 1997
are attributable approximately 70% to properties acquired in acquisitions and
30% to existing properties.
Average oil prices decreased from $18.04 per barrel in 1996 to $17.63 per
barrel in 1997. Average natural gas prices increased slightly from $2.19 per Mcf
in 1996 to $2.22 per Mcf in 1997. The average oil price includes hedging losses
in 1997 of $0.2 million, or $0.50 per barrel. No natural gas price hedges were
in place in 1996.
Oil and gas production costs, including production and ad valorem taxes,
increased to $3.7 million, or $6.90 per BOE, for the year ended December 31,
1997, compared to $2.5 million, or $7.72 per BOE, in 1996. The increase in oil
and gas productions costs was primarily attributable to the properties acquired
in the 1997 acquisitions.
Exploration and abandonment costs decreased from $0.3 million in 1996 to
$0.1 million in 1997. The reduced costs were the result of less dry hole costs
and a decreased write-down of expired acreage.
General and administrative expenses, net of third party reimbursements, for
1997 totaled $1.0 million, or $1.85 per BOE, a 70% increase from 1996. The
increase resulted primarily because of the 1997 acquisitions, which resulted in
the hiring of additional personnel to handle Vista's expanded operations.
Depletion, depreciation and amortization expense for 1997 totaled $2.2
million, or $4.06 per BOE, an increase of $0.9 million or 69% from 1996. This
increase relates to a full year of depletion relating to production for the 1996
acquisitions and depletion related to the 1997 acquisitions.
Vista recognized no impairment charges for either 1997 or 1996.
Interest expense was $1.0 million in 1997, compared to $0.5 million in
1996, an increase of 100%. The increase in interest expense was primarily
attributable to increased debt levels relating to the financing of the 1997
acquisitions.
CAPITAL COMMITMENTS, CAPITAL RESOURCES AND LIQUIDITY
Capital Commitments. Vista's primary needs for cash are for acquisitions,
development and exploration of oil and gas properties, repayment of principal
and interest on outstanding indebtedness and working capital obligations.
Vista's cash expenditures during the first nine months of 1999 for additions to
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oil and gas properties totaled $5.3 million. This amount includes $1.0 million
for the acquisition of properties and $4.3 million for development and
exploratory drilling.
Vista's 1999 capital expenditure drilling budget has been approved at an
amount up to $11.1 million. Under this budget, $9.3 million has been allocated
to exploitation and development activities and $1.8 million to exploration
activities. Vista does not budget for oil and gas property acquisitions as they
are made on a case by case basis as opportunities arise. The 1999 budget
reflects Vista's plans to drill and/or recomplete approximately 25 oil and gas
wells in 1999. Vista currently expects to fund its 1999 capital expenditure
budget primarily with internally generated cash flow, borrowings under its bank
credit facility and proceeds from the sale of non-strategic assets.
Capital Resources. Vista's primary capital resources are net cash provided
by operating activities, borrowings under its bank credit facility and proceeds
from the sale of non-strategic assets.
Financing Activities. As of September 30, 1999, $52.6 million was
outstanding under a $100 million revolving credit agreement dated December 18,
1998, and accompanying note with BankBoston subject to a borrowing base which is
redetermined on a semi-annual basis. The borrowing base at September 30, 1999,
was $55.0 million. The next scheduled borrowing base redetermination is
scheduled for February 28, 2000. Borrowings under the credit facility are to be
used for the acquisition and development of oil and gas properties and for other
company purposes.
Vista has two options with respect to interest rate elections on borrowings
under the credit facility. Vista may either elect an interest rate equal to:
- the alternate base rate plus the applicable margin, which is called the
prime basis; or
- a Eurodollar rate, which is the London Interbank Offered Rate, plus the
applicable margin, which is called the LIBOR basis.
The applicable margin, as defined in the credit facility, will be adjusted for
borrowing base usage. The LIBOR basis option provides for one-, two-, three-,
six- and twelve-month interest periods. At September 30, 1999, the effective
interest rate on the amount outstanding was 7.59%.
Unless otherwise extended by BankBoston, the credit facility converts to a
three-year fully amortizing term loan at December 15, 2001.
The obligations of Vista under the credit facility are secured by a first
lien deed of trust on Vista's interests in specific oil and gas properties.
The credit facility contains two financial covenants including a minimum
current ratio, including available borrowings, of 1:1 and an interest coverage
to EBITDA test consisting of 2.0 to 1.0 for the four-fiscal quarter period
ending December 31, 1998; 2.25 to 1.0 for the four-fiscal quarter period ending
March 31, 1999; and 2.5 to 1.0 for each subsequent four-fiscal quarter period.
Vista is in compliance with its credit facility covenants including its two
financial covenants. As calculated under the terms of the credit facility,
Vista's minimum current ratio at September 30, 1999 was 1.44 to 1.0 and Vista's
interest coverage ratio at September 30, 1999 was 3.53 to 1.0. The credit
facility also includes covenants which, among other things, restrict the
incurrence of additional indebtedness and the sale or acquisition of oil and gas
properties above stated levels without the consent of the lender. Failure to
comply with Vista's covenants under its credit facility could result in an event
of default under the credit facility. This would permit Vista's lenders to
exercise their remedies under the credit facility, which could include
acceleration of the payment of all indebtedness owed under the credit facility
to the lenders.
Effective as of December 23, 1997, Vista entered into an interest rate swap
accounted for as a hedge with any realized gains or losses appropriately
recorded as interest expense. See Note 7 of Notes to Consolidated Financial
Statements for further discussion of hedge accounting. The swap consists of a
$10 million notional amount of indebtedness at a fixed swap rate of 6.02%
three-month LIBOR for Vista. The term of this swap ends on December 23, 1999.
Effective as of January 1, 1999, this interest rate swap was assigned to
BankBoston. In conjunction with this assignment the terms of the swap were
modified to
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<PAGE> 65
reduce the fixed swap rate from 6.02% to 5.65% and to extend the term of the
swap until December 23, 2000, at the option of BankBoston.
Vista's level of debt affects its business operations in several important
ways, including the following:
- a large portion of Vista's cash flow from operations is used to pay
interest on borrowings;
- covenants contained in Vista's credit facility may affect its flexibility
in planning for and reacting to changes in business conditions;
- covenants contained in Vista's credit facility limit its ability to
borrow additional funds or to dispose of assets;
- Vista's level of debt may impair its ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes;
- Vista's leveraged financial position may make it more vulnerable to
economic downturns;
- any debt that Vista incurs under its credit facility will be at variable
rates, making it vulnerable to increases in interest rates; and
- a high level of debt will affect Vista's flexibility in planning for or
reacting to changes in market conditions.
Deferred Tax Asset. Vista believes it is more likely than not that the
deferred tax assets are realizable based on the estimated timing of the reversal
of the property temporary differences and the scheduled expiration of the net
operating loss carryforwards.
Liquidity.
Cash Flow from Operating Activities: Vista's net cash flow from operations
for the nine months ended September 30, 1999 was $3.0 million, compared to $0.4
million for the same period in 1998. The increase was primarily attributable to
the properties acquired in the 1998 acquisitions.
Cash Flow from Investing Activities: Vista's net cash used for investing
activities during the nine months ended September 30, 1999 totaled $4.9 million,
compared to $1.9 million for the same period in 1998. The increase was primarily
attributable to increased capital expenditures for drilling and completion
activities due to the additional properties acquired in the 1998 acquisitions.
Cash Flow from Financing Activities: For the nine months ended September
30, 1999, cash provided by financing activities totaled $1.9 million. Vista
borrowed $2.9 million and repaid $1.0 million of debt.
At September 30, 1999, Vista had cash of $20,623 on hand compared to $0 at
December 31, 1998. Vista's ratio of current assets to current liabilities was
.95:1 at September 30, 1999 compared to .86:1 at December 31, 1998.
YEAR 2000 READINESS DISCLOSURE
"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that were not Year 2000 compliant by January 1, 2000 may cause material adverse
effects to companies and organizations that rely upon those systems. Continuity
of Vista's operations in January 2000 will not only depend upon Year 2000
compliance of Vista's computer systems and computer-controlled equipment, but
also compliance of computer systems and computer-controlled equipment of third
parties. These third parties include oil and natural gas purchasers and
significant service providers such as electric utility companies and natural gas
plant, pipeline and gathering system operators.
Vista reviewed its computer systems and computer-controlled field equipment
and made the necessary modifications for Year 2000 compliance. Vista has
completed modifications and testing of its primary
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<PAGE> 66
accounting and land computer programs. The remaining computer systems have been
inventoried and assessed.
Based on its review, remediation efforts and the results of testing to
date, Vista does not believe that timely modification of its computer systems
and computer-controlled equipment for Year 2000 compliance represents a material
risk to Vista. Vista estimates that total costs related to Year 2000 compliance
efforts will be less than $10,000, of which approximately $3,600 has been
incurred and expensed through September 30, 1999.
Vista has communicated with its material vendors and suppliers to verify
that their operations are Year 2000 compliant. Despite efforts to assure that
these third parties are Year 2000 compliant, Vista cannot provide assurance that
all significant third parties achieved compliance in a timely manner. A third
party's failure to achieve Year 2000 compliance could have a material adverse
effect on Vista's operations and cash flow. The most likely "worst case" impacts
would be of three months' duration and would be:
- impairment of Vista's ability to deliver its production to, or receive
payment from, third parties gathering and/or purchasing its production
from affected facilities;
- impairment of the ability of third-party suppliers or service companies
to provide needed materials or services to Vista's planned or ongoing
operations, necessitating deferral or shut-in of exploration, development
or production operations;
- impairment of Vista's ability to receive and process data, which would
hinder its ability to conduct development drilling and exploitation
activities; and
- Vista's inability to execute financial transactions with its banks and
other third parties whose systems fail or malfunction.
At the date of this document, it does not appear that any of these potential
Year 2000 problems will materially affect Vista.
Vista has developed appropriate contingency plans in the event it becomes
aware of potential problems resulting from failure of Vista's or of significant
third party computer systems in January 2000. These contingency plans include
installing backup computer systems or equipment, temporarily replacing systems
or equipment with manual processes, and identifying alternative suppliers,
service companies and purchasers.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the inability to ensure readiness of third parties, the
Year 2000 compliance issue could have a material adverse impact on Vista's
results of operations and financial condition.
COMMODITY PRICE HEDGING INSTRUMENTS
The oil and gas prices that Vista reports are based on the actual prices
received for the commodities as adjusted for the results of Vista's hedging
activities. Since its inception, Vista has entered into commodity derivative
contracts, which are called swaps and collars, in order to:
- reduce the effect of the volatility of price changes on the commodities
Vista produces and sells;
- protect cash flow in order to support Vista's annual capital budgeting
and expenditure plans;
- lock in prices to protect the economics related to capital projects; and
- protect its borrowing base availability under its credit facility.
As a result of the last three years of Vista's hedging activities, Vista
incurred a loss of approximately $600,000 in 1996, a loss of approximately
$200,000 in 1997 and a gain of approximately $900,000 in 1998. In the first nine
months of 1999, as oil and gas prices have risen dramatically over 1998 levels,
Vista incurred a loss of approximately $1.4 million, which includes an
approximate gain of $300,000 in the first quarter of 1999.
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<PAGE> 67
In the tables set forth below, "Transaction Date" is the date on which
Vista entered into the hedge. Vista typically enters into "swaps" or "collars."
A swap is a fixed-price hedge and a collar is a hedge that has a ceiling price
and a floor price. If the particular product price stays in between the ceiling
and the floor prices, then no payments are made by either party under a collar.
The terms "Put Floor Price" and "Call Ceiling Price" refer to the prices at
which Vista has hedged its production and are expressed in the calendar monthly
average of daily NYMEX closing prices for Light Sweet Crude Oil or monthly NYMEX
(Henry Hub) closing prices for natural gas. Volumes refer to barrels of crude
oil or Mcf of gas, where one Mcf is equivalent to one MMBtu. The "Term" refers
to the time period of the hedge.
Set forth below is the contract amount and material terms of all crude oil
hedging instruments held by Vista at September 30, 1999.
<TABLE>
<CAPTION>
TRANSACTION DATE TYPE TRANSACTION MONTHLY VOLUME PUT FLOOR PRICE PER BBL CALL CEILING PRICE PER BBL
- ---------------- ---------------- -------------- ----------------------- --------------------------
<S> <C> <C> <C> <C>
12-11-98................... Swap 40,000 $14.20 $14.20
4-19-99.................... Collar 20,000 15.00 17.00
4-19-99.................... Collar 40,000 15.00 16.85
<CAPTION>
FAIR VALUE (LOSS)
AT SEPTEMBER 30,
TRANSACTION DATE TERM 1999
- ---------------- ------------------ -----------------
<S> <C> <C>
12-11-98................... 8-1-99 to 6-30-00 $(2,890,724)
4-19-99.................... 1-1-00 to 6-30-00 (566,380)
4-19-99.................... 7-1-00 to 12-31-00 (735,433)
</TABLE>
Set forth below is the contract amount and material terms of all NYMEX
natural gas hedging instruments held by Vista at September 30, 1999.
<TABLE>
<CAPTION>
TRANSACTION DATE TYPE TRANSACTION MONTHLY VOLUME PUT FLOOR PRICE PER MCF CALL CEILING PRICE PER MCF
- ---------------- ---------------- -------------- ----------------------- --------------------------
<S> <C> <C> <C> <C>
8-20-98................... Collar 40,000 $2.25 $2.42
11-12-98.................. Collar 50,000 2.25 2.51
8-20-98................... Collar 40,000 2.17 2.55
12-28-98.................. Swap 50,000 2.01 2.01
1-12-98................... Swap 120,000 2.12 2.12
2-8-99.................... Swap 120,000 2.35 2.35
<CAPTION>
FAIR VALUE (LOSS)
AT SEPTEMBER 30,
TRANSACTION DATE TERM 1999
- ---------------- ------------------ -----------------
<S> <C> <C>
8-20-98................... 1-1-99 to 12-31-99 $ (37,620)
11-12-98.................. 1-1-99 to 12-31-99 (42,830)
8-20-98................... 1-1-99 to 12-31-99 (39,011)
12-28-98.................. 1-1-99 to 12-31-99 (91,400)
1-12-98................... 1-1-00 to 12-31-00 (796,000)
2-8-99.................... 1-1-01 to 12-31-01 (328,480)
</TABLE>
Vista also hedges from time to time the basis for its natural gas
production which depends upon the location of its gas production. These basis
hedges are immaterial to the financial performance of Vista.
INTEREST RATE SWAP AGREEMENT
Effective as of December 23, 1997, Vista entered into an interest rate swap
accounted for as a hedge with any realized gains or losses appropriately
recorded as interest expense. The swap consists of a $10 million notional amount
of indebtedness at a fixed swap rate of 6.02% based on the three-month LIBOR for
Vista. The term of this swap ends on December 23, 1999. Effective as of January
1, 1999, this interest rate swap was assigned to BankBoston. In conjunction with
this assignment, the terms of the swap were modified to reduce the fixed swap
rate from 6.02% to 5.65% and to extend the term of the swap until December 23,
2000, at the option of BankBoston.
BUSINESS OF VISTA
GENERAL
Vista was incorporated in Delaware in May 1998 for the purpose of
consolidating and continuing the activities previously conducted by Vista
Resources Partners, L.P., a privately held limited partnership, and Midland
Resources, Inc. Vista is an independent energy company engaged in the
acquisition, development and exploration of oil and natural gas properties.
Vista has experienced significant growth in reserves, production and cash flow
by acquiring and exploiting producing properties primarily in the Permian Basin
of West Texas, Southeastern New Mexico and the onshore Gulf Coast region of
South Texas.
In 1998, Vista completed two transactions that substantially impacted
Vista. On October 28, 1998, Vista completed its merger with Midland Resources,
an independent oil and gas corporation engaged in the exploration, acquisition,
development and production of oil and gas properties primarily located in the
Permian Basin. In connection with the Midland Resources merger, Vista acquired
all of the outstanding equity securities of Vista Resources Partners, L.P. and
Vista Resources I, Inc., its general partner, in
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exchange for shares of common stock and warrants of Vista. The acquisition of
those equity securities was consummated immediately prior to the closing of the
Midland Resources merger. As a result of the acquisition and merger, Midland
Resources' security holders acquired 4,470,123 shares, or 27.3%, of the
outstanding common stock of Vista while security holders of Vista Resources
Partners and Vista Resources I, Inc. acquired 11,903,506 shares, or 72.7%, of
the outstanding common stock of Vista and warrants exercisable for 8,563,028
shares of common stock of Vista. Also as a result of the acquisition and merger,
Vista's common stock became publicly traded on the American Stock Exchange on
October 29, 1998. References to "Vista" include Vista Energy Resources, Inc. and
its predecessors and subsidiaries, including Vista Resources Partners, L.P.,
Vista Resources, Inc., Vista Resources I, Inc. and Midland Resources.
On December 18, 1998, with an effective date of October 1, 1998, Vista
acquired working interests ranging from 65% to 85% in a group of oil and gas
producing leases from IP Petroleum Company, Inc. and a number of its co-working
interest owners. These leases are located primarily in the War-Wink area of Ward
and Winkler Counties, Texas. The interests were acquired for a cash purchase
price of $19.1 million. The Midland Resources merger and the IP Petroleum
acquisition are called the 1998 acquisitions in this document.
As of September 30, 1999, Vista had estimated net proved reserves of
approximately 15 MMBbls of oil and 38 Bcf of natural gas, or an aggregate of 21
MMBOE with a PV-10 value of $153 million. As of September 30, 1999, Vista
operated 552 gross oil and gas wells. Vista's operated properties represent
approximately 93% of its proved reserve base at September 30, 1999. Vista's
emphasis on controlling the operation of its properties enables Vista to better
manage expenses, capital allocation and other aspects of development and
exploration.
BUSINESS STRATEGY
Historically, Vista's goals have been to substantially grow its reserves,
production, cash flow and net income per share through:
- the acquisition of producing properties that provide development and
exploratory drilling potential;
- the exploitation and development of its existing reserve base;
- the exploration for oil and gas reserves; and
- the implementation and maintenance of a low operating and overhead cost
structure.
During the first half of 1999 Vista shifted its strategy from an
acquisition perspective to finding and evaluating potential merger candidates
within the industry that were larger or significantly larger than Vista. See
"The Merger -- Background of the Merger" on page 24.
CURRENT OPERATING ENVIRONMENT
Many factors that Vista typically cannot control affect the oil and gas
industry. Global supply and demand generally control crude oil prices. After
sinking to a five-year low at the end of 1993, oil prices reached their highest
levels since the 1990 Persian Gulf War during the fourth quarter of 1996 and
January 1997. Crude oil prices ranged from $17 to $20 per barrel during most of
1997, then declined to a $16 per barrel average in December 1997. Crude oil
prices continued to decline throughout 1998, dropping to a West Texas
Intermediate posted price of $8.00 per barrel in December 1998, the lowest level
since 1978. This decline was caused by low demand, as well as the failure of the
Organization of Petroleum Exporting Countries, or OPEC, at its November 1998
meeting, to further reduce production quotas. Low demand has been caused by
warmer than normal winter temperatures and a slow recovery in Asian economies.
Since March 1999, oil prices have increased dramatically to levels ranging from
$20 to $26 per barrel as a result of OPEC production cuts and increased demand,
including demand from improving Asian economics.
Natural gas prices are influenced by national and regional supply and
demand, which is often dependent upon weather conditions. Natural gas competes
with alternative energy sources as a fuel for
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heating and the generation of electricity. Generally because of colder weather,
storage concerns and U.S. economic growth, prices remained relatively high
during most of 1996 and 1997, reaching their highest levels since 1985. Gas
prices declined, from the $2.80 per Mcf level to approximately $2.30 per Mcf,
however, in December 1997, and remained at a low level of approximately $2.00
per Mcf throughout 1998, primarily because the winters of 1997-1998 and
1998-1999 were abnormally mild in the central and eastern United States. Gas
prices during 1999 have improved to approximately $2.50 per Mcf, which is
relatively high on a historic basis as a result of strong demand and decreased
drilling activity in the industry during the prior year.
MARKETING
Vista principally sells its oil and natural gas production to pipelines,
marketers, refiners and other purchasers with access to natural gas pipeline
facilities near its properties and the ability to truck oil to local refineries
or oil pipelines. Vista's ability to market its oil and gas depends on many
factors beyond its control, including the extent of domestic production and
imports of oil and gas, the proximity of Vista's gas production to pipelines,
the available capacity in these pipelines, the demand for oil and gas, the
effects of weather and the effects of state and federal regulation. Vista cannot
assure that it will always be able to market all of its production or obtain
favorable prices. Vista does not believe, however, that the loss of any of its
oil or gas purchasers would have a material adverse impact on its results of
operations or financial condition.
COMPETITION
Vista encounters competition from other oil and gas companies in all areas
of its operations, including the acquisition of producing properties and oil and
gas leases, marketing of oil and gas and obtaining goods, services and
resources. Vista's competitors range from individual oil and gas operators to
the major oil and gas firms. Since many of the competitors are larger with more
human and monetary resources and are sometimes able to pay more for productive
oil and gas properties, Vista's ability to acquire additional properties and
discover reserves will be dependent upon its ability to evaluate and select
suitable properties and to consummate the transactions in a highly competitive
market. Alternative fuel sources, including heating oil and other fossil fuels,
also present competition. Because of the long-lived nature of Vista's oil and
gas reserves and management's expertise in exploiting these reserves, management
believes that it is effective in competing in the market.
ABANDONMENT COSTS
Vista is responsible for payment of its working interest share of plugging
and abandonment costs on its oil and natural gas properties. Based on its
experience, Vista anticipates that the ultimate aggregate salvage value of lease
and well equipment located on its properties will exceed the costs of abandoning
these properties. There can be no assurance, however, that Vista will be
successful in avoiding additional expenses in connection with the abandonment of
any of its properties. In addition, abandonment costs and their timing may
change due to many factors including actual production results, inflation rates
and changes in environmental laws and regulations.
TITLE TO PROPERTIES
Title to Vista's oil and natural gas properties is subject to royalty,
overriding royalty, carried interest and other similar interests and contractual
arrangements customary in the oil and natural gas industry, to liens incident to
operating agreements and to current taxes not yet due and other comparatively
minor encumbrances. As is customary in the oil and natural gas industry, Vista
conducts only a perfunctory investigation as to ownership at the time it
acquires undeveloped properties believed to be suitable for drilling. Prior to
the commencement of drilling on a tract, Vista conducts a detailed title
examination and performs curative work with respect to known significant title
defects.
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INSURANCE
The oil and gas industry is subject to many risks, including the risk that
no commercially productive reservoirs will be discovered, or if reserves are
found, that they will not be in sufficient quantities to be economical for
recovery. The costs of drilling, completing and operating wells is often
uncertain. Vista's drilling operations may be curtailed, delayed or canceled
because of numerous outside factors including title problems, weather
conditions, mechanical problems, governmental requirements and shortages or
delays in deliveries of equipment and services. Vista has risks inherent in
normal oil and gas operations such as fire, natural disasters, explosions,
blowouts, cratering, pipeline ruptures and spills, any of which could result in
the loss of oil and gas, environmental pollution, personal injury claims and
property damage. Any unsuccessful drilling activities or accidents may have an
adverse effect on Vista's future results of operations and financial condition.
Vista maintains insurance against some, but not all, of the risks described
above. Vista may elect to self-insure in circumstances in which management
believes that the cost of insurance is excessive relative to the risks
presented. The occurrence of an event that is not covered, or not fully covered,
by insurance could have a material adverse effect on Vista's financial condition
and results of operations.
EMPLOYEES
As of January 4, 2000, Vista had 32 full-time employees, none of whom is
represented by a labor union. Vista believes that it has good relations with its
employees.
OFFICE FACILITIES
Vista currently leases approximately 10,963 square feet of office space at
550 West Texas Avenue, Suite 700 Midland, Texas. The lease is a typical office
lease containing standard and customary lease provisions and runs from January
1, 1997, through August 31, 2002.
The annual rental payments due under the Midland, Texas, office lease are
as follows:
<TABLE>
<CAPTION>
PERIOD AMOUNT
- ------ --------
<S> <C>
September 1, 1997 -- August 31, 1998...................... $ 50,523
September 1, 1998 -- August 31, 1999...................... 71,284
September 1, 1999 -- August 31, 2000...................... 86,676
September 1, 2000 -- August 31, 2001...................... 86,676
September 1, 2001 -- August 31, 2002...................... 86,676
--------
$381,835
========
</TABLE>
Vista also leases office space at 616 F.M. 1960 West, Suite 600, Houston, Texas
77090. Midland Resources previously leased this space. Vista has sublet its
space in Houston since it conducts no operations in the Houston area. This lease
expires in 2002.
LITIGATION
From time to time, Vista and its subsidiaries are involved in lawsuits and
governmental proceedings arising in the ordinary course of business. Vista
management does not believe that the ultimate resolution of these claims will
have a material adverse effect on Vista's financial position or the results of
its operations.
GOVERNMENTAL REGULATION
General. There have been, and continue to be, numerous federal and state
laws and regulations governing the oil and gas industry that are often changed
in response to the current political or economic environment. Compliance with
this regulatory burden is often difficult and costly and may carry substantial
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penalties for noncompliance. The following are some specific regulations that
may affect Vista. Vista cannot predict the impact of these or future legislative
or regulatory initiatives.
In 1992, the Federal Energy Regulatory Commission, or FERC, issued Order
Nos. 636 and 636-A, requiring operators of pipelines to unbundle transportation
services from sales services and allow customers to pay for only the services
they require, regardless of whether the customer purchases gas from these
pipelines or from other suppliers. The United States Court of Appeals upheld the
unbundling provisions and other components of FERC's orders, but remanded
several issues to FERC for further explanation. On February 27, 1997, FERC
issued Order No. 636-C, addressing the court's concern. Petitions for rehearing
on Order No. 636-C were denied on May 28, 1998. FERC's order remains subject to
judicial review and may be changed as a result of that review. Although FERC's
regulations should generally facilitate the transportation of gas produced from
Vista's properties and the direct access to end-user markets, the impact of
these regulations on marketing Vista's production or on its gas transportation
business cannot be predicted. Vista, however, does not believe that it will be
affected any differently than other natural gas producers and marketers with
which it competes.
Federal Regulation of Oil. Sales of crude oil, condensate and natural gas
liquids are not currently regulated and are made at market prices. Market
transportation costs affect net price received from the sale of these products.
Vista transports a significant part of its oil production by pipeline. The
Energy Policy Act of 1992 required FERC to adopt a simplified ratemaking
methodology for interstate oil pipelines. In 1993 and 1994, FERC issued Order
Nos. 561 and 561-A, adopting rules that establish new rate methods for these
pipelines. Under the new rules, effective January 1, 1995, interstate oil
pipelines can change rates based on an inflation index, though other rate
mechanisms may be used in specific circumstances. The United States Court of
Appeals upheld FERC's orders in 1996. These rules have had little, if any,
effect on Vista with respect to the cost of moving oil to market.
State Regulation. Oil and gas operations are subject to various types of
regulation at the state and local levels. This regulation includes requirements
for drilling permits, the method of developing new fields, the spacing and
operations of wells and waste prevention. The production rate may be regulated
and the maximum daily production allowable from oil and gas wells may be
established on a market demand or conservation basis. These regulations may
limit production by well and the number of wells or locations that can be
drilled.
Vista may become party to agreements relating to the construction or
operation of pipeline systems for the transportation of natural gas. To the
extent that gas is produced, transported and consumed wholly within one state,
operations may, in some instances, be subject to the state's administrative
authority charged with regulating pipelines. The rates that can be charged for
gas, the transportation of gas and the construction and operation of such
pipelines would be subject to the regulations governing such matters. Some
states have recently adopted regulations with respect to gathering systems, and
other states are considering regulations with respect to gathering systems. New
regulations passed have not had a material effect on the operations of Vista's
gathering systems, but Vista cannot predict whether any further rules will be
adopted or, if adopted, the effect these rules may have on its gathering
systems.
Environmental Matters. Vista's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. There has been a trend to even stricter standards than are
currently in place, and this trend will likely continue. Governmental
authorities have the power to enforce compliance with their regulations and
violators are subject to fines, injunction or both. Vista is subject to laws
including those governing the disposal of hazardous waste, spill prevention,
control countermeasure and response plans relating to the possible discharge of
oil into surface waters and the discharge of produced waters into navigable
waters.
Regulations are currently being developed under federal and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on Vista. The implementation of new or modification of
existing laws or regulations could have a material adverse effect on Vista. The
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discharge of oil, gas or other pollutants into the air, soil or water may give
rise to significant liabilities on the part of Vista to the government and third
parties, and may require Vista to incur substantial costs for remediation. Vista
has acquired leasehold interests in numerous properties that for many years have
produced oil and gas. The previous owners of these interests may have used
operating and disposal practices that were standard in the industry at the time.
Also, Vista has purchased interests in properties that are operated by third
parties over which Vista has no control. The failure of the operator to comply
with applicable environmental regulations may, in some circumstances, materially
adversely impact Vista.
In the opinion of management, Vista is in substantial compliance with
current applicable environmental laws and regulations, and Vista has no material
commitments for capital expenditures to comply with existing environmental
requirements. Furthermore, since its inception, the total amount of capital
expenditures and operating costs incurred by Vista relating to environmental
matters has been immaterial. Nevertheless, changes in existing environmental
laws and regulations or in interpretations thereof could have a significant
adverse effect on Vista.
PROPERTIES OF VISTA
The following table summarizes the proved reserves and PV-10 value of
proved reserves by Vista's major operating areas as of September 30, 1999:
<TABLE>
<CAPTION>
PROVED RESERVES AS OF SEPTEMBER 30, 1999
-------------------------------------------------------
AREA OIL (MBBLS) GAS (BCF) TOTAL (MBOE) PV-10 VALUE
- ---- ----------- --------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Permian Basin...................... 14,317 29.8 19,284 $ 140,419
South Texas........................ 428 8.5 1,845 12,317
Other.............................. 94 0.1 112 608
------ ---- ------ --------------
Total.................... 14,839 38.4 21,241 $ 153,344
====== ==== ====== ==============
</TABLE>
PERMIAN BASIN
Approximately 90% of Vista's reserves are located in the Permian Basin of
West Texas and Southeastern New Mexico. Vista's single largest concentration of
reserves, which comprises 36% of Vista's total proved reserves, is located in
three contiguous fields in the Delaware Basin. These fields hold numerous
opportunities for development of new drilling locations as well as behind pipe
reserves at relatively shallow depths, with relatively small capital
expenditures required for this development. An additional 40% of Vista's
reserves are located in several prolific fields in West Texas including Howard
Glasscock, Jameson, Sharon Ridge, Brahaney and Keystone. Each of these large
fields can be characterized by multiple reservoirs, most of which are fairly
shallow, with substantial primary and secondary reserves remaining to be
recovered. Vista is attracted to these types of fields due to the huge reserve
base remaining and the long-lived nature of the reserves, as well as the
economies of scale afforded by establishing core areas of operations.
War-Wink, Caprito and Rhoda Walker Fields, Ward and Winkler Counties,
Texas. The Delaware Basin is a large depositional basin in the southwestern
portion of the Permian Basin approximately 70 miles west of Midland, Texas.
Vista substantially increased its position in this basin with the purchase of IP
Petroleum's Warwink field properties located in Ward and Winkler Counties,
Texas, effective October 1, 1998. This purchase of 65 producing wells brought
Vista's overall well count in the Delaware basin to over 100 wells when added to
Vista's existing assets in the nearby Rhoda Walker and Caprito fields.
Production net to Vista from these leases is approximately 1,150 BOE per day, or
about 30% of Vista's production.
In addition, these leases include over 3,300 net undeveloped acres that
offer numerous drilling opportunities. Vista has 15 proved undeveloped locations
identified at this time and an additional 20 probable drilling locations. Total
proved reserves attributable to these leases are estimated to be 7,561 MBOE,
which is 36% of Vista's total proved reserves. The primary producing interval in
these three
64
<PAGE> 73
fields is the Cherry Canyon sand formation, which is the middle member of the
Delaware Mountain Group. The Cherry Canyon is a series of sand and shale
formations ranging in depth from 5,800 to 7,200 feet. Vista has identified
productive sands behind pipe in nearly 50 wells on its leases in the basin.
These unexploited reserves can accelerate production from these fields with
minor capital outlays. Accordingly, Vista spent a substantial amount of its
capital budget for 1999 in this area.
Howard Glasscock Field, Howard County, Texas. This field is located 60
miles east of Midland, Texas, and was discovered in 1925. The field has produced
over 439 MMBbls of oil from wells less than 4,000 feet deep. Vista owns a 100%
working interest in 10 of the 11 leases it operates in this field, which
comprise 1,675 net acres. The field contains Vista's greatest concentration of
proved undeveloped reserves, consisting of 2,160 MBOE, net, and its second
largest concentration of proved producing reserves, consisting of 1,479 MBOE,
net. Accordingly, Vista plans to continue to devote a substantial portion of its
capital budget and operating resources to the ongoing development of these low
risk reserves. Since acquiring these leases less than three years ago, Vista has
increased gross production by over 300% and expanded or initiated new secondary
recovery projects in the Glorieta formation, the San Andres formation and the
Middle Clearfork formation on six of its leases in the field. In addition to
future production increases from secondary recovery projects, Vista expects
continued growth in production in this area from development drilling of the San
Andres formation on several of its leases. Vista owns an interest in 52
producing wells in this field.
Jameson (Strawn) Field, Coke and Sterling Counties, Texas. This field is
located in Coke and Sterling Counties, Texas. Vista owns and operates 58 active
wells with a combined 1998 average production rate of approximately 125 BOPD and
1,200 Mcfd. At the time Vista acquired the Jameson properties in 1992, there
were 21 gross wells which were shut-in for various reasons by the former
operator. Vista has returned 15 of those wells to production and has converted
nearly 40% of the wells from producing via conventional pumping unit to a less
expensive plunger lift method of artificial lift. The low lifting cost and high
net revenue interest on this lease results in high operating margins in this
field. Vista owns a 100% working interest in this field which includes 7,360
acres under lease. Net revenue interests on individual leases range from 90% to
92%. Net proved reserves are estimated at over 1,850 MBOE from this field which
includes 15 proved undeveloped locations. In addition to these proved reserves,
there are 20 additional possible drilling locations.
Brahaney Field, Yoakum County, Texas. Vista first acquired three leases in
this field as part of the $6.1 million acquisition of E.G. Operating Co., a
division of FGL, Inc., in 1996. At that time the properties produced 50 Bbls of
oil per day from four wells producing from the Wolfcamp and Devonian formations.
In late 1998, Vista made a significant new discovery when two marginal wells in
the field were recompleted into a new reservoir that had not previously produced
in the area. Based on those results, additional leases with similar potential
were acquired in late December 1998. By year-end 1998, Vista operated seven
producing wells located on 546 net acres in the field. Net production at the end
of the year was 220 BOPD, an increase of 400% from the prior year. Proved
producing and non-producing reserves are estimated at 416 MBOE for the field.
Sharon Ridge Field, Scurry County, Texas. This field is located 80 miles
northeast of Midland, Texas, and has produced over 100 MMBbls of oil from depths
as shallow as 1,700 feet. Vista owns a 100% working interest in the two leases,
consisting of 227 net acres, that it operates in this field, the Hardee lease
and House lease. These two adjacent properties are located in the middle of the
Sharon Ridge field, at 1,700 feet, and are surrounded by successful waterfloods.
Since acquiring these properties in 1996, Vista has successfully drilled the
remaining locations, consisting of nine wells, and implemented a full scale
waterflood on the two leases. As of January 1998, through infill drilling and
early secondary response, production has increased over 300%, and Vista expects
a continued gradual increase in production as the reservoir is repressured and
oil is swept towards the producing wells. Vista operates 17 producing wells in
this field with net proved producing reserves of 375 MBOE.
Keystone Field, Winkler County, Texas. The Keystone field is located 50
miles west of Midland, Texas, and produces from nine different formations with
depths ranging from 3,000 feet to 9,000 feet.
65
<PAGE> 74
Since discovery in 1927, the various reservoirs of the Keystone field have
produced over 320 MMbls of oil and 693 Bcf of natural gas. Vista owns a 100%
working interest in each of the two leases it operates in the field, the Waddell
lease, consisting of 2,232 net acres and 35 net producing wells, and the
Keystone Cattle Company lease, consisting of 640 net acres and 21 net producing
wells. The field has net proved reserves of 853 MBOE. In addition, there are
substantial probable reserves in the San Andres and Holt formations that should
be recovered through secondary recovery as well as probable gas reserves in the
shallow Yates formation.
Latigo and Lakota 3D Seismic Exploration and Development Projects. These
projects were defined and acquired as 3-D seismic exploration projects in 1995
in the Northwest Shelf area of the Permian Basin in Hockley County, Texas. The
seismic survey covered 12 square miles and resulted in the leasing of
approximately 4,890 acres. Two successful exploratory wells were drilled in the
Lakota project in 1997 at a cost to Vista of approximately $1.6 million. Average
daily production from the wells drilled in this project in 1998 was 170 BOPD.
Vista owns a 55% working interest in this project. Recently Vista has elected to
purchase additional existing seismic data in the area and extend its leasehold
in several areas. Vista believes there are as many as six drill-ready prospects
on this acreage to develop once commodity prices improve.
SOUTH TEXAS
North Rucias Field, Brooks County, Texas. Vista operates two wells in this
geologically complex field. Vista's working interest in the Huerta lease,
consisting of 323 net acres and one well, is 50%, and its working interest in
the Deluna lease, consisting of 596 net acres and one well, is 93%.
Additionally, Vista holds 758 net acres of leasehold under primary term in the
field. The principal producing formation in the field is the Vicksburg formation
at an approximate depth of 9,600 feet. The Vicksburg wells in the area average
over 6 Bcf of natural gas per well. Vista has successfully negotiated an
exploration agreement with an industry partner in which the industry partner has
funded the purchase of 3-D seismic covering an area which includes Vista's
leasehold in return for an interest in Vista's acreage position. Interpretation
of the 3-D seismic is nearly complete and Vista expects to drill its first
prospect here in early 2000.
Orange Hill, South Field, Austin County, Texas. Vista owns a 100% working
interest in this 984-acre Hillboldt lease which has one lower Wilcox well and
one shallow Frio well producing a combined 750 Mcfd. In 1998, Vista contributed
a portion of its acreage and entered into an area of mutual interest agreement
with another company for the purpose of drilling additional lower Wilcox wells.
The first well on the area of mutual interest was successfully completed in the
fourth quarter of 1998, and is currently producing approximately 1.1 MMcfd. One
additional well was drilled in the fourth quarter of 1999. Gross reserves for
each of these wells are estimated to be 4 Bcf of natural gas with Vista owning a
33.34% working interest in each well. Total proved recoverable reserves for this
field are estimated to be 5.43 Bcfe, or 800 MBOE, net to Vista.
66
<PAGE> 75
Net Production, Unit Sales and Production Costs. The following table
summarizes the net oil and natural gas production for Vista, the average sales
price per barrel of oil and per Mcf of natural gas produced and the average
production, or lifting cost, including all severance and ad valorem taxes, per
unit of production for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues............................................ $8,737,056 $8,874,961 $5,537,720
Costs and expenses:
Production costs.................................. 4,398,384 3,688,695 2,544,567
Depletion, depreciation and amortization.......... 3,014,707 2,169,098 1,272,316
Exploration....................................... 32,077 97,211 273,843
---------- ---------- ----------
7,445,168 5,955,004 4,090,726
---------- ---------- ----------
Operating profit (excluding impairment, general
and administrative and interest expenses and
income taxes).................................. $1,291,888 $2,919,957 $1,446,994
========== ========== ==========
Production:
Oil (Bbls)........................................ 529,426 403,812 253,321
Gas (Mcf)......................................... 1,250,490 784,298 458,278
Total (BOE)(a)............................ 737,841 534,528 329,701
Average daily production:
Oil (Bbls)........................................ 1,450 1,107 693
Gas (Mcf)......................................... 3,426 2,148 1,255
---------- ---------- ----------
Total (BOE)(a)............................ 2,021 1,465 902
Average oil price (including hedging effects) (Per
Bbl).............................................. $ 12.25 $ 17.63 $ 18.04
Average gas price (including hedging effects) (Per
Mcf).............................................. $ 1.80 $ 2.22 $ 2.19
Costs (Per BOE)(a)
Lease operating expense........................... $ 5.24 $ 5.62 $ 6.35
Production taxes.................................. $ .72 $ 1.28 $ 1.37
---------- ---------- ----------
Total production costs.................... $ 5.96 $ 6.90 $ 7.72
Depletion, depreciation and amortization.......... $ 4.09 $ 4.06 $ 3.86
</TABLE>
- ---------------
(a) Gas production is converted to equivalent Bbls at the rate of 6 Mcf per
Bbl, representing the estimated relative energy content of natural gas to
oil.
Oil and Gas Reserves. The estimates of Vista'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
the Financial Accounting Standards Board. Williamson Petroleum Consultants, Inc.
evaluated leases containing 97% of the estimated reserves owned by Vista as of
December 31, 1998, with the remaining 3% being evaluated by Vista. The estimates
as of December 31, 1997, and December 31, 1996, were prepared by Vista, based on
work done in conjunction with Williamson Petroleum Consultants. For information
concerning costs incurred by Vista for oil and gas operations, net revenues from
oil and gas production, estimated future net revenues attributable to Vista's
oil reserves and present value of future net revenues on a 10% discount rate,
see Notes to Vista's Consolidated Financial Statements.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of Vista. Reservoir
engineering is a subjective process of estimating subsurface accumulations of
oil and gas that cannot be measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available data and the
interpretation of that data. As a result, estimates by different engineers often
vary, sometimes significantly. In addition, physical factors, such as
67
<PAGE> 76
changes in product price, may justify revision of these estimates. Accordingly,
oil and gas quantities ultimately recovered will vary from reserve estimates.
Proved Reserves. The estimated proved oil and gas reserves and present
value of estimated future net revenues from proved oil and gas reserves for
Vista as of December 31, 1998, 1997 and 1996, are summarized below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ----------------------
OIL (BBLS) GAS (MCF) OIL (BBLS) GAS (MCF) OIL (BBLS) GAS (MCF)
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year..... 7,216,559 11,295,325 4,540,419 7,185,636 2,230,190 4,837,030
Revisions of previous
estimates.......... (1,669,606) (2,576,510) 1,304,819 (969,377) 548,009 (458,198)
Extensions and
discoveries........ 465,458 4,182,533 1,161,953 -- 205,859 28,442
Purchase of minerals
in place........... 5,118,101 20,024,034 762,282 6,206,929 1,838,595 3,339,214
Sale of minerals in
place.............. (142,316) (28,925) (148,902) (343,565) (46,455) (126,680)
Production............ (529,426) (1,250,490) (403,812) (784,298) (235,779) (434,172)
---------- ---------- --------- ---------- --------- ---------
End of year........... 10,458,770 31,645,967 7,216,759 11,295,325 4,540,419 7,185,636
========== ========== ========= ========== ========= =========
Proved developed
reserves:
Beginning of year..... 3,559,850 7,909,902 3,092,149 5,510,499 1,352,870 3,893,360
---------- ---------- --------- ---------- --------- ---------
End of year........... 6,708,844 22,613,532 3,559,850 7,909,902 3,092,149 5,510,499
========== ========== ========= ========== ========= =========
</TABLE>
Standardized Measure. The following table sets forth the standardized
measure of discounted future net cash flows relating to proved reserves at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows relating to proved reserves:
Future cash flows................................ $170,551,299 $131,921,276 $125,076,627
Future costs:
Production....................................... (69,536,325) (45,194,356) (47,139,363)
Development................................... (15,369,172) (12,371,206) (6,835,546)
Income taxes.................................. (10,032,197) -- --
------------ ------------ ------------
Future net cash flows............................ 75,613,605 74,355,714 71,101,718
10% discount factor.............................. (25,376,691) (35,775,170) (30,250,175)
------------ ------------ ------------
Standardized measure of discounted future net
Cash flows.................................... $ 50,236,914 $ 38,580,544 $ 40,851,543
============ ============ ============
</TABLE>
Had Vista been a taxable entity at December 31, 1997, the future income
taxes would have been $14.1 million on an undiscounted basis and $7.8 million on
a discounted basis, and the standardized measure of discounted future net cash
flows at December 31, 1997 would have been $37.0 million.
68
<PAGE> 77
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved reserves for the years ended
December 31, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Standardized measure, beginning of year............. $ 38,580,544 $ 40,851,543 $17,242,730
Net change in sales prices, net of production
costs.......................................... (17,336,320) (12,557,771) 6,601,987
Development costs incurred during the year which
were previously estimated...................... 3,000,000 5,073,000 2,033,000
Revisions of quantity estimates................... (6,361,075) 6,325,872 4,182,057
Extensions, discoveries and improved recovery, net
of future production and development costs..... 4,296,455 2,382,351 1,485,041
Accretion of discount............................. 3,858,054 4,085,154 1,724,273
Change in future development costs................ 4,484,697 (4,116,068) (2,598,316)
Change in timing and other........................ (2,830,538) (5,394,793) (4,484,968)
Purchases of reserves in place.................... 27,382,247 8,289,041 17,756,033
Sales of reserves in place........................ (498,478) (1,171,519) (97,141)
Sales, net of production costs.................... (4,338,672) (5,186,266) (2,993,153)
------------ ------------ -----------
Standardized measure, end of year................. $ 50,236,914 $ 38,580,544 $40,851,543
============ ============ ===========
</TABLE>
The preceding tables should be read in connection with the definitions of
proved reserves, proved developed reserves and proved undeveloped reserves set
out in "Commonly Used Oil and Gas Terms."
Oil and Gas Prices. In estimating oil reserves for 1998, 1997 and 1996, a
price of $10.64, $16.10 and $23.55 per barrel was used, which is the average
actual price in effect for Vista's oil production at the respective dates. In
estimating gas reserves for 1998, 1997 and 1996, a price of $1.83, $2.01 and
$3.43 per Mcf was used, based on prices in effect at the respective dates.
EXPLORATION AND PRODUCTION DATA. For the following data, "gross" refers to
the total wells or acres in which Vista owns a working interest, and "net"
refers to the gross wells or acres multiplied by the percentage working interest
owned by Vista. Although many of Vista's wells produce both oil and gas, a well
is designated as an oil well or a gas well based upon the ratio of oil to gas
production.
Producing Wells. The following table summarizes Vista's producing wells as
of September 30, 1999, all of which are located in the United States:
<TABLE>
<CAPTION>
NON-OPERATED
OPERATED WELLS WELLS TOTAL
--------------- ------------ -------------
GROSS NET GROSS NET GROSS NET
------ ------ ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil........................................ 508 470.3 76 17.5 584 487.8
Gas........................................ 44 39.0 23 3.6 67 42.6
--- ----- -- ---- --- -----
Total................................. 552 509.3 99 21.1 651 530.4
=== ===== == ==== === =====
</TABLE>
69
<PAGE> 78
Drilling Activities. The following table sets forth the drilling activity
of Vista on its properties for the years ended December 31, 1998, 1997 and 1996.
At December 31, 1998, Vista was not in the process of drilling any wells.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ------------ ------------
GROSS NET GROSS NET GROSS NET
----- --- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive.......................................... 2 .17 1 0.2 1 0.2
Dry................................................. 0 0 4 0.5 1 0.1
-- --- -- ---- -- ----
Total....................................... 2 .17 5 0.7 2 0.3
== === == ==== == ====
Developmental:
Productive.......................................... 11 9.8 18 17.5 15 10.5
Dry................................................. 0 0 0 0.0 1 0.2
-- --- -- ---- -- ----
Total....................................... 11 9.8 18 17.5 16 10.7
== === == ==== == ====
</TABLE>
Acreage. The following table sets forth information concerning Vista's
leasehold ownership interests as of September 30, 1999:
<TABLE>
<CAPTION>
GROSS NET
------ ------
<S> <C> <C>
Developed acreage(a)........................................ 37,585 25,785
Undeveloped acreage(b)...................................... 46,688 27,656
------ ------
Total acreage..................................... 84,273 53,441
====== ======
</TABLE>
- ---------------
(a) "Developed acreage" is acreage spaced for or assignable to productive
wells.
(b) "Undeveloped acreage" is oil and gas acreage on which wells have not been
drilled or to which no Proved Reserves other than Proved Undeveloped
Reserves have been attributed.
70
<PAGE> 79
PRIZE
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA FOR PRIZE
The following table presents for the periods indicated the revenues and
direct operating expenses from the producing oil and gas properties acquired by
Prize from Pioneer Natural Resources USA, Inc., which we refer to in this
document as the acquired properties. The acquisition of the acquired properties
from Pioneer was effective July 1, 1999. As a result of the limited operating
history of Prize, which commenced operations in January 1999, the management of
Prize believes that the following presentation of revenues and direct operating
expenses is indicative of the historical performance of Prize prior to the
properties being acquired from Pioneer. The data for the nine months ended
September 30, 1998, is presented for comparative purposes, versus the data for
the nine months ended September 30, 1999. To arrive at the data for the nine
months ended September 30, 1999, the data for the six months ended June 30, 1999
of the acquired properties prior to the purchase must be added to the historical
operating results of Prize for the three months ended September 30, 1999 after
the purchase. The table should be read in conjunction with the Statements of
Revenues and Direct Operating Expenses of the Producing Properties Acquired by
Prize from Pioneer included elsewhere in this document.
<TABLE>
<CAPTION>
ACQUIRED PRIZE - ACQUIRED
PROPERTIES - THREE COMBINED PROPERTIES -
SIX MONTHS MONTHS NINE MONTHS NINE MONTHS ACQUIRED PROPERTIES -
ENDED ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -----------------------------------------
1999 (1) 1999 (2) 1999 1998 (3) 1998 (4) 1997 (4) 1996 (4)
------------ ------------- ------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales...... $33,206,914 $22,692,680 $55,899,594 $62,748,095 $79,418,094 $120,820,981 $109,265,962
Direct operating
expenses:
Lease operating
expenses............. 7,255,141 3,740,714 10,995,855 14,138,312 18,114,389 22,289,235 15,012,345
Oil and gas production
taxes................ 3,612,153 2,277,453 5,889,606 5,435,932 8,096,670 10,450,116 9,221,071
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total direct
operating
expenses......... 10,867,294 6,018,167 16,885,461 19,574,244 26,211,059 32,739,351 24,233,416
----------- ----------- ----------- ----------- ----------- ------------ ------------
Revenues in excess of
direct operating
expenses............... $22,339,620 $16,674,513 $39,014,133 $43,173,851 $53,207,035 $ 88,081,630 $ 85,032,546
=========== =========== =========== =========== =========== ============ ============
</TABLE>
- ---------------
(1) Data for the six months ended June 30, 1999, excludes revenues of $1,911,604
and direct operating expenses of $259,018 associated with the mineral
interest properties, which were sold subsequent to the acquisition of the
acquired properties.
(2) These amounts represent the revenues and direct operating expenses of Prize
for the three months ended September 30, 1999, and include results of the
acquired properties as operated by Prize for that period.
(3) Data for the nine months ended September 30, 1998, excludes revenues of
$4,007,254 and direct operating expenses of $600,493 associated with the
mineral interest properties, which were sold subsequent to the acquisition
of the acquired properties.
(4) These amounts are derived from the audited statements of revenues and direct
operating expenses. The data for the years ended December 31, 1998, 1997 and
1996, excludes revenues of $5,136,967, $7,189,442 and $8,578,608,
respectively, as well as direct operating expense of $793,131, $1,115,379
and $1,037,518, respectively, associated with the mineral interest
properties, which were sold subsequent to the acquisition of the acquired
properties.
71
<PAGE> 80
The following table presents unaudited historical and pro forma financial
information for Prize for the periods indicated. The table should be read in
conjunction with the unaudited historical and pro forma condensed financial
statements for Prize included elsewhere in this document. The unaudited pro
forma statement of operations data for the nine months ended September 30, 1999,
and the year ended December 31, 1998, assumes that the purchase of properties
from Pioneer and the subsequent sale of the mineral interests occurred on
January 1, 1998.
<TABLE>
<CAPTION>
HISTORICAL PRIZE
PRO FORMA PRIZE -------------------
-------------------------------------- JANUARY 15, 1999
NINE MONTHS ENDED YEAR ENDED (INCEPTION) THROUGH
SEPTEMBER 30, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Oil and gas sales........................ $57,218 $81,760 $ 22,693
Costs and expenses:
Lease operating expenses................. 17,406 27,001 6,019
Depreciation, depletion and
amortization.......................... 12,493 19,535 4,646
General and administrative............... 3,972 6,500 722
------- ------- ---------
Total costs and expenses......... 33,871 53,036 11,387
------- ------- ---------
Operating income (loss).......... 23,347 28,724 11,306
Other
Interest (income) expense................ 8,085 10,797 3,101
Other.................................... (116) -- (204)
------- ------- ---------
Total other...................... 7,969 10,797 2,897
------- ------- ---------
Income before tax.......................... 15,378 17,927 8,409
Provision for income tax................... 5,685 6,628 2,745
------- ------- ---------
Net income....................... 9,693 11,299 5,664
Less preferred dividends................... (1,454) (1,841) (450)
------- ------- ---------
Income available to common stockholders.... $ 8,239 $ 9,458 $ 5,214
======= ======= =========
Balance sheet data (end of period):
Working capital.......................... N/A N/A $ 9,024
Property, plant and equipment, net....... N/A N/A $ 212,486
Total assets............................. N/A N/A $ 247,103
Long-term debt........................... N/A N/A $ 139,000
Preferred stock.......................... N/A N/A $ 30,450
Stockholders' equity..................... N/A N/A $ 84,857
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PRIZE
GENERAL
Prize, which was formed in January 1999, is a mid-sized independent oil and
gas company with producing properties concentrated in the Permian Basin of West
Texas and New Mexico, the onshore Gulf Coast region of Texas and Louisiana and
the Mid-Continent area of Oklahoma and the Texas Panhandle. Prize's strategy is
to grow reserves, production, cash flow and net income on a per share basis by
acquiring, enhancing and exploiting producing oil and gas properties and the
maintenance of a low operating and corporate cost structure with an emphasis on
the following factors:
- obtaining operatorship of acquired properties;
- geographic concentration;
- aggressive value enhancement;
- active risk management;
72
<PAGE> 81
- utilization of experienced management and employees; and
- commitment to financial flexibility.
Prize has grown rapidly through the acquisition of producing oil and gas
properties, consummating on June 29, 1999 the Pioneer acquisition for a purchase
price of $239 million.
Prize's growth resulting from the acquisition of producing oil and gas
properties has impacted its financial results in a number of ways. Acquired
properties frequently have not received the focused attention of the operator
prior to acquisition by Prize. After acquisition, the properties require
maintenance, workovers, recompletions and other remedial activity not
constituting capital expenditures, which initially increase lease operating
expenses. Prize anticipates spending a least $1.7 million in nonrecurring
remedial lease operating expenses with respect to the properties obtained in the
Pioneer acquisition.
As a result of the Pioneer acquisition, Prize has been required to recruit
and develop operating, geological, engineering, accounting, and administrative
personnel compatible with its increased size of operations. Since inception,
Prize has added 88 employees. Consequently, Prize anticipates corresponding
increases in its general and administrative expenses.
In summary, Prize believes that the large portfolio of exploitation
projects associated with its asset base and the additional staff added have well
positioned it to follow through on its development and exploitation activities
and to pursue additional acquisition opportunities which complement its existing
asset base.
Prize uses the successful efforts method of accounting for its oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved reserves,
and to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not result in proved reserves, geological and
geophysical costs, and costs of carrying and retaining properties that do not
contain proved reserves are expensed. Costs of significant nonproducing
properties, wells in the process of being drilled and significant development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.
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<PAGE> 82
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
The financial statements of Prize, which began operations on January 15,
1999, include the results of the 37-week period ended September 30, 1999. As a
result of Prize's limited operating history and rapid growth associated with the
Pioneer acquisition, which was effective July 1, 1999, its financial statements
are not readily comparable and are not indicative of future results.
Consequently, Prize has based its results of operations discussion upon the pro
forma revenues and direct operating expenses of Prize for the nine months ended
September 30, 1999 compared to the revenues and direct operating expenses of the
acquired properties for the nine months ended September 30, 1998 adjusted for
the minerals sale and the Sunterra purchase. The following table reconciles the
historical revenues and direct operating expenses for the nine months ended
September 30, 1998 to the adjusted amounts used in this discussion:
<TABLE>
<CAPTION>
ACQUIRED PROPERTIES ADJUSTED
FOR THE NINE ADJUSTMENTS FOR THE FOR THE NINE
MONTHS ENDED SUNTERRA PURCHASE AND THE MONTHS ENDED
SEPTEMBER 30, 1998 MINERALS SOLD SEPTEMBER 30, 1998
------------------- ------------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Oil/liquids................. $29,012 $(1,013) $27,999
Gas......................... 37,743 (1,222) 36,521
------- ------- -------
66,755 (2,235) 64,520
Direct operating expenses:
Lease operating expenses.... 14,297 320 14,617
Oil and gas production
taxes.................... 5,878 (343) 5,535
------- ------- -------
20,175 (23) 20,152
------- ------- -------
Revenues in excess of direct
operating expenses.......... $46,580 $(2,212) $44,368
======= ======= =======
</TABLE>
Changes in oil/liquids and gas production, prices, and revenues for the
nine months ended September 30, 1999 and 1998 are shown in the table below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
PRO FORMA ADJUSTED 1999
1999 1998 VS 1998
--------- -------- -------
<S> <C> <C> <C>
Production
Oil/liquids (MBbls)....................................... 1,859 2,346 (21)%
Gas (MMcf)................................................ 15,779 18,400 (14)%
Total (MBOE).............................................. 4,488 5,413 (17)%
Realized Price
Oil/liquids (per Bbl)..................................... $ 13.82 $ 11.94 16%
Gas (per Mcf)............................................. $ 2.00 $ 1.98 1%
Total (per BOE)........................................... $ 12.75 $ 11.92 7%
Total Revenues (in thousands)
Oil/liquids............................................... $25,691 $27,999 (8)%
Gas....................................................... 31,527 36,521 (14)%
Total..................................................... $57,218 $64,520 (11)%
</TABLE>
Oil/Liquids Revenues for 1999 compared to 1998. Oil/liquids revenues
decreased $2.3 million in 1999. Oil/liquids production decreased 487,000 barrels
resulting in reduced revenues of $5.8 million. This decrease was offset by $3.5
million added as a result of a $1.88 per barrel increase in the oil/liquids
price.
Gas Revenues for 1999 compared to 1998. Gas revenues decreased $5 million
in 1999. As a result of lower gas production in the amount of 2,621 MMcf, gas
revenues decreased by $5.2 million. A price increase of $.02 per Mcf added $.2
million in gas revenues.
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<PAGE> 83
Listed below are the changes in production and operating expenses for the
nine months ended September 30, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
PRO FORMA ADJUSTED 1999
1999 1998 VS 1998
--------- -------- -------
<S> <C> <C> <C>
Production and operating expenses (in thousands)
Lease operating........................................... $11,516 $14,617 (21)%
Production taxes.......................................... 5,890 5,535 6%
------- -------
Total............................................. $17,406 $20,152 (14)%
Per BOE produced
Lease operating........................................... $ 2.57 $ 2.70 (5)%
Production taxes.......................................... $ 1.31 $ 1.02 28%
</TABLE>
1999 compared to 1998. Lease operating expense decreased $3.1 million or
22% in 1999. The primary reason for the decrease is the reduction of 924,000 BOE
or 17% in oil and gas production as a result of Pioneer's decision to sell the
properties. Production taxes increased $355,000 as a result of the increase in
the price realized per BOE.
RESULTS OF OPERATIONS FOR 1998, 1997 AND 1996
Prize has based its results of operations discussion upon the statements of
revenues and direct operating expenses of producing properties acquired from
Pioneer. The statements of revenues and direct operating expenses are not a
complete representation of the operating results of the acquired properties.
Revenues associated with the oil and gas properties acquired from Pioneer
have risen from $117.8 million in 1996 to $128.0 million in 1997 and have
decreased to $84.6 million in 1998. Changes in oil/liquids and gas production,
prices and revenues from 1996 through 1998 are shown in the table below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997
1998 VS 1997 1997 VS 1996 1996
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Production
Oil/liquids (MBbls)......................... 3,134 8% 2,911 16% 2,502
Gas (MMcf).................................. 24,929 -21% 31,733 5% 30,325
Total (MBOE)................................ 7,289 -11% 8,200 9% 7,556
Realized Prices
Oil/liquids (per Bbl)....................... $ 11.51 -37% $ 18.27 -9% $ 20.16
Gas (per Mcf)............................... $ 1.94 -18% $ 2.36 6% $ 2.22
Total (per BOE)............................. $ 11.60 -26% $ 15.61 -- $ 15.60
Total Revenues (in thousands)
Oil/liquids................................. $36,070 -32% $ 53,174 5% $ 50,449
Gas......................................... 48,485 -35% 74,836 11% 67,396
Total....................................... 84,555 -34% 128,010 9% 117,845
</TABLE>
Oil/Liquid Revenues for 1998 Compared to 1997. Oil/liquids revenues
decreased $17.1 million in 1998. An average price decline of $6.76 per barrel
reduced revenues $19.5 million. This decrease was offset by $2.4 million of
revenue added by production gains of 223,000 barrels.
Oil/Liquid Revenues for 1997 Compared to 1996. Oil/liquids revenues
increased $2.7 million in 1997. Production gains of 409,000 barrels added $7.4
million to oil/liquids revenues in 1997. This gain was offset by a decrease of
$4.7 million in oil/liquids revenues due to a price decline of $1.89 per barrel
in 1997.
Gas Revenues for 1998 Compared to 1997. Gas revenues decreased $26.4
million in 1998. An average price decline of $.42 per Mcf reduced revenues $10.4
million. As a result of normal production
75
<PAGE> 84
decline associated with gas wells, along with reduced activity levels, gas
production decreased in the amount of 6,804 MMcf and gas revenues decreased by
$16.0 million.
Gas Revenues for 1997 Compared to 1996. Gas revenues increased $7.5 million
in 1997. Production gains of 1,408 MMcf added $3.3 million to gas revenues. A
price increase of $.14 per Mcf added $4.2 million in gas revenues in 1997.
Listed below are the changes in production and operating expenses between
1996 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
1998 VS 1997 1997 VS 1996 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Production and operating expenses (in thousands)
Lease operating............................... $18,318 -19% $22,562 48% $15,295
Production taxes.............................. 8,686 -23% 11,293 13% 9,976
------- ------- -------
Total................................. $27,004 $33,855 $25,271
Per BOE produced
Lease operating............................... $ 2.51 -9% $ 2.75 36% $ 2.02
Production taxes.............................. $ 1.19 -14% $ 1.38 5% $ 1.32
</TABLE>
1998 Compared to 1997. Lease operating expenses decreased $4.2 million or
19% in 1998. The primary cause of this decrease was the very limited amount of
drilling and workover activity associated with the properties following
Pioneer's decision to sell the properties. Pioneer announced its intention to
divest non-strategic properties on February 10, 1998 and announced a definitive
sale agreement with another party on September 8, 1998. The production taxes
include severance and ad valorem taxes. Severance taxes are based upon a fixed
percentage of revenues. Therefore, the 34% reduction in oil and gas revenues is
the principal reason for the 23% reduction in production taxes.
1997 Compared to 1996. Lease operating expenses increased $7.3 million or
47% in 1997. The primary cause of this increase is production increasing as a
result of drilling and workover activity associated with the properties. The
production taxes include severance and ad valorem taxes. Severance taxes are
based upon a fixed percentage of revenues and ad valorem rate determined by
local taxing authorities. Therefore, the 9% increase in oil and gas revenues is
the principal reason for the 13% increase in production taxes.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. As of September 30, 1999, Prize had current cash reserves of
$9.7 million and working capital of $9.0 million. The current ratio was 1.4 to
1. In addition, Prize had long-term debt outstanding of $140.3 million with an
effective cash interest rate of 7.93%. Listed below is an amortization schedule.
Under the terms and conditions of the senior credit facility, Prize had a
borrowing capacity of approximately $10 million.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999.................................................. $ 1,323,691
2000.................................................. --
2001.................................................. --
2002.................................................. 26,062,500
2003.................................................. 34,750,000
Thereafter............................................ 78,187,500
------------
$140,323,691
============
</TABLE>
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<PAGE> 85
Prize has obligations under noncancelable operating leases for certain
equipment and office space expiring in various years through 2003. Minimum
annual rental commitments at September 30, 1999 are:
<TABLE>
<S> <C>
1999..................................................... $ 67,000
2000..................................................... 266,000
2001..................................................... 266,000
2002..................................................... 266,000
2003..................................................... 133,000
--------
$998,000
========
</TABLE>
Capital Sources. Prize's initial capitalization, bank financing, cash flow
from operations and private equity sales have provided funding for its business
activities. The Pioneer acquisition was funded with the issuance of the Prize
convertible preferred stock to Pioneer and cash from Prize's initial
capitalization, additional private equity sales and bank financing.
While Prize regularly engages in discussions relating to the potential
acquisition of oil and gas properties, Prize has no present agreement,
commitment or understanding with respect to any acquisition, other than the
merger. Any future acquisitions may require additional financing and will be
dependent upon financing arrangements being available at the time.
Prize believes that, in the short term, the availability under its senior
credit agreement and cash flow from operations will be sufficient for
anticipated operating and capital expenditure requirements in 2000. Prize
anticipates that its oil and gas capital expenditures will be between $50
million and $60 million for drilling and recompletion activity in 2000. The
capital expenditure budget will be funded from internally generated cash flow.
However, in the long term, if Prize's cash flow from operations and availability
under its senior credit agreement are not sufficient to satisfy cash
requirements, there can be no assurance that additional debt or equity financing
will be available to meet its requirements.
Although Prize's costs and expenses may be affected by inflation, inflation
has not had a significant effect on Prize's results of operations.
Cash provided by operating activities will be the primary source of Prize's
capital and short-term liquidity in the future. For the period from inception
through September 30, 1999, net cash provided by operating activities was $9.7
million. However, this amount only reflects the cash flows from the properties
purchased from Pioneer for the third quarter of 1999.
Revenues in excess of direct operating expenses for the properties
purchased from Pioneer were $57.6 million, $94.2 million and $92.6 million in
1998, 1997 and 1996, respectively. The trends in revenues in excess of direct
operating expenses during these periods have generally followed those of the
various revenue and expense items previously discussed in this section.
During the period from inception through September 30, 1999, Prize's cash
used in investing activities was $181.8 million and consisted primarily of the
acquisition of oil and gas properties acquired from Pioneer, net of the proceeds
from the sale of the mineral interests acquired from Pioneer.
Cash provided by financing activities was $181.8 million for the period
from inception through September 30, 1999. This includes $138.7 million of net
borrowings under Prize's senior credit agreement and $45.5 million of capital
contributions, offset by $2.4 million of loan origination fees.
Credit Agreements. Prize's senior credit agreement established a four-year
revolving credit facility, up to the maximum amount of $250 million, subject to
a borrowing base to be determined annually by the lenders based on proved oil
and gas reserves and other assets of Prize. To the extent that the borrowing
base is less than the aggregate principal amount of all outstanding loans and
letters of credit under the senior credit agreement, the deficiency must be
cured by Prize, by either prepaying a portion of the outstanding amounts under
the senior credit agreement or pledging additional collateral to the lenders.
Prize borrowed $154.5 million of the $159.7 million available under the senior
credit agreement at the
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<PAGE> 86
closing of the Pioneer acquisition. As of December 7, 1999, the bank borrowing
base was $150 million and Prize's outstanding net long-term debt was $134
million.
Prize's financial covenants under the senior credit agreement are the ratio
of consolidated current assets to consolidated current liabilities as of the end
of any fiscal quarter, not to be less than 1.0 to 1 and the ratio of
consolidated EBITDA to the sum of consolidated net interest expense plus letter
of credit fees not to be less than 2.5 to 1. In addition to the financial
covenants, restrictions under the senior credit agreement are incurrence of
debt, restricted payments, asset dispositions, consolidations and mergers and
others that would be typical in the oil and gas industry. As of September 30,
1999, Prize was in compliance with all financial covenants and restrictions.
All outstanding amounts under the senior credit agreement will convert to a
term loan on June 29, 2002, with quarterly principal payments after that date
through June 29, 2006.
At Prize's option, borrowings under the senior credit agreement bear
interest at either (1) the "Base Rate," which is the annual rate of interest
announced by BankBoston, or (2) the Eurodollar rate plus a margin ranging from
1.25% to 1.875% per annum, depending on the level of Prize's aggregate
outstanding borrowings under the senior credit agreement. In addition, Prize is
committed to pay quarterly in arrears a fee ranging from .25% to .50% of the
unused portion of the borrowing base.
The loan documents governing the senior credit agreement contain covenants
and restrictions relating to Prize's operations that are customary in the oil
and gas industry. In addition, the line of credit is secured by a first lien on
properties that represent at least 80% of the value of Prize's proved oil and
gas properties. See note 2 of notes to Prize's consolidated financial statements
included elsewhere in this document.
Along with the senior credit agreement, Prize entered into a $13 million
senior subordinate credit agreement. The amount borrowed under the senior
subordinate credit agreement was due December 31, 1999, and the interest rate
was the Eurodollar rate plus a margin of 1% per annum. The senior subordinate
credit agreement was retired in August 1999 from proceeds of Prize's sale of
most of its producing and non-producing mineral ownership interests.
STOCK OPTIONS AND COMPENSATION EXPENSE
Prize has instituted a stock option plan for key employees. Under the stock
option plan, the board of directors of Prize has the authority to grant to key
employees of Prize options to purchase shares of Prize's common stock. Each
option vests ratably over a three year period commencing on the date of grant.
Upon exercise, the holder is to pay a cash amount equal to $13,053 per share
subject to adjustment as defined by the stock option plan. The maximum number of
shares that may be issued is 1,286 shares, with a proportionate adjustment to
reflect any stock splits, reverse splits, or retirement of stock. Total
outstanding options as of September 30, 1999, were 1,286. Accordingly, 1,286
shares of Prize common stock have been reserved for issuance upon exercise.
Assuming completion of the merger on February 8, 2000, and after giving effect
to the one-for-seven reverse stock split, the number of shares that may be
issued upon exercise of the outstanding options will be adjusted to 2,141,263
shares of New Prize at an exercise price of $7.84 per share. The closing of the
merger will accelerate the vesting of all outstanding options. Prize did not
recognize any compensation expense in connection with the issuance of the
options.
MARKET RISK DISCLOSURES
Prize's business is impacted by fluctuations in commodity prices and
interest rates. The following discussion is intended to identify the nature of
these market risks, describe Prize's strategy for managing these risks and to
quantify the potential effect of market volatility on Prize's financial
condition and results of operations.
Oil and Gas Prices. Prize's financial condition, results of operations and
capital resources are highly dependent upon the prevailing market prices of, and
demand for, oil and natural gas. These commodity prices are subject to wide
fluctuations and market uncertainties due to a variety of factors that are
beyond
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<PAGE> 87
the control of Prize. These factors include the level of global demand for
petroleum products, foreign supply of oil and gas, the establishment of and
compliance with production quotas by oil-exporting countries, weather
conditions, the price and availability of alternative fuels and overall economic
conditions, both foreign and domestic. It is impossible to predict future oil
and gas prices with any degree of certainty. Sustained weakness in oil and gas
prices may adversely affect Prize's financial condition and results of
operations, and may also reduce the amount of net oil and gas reserves that
Prize can produce economically. Any reduction in reserves, including reductions
due to price fluctuations, can have an adverse effect on Prize's ability to
obtain capital for its exploitation and development activities. Similarly, any
improvements in oil and gas prices can have a favorable impact on Prize's
financial condition, results of operations and capital resources.
In order to mitigate the effect of price fluctuations, Prize regularly
utilizes hedging transactions with respect to a portion of its oil and gas
production. Prize utilizes derivative financial instruments to provide methods
to fix the price for natural gas and oil independently of the physical sale and
also to manage interest rates. While the use of these hedging arrangements
limits the downside risk of price declines, this use may also limit benefits
which may be derived from price increases. Prize uses various financial
instruments, such as swaps and collars, in which monthly settlements are based
on differences between the prices specified in the instruments and the
settlement prices of futures contracts quoted on the NYMEX or other indices.
Generally, when the applicable settlement price is less than the price specified
in the contract, Prize receives a settlement from the counterparty based on the
difference. Similarly, when the applicable settlement price is higher than the
specified price, Prize pays the counterparty based on the difference. The
instruments utilized by Prize differ from futures contracts in that there is not
a contractual obligation which requires or permits the future physical delivery
of the hedged products.
During 1998 and continuing into the third quarter of 1999, the oil and gas
industry operated in a depressed commodity price environment. In mid-1999,
prices for both oil and gas began to increase to high levels based on the price
history of the 1990s. Prize began hedging both oil and gas prices just prior to
the closing of the purchase of the properties from Pioneer in June 1999, and
continues to enter the hedge market from time to time. Prize's hedging policies
are based upon the judgement of management and the need to meet requirements of
Prize's lenders. See "Risk Factors."
In the tables set forth below, "Transaction Date" is the date on which
Prize entered into the hedge. Prize typically enters into "swaps" or "collars."
A swap is a fixed-price hedge and a collar is a hedge that has a ceiling price
and a floor price. If the particular product stays in between the ceiling and
the floor prices, then no payments are made by either party under a collar. The
terms "Put Floor Price" and "Call Ceiling Price" refer to the prices at which
Prize has hedged its production and are expressed in the calendar monthly
average of daily NYMEX closing prices for Light Sweet Crude Oil or monthly NYMEX
(Henry Hub) or other indices' closing prices for natural gas. Volumes refer to
barrels of crude oil or Mcf of gas, where one Mcf is equivalent to one MMBtu.
The "Term" refers to the time period of the hedge.
Set forth below is the contract amount and material terms of all natural
gas hedging instruments held by Prize at September 30, 1999.
<TABLE>
<CAPTION>
FAIR VALUE (LOSS)
TRANSACTION PUT FLOOR PRICE CALL CEILING PRICE AT SEPTEMBER 30,
DATE TYPE TRANSACTION DAILY VOLUME INDEX PER MCF PER MCF TERM 1999
- ----------- ---------------- ------------ ------------ --------------- ------------------ --------- ------------------
<C> <C> <C> <S> <C> <C> <C> <C>
6/14/99 Collar 10,000 Houston Ship $2.30 $2.57 7/99-6/01 $(930,644)
6/22/99 Collar 5,000 Permian 2.10 2.42 8/99-7/01 (656,523)
6/22/99 Collar 5,000 Mid-Con 2.15 2.43 8/99-7/01 (678,331)
6/30/99 Collar 5,000 Houston Ship 2.37 2.58 9/99-8/01 (620,924)
7/01/99 Collar 5,000 Houston Ship 2.295/1.995 2.64 9/99-8/01 (558,650)
</TABLE>
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<PAGE> 88
Set forth below is the contract amount and material terms of all crude oil
hedging instruments held by Prize at September 30, 1999.
<TABLE>
<CAPTION>
FAIR VALUE (LOSS)
TRANSACTION PUT FLOOR PRICE CALL CEILING PRICE AT SEPTEMBER 30,
DATE TYPE TRANSACTION DAILY VOLUMES PER BBL PER BBL TERM 1999
- ----------- ---------------- ------------- --------------- ------------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
6/14/99 Swap 1,500 $17.44 $17.44 7/99-7/01 $(3,173,933)
6/18/99 Collar 1,000 17.00 19.00 8/99-7/01 (1,599,104)
7/01/99 Collar 500 17.15 20.05 9/99-9/01 (642,799)
</TABLE>
Prize may choose at some time in the future to hedge separately the basis
differential for its natural gas production. This separation would be immaterial
to the financial performance of Prize.
Interest Rates. Prize's interest rate risk exposure results primarily from
having short-term rates from its commercial banks under its credit facility. All
of Prize's outstanding indebtedness is subject to market rates of interest as
determined from time to time by the banks under the credit facility. Any
increases in the variable interest rates related to this facility can have an
adverse impact on Prize's results of operations and cash flow. As of September
30, 1999, Prize had $140.3 million of outstanding debt, of which $139 million
was under the senior facility. The senior facility is due June 30, 2006, but
converts to a term loan on June 29, 2002 with quarterly principal payments after
that date. Interest is due quarterly at either the bank's prime rate or a
Eurodollar rate plus a margin. Under the credit facility, Prize currently pays
interest at a rate of LIBOR plus 1.875 percent, which as of December 7, 1999,
was 7.995%.
In an attempt to manage these risks, Prize entered into two interest rate
swaps effective July 2, 1999, which are accounted for as hedges with any
realized gains or losses appropriately recorded as interest expense. The swaps
consist of $50 million of notional amount of indebtedness at a fixed swap rate
of 5.76 percent based on the 3-month LIBOR rate, and $50 million of notional
amount of indebtedness at a fixed swap rate of 6.07 percent based on the 3-month
LIBOR rate. The terms of the swaps are until July 2, 2000, and July 2, 2001,
respectively. As of September 30, 1999, the fair value of the swaps was
$(93,334).
NATURAL GAS BALANCING
It is possible in the natural gas industry for various working interest
partners to produce more or less than their entitlement share of natural gas. In
those events, it is possible for there to be overproduced parties and
underproduced parties. At September 30, 1999, Prize's net gas balancing position
was not material.
YEAR 2000 READINESS DISCLOSURE
"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that were not Year 2000 compliant by January 1, 2000 may cause material adverse
effects to companies and organizations that rely upon those systems. Continuity
of Prize's operations in January 2000 will not only depend upon Year 2000
compliance of Prize's computer systems and computer-controlled equipment, but
also compliance of computer systems and computer-controlled equipment of third
parties. These third parties include oil and natural gas purchasers and
significant service providers such as electric utility companies and natural gas
plant, pipeline and gathering system operators.
Prize reviewed its computer systems and computer-controlled field equipment
and made the necessary modifications for Year 2000 compliance. Prize has
completed modifications and testing of its primary accounting and land computer
programs. All remaining computer systems have been inventoried and assessed.
Virtually all of Prize's office equipment and software has been purchased since
July 1, 1999.
Based on its review, remediation efforts and the results of testing to
date, Prize does not believe that timely modification of its computer systems
and computer-controlled equipment for Year 2000 compliance represents a material
risk to Prize. Prize estimates that total costs related to Year 2000 compliance
efforts will be less than $100,000, of which approximately $53,000 has been
incurred through September 30, 1999.
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<PAGE> 89
Prize has communicated with its material vendors and suppliers to verify
that their operations are Year 2000 compliant. Despite efforts to assure that
these third parties are Year 2000 compliant, Prize cannot provide assurance that
all significant third parties achieved compliance in a timely manner. A third
party's failure to achieve Year 2000 compliance could have a material adverse
effect on Prize's operations and cash flow.
The most likely "worst case" impacts would be of three months' duration and
would be:
- impairment of Prize's ability to deliver its production to, or receive
payment from, third parties gathering and/or purchasing its production
from affected facilities;
- impairment of the ability of third-party suppliers or service companies
to provide needed materials or services to Prize's planned or ongoing
operations, necessitating deferral or shut-in of exploration, development
or production operations;
- impairment of Prize's ability to receive and process data, which would
hinder its ability to conduct development drilling and exploitation
activities; and
At the date of this document, it does not appear that any of these potential
Year 2000 problems will materially affect Prize.
- Prize's inability to execute financial transactions with its banks and
other third parties whose systems fail or malfunction.
Prize has developed appropriate contingency plans in the event it becomes
aware of potential problems resulting from failure of Prize or of significant
third party computer systems in January 2000. These contingency plans include
installing backup computer systems or equipment, temporarily replacing systems
or equipment with manual processes, and identifying alternative suppliers,
service companies and purchasers.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the inability to ensure readiness of third parties, the
Year 2000 compliance issue could have a material adverse impact on Prize's
results of operations and financial condition.
BUSINESS OF PRIZE
GENERAL
Prize, which commenced operations in January 1999, is a privately held
independent oil and gas company focused on the acquisition and enhancement of
producing oil and gas properties. All of Prize's properties are located in the
United States, with principal operations conducted in portions of the Permian
Basin, the onshore Gulf Coast and the Mid-Continent regions. At September 30,
1999, Prize's estimated net proved reserves totaled 35.8 MMBbls of oil and
natural gas liquids and 251.8 Bcf of natural gas, or 77.7 MMBOE. The PV-10 value
was $450.4 million at September 30, 1999. On a BOE basis, approximately 54% of
Prize's proved reserves are natural gas and approximately 79% of Prize's proved
reserves are proved developed reserves. At September 30, 1999, Prize owned
interests in 970 gross, 658 net, operated and 1,076 gross, 221 net, non-operated
oil and gas wells.
BUSINESS STRATEGY
The business strategy of Prize is to increase its reserves, cash flow and
net income on a per share basis by acquiring, enhancing and exploiting producing
oil and gas properties and by maintaining a low operating and corporate cost
structure. It seeks to purchase properties which will be operated by Prize,
which have sufficient production history to allow Prize to accurately assess
future performance, and which Prize may be able to enhance by implementing
operational improvements. Prize believes it will be successful in implementing
its strategy due, in part, to the following factors.
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Focus on Acquisition of Producing Properties. Management emphasizes
acquiring producing reserves with a long production history which generally is
more than five years in order to reduce the risks inherent in estimating the
remaining oil and gas reserves and the future production profile. The emphasis
on property acquisitions reflects the belief that continuing consolidation and
restructuring activities on the part of major integrated and large independent
oil companies should afford attractive opportunities to purchase domestic
producing properties.
Aggressive Value Enhancement and Exploitation. Prize undertakes an
operational study of acquired properties in order to identify value
enhancements. In many cases, cost saving measures or production improvements are
rapidly implemented which increase cash flow and, in some cases, add incremental
reserves. Other activities include identifying development drilling,
recompletion or workover opportunities which can be performed to add incremental
production or extend the life of an existing well. Prize implements its
development drilling activities through ongoing geological analysis of producing
properties that have developmental drilling potential. Prize emphasizes the
acquisition of operated properties in order to have greater control over the
implementation of value-enhancing activities. Prize has an extensive inventory
of exploitation and development opportunities.
Geographic Concentration. Prize focuses its acquisition program on the
Permian Basin region of West Texas and Southeastern New Mexico, the onshore Gulf
Coast region of Texas and Louisiana, and the Mid-Continent region of Western
Oklahoma and the Texas Panhandle, where management is best able to exploit its
expertise and experience obtained through operating properties in these regions.
Management believes its understanding of the reservoir and production
characteristics of oil and gas properties in these regions allows it to identify
acquisitions with an attractive risk/reward profile. Virtually all of the
properties of Prize are located in these geographic regions.
Low Cost Operating Strategy. Prize pursues a low cost operating strategy
and believes that it maintains a lower overhead than many similarly-sized,
publicly-held independent oil and gas operators. In addition, it targets
acquisition candidates which are located in its core areas and can provide
opportunities for cost efficiencies through consolidation with other operations.
Prize intends to enhance production through recompletion and low risk
development drilling activities. Prize believes that these activities will
reduce operating costs on a per BOE basis.
Active Risk Management. Prize seeks to reduce further the oil and gas
reserve, price and financial risks to which it is exposed by:
- diversifying its property holdings and avoiding concentrating a large
value in any single property;
- periodically using commodity price hedging strategies;
- maintaining what Prize believes to be a prudent level of indebtedness;
and
- using interest rate swaps and other financial strategies.
Experienced Management and Employees. All of the members of the Prize
management, technical staff, and field operations groups have been part of
successfully implementing the acquisition and exploitation strategy at other
companies. The average amount of time of employment in the oil and gas industry
by the Prize management and technical staff is 19 years.
Financial Flexibility. Prize is committed to maintaining financial
flexibility, which management believes is important for the successful execution
of its strategy. Management expects to keep debt at levels reasonable for its
peer group, and will finance future capital expenditures from cash flow, except
for major property acquisitions, which will be financed in the most efficient
way at the time. As a result of Prize's growth strategy of acquisition,
enhancement and exploitation, debt levels will vary from time to time. Over the
long-term, Prize believes that an appropriate debt level would be no more than
50% of oil and gas reserve value.
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ACQUISITION ACTIVITIES
Prize was incorporated in January 1999 with an initial capitalization of
$20.5 million and an ownership interest in Sunterra Petroleum, L.L.C. For the
first several months following formation, the primary activity of Prize was to
manage Sunterra Petroleum, L.L.C. and to evaluate acquisition candidates.
In May 1999, Prize signed a purchase and sale agreement to purchase
properties from Pioneer Natural Resources USA, Inc. for $245 million. Concurrent
with the closing of the purchase in June 1999, Prize arranged for the sale of
properties in North Dakota for $6 million, which reduced the final purchase
price to Prize to $239 million. The purchased properties were located primarily
in Texas, with most of the remainder in Oklahoma and Louisiana. All of the
properties were on-shore.
In July 1999, Prize sold most of its producing and non-producing mineral
ownership interests for $32 million.
In July 1999, Prize exchanged its interest in its Will-O-Mills treating
facility and $750,000 cash for the remaining interests in Sunterra Petroleum,
L.L.C., which owns oil and gas producing properties.
Prize frequently reviews acquisition opportunities and anticipates making
additional acquisitions when the properties, and the terms and conditions of the
transaction, are determined to be appropriate. Prize does not have a specific
acquisition budget since the timing and size of acquisitions are difficult to
forecast. At the present time, Prize has no binding agreements with respect to
any significant acquisitions other than the merger agreement with Vista.
MARKETING
The gas production of Prize is typically sold on the spot market or under
market-sensitive, long-term agreements with a variety of purchasers, including
intrastate and interstate pipelines, their marketing affiliates, independent
marketing companies and other purchasers who have the ability to move the gas
under firm transportation agreements. Because very little of its gas in the
United States is committed to long-term fixed-price contracts, Prize is
positioned to take advantage of rising prices for gas but it is also subject to
gas price declines. Prize conducts its own marketing efforts.
The oil production of Prize is typically sold under short-term contracts at
posted prices plus a premium. Prices are compared and shopped on a regular
basis, and purchasers are changed whenever price improvements can be received.
The oil is typically trucked from the leases, so that competition occurs among
all purchasers in the area.
Prize engages in hedging activities as a regular part of its business. It
endeavors to match hedges with the appropriate basis differentials for both oil
and gas.
COMPETITION
Competition in the oil and gas industry is intense. Both in seeking to
obtain and acquire desirable producing properties, new leases and exploration
prospects, and in marketing oil and gas, Prize faces competition from both major
and independent oil and gas companies, as well as from numerous individuals and
drilling programs. Many of these competitors have financial and other resources
substantially in excess of those available to Prize.
ABANDONMENT COSTS
Prize is responsible for payment of its working interest share of plugging
and abandonment costs on its oil and gas properties. Prize anticipates that the
ultimate aggregate salvage value of lease and well equipment located on its
properties will exceed the costs of abandoning these properties. There can be no
assurance, however, that Prize will be successful in avoiding additional
expenses in connection with the abandonment of any of its properties. In
addition, abandonment costs and their timing may change due to many factors
including actual production results, inflation rates and changes in
environmental laws and regulations.
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TITLE TO PROPERTIES
Title to Prize's oil and gas properties is subject to royalty, overriding
royalty, carried interest and other similar interests and contractual
arrangements customary in the oil and gas industry, to liens incident to
operating agreements and to current taxes not yet due and other comparatively
minor encumbrances. As is customary in the oil and gas industry, Prize conducts
only a perfunctory investigation as to ownership at the time it acquires
undeveloped properties believed to be suitable for drilling. Prior to the
commencement of drilling on a tract, Prize conducts a detailed title examination
and performs curative work with respect to known significant title defects.
INSURANCE
The oil and gas industry is subject to many risks, including the risk that
no commercially productive reservoirs will be discovered, or if reserves are
found, that they will not be in sufficient quantities to be economical for
recovery. The costs of drilling, completing and operating wells is often
uncertain. Prize's drilling operations may be curtailed, delayed or canceled
because of numerous outside factors including title problems, weather
conditions, mechanical problems, governmental requirements and shortages or
delays in deliveries of equipment and services. Prize has risks inherent in
normal oil and gas operations such as fire, natural disasters, explosions,
blowouts, cratering, pipeline ruptures and spills, any of which could result in
the loss of oil and gas, environmental pollution, personal injury claims and
property damage. Any unsuccessful drilling activities or accidents may have an
adverse effect on Prize's future results of operations and financial condition.
Prize maintains insurance against some, but not all, of the risks described
above. Prize may elect to self-insure in circumstances in which management
believes that the cost of insurance is excessive relative to the risks
presented. The occurrence of an event that is not covered, or not fully covered,
by insurance could have a material adverse effect on Prize's financial condition
and results of operations.
OFFICE FACILITIES
Prize currently leases approximately 19,000 square feet of office space at
3500 William D. Tate, Suite 200, Grapevine, Texas, at an annual rental of
$266,000. This lease expires in 2003. Prize also leases approximately 1,824
square feet of office space at 20 E. 5th Street, Suite 1400, Tulsa, Oklahoma, at
an annual rental of $15,000. This lease expires in 2000. Both leases are typical
office leases containing standard and customary lease provisions.
LEGAL PROCEEDINGS
Prize is a defendant in legal proceedings that have resulted from the
ordinary conduct of its business. While the outcome of these proceedings against
Prize cannot be predicted with certainty, management of Prize does not expect
that these proceedings will have a material adverse effect on Prize's financial
condition or results of operations.
GOVERNMENTAL REGULATION
General. There have been, and continue to be, numerous federal and state
laws and regulations governing the oil and gas industry that are often changed
in response to the current political or economic environment. Compliance with
this regulatory burden is often difficult and costly and may carry substantial
penalties for noncompliance. The following are some specific regulations that
may affect Prize. Prize cannot predict the impact of these or future legislative
or regulatory initiatives.
In 1992, the Federal Energy Regulatory Commission, or FERC, issued Order
Nos. 636 and 636-A, requiring operators of pipelines to unbundle transportation
services from sales services and allow customers to pay for only the services
they require, regardless of whether the customer purchases gas from these
pipelines or from other suppliers. The United States Court of Appeals upheld the
unbundling provisions and other components of FERC's orders, but remanded
several issues to FERC for further explanation. On
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February 27, 1997, FERC issued Order No. 636-C, addressing the court's concern.
Petitions for rehearing on Order No. 636-C were denied on May 28, 1998. FERC's
order remains subject to judicial review and may be changed as a result of that
review. Although FERC's regulations should generally facilitate the
transportation of gas produced from Prize's properties and the direct access to
end-user markets, the impact of these regulations on marketing Prize's
production or on its gas transportation business cannot be predicted. Prize,
however, does not believe that it will be affected any differently than other
gas producers and marketers with which it competes.
Federal Regulation of Oil. Sales of crude oil, condensate and gas liquids
are not currently regulated and are made at market prices. Market transportation
costs affect net price received from the sale of these products. Prize
transports a significant part of its oil production by pipeline. The Energy
Policy Act of 1992 required FERC to adopt a simplified ratemaking methodology
for interstate oil pipelines. In 1993 and 1994, FERC issued Order Nos. 561 and
561-A, adopting rules that establish new rate methods for these pipelines. Under
the new rules, effective January 1, 1995, interstate oil pipelines can change
rates based on an inflation index, though other rate mechanisms may be used in
specific circumstances. The United States Court of Appeals upheld FERC's orders
in 1996. These rules have had little, if any, effect on Prize with respect to
the cost of moving oil to market.
State Regulation. Oil and gas operations are subject to various types of
regulation at the state and local levels. This regulation includes requirements
for drilling permits, the method of developing new fields, the spacing and
operations of wells and waste prevention. The production rate may be regulated
and the maximum daily production allowable from oil and gas wells may be
established on a market demand or conservation basis. These regulations may
limit production by well and the number of wells or locations that can be
drilled.
Prize may become party to agreements relating to the construction or
operation of pipeline systems for the transportation of gas. To the extent that
gas is produced, transported and consumed wholly within one state, operations
may be subject to the state's administrative authority charged with regulating
pipelines. The rates that can be charged for gas, the transportation of gas and
the construction and operation of these pipelines would be subject to the
regulations governing these matters. Some states have recently adopted
regulations with respect to gathering systems, and other states are considering
regulations with respect to gathering systems. New regulations passed have not
had a material effect on the operations of Prize's gathering systems, but Prize
cannot predict whether any further rules will be adopted or, if adopted, the
effect these rules may have on its gathering systems.
Environmental Matters. Prize's operations and properties are subject to
extensive and changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. There has been a trend to even stricter standards than are
currently in place, and this trend will likely continue. Governmental
authorities have the power to enforce compliance with their regulations and
violators are subject to fines, injunction or both. Prize is subject to laws
including those governing the disposal of hazardous waste, spill prevention,
control countermeasure and response plans relating to the possible discharge of
oil into surface waters and the discharge of produced waters into navigable
waters.
Regulations are currently being developed under federal and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on Prize. The implementation of new or modification of
existing laws or regulations could have a material adverse effect on Prize. The
discharge of oil, gas or other pollutants into the air, soil or water may give
rise to significant liabilities on the part of Prize to the government and third
parties, and may require Prize to incur substantial costs for remediation. Prize
has acquired leasehold interests in numerous properties that for many years have
produced oil and gas. The previous owners of these interests may have used
operating and disposal practices that were standard in the industry at the time.
Also, Prize has purchased interests in properties that are operated by third
parties over which Prize has no control. The failure of the operator to comply
with applicable environmental regulations may, in some circumstances, materially
adversely impact Prize.
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In the opinion of management, Prize is in substantial compliance with
current applicable environmental laws and regulations, and Prize has no material
commitments for capital expenditures to comply with existing environmental
requirements. Furthermore, since its inception, the total amount of capital
expenditures and operating costs incurred by Prize relating to environmental
matters has been immaterial. Nevertheless, changes in existing environmental
laws and regulations or in interpretations of these laws and regulations could
have a significant adverse effect on Prize.
PROPERTIES OF PRIZE
PRINCIPAL AREAS OF OPERATIONS
At September 30, 1999, Prize had total proved reserves of 251.8 Bcf of
natural gas and 35.8 MMBbls of crude oil and liquids, or 77.7 MMBOE,
representing a PV-10 value of $450.4 million. On a BOE basis, natural gas
constitutes 54% of Prize's total proved reserves and crude oil and liquids
constitutes 46%. Of these total proved reserves, 79% are proved developed
reserves. For the quarter ended September 30, 1999, average daily net production
was 6,627 Bbls of crude oil and liquids and 56.8 MMcf of natural gas, or 16,093
BOE. Based on the reserve information as of September 30, 1999, and using the
annualized production for the quarter ended September 30, 1999, the
reserve-to-production ratio associated with Prize's reserves is 13 years. The
following tables provide information regarding Prize's proved reserves by
geographic area as of September 30, 1999.
<TABLE>
<CAPTION>
PROVED RESERVES AS OF SEPTEMBER 30, 1999
----------------------------------------------------
AREA OIL(MBBLS) GAS(BCF) TOTAL(MBOE) PV-10 VALUE
- ---- ---------- -------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Permian Basin................................ 22,260 31.7 27,551 $167,053
Onshore Gulf Coast........................... 7,286 140.4 30,675 193,263
Mid-Continent................................ 6,206 79.7 19,494 90,103
------ ----- ------ --------
Total.............................. 35,752 251.8 77,720 $450,419
====== ===== ====== ========
</TABLE>
Prize manages its oil and gas properties based on their geographic area
and, as a result, Prize has divided its oil and gas operations into three
operating regions:
- Permian Basin region;
- Onshore Gulf Coast region; and
- Mid-Continent region.
Permian Basin Region. The Permian Basin region accounts for 35% of Prize's
total proved reserves at September 30, 1999. The Permian Basin region is located
in West Texas and Southeastern New Mexico and is predominantly oil. Prize's net
acreage position in the Permian Basin region is approximately 31,934 acres and
Prize has ownership interests in 1,146 gross, or 531 net, producing oil and gas
wells. The majority of Prize's production is from the Yates, Holt, Spraberry,
Canyon and Clearfork formations, from depths of 2,800 feet to 11,000 feet.
Onshore Gulf Coast Region. The Onshore Gulf Coast region accounts for 40%
of Prize's total proved reserves at September 30, 1999. The Onshore Gulf Coast
region is located in South and East Texas, Louisiana and Mississippi and is
predominantly gas. Prize's net acreage position is approximately 34,597 acres
and Prize has ownership interests in 446 gross, or 212 net, producing oil and
gas wells. The majority of Prize's production is from the Wilcox, Edwards, Frio,
Yegua, Bol mex and Miocene formations, from depths of 5,000 feet to 14,000 feet.
Mid-Continent Region. The Mid-Continent region accounts for 25% of Prize's
total proved reserves at September 30, 1999. The Mid-Continent region is located
in Western Oklahoma and the Texas Panhandle and is predominantly gas. Prize's
net acreage position is approximately 35,611 acres and Prize has ownership
interests in 454 gross, or 136 net, producing oil and gas wells. The majority of
Prize's
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production is from the Morrow, Granite Wash, Douglas, Bromide, Upper McLish and
Oil Creek formations, from depths of 800 feet to 15,000 feet. Prize also owns
and operates one natural gas processing plant and one natural gas gathering
system located in the Mid-Continent region.
PRODUCTION, PRICE AND COST DATA
The following table sets forth the pro forma production price and cost
information for the first nine months of 1999.
<TABLE>
<S> <C>
Average daily production:
Oil (Bbls)............................................... 5,347
Liquids (Bbls)........................................... 1,461
Natural gas (Mcf)........................................ 57,797
Total (BOE).............................................. 16,441
Average realized price:
Oil (per Bbl)............................................ $14.91
Liquids (per Bbl)........................................ $ 9.83
Natural gas (per Mcf).................................... $ 2.00
Average production cost (per BOE).......................... $ 3.88
</TABLE>
At September 30, 1999, Prize owned interests in 2,046 productive oil and
gas wells. Prize operates 970 producing oil and gas wells, representing
approximately 75% of its total proved oil and gas reserves.
OIL AND GAS RESERVE MIX
At September 30, 1999, Prize's reserve mix was 54% natural gas and 46%
crude oil and liquids. Prize's pro forma production mix for the nine months
ended September 30, 1999 was 59% natural gas and 41% crude oil and liquids.
Prize anticipates that its reserve and production mix will vary as it takes
advantage of market conditions and specific acquisition and development
opportunities.
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NEW PRIZE
GENERAL
The merger will create a mid-sized independent oil and gas company. As
compared to either Prize or Vista, New Prize will: have a larger, more balanced
and diversified oil and gas reserve base; be financially stronger and more
cost-efficient; and have an increased ability to pursue acquisitions. New
Prize's focused growth strategy will be concentrated on the acquisition and
exploitation of oil and gas properties in its core operating areas of the
Permian Basin of West Texas and Southeastern New Mexico, the onshore Gulf Coast
area of Texas and Louisiana, and the Mid-Continent area of Oklahoma and the
Texas Panhandle.
BUSINESS STRATEGY
New Prize will continue the same business strategy as Prize. See
"Prize -- Business of Prize -- Business Strategy" on page 81.
STRENGTHS
The principal strengths of New Prize will be the following:
RESERVES AND PRODUCTION
- New Prize will have, based on reserve estimates as of September 30, 1999,
total proved reserves of approximately 290 Bcf of gas and 51 MMBbls of
oil and natural gas liquids, or 99 MMBOE, with a PV-10 value of
approximately $604 million. Approximately 77% of New Prize's proved
reserves will be proved developed reserves.
- New Prize's average net daily production, based on the nine months ended
September 30, 1999, will be over 66 MMcf of gas and 9,327 Bbls of oil and
natural gas liquids, or approximately 20,330 BOE.
- New Prize's reserve base will be approximately 49% gas and 51% oil and
natural gas liquids on a BOE basis.
- New Prize's aggregate reserve to production ratio will be approximately
13 years. A significant benefit of owning long-lived reserves is an
enhanced ability to provide long-term funding for additional growth
opportunities.
- All of New Prize's proved reserves will be in premier oil and gas
producing areas typified by numerous long-life, multi-pay exploitation
and exploration opportunities.
- New Prize will operate over 1,500 producing wells, representing over 80%
of the PV-10 value of its proved reserves and increasing its control over
the implementation of its strategies and projects.
- New Prize will have an extensive inventory of exploitation and
development opportunities, including identified projects which represent
approximately a two to three year inventory at current activity levels.
MANAGEMENT
- New Prize's executive management team will be led by Philip B. Smith, Lon
C. Kile and D. Richard Massengill, the current chairman and chief
executive officer, president, and vice president, respectively, of Prize.
- New Prize's executive management team is well-rounded and experienced
with over 75 years of collective experience in the oil and gas industry.
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- The members of this management team will collectively own approximately
6.3% of the New Prize common stock outstanding, assuming conversion of
the New Prize convertible preferred stock, aligning their interests with
those of the other New Prize stockholders.
NATURAL GAS PARTNERS' OWNERSHIP
- Assuming completion of the merger on February 8, 2000, investment
partnerships affiliated with Natural Gas Partners will collectively own
approximately 58% of the New Prize common stock, assuming conversion of
the New Prize convertible preferred stock, and will be New Prize's
largest stockholder upon consummation of the merger.
- Natural Gas Partners enjoys a reputation as an active and experienced
investor in the oil and gas industry.
- Two of Natural Gas Partners' managers, Kenneth A. Hersh and David R.
Albin, will serve as directors of New Prize. New Prize considers Natural
Gas Partners' continued participation in the ownership and management of
New Prize to be of substantial value, particularly in the areas of
corporate finance activities, access to financial markets and building
sponsorship of New Prize in the public arena.
NEW CREDIT FACILITY
Each of Vista and Prize currently has a credit facility with BankBoston,
N.A. and other banks. In conjunction with the completion of the merger, New
Prize intends to enter into a new credit facility with BankBoston and other
banks by amending Prize's existing credit facility, which will replace the
existing facilities. New Prize has requested a $350 million to $400 million
revolving credit facility subject to a borrowing base which is redetermined on a
periodic basis. The new credit facility will establish a borrowing base
determined by the banks' evaluation of New Prize's oil and gas reserves. New
Prize has requested an initial borrowing base of approximately $250 million,
which is an increase over the current combined borrowing bases of Vista and
Prize. New Prize anticipates that the other terms of the new credit facility
will be similar to the terms of Prize's existing credit facility. There can be
no assurance that New Prize will be able to enter into a new credit facility
containing the terms discussed above. See "Prize -- Management's Discussion and
Analysis of Financial Condition and Results of Operations of Prize -- Liquidity
and Capital Resources -- Credit Agreements" on page 77.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF NEW PRIZE FOLLOWING THE MERGER. The
board of directors and executive officers of Vista will change as a result of
the merger. Set forth below is selected information regarding the persons who
are expected to be the directors and executive officers of New Prize following
the merger. Each director is elected for a one-year term. Executive officers are
elected by the board of directors of New Prize and serve at its discretion.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Philip B. Smith................ 48 Director, Chairman of the Board of Directors, Chief
Executive Officer and Treasurer
Lon C. Kile.................... 44 Director, President and Chief Operating Officer
D. Richard Massengill.......... 52 Vice President
Kenneth A. Hersh............... 36 Director
David R. Albin................. 40 Director
Scott D. Sheffield............. 47 Director
Mark L. Withrow................ 52 Director
</TABLE>
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The following is a brief description of the business background of each of
the persons who will be the directors and executive officers of New Prize.
Mr. Smith, the founder of Prize, has been chairman of the board of
directors, chief executive officer, treasurer and a director of Prize since
January 1999. He was also president of Prize during a portion of 1999. From 1996
until 1999, he served as a director of HS Resources, Inc. and Pioneer Natural
Resources Company and its predecessor, MESA, Inc. In 1996, Mr. Smith founded a
small independent oil and gas company which he managed until 1999. Mr. Smith
served as president, chief executive officer and a director of Tide West Oil
Company, an independent oil and gas company, from 1992 until 1996. He was
president and a director of Draco Petroleum, Inc., a wholly-owned subsidiary of
Tide West, from 1991 until 1996, and of Tide West Trading & Transport Company,
formerly Draco Production Company, a wholly-owned subsidiary of Tide West, from
1989 until 1996. From 1986 until 1991, Mr. Smith was a senior vice president of
Mega Natural Gas Company, a natural gas gathering company and the former parent
company of Tide West Trading & Transport Company and its predecessor companies.
Prior to that time, he held various technical and management positions at other
independent and major oil and gas companies. He earned his M.B.A. from the
University of Tulsa and his B.S. in mechanical engineering from Oklahoma State
University.
Mr. Kile has been president, chief operating officer and a director of
Prize since June 1999. From 1997 until 1999, he was executive vice president of
Pioneer Natural Resources Company, an independent oil and gas company. Mr. Kile
joined Parker & Parsley Petroleum Company, an independent oil and gas company
and a predecessor to Pioneer, in 1985 and was promoted to senior vice
president -- investor relations in 1996. Previously, he was vice president and
manager of the mid-continent division of Parker & Parsley. Prior to that, he
held the positions of vice president -- equity finance & analysis and vice
president -- marketing and program administration of Parker & Parsley. Before
joining Parker & Parsley, he was employed as supervisor -- senior, audit, in
charge of Parker & Parsley's audit, with Arthur Young & Co. Mr. Kile earned his
Bachelor of Business Administration degree in accounting from Oklahoma State
University.
Mr. Massengill has been a vice president of Prize since July 1999. From
1998 to 1999, he served as reservoir engineering manager, domestic division for
Pioneer Natural Resources Company. He was reservoir engineering manager for the
mid-continent division of Pioneer and its predecessors from 1996 to 1998. Prior
to that time, he held various positions with both large and small oil companies
as well as an owner in consulting and acquisition companies. Mr. Massengill
earned a Master of Science in Chemical Engineering from the University of
Wyoming.
Mr. Hersh, has been a director of Prize since January 1999. From 1989 to
the present, he has been a manager of the Natural Gas Partners private equity
investment funds which were organized to make equity investments in the oil and
gas industry. Previously, he was employed by the investment banking division of
Morgan Stanley & Co. Incorporated where he was a member of the firm's energy
group specializing in oil and gas financing and acquisition transactions. Mr.
Hersh serves as a director of Vista. Mr. Hersh earned an M.B.A. from the
Stanford University Graduate School of Business and a B.A. from Princeton
University.
Mr. Albin has been a director of Prize since January 1999. From 1988 to the
present, he has been a manager of the Natural Gas Partners private equity
investment funds. Previously, he was employed as a portfolio manager for the
Bass Investment Limited Partnership, a partnership formed by the Bass family of
Fort Worth, Texas. Before joining Bass, he was a member of the oil and gas group
in Goldman, Sachs & Co.'s investment banking division. Mr. Albin serves as a
director of Vista. Mr. Albin earned a B.S. in physics and an M.B.A., both from
Stanford University.
Mr. Sheffield has been a director of Prize since June 1999. He has been
president and chief executive officer of Pioneer since 1997. He was chairman of
the board, president, chief executive officer and a director of Parker & Parsley
Petroleum Company from 1990 until 1997. Mr. Sheffield was the sole director of
Parker & Parsley from May 1990 until October 1990. Mr. Sheffield joined Parker &
Parsley Development Company, a predecessor of Parker & Parsley, as a petroleum
engineer in 1979. Mr. Sheffield
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served as vice president -- engineering of Parker & Parsley Development Company
from 1981 until 1985, when he was elected president and a director. In 1989, Mr.
Sheffield was elected chairman of the board and chief executive officer of
Parker & Parsley Development Company. Before joining Parker & Parsley
Development Company's predecessor, Mr. Sheffield was employed as a production
and reservoir engineer for Amoco Production Company. Mr. Sheffield serves as a
director of Pioneer. He earned his B.S. in Petroleum Engineering from the
University of Texas.
Mr. Withrow has been a director of Prize since June 1999. He has been
executive vice president, general counsel and secretary of Pioneer since 1997.
He served as vice president -- general counsel of Parker & Parsley Petroleum
Company from 1991 until 1995, and served as senior vice president, general
counsel of Parker & Parsley from 1995 until 1997. He was Parker & Parsley's
secretary from 1992 until 1997. Mr. Withrow joined Parker & Parsley Development
Company in 1991. Prior to that time, Mr. Withrow was the managing partner of the
law firm of Turpin, Smith, Dyer, Saxe & MacDonald, Midland, Texas. He earned his
J.D. from Texas Tech University and his B.S. in Accounting from Abilene
Christian University.
EXECUTIVE COMPENSATION. The compensation of the executive officers of New
Prize will be initially set at the same level as currently being paid in
connection with their services for Prize. After consummation of the merger, New
Prize's compensation committee will determine any adjustments to the
compensation of these officers. The executive officers of New Prize will be
Philip B. Smith, Lon C. Kile and David R. Massengill. These officers' current
annual salaries in connection with their services for Prize are $140,000,
$225,000 and $165,000, respectively. These officers will also be eligible to
receive performance bonuses at the discretion of the New Prize board and stock
option grants under New Prize's stock option plan. In addition, New Prize
intends to implement a 401(k) plan in which its officers and employees will be
able to participate. During 1999, Messrs. Smith, Kile and Massengill have been
granted stock options for 643.417 shares, 321.707 shares and 160.854 shares of
Prize common stock each at an exercise price of $13,053 per share, respectively,
under Prize's stock option plan. Assuming the merger closes on February 8, 2000,
and after giving effect to the one-for-seven reverse stock split, these
outstanding options may be exercised to acquire 1,071,409 shares, 535,702 shares
and 267,852 shares of New Prize common stock, each at an exercise price of $7.84
per share. None of the executive officers of Prize have employment agreements
and none of the executive officers of New Prize are expected to have employment
agreements. See "Prize -- Management's Discussion and Analysis of Financial
Condition and Results of Operations of Prize -- Stock Options and Compensation
Expense" on page 78.
DIRECTOR COMPENSATION. The compensation of the directors of New Prize will
be initially the same as that currently being paid to the directors of Vista.
Accordingly, directors who are also employees of New Prize will not be
separately compensated for serving on the New Prize board of directors.
Directors who are not employees of New Prize will receive $250 per meeting for
their services as directors. In addition, New Prize will reimburse directors for
reasonable expenses incurred in connection with attending meetings of New
Prize's board and its committees. After consummation of the merger, New Prize's
board will determine any adjustments to the compensation of directors. The
directors of Prize currently are not compensated for serving on the Prize board
of directors, except for reimbursement of their reasonable expenses incurred in
connection with attending meetings of Prize's board.
VISTA STOCK OPTION PLAN
The description set forth below represents a summary of the material terms
and conditions of the Vista stock option plan. After the merger, the Vista stock
option plan will remain in effect and will become a stock option plan of New
Prize.
General
Vista may grant awards with respect to shares of Vista common stock under
the Vista stock option plan to officers, directors and employees of Vista or any
parent or subsidiary corporation of Vista. The awards under the Vista stock
option plan include (1) incentive stock options qualified as such under U.S.
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federal income tax laws and (2) stock options that do not qualify as incentive
stock options. The number of shares of Vista common stock that may be subject to
outstanding awards under the Vista stock option plan is 900,000, or 128,572
shares after the merger. As of the date of this document, no options are
outstanding under the Vista stock option plan.
The board of directors of Vista or any committee designated by it may
administer the Vista stock option plan. The committee has broad discretion to
administer the Vista stock option plan, interpret its provisions and adopt
policies for implementing the Vista stock option plan. This discretion includes
the ability to select the recipient of an award, determine the type and amount
of each award, establish the terms of each award, accelerate vesting or
exercisability of an award, determine whether performance conditions have been
satisfied and otherwise modify or amend any award under the Vista stock option
plan. Nevertheless, no awards for more than 36,429 shares may be granted to any
one employee in a calendar year.
Awards
The committee determines the exercise price of each option granted under
the Vista stock option plan. The exercise price for an incentive stock option
must not be less than the fair market value of the Vista common stock on the
date of grant. Stock options may be exercised as the committee determines, but
not later than ten years from the date of grant in the case of incentive stock
options. At the discretion of the committee, holders may use shares of stock to
pay the exercise price, including shares issuable upon exercise of the option.
Other Provisions
At the committee's discretion and subject to conditions that the committee
may impose, a participant's tax withholding with respect to an award may be
satisfied by the withholding of shares of Vista common stock issuable pursuant
to the award or the delivery of previously owned shares of Vista common stock,
in either case based on the fair market value of the shares.
If a change of control occurs or Vista enters into an agreement providing
for a change of control, then the committee may declare any or all options
outstanding under the Vista stock option plan to be exercisable in full at such
time or times as the committee shall determine. Each option accelerated by the
committee according to the preceding sentence shall terminate on the date, which
shall not be later than the stated exercise date, as the committee shall
determine.
Without stockholder approval, the Vista board may not amend the Vista stock
option plan to increase the total number of shares of Vista common stock that
may be issued under the Vista stock option plan. Otherwise, the Vista board may
at any time alter, amend, modify, suspend or terminate the Vista stock option
plan. No award may be issued under the Vista stock option plan after the tenth
anniversary of stockholder approval of the plan, which occurred in 1998.
RELATED PARTY TRANSACTIONS
ADVISORY SERVICES AND INDEMNIFICATION AGREEMENT. Prize has entered into an
advisory services and indemnification agreement, dated as of January 25, 1999,
as amended, with Natural Gas Partners V, L.P., a more than 5% stockholder of
Prize. Kenneth A. Hersh and David R. Albin, representatives of Natural Gas
Partners, also serve as directors of Prize. According to the terms of the
agreement, Prize currently pays Natural Gas Partners $150,000 per year, and
reimburses Natural Gas Partners for various expenses, in consideration for
certain consulting and financial advisory services provided by Natural Gas
Partners and its representatives. The agreement is expected to be continued with
New Prize. Vista has a similar advisory services agreement with Natural Gas
Partners II, L.P. and Natural Gas Partners III, L.P., more than 5% stockholders
of Vista, except that the annual fee is $75,000 per year. Kenneth A. Hersh,
David R. Albin and John S. Foster, representatives of Natural Gas Partners, also
serve as directors of Vista. This agreement is expected to be terminated upon
completion of the merger.
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FEES AND REIMBURSEMENTS. In connection with the formation and organization
of Prize in January 1999 and additional investment by Natural Gas Partners V,
L.P. in Prize in June 1999, Prize paid fees of $560,000, in the aggregate, to
Natural Gas Partners. In addition, Prize reimbursed Natural Gas Partners for its
out-of-pocket expenses incurred in connection with these transactions. Natural
Gas Partners is a more than 5% stockholder of Prize, and its representatives,
Kenneth A. Hersh and David R. Albin, serve as directors of Prize.
See "The Merger -- Other Agreements" on page 40 for a description of the
registration rights agreement, the voting and shareholders agreement and the
joint participation agreement.
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THE MERGER AGREEMENT
The following section describes the material terms of the merger agreement.
The full text of the merger agreement is attached as Annex A to this document
and is incorporated by reference in this document. We encourage you to read the
entire merger agreement.
STRUCTURE; EFFECTIVE TIME
The merger agreement provides for the merger of a wholly-owned subsidiary
of Vista into Prize, with Prize surviving the merger and becoming a wholly-owned
subsidiary of Vista. The merger will become effective at the time of the filing
of a certificate of merger with the Secretary of State of the State of Delaware
or at a later time as agreed in writing by the parties and specified in the
certificate of merger, which is expected to occur as soon as practicable after
the last condition precedent to the merger set forth in the merger agreement has
been satisfied or waived, but not later than February 29, 2000.
CONVERSION OR CANCELLATION OF PRIZE SECURITIES IN THE MERGER
Assuming the merger closes on February 8, 2000, each share of Prize common
stock outstanding immediately prior to the effective time, other than dissenting
shares, will, at the effective time, automatically convert into 1,665.187 shares
of New Prize common stock and each share of Prize convertible preferred stock
outstanding immediately prior to the effective time, other than dissenting
shares, will, at the effective time, automatically convert into 1,665.187 shares
of New Prize convertible preferred stock. The above conversion ratio is based on
the number of outstanding shares of Prize common and convertible preferred stock
and Vista common stock as of the date of this document and reflects the
one-for-seven reverse stock split. See also "The Merger -- Consideration" on
page 24.
DIRECTORS AND OFFICERS OF NEW PRIZE FOLLOWING THE MERGER
As a condition to the closing under the merger agreement, Prize shall
receive the resignations of each of the executive officers and directors of
Vista, except David R. Albin and Kenneth A. Hersh, who shall continue to serve
as directors of New Prize after completion of the merger. It is anticipated that
Prize will designate, and the existing directors will appoint, Philip B. Smith,
Lon C. Kile, Scott D. Sheffield and Mark L. Withrow to fill the vacancies on the
board of New Prize.
After the merger, it is anticipated that the board of directors of New
Prize will appoint the current executive officers of Prize to serve as the
executive officers of New Prize.
CONVERSION OF SHARES
At the effective time, Vista will deliver certificates representing shares
of New Prize common stock and convertible preferred stock, respectively, in
exchange for certificates representing shares of Prize common stock and
convertible preferred stock. Assuming the merger closes on February 8, 2000,
holders of Prize common stock and convertible preferred stock who surrender
their certificates to Vista will receive 1,665.187 shares of New Prize common
stock for each surrendered share of Prize common stock, and 1,665.187 shares of
New Prize convertible preferred stock for each surrendered share of Prize
convertible preferred stock. The above conversion ratio is based on the number
of outstanding shares of Prize common and convertible preferred stock and Vista
common stock as of the date of this document and reflects the one-for-seven
reverse stock split.
CONDUCT OF BUSINESS PRIOR TO MERGER
From the date of the execution of the merger agreement until the effective
time, Vista and its subsidiaries and Prize and its subsidiaries are required to
conduct their businesses only in the ordinary course consistent with past
practice. In particular, except as otherwise provided in the merger agreement,
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during this period, Vista may not, without Prize's prior written consent, and
Prize may not, without Vista's prior written consent:
- issue any securities or amend the terms of any of its outstanding
securities;
- merge or consolidate with, or transfer all or substantially all of its
assets to, any other corporation, partnership, or other business entity;
- acquire any corporation, partnership or other business entity, except, in
the case of Prize, having an acquisition price of $500,000 or less;
- sell, lease, transfer or otherwise dispose of any of its assets with a
value of, in the case of Vista, more than $100,000 and, in the case of
Prize, more than $500,000;
- incur indebtedness outside the ordinary course of business or permit to
be outstanding under their respective senior bank credit facilities
indebtedness for borrowed money in excess of, in the case of Vista,
$55,000,000 and, in the case of Prize, $150,000,000;
- resign or voluntarily relinquish any right as operator of any of its oil
and gas interests;
- enter into any employee benefit plan or compensation plan;
- create, incur, assume or permit to exist any lien on any of its assets,
except for permitted encumbrances; or
- increase the compensation payable or modify the employment or severance
agreements with any employee or consultant.
COVENANTS AND AGREEMENTS
SPECIAL MEETINGS. Vista and Prize have agreed to cause the special meetings
of their stockholders to be duly called and held as promptly as practicable for
the purpose of voting on the approval and adoption of the merger agreement and,
in the case of Vista, effecting a reverse stock split, as discussed in this
document.
NO SOLICITATION. In the merger agreement, Vista has agreed that:
- it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations conducted prior to the date of
the merger agreement with respect to any Alternative Proposal, as defined
below; and
- it will not, and will instruct each of its directors, officers,
employees, agents, attorneys, independent accountants, independent
financial advisors and other affiliates not to, solicit, initiate or
knowingly encourage the submission of an Alternative Proposal.
However, the merger agreement does not prohibit:
- Vista from entering into discussions or negotiations with a third party
with respect to an Alternative Proposal and furnishing that third party
information concerning Vista;
- Vista's board from taking and disclosing to the stockholders of Vista a
position with respect to a tender offer by a third party pursuant to Rule
14e-2 under the Securities Exchange Act of 1934; and
- Vista's board from withdrawing or modifying its approval or
recommendation of the merger and the merger agreement;
if the Vista board determines that this action or disclosure is required in
order for the Vista board to act in a manner consistent with its fiduciary
duties to the Vista stockholders.
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The term "Alternative Proposal" means any offer or proposal to acquire all
or any part of the Vista common stock or all or any material portion of the
assets or business of Vista, other than the merger, whether by merger, purchase
of assets, tender offer, exchange offer or otherwise.
INDEMNIFICATION AND INSURANCE OF VISTA OFFICERS AND DIRECTORS. Prize has
agreed that, for six years after the effective time, New Prize will indemnify
and hold harmless the present and former directors, officers and controlling
stockholders of Vista and its subsidiaries against various liabilities. Prize
will indemnify these individuals to the extent provided by the Delaware General
Corporation Law and Vista's certificate of incorporation, bylaws and
indemnification agreements in effect at the effective time. Prize has also
agreed to maintain Vista's officers' and directors' liability insurance policy,
or to purchase a "tail" policy, for a period of at least six years after the
effective time, provided that the aggregate amount of premiums paid for the
insurance during this period do not exceed 200% of the last annual premium paid
by Vista prior to the date that the merger agreement was signed.
SEVERANCE. Under the terms of the merger agreement, after the closing of
the merger, New Prize will promptly pay severance payments due under the New
Prize severance benefit plan. Under the terms of the severance benefit plan, if
New Prize terminates the employment of New Prize employees within six months
after the closing of the merger, each employee so terminated shall receive from
New Prize one month's salary plus an additional month's salary for each year of
service with Vista rounded up to the nearest month.
ADDITIONAL MUTUAL COVENANTS. The merger agreement contains certain mutual
covenants of the parties, including covenants relating to:
- access to information;
- confidential treatment of non-public information;
- preparation of this document;
- the listing on the American Stock Exchange of the New Prize common stock
to be issued in conjunction with the merger;
- agreements of affiliates of Prize regarding restrictions on selling New
Prize common stock;
- public announcements;
- notification of various matters;
- payment of expenses in connection with the merger;
- registration rights for all holders of shares of Prize common stock and
convertible preferred stock and various holders of Vista common stock and
Vista warrants; and
- amendment of Vista's certificate of incorporation to effect a reverse
stock split.
REPRESENTATIONS AND WARRANTIES OF VISTA AND PRIZE
The merger agreement contains substantially reciprocal representations and
warranties of Vista and Prize as to various matters, such as:
- due organization and good standing;
- corporate authorization to enter into the contemplated transaction;
- governmental approvals required in connection with the contemplated
transaction;
- absence of any breach of organizational documents and material agreements
as a result of the contemplated transaction;
- capital structure;
- financial statements;
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- absence of material changes, including changes which would have a
material adverse effect, since June 30, 1999;
- absence of undisclosed material liabilities;
- compliance with laws and court orders;
- governmental regulation;
- litigation;
- tax matters;
- employee matters;
- environmental matters;
- trademarks and other proprietary rights;
- status and operation of oil and gas properties;
- title to assets;
- accounts receivable;
- insurance coverage;
- absence of brokers in connection with the merger;
- hedging; and
- year 2000 issues.
The merger agreement defines the term "material adverse effect" to mean a
result or consequence that:
- would materially adversely affect the financial or other condition,
results of operations or business of Vista and its subsidiaries, in the
aggregate, or Prize and its subsidiaries, in the aggregate, as
applicable, or the aggregate value of their assets;
- would materially impair the ability of Vista and its subsidiaries, in the
aggregate, or Prize and its subsidiaries, in the aggregate, as
applicable, to own, hold, develop or operate their assets; or
- would impair Vista's or Prize's, as applicable, ability to perform its
obligations under the merger agreement or consummate the merger.
The representations and warranties in the merger agreement do not survive
the effective time of the merger.
CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATION OF EACH PARTY. The obligations of Vista and
Prize to consummate the merger are dependent on the satisfaction of the
following conditions:
- the merger agreement shall have been approved by the vote of a majority
of the outstanding common stock of Vista and by a majority of the
outstanding common stock and convertible preferred stock of Prize;
- the receipt of all necessary governmental approvals;
- the absence of any injunction, order or other legal restraint or
prohibition that would prohibit the consummation of the merger;
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- the registration statement to register the shares of New Prize common
stock and New Prize preferred stock to be issued in the merger shall have
been filed by Vista with the Securities and Exchange Commission and been
declared effective and no stop order suspending the effectiveness of the
registration statement shall be in effect and no proceedings for this
purpose shall be pending before or threatened by the Securities and
Exchange Commission;
- the receipt by each of Vista and Prize of accountants' letters regarding
financial matters of each company; and
- the shares of New Prize common stock to be issued in the merger shall
have been approved for listing on the American Stock Exchange, subject to
official notice of issuance.
Neither Vista nor Prize is aware of any governmental or regulatory filings
or approval required in connection with the merger, other than compliance with
applicable securities laws.
CONDITIONS TO THE OBLIGATION OF VISTA. The obligation of Vista to
consummate the merger is further subject to the satisfaction of the following
conditions:
- Prize shall have performed in all material respects the obligations
required to be performed by it at or prior to the effective time and each
of Prize's representations and warranties contained in the merger
agreement shall be true and correct in all material respects as of the
effective time as if made at that time;
- Vista shall have received a letter from some of Prize's stockholders
regarding restrictions on sales of Vista securities;
- the absence of any change in the business or operations of Prize or any
of its subsidiaries that would have a material adverse effect on Prize;
- Vista shall have received an opinion from Dain Rauscher Wessels to the
effect that the merger is fair to Vista and its stockholders from a
financial point of view and the opinion shall not have been withdrawn,
revoked or modified; and
- Vista shall have received an opinion from Conners & Winters, A
Professional Corporation, covering various corporate matters about Prize.
CONDITIONS TO THE OBLIGATION OF PRIZE. The obligation of Prize to
consummate the merger is further subject to the satisfaction of the following
conditions:
- Vista shall have performed in all material respects the obligations
required to be performed by it at or prior to the effective time and each
of Vista's representations and warranties contained in the merger
agreement shall be true and correct in all material respects as of the
effective time as if made at that time;
- Prize shall have received an opinion from Conner & Winters, A
Professional Corporation, that
-- the merger shall constitute a reorganization under Section 368(a) of
the Internal Revenue Code,
-- Vista, Prize and the Vista subsidiary that will merge into Prize will
each be a party to that reorganization,
-- no gain or loss will be recognized by Vista, Prize or the Vista
subsidiary by reason of the merger, and
-- no gain or loss will be recognized by holders of Prize common stock or
convertible preferred stock by reason of the merger upon the conversion
of shares of Prize common stock into New Prize common stock or Prize
convertible preferred stock into New Prize convertible preferred stock,
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and the opinion shall not have been withdrawn, revoked or modified;
- the absence of any change in the business or operations of Vista or any
of its subsidiaries that would have a material adverse effect on Vista;
- except as otherwise designated by Prize, Prize shall have received the
written resignations, effective as of the closing date, of all officers
and some members of the boards of directors of Vista and all of its
subsidiaries;
- Vista, Natural Gas Partners II, L.P., Natural Gas Partners III, L.P. and
the most senior executive officers of Vista shall have executed and
delivered the registration rights agreement;
- Vista shall have delivered to its transfer agent a letter of instruction
authorizing the issuance of certificates representing New Prize
securities to Prize stockholders;
- Prize shall have received an opinion from Vinson & Elkins L.L.P. covering
various corporate matters about Vista;
- Vista shall have assumed the obligations of Prize under the joint
participation agreement;
- Vista shall have executed and delivered the voting and shareholders
agreement; and
- Vista shall have amended its bylaws to reflect provisions substantially
the same as the Prize bylaws.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the effective
time, whether before or after approval by the stockholders of Vista and Prize:
- by the mutual written consent of Vista and Prize;
- by either Vista or Prize, if the merger has not been consummated by
February 29, 2000;
- by either Vista or Prize, if any final and non-appealable order, decree,
ruling or other action enjoining any party from consummating the merger
shall have been entered by any governmental authority;
- by either Vista or Prize, if the requisite stockholder approval is not
obtained by a vote at duly held meetings of Vista stockholders and Prize
stockholders, as the case may be, or at any adjournment or postponement
thereof;
- by Vista, if Prize is in material breach of the merger agreement and the
breach is not cured in all material respects within 10 days after notice
of the breach;
- by Prize, if Vista is in material breach of the merger agreement and the
breach is not cured in all material respects within 10 days after notice
of the breach;
- by Vista, if Vista is prepared to accept a bona fide written acquisition
proposal which the board of directors of Vista concludes in good faith is
a superior acquisition proposal; or
- by Prize, if the board of directors of Vista amends or withdraws its
recommendation of the merger agreement or the merger and does not
reinstate its recommendation within five business days after the
amendment or withdrawal.
If the merger agreement is validly terminated, only provisions related to
the following will survive:
- confidentiality;
- termination fee and expenses;
- information supplied for use in this document;
- public announcements;
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- payment of expenses;
- notices; and
- governing law.
The confidentiality agreement entered into between Vista and Prize on
September 14, 1999, will continue in effect despite termination of the merger
agreement.
TERMINATION FEE AND EXPENSES
If the merger agreement is terminated by Vista in order to accept a
superior acquisition proposal, then Vista shall pay to Prize $400,000 as a
non-accountable reimbursement to Prize for its out-of-pocket fees, costs and
expenses and an additional fee equal to $1,100,000.
MERGER EXPENSES
The merger agreement provides that all expenses incurred by the parties to
the merger agreement shall be borne solely and entirely by the party that has
incurred the expenses. Vista will pay all costs and expenses in connection with
the printing of this document, as well as all Securities and Exchange Commission
filing fees and fees to comply with applicable state securities or "blue sky"
laws related to the transactions contemplated by the merger agreement. The costs
and expenses associated with mailing this document to Vista stockholders and the
soliciting of votes of Vista stockholders will be paid by Vista. The costs and
expenses associated with mailing this document to Prize stockholders and the
soliciting of votes of Prize stockholders will be paid by Prize.
AMENDMENTS
The merger agreement may be amended only by written agreement of Vista and
Prize at any time before the effective time. However, after the required Vista
or Prize stockholder approval, no amendment may be made to the merger agreement
that by law requires further approval by the stockholders of Vista or Prize
without obtaining that further stockholder approval.
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OWNERSHIP OF VISTA, PRIZE AND NEW PRIZE STOCK
The following table sets forth:
- as of the date of this document, the number and percentage of the
outstanding shares of Vista common stock that are beneficially owned by
the directors and executive officers of Vista, as well as by each person
or entity known by Vista to beneficially own more than 5% of the Vista
common stock;
- as of the date of this document, the number and percentage of the
outstanding shares of Prize common stock and convertible preferred stock
that are beneficially owned by the directors and executive officers of
Prize, as well as by each person or entity known by Prize to beneficially
own more than 5% of the Prize common stock or convertible preferred
stock; and
- the number and percentage of the outstanding shares of New Prize's common
stock and convertible preferred stock that will be owned by all of these
persons after the merger.
Shares of common stock which were not outstanding but which could be
acquired by a person upon exercise of an option or warrant or conversion of
preferred stock within 60 days of the date of this document or the effective
time of the merger, as applicable, are deemed outstanding for the purpose of
computing the percentage of outstanding shares of common stock beneficially
owned by that person. These shares, however, are not deemed to be outstanding
for the purpose of computing the percentage of outstanding shares of common
stock beneficially owned by any other person.
The column showing the number of shares of New Prize securities
beneficially owned reflects a one-for-seven reverse stock split to be effective
immediately before closing of the merger, and, with respect to the Prize
stockholders, is based on the number of outstanding shares of Prize common and
convertible preferred stock and Vista common stock as of the date of this
document and assumes the merger closes on February 8, 2000.
Except as otherwise indicated below, Vista or Prize, as applicable,
respectively believes that each individual or entity named has sole investment
and voting power with respect to shares of stock indicated as beneficially owned
by them.
<TABLE>
<CAPTION>
SHARES OF VISTA SHARES OF PRIZE SHARES OF NEW PRIZE
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
----------------------------- ---------------------------- -----------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK:
Vista
Natural Gas Partners II, L.P.
777 Main Street, Suite 2250,
Fort Worth, Texas 76102........... 6,158,726(1) 32.51% N/A N/A 879,818(1) 8.00%
Natural Gas Partners III, L.P.
777 Main Street, Suite 2250,
Fort Worth, Texas 76102........... 8,417,569(2) 42.32% N/A N/A 1,202,510(2) 10.80%
C. Randall Hill
550 West Texas Avenue, Suite 700,
Midland, Texas 79701.............. 1,492,118(3) 8.78% N/A N/A 213,160(3) 1.99%
Steven D. Gray
550 West Texas Avenue, Suite 700,
Midland, Texas 79701.............. 1,492,118(4) 8.78% N/A N/A 213,160(4) 1.99%
R. Cory Richards
550 West Texas Avenue, Suite 700,
Midland, Texas 79701.............. 823,083(5) 4.92% N/A N/A 117,584(5) 1.10%
Kenneth A. Hersh
777 Main Street, Suite 2250,
Fort Worth, Texas 76102........... 14,616,195(6) 65.06% N/A N/A 9,414,849(7) 81.86%
David R. Albin
100 N. Guadalupe, Suite 205,
Santa Fe, New Mexico 87501........ 14,576,295(6) 64.88% N/A N/A 9,409,149(7) 81.81%
</TABLE>
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<TABLE>
<CAPTION>
SHARES OF VISTA SHARES OF PRIZE SHARES OF NEW PRIZE
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
----------------------------- ---------------------------- -----------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John S. Foster
500 West Putnam Avenue, 4th Floor,
Greenwich, Connecticut 06830....... 14,576,295(6) 64.88% N/A N/A 2,082,328(7) 18.11%
John Q. Adams
2350 Airport Freeway, Suite 280,
Bedford, Texas 76022.............. 362,275(8) 2.20% N/A N/A 51,754(8) 0.49%
All executive officers and
directors as a group (7
persons).......................... 18,785,789(9) 77.59% N/A N/A 10,014,768(10) 85.23%
Prize
Natural Gas Partners V, L.P.
777 Main Street, Suite 2250,
Fort Worth, Texas 76102........... N/A N/A 4,400.000 88.37% 7,326,821 68.93%
Philip B. Smith
20 E. 5th Street, Suite 1400,
Tulsa, Oklahoma 74103............. N/A N/A 1,097.355(11)(12) 19.78% 1,827,301(11)(12) 15.79%
Lon C. Kile
3500 William D. Tate, Suite 200,
Grapevine, Texas 76051............ N/A N/A 346.707(13) 6.54% 577,618(13) 5.17%
David R. Massengill................ N/A N/A 160.854(14) 3.13% 267,852(14) 2.46%
Kenneth A. Hersh
777 Main Street, Suite 2250,
Fort Worth, Texas 76102........... N/A N/A 4,400.000(15) 88.37% 9,414,849(7) 81.86%
David R. Albin
100 N. Guadalupe, Suite 205,
Santa Fe, New Mexico 87501........ N/A N/A 4,400.000(15) 88.37% 9,409,149(7) 81.81%
Scott D. Sheffield
1400 Williams Square West,
5205 N. O'Connor Boulevard,
Irving, Texas 75039............... N/A N/A --(16) -- --(16) --
Mark L. Withrow
1400 Williams Square West,
5205 N. O'Connor Boulevard,
Irving, Texas 75039............... N/A N/A --(16) -- --(16) --
All executive officers and
directors as a group (7
persons).......................... N/A N/A 6,004.916(12) 99.58% 12,087,620(12)(16) 91.22%
(16)(17) (18)(19)
Pioneer Natural Resources USA, Inc.
1400 Williams Square West,
5205 N. O'Connor Boulevard,
Irving, Texas 75039............... N/A N/A 2,377.443(20) 32.32% 3,984,197(20) 27.26%
SERIES A 6% CONVERTIBLE PREFERRED
STOCK:
Pioneer Natural Resources USA, Inc.
1400 Williams Square West,
5205 N. O'Connor Boulevard,
Irving, Texas 75039............... N/A N/A 2,377.443(21) 100.00% 3,984,197 100.00%
</TABLE>
- ---------------
(1) Includes 2,576,760 shares, after the reverse stock split 368,109 shares,
issuable upon exercise of stock warrants currently exercisable at an
exercise price of $4.00 per share, after the merger $28.00 per share.
(2) Includes 3,521,841 shares, after the reverse stock split 503,120 shares,
issuable upon exercise of stock warrants currently exercisable at an
exercise price of $4.00 per share, after the merger $28.00 per share.
(3) Includes 632,838 shares, after the reverse stock split 90,405 shares,
issuable upon exercise of stock warrants currently exercisable at an
exercise price of $4.00 per share, after the merger $28.00 per share.
(4) Includes 632,838 shares, after the reverse stock split 90,405 shares,
issuable upon exercise of stock warrants currently exercisable at an
exercise price of $4.00 per share, after the merger $28.00 per share.
102
<PAGE> 111
(5) Includes 352,919 shares, after the reverse stock split 50,417 shares,
issuable upon exercise of stock warrants currently exercisable at an
exercise price of $4.00 per share, after the merger $28.00 per share.
(6) Includes, as to Mr. Hersh, and represents, as to Messrs. Albin and Foster,
shares of Vista common stock beneficially owned by Natural Gas Partners II,
L.P. and Natural Gas Partners III, L.P. Messrs. Hersh, Albin and Foster
serve as directors of Vista and constitute three of the four managing
members of each entity that serves as the ultimate general partner of
Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P., and they
own interests in these Natural Gas Partners partnerships. Accordingly, they
may be deemed to beneficially own, or otherwise control, the voting of all
or some portion of the shares of Vista common stock owned by Natural Gas
Partners II, L.P. and Natural Gas Partners III, L.P. Messrs. Hersh, Albin
and Foster disclaim beneficial ownership of the common stock of Vista owned
by Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
(7) Includes, as to Mr. Hersh, and represents as to Messrs. Albin and Foster,
shares of New Prize common stock beneficially owned by Natural Gas Partners
II, L.P. and Natural Gas Partners III, L.P. and, as to Messrs. Hersh and
Albin, Natural Gas Partners V, L.P. Messrs. Hersh, Albin and Foster serve
as directors of Vista and constitute three of the four managing members of
each entity that serves as the ultimate general partner of Natural Gas
Partners II, L.P. and Natural Gas Partners III, L.P. Messrs. Hersh and
Albin, who will serve as directors of New Prize, constitute a majority of
the managing members of the entity that serves as the ultimate general
partner of Natural Gas Partners V, L.P. They also own interests in these
Natural Gas Partners partnerships. Accordingly, they may be deemed to
beneficially own, or otherwise control, the voting of all or some portion
of the shares of common stock of New Prize owned by Natural Gas Partners
II, L.P. and Natural Gas Partners III, L.P. and, as to Messrs. Hersh and
Albin, Natural Gas Partners V, L.P. Messrs. Hersh, Albin and Foster
disclaim beneficial ownership of these shares.
(8) Includes 126,875 shares, after the reverse stock split 18,125 shares,
issuable upon exercise of stock warrants currently exercisable at an
exercise price of $4.00 per share, after the merger $28.00 per share.
(9) Includes 1,745,470 shares, after the reverse stock split 249,353 shares,
issuable upon exercise of stock warrants held by Messrs. Hill, Gray,
Richards and Adams currently exercisable at an exercise price of $4.00 per
share, after the merger $28.00 per share. Also includes shares of Vista
common stock beneficially owned by Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P. Messrs. Hersh, Albin and Foster disclaim
beneficial ownership of the common stock of Vista beneficially owned by
Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
(10) Includes 249,353 shares, after the reverse stock split, issuable upon
exercise of stock warrants held by Messrs. Hill, Gray, Richards and Adams
currently exercisable at an exercise price of $28.00 per share, after the
merger. Also includes shares of New Prize common stock beneficially owned
by Natural Gas Partners II, L.P., Natural Gas Partners III, L.P. and
Natural Gas Partners V, L.P. Messrs. Hersh, Albin and Foster disclaim
beneficial ownership of the common stock of New Prize beneficially owned by
Natural Gas Partners II, L.P., Natural Gas Partners III, L.P. and Natural
Gas Partners V, L.P.
(11) Includes 568.417 shares issuable upon exercise of stock options which are
exercisable within 60 days of the date of this document at an exercise
price of $13,053 per share, after the merger 946,520 shares issuable upon
exercise of stock options then currently exercisable at an exercise price
of $7.84 per share.
(12) Includes (a) 50.525 shares, after the merger 84,134 shares, held by the
Scott C. Smith Irrevocable Trust, of which Mr. Smith is the trustee, and
(b) 50.525 shares, after the merger 84,134 shares, held by the Laura E.
Smith Irrevocable Trust, of which Mr. Smith is the trustee. Mr. Smith has
sole voting power with respect to all of the shares shown in the table and
sole investment power with respect to 883.411 of these shares, after the
merger 1,471,044 of these shares.
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<PAGE> 112
(13) Includes 321.707 shares issuable upon exercise of stock options which are
exercisable within 60 days of the date of this document at an exercise
price of $13,053 per share, after the merger 535,702 shares issuable upon
exercise of stock options then currently exercisable at an exercise price
of $7.84 per share.
(14) Represents shares issuable upon exercise of stock options which are
exercisable within 60 days of the date of this document at an exercise
price of $13,053 per share, after the merger 267,852 shares issuable upon
exercise of stock options then currently exercisable at an exercise price
of $7.84 per share.
(15) Represents shares of Prize common stock beneficially owned by Natural Gas
Partners V, L.P. Messrs. Hersh and Albin constitute two of the three
managing members of the entity that serves as the ultimate general partner
of Natural Gas Partners V, L.P., and own interests in this partnership.
Accordingly, they may be deemed to beneficially own, or otherwise control,
the voting of all or some portion of the shares of common stock of Prize
beneficially owned by Natural Gas Partners V, L.P. Messrs. Hersh and Albin
disclaim beneficial ownership of these shares.
(16) Does not include shares of convertible preferred stock of Prize or New
Prize, as applicable, which are currently convertible, at the option of the
holder, into shares of common stock of Prize or New Prize, as applicable,
owned by Pioneer Natural Resources USA, Inc., a wholly-owned subsidiary of
Pioneer Natural Resources Company. Mr. Sheffield is a director and
executive officer of, and Mr. Withrow is an executive officer of, Pioneer
Natural Resources Company. Messrs. Sheffield and Withrow disclaim
beneficial ownership of these shares.
(17) Includes 1,050.978 shares issuable upon exercise of stock options which are
exercisable within 60 days of the date of this document at an exercise
price of $13,053 per share, after the merger 1,750,074 shares issuable upon
exercise of stock options then currently exercisable at an exercise price
of $7.84 per share. Also includes shares of Prize common stock beneficially
owned by Natural Gas Partners V, L.P. Messrs. Hersh and Albin disclaim
beneficial ownership of the common stock of Prize beneficially owned by
Natural Gas Partners V, L.P.
(18) Includes, after the merger, 1,750,074 shares issuable upon exercise of
stock options then currently exercisable at an exercise price of $7.84 per
share. Also includes shares of New Prize common stock beneficially owned by
Natural Gas Partners II, L.P., Natural Gas Partners III, L.P. and Natural
Gas Partners V, L.P. Messrs. Hersh and Albin disclaim beneficial ownership
of the common stock of New Prize beneficially owned by Natural Gas Partners
II, L.P., Natural Gas Partners III, L.P. and Natural Gas Partners V, L.P.
(19) Includes all New Prize officers and directors as a group consisting of 7
persons.
(20) Represents shares issuable upon conversion of convertible preferred stock
of Prize or New Prize, as applicable, which is currently convertible at the
option of the holder.
(21) Does not include the additional shares of convertible preferred stock
accrued as a dividend on the outstanding shares of convertible preferred
stock since December 31, 1999, the most recent date of payment of a
dividend. Dividends accrue at the rate of 6% per annum of the stated value,
which is currently $13,000, of a share of convertible preferred stock and
are currently payable by issuance of additional shares of Prize convertible
preferred stock.
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<PAGE> 113
COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
The rights of Vista stockholders are currently governed by the Delaware
General Corporation Law and the certificate of incorporation and bylaws of
Vista. The rights of Prize stockholders are currently governed by the Delaware
General Corporation Law and the certificate of incorporation and bylaws of
Prize. In connection with the merger, the Vista certificate of incorporation is
being amended to effect a one-for-seven reverse stock split and a name change to
"Prize Energy Corp." The following is a summary of the material differences
between the current rights of Prize stockholders and those of Vista
stockholders.
The following summary of the material differences among the Vista
certificate of incorporation, the Vista bylaws, the Prize certificate of
incorporation and the Prize bylaws may not contain all the information that is
important to you. To review all provisions and differences of these documents in
full detail, please read the full text of these documents and the Delaware
General Corporation Law. Copies of the Vista certificate of incorporation, Vista
bylaws, Prize certificate of incorporation and Prize bylaws will be sent to
holders of shares of Vista common stock, Prize common stock and Prize
convertible preferred stock upon request. For information on how these documents
may be obtained, see "Where You Can Find More Information" on page 116.
SUMMARY COMPARISON OF TERMS OF VISTA SECURITIES AND PRIZE SECURITIES
On completion of the merger, the rights of Vista stockholders and of Prize
stockholders who become New Prize stockholders in the merger will be governed by
the Delaware General Corporation Law and the Vista certificate of incorporation.
Immediately after the merger is completed, the New Prize board of directors will
replace the Vista bylaws with bylaws that are substantially the same as the
Prize bylaws.
AUTHORIZED CAPITAL STOCK; AMENDMENT OF CERTIFICATE OF INCORPORATION
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
Concurrently with consummation of the merger, The Prize certificate of incorporation is not
the Vista certificate of incorporation will being amended as part of the merger.
be amended to effect a one-for-seven reverse
stock split with respect to all then
outstanding shares of Vista common stock.
The authorized capital stock of Vista The authorized capital stock of Prize
consists of 50,000,000 shares of common stock consists of 20,000 shares of common stock and
and 10,000,000 shares of preferred stock. 10,000 shares of convertible preferred stock.
</TABLE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
Number of Directors. The Vista certificate of Number of Directors. The Prize certificate of
incorporation provides that the number of incorporation provides that the number of
directors shall be not fewer than two or more directors shall not be fewer than three or
than 21, as determined from time to time by more than seven, as determined from time to
the board. The Vista board set the current time by the board. The Prize board set the
number of directors at six. current number of directors at six.
Classification. The Vista bylaws do not Classification. The Prize bylaws do not
provide for a classified board; all directors provide for a classified board; all directors
are elected annually. are elected annually.
</TABLE>
105
<PAGE> 114
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
Quorum. A quorum consisting of a majority of Quorum. A quorum consisting of a majority of
the total number of Vista directors then in the total number of Prize directors then in
office is required for the transaction of office is required for the transaction of
business at a meeting of the Vista board. business at a meeting of the Prize board.
Special Board Authorization for Certain Special Board Authorization for Certain
Matters. The Vista bylaws contain no Matters. An affirmative vote of at least a
provisions of this type. majority of all directors then serving on the
board is required for the following actions:
- approve and implement annual budgets;
- approve, agree, grant or otherwise make
arrangements for any payment or grant of
annual compensation or benefits to officers
or other executive employees of Prize;
- make any expenditure which exceeds five
percent of the amount set forth in the
appropriate line item in the approved
budget;
- approve capital projects and acquisitions;
- authorize or permit any amendment or
modification to any agreement pertaining to
debt;
- approve, agree or consent to any agreement
or transaction that would result in a
fundamental change in Prize;
- issue or repurchase any capital stock or
other similar equity interest in Prize;
- create additional subsidiaries or make
additional contributions to subsidiaries;
- approve dispositions of assets; and
- enter into any hedging transactions.
An affirmative vote of 70% of all directors
then serving on the board of Prize is
required for the following actions:
- approve, agree or consent to any agreement
or transaction resulting in a merger,
consolidation, liquidation, dissolution or
disposition of properties having a value of
$100 million or more;
- incur, create or suffer to exist any debt
or any liens other than permitted debt and
permitted liens;
- enter into any transaction with any
affiliate or employee unless in the ordinary
course of business and upon fair and
reasonable terms;
- pay any dividends on shares of Prize common
stock while any shares of Prize preferred
stock remain outstanding; and
</TABLE>
106
<PAGE> 115
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
- increase or decrease the number of
authorized shares of Prize preferred stock or
alter the powers, preferences or special
rights of Prize preferred stock.
No Cumulative Voting. Neither the Vista No Cumulative Voting. Neither the Prize
certificate of incorporation nor the Vista certificate of incorporation nor the Prize
bylaws provide for cumulative voting for the bylaws provide for cumulative voting for the
election of directors. election of directors.
Vacancies. Vacancies on the Vista board may Vacancies. Vacancies on the Prize board may
be filled by at least a majority of the be filled by a majority of the directors then
remaining directors then in office for a term in office for a term of office continuing
of office continuing only until the next until the next annual meeting of stockholders
election of one or more directors by and until their successors are duly elected,
stockholders or by election at an annual or unless sooner displaced.
special meeting of stockholders called for
that purpose.
Removal of Directors. A majority of the Removal of Directors. The Prize bylaws do not
stockholders entitled to vote at an election address the removal of directors.
of directors may remove a director only for
cause.
</TABLE>
ADJOURNMENT OF STOCKHOLDER MEETINGS
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
The Vista bylaws provide that if a quorum, The Prize bylaws provide that if a quorum,
consisting of a majority, is not present, in consisting of a majority, is not present, in
person or by proxy, a majority of the person or by proxy, a majority of the
stockholders present may adjourn the meeting stockholders present may adjourn the meeting
to another time and place. If a quorum is to another time and place. If a quorum is
present at the adjourned meeting, any present at the adjourned meeting, any
business may be transacted that might have business may be transacted that might have
been transacted at the meeting as originally been transacted at the meeting as originally
convened. convened.
</TABLE>
SPECIAL MEETINGS OF STOCKHOLDERS
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
The Vista bylaws provide that special The Prize bylaws provide that special
meetings of the stockholders may be called meetings of the stockholders may be called by
only by the Vista board. the chairman of the board and shall be called
by the chairman of the board, president or
secretary at the request in writing of a
majority of the board of directors or at the
request in writing of stockholders owning a
majority of the entire capital stock of Prize
entitled to vote.
</TABLE>
107
<PAGE> 116
STOCKHOLDER CONSENT IN LIEU OF MEETING
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
Stockholder action required or permitted to Stockholder action required or permitted to
be taken at an annual or a special meeting of be taken at an annual or special meeting of
the stockholders may be taken by written the stockholders may be taken by written
consent if the consent is signed by the consent if the consent is signed by the
holders of outstanding stock having not less holders of outstanding stock having not less
than the minimum number of votes that would than the minimum number of votes that would
be necessary to take this action at a meeting be necessary to take this action at a meeting
at which the holders of all shares entitled at which the holders of all shares entitled
to vote on the action were present and voted. to vote on the action were present and voted.
</TABLE>
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
Certificate of Incorporation. An amendment to Certificate of Incorporation. An amendment to
Vista's certificate of incorporation requires Prize's certificate of incorporation is
the approval of a majority of Vista's board permitted upon the approval of a majority of
of directors and the approval of the holders Prize's board of directors and the approval
of a majority of the voting power of the then of the holders of a majority of the voting
outstanding capital stock of Vista. power of the then outstanding capital stock
of Prize.
Bylaws. Vista's bylaws may be amended or Bylaws. The provisions in Prize's bylaws
repealed by a majority of the directors relating to the special authorization
present at a meeting at which a quorum is requirements and amendment of the bylaws may
present. If the certificate of incorporation be amended only by the affirmative vote of at
or bylaws require a specific bylaw to be least 70% of all directors then serving on
amended by stockholders, the amendment the board of directors or by the unanimous
requires the vote of at least a majority of written consent of all the directors. All
the outstanding shares entitled to vote. other provisions in Prize's bylaws may be
amended by the affirmative vote of a majority
of the directors then serving on the board of
directors or by unanimous written consent of
all the directors unless a statute or Prize's
certificate of incorporation require a
specific bylaw to be amended by the
stockholders or the stockholders, in
amending, expressly provide that the board of
directors may not amend the specific bylaw.
</TABLE>
REMOVAL OF OFFICERS
<TABLE>
<CAPTION>
VISTA PRIZE
<S> <C>
Vista's bylaws permit the removal of any Prize's bylaws permit the removal of any
officer at any time by the Vista board, with officer at any time, with or without cause,
or without cause, if in the board's judgment by the board of directors.
the removal is in the best interests of
Vista.
</TABLE>
108
<PAGE> 117
DESCRIPTION OF VISTA CAPITAL STOCK
The following section is a summary of the material terms of the Vista
certificate of incorporation concerning capital stock of Vista. Copies of the
Vista certificate of incorporation, Vista bylaws, Prize certificate of
incorporation and Prize bylaws will be sent to holders of shares of Vista common
stock, Prize common stock and Prize convertible preferred stock upon request.
See "Where You Can Find More Information" on page 116. For a comparison of
material provisions of the Vista certificate of incorporation and the Prize
certificate of incorporation and the Vista bylaws and the Prize bylaws, see
"Comparison of Stockholder Rights" on page 105.
AUTHORIZED CAPITAL STOCK
Under the Vista certificate of incorporation, Vista's authorized capital
stock consists of 50,000,000 shares of Vista common stock, par value $.01 per
share, and 10,000,000 shares of Vista preferred stock, par value $.01 per share.
In connection with the merger, the Vista certificate of incorporation is being
amended to effect a one-for-seven reverse stock split with respect to all then
outstanding shares of Vista common stock.
COMMON STOCK
The holders of Vista common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding Vista preferred stock,
holders of Vista common stock are entitled to receive ratably dividends as they
may be declared by the Vista board out of funds legally available for dividends.
In the event of a liquidation or dissolution of Vista, holders of Vista common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Vista preferred
stock.
Holders of Vista common stock have no preemptive rights and have no rights
to convert their Vista common stock into any other securities. All of the
outstanding shares of Vista common stock are, and the shares of Vista common
stock issued in the merger will be, duly authorized, validly issued, fully paid
and nonassessable.
SERIES A 6% CONVERTIBLE PREFERRED STOCK
GENERAL
The summary of terms and provisions of the convertible preferred stock set
forth below addresses the material terms and provisions of Vista's certificate
of designation, voting powers and rights governing the convertible preferred
stock. A copy of the Vista certificate of designation has been filed as an
exhibit to the registration statement of which this document forms a part.
When issued, the shares of convertible preferred stock will be validly
issued, fully paid, and nonassessable. The transfer agent, registrar and
dividend disbursing agent for the convertible preferred stock is American Stock
Transfer & Trust Company.
RANKING
No senior securities or parity securities will be outstanding or authorized
on the date that the shares of convertible preferred stock are originally
issued. The shares of convertible preferred stock shall be senior to the shares
of Vista common stock with respect to payments of dividends and distributions or
upon liquidation, dissolution or winding up of Vista.
DIVIDENDS
Holders of shares of convertible preferred stock will be entitled to
receive, when and as declared by Vista, out of funds legally available for the
payment of dividends, cumulative preferential dividends at the
109
<PAGE> 118
rate of 6% of the liquidation preference per annum per share. The dividends will
be cumulative and payable quarterly, in arrears, on the last business day of
each December, March, June and September, commencing with the next date
following completion of the merger. Dividends shall also be payable on any
redemption date and on the final distribution date relating to the dissolution,
liquidation or winding up of Vista. The dividends payable on the convertible
preferred stock will be computed by applying the dividend rate from but
excluding the immediately preceding dividend payment date, or from but excluding
the date of issuance of shares of convertible preferred stock, with respect to
the first dividend period, to and including the current dividend payment date.
Dividends will be payable to holders of record as they appear on the books of
Vista at the close of business on the 10th business day immediately preceding
the respective dividend payment date, or on any other record date as may be
fixed by the board of directors. However, no record date shall be less than 10
nor more than 60 calendar days preceding the dividend payment date.
Dividends on convertible preferred stock will accrue whether or not Vista
has profits, surplus or other funds legally available for the payment of
dividends. Dividends on convertible preferred stock shall be payable-in-kind by
an issuance of that number of additional shares of convertible preferred stock
that has an aggregate stated value equal to the dollar amount of the dividend
then payable, rounded to the nearest whole share, during the period beginning on
the original issue date and ending on the earlier of:
- the dividend payment date on December 31, 2001; or
- the liquidation, dissolution or winding up of Vista.
After this period, dividends on the shares of convertible preferred stock
shall be payable-in-kind or, at Vista's option, payable in cash.
Except as provided in the next sentence, so long as any shares of
convertible preferred stock are outstanding, no dividends shall be declared or
paid, or set apart for payment, on any shares ranking on a parity with the
convertible preferred stock unless full cumulative dividends on all outstanding
shares of convertible preferred stock and any parity securities have been or
contemporaneously are declared and paid for all dividend periods terminating on
or prior to the date set for payment of the dividend. If accrued dividends on
the convertible preferred stock and any parity securities have not been paid in
full, then any dividend declared on the convertible preferred stock and on any
shares ranking on a parity with the convertible preferred stock for any dividend
period will be declared ratably in proportion to accrued and unpaid dividends on
the convertible preferred stock and the shares ranking on a parity with the
convertible preferred stock.
So long as any shares of convertible preferred stock are outstanding, no
shares of convertible preferred stock or any parity securities shall be
redeemed, purchased or otherwise acquired for any consideration by Vista unless
the full cumulative dividends on all outstanding shares of convertible preferred
stock shall have been or contemporaneously are declared and paid for all
dividend periods terminating on or prior to the date on which the redemption,
purchase or other payment is to occur.
So long as any shares of convertible preferred stock are outstanding, Vista
will not:
- declare, pay or set apart for payment any dividend or other distribution
with respect to any shares of common stock or any other series of stock
issued by Vista ranking junior to the convertible preferred stock, or
- redeem, purchase or otherwise acquire for any consideration any shares
ranking junior to the shares of convertible preferred stock,
unless full cumulative dividends on all outstanding shares of convertible
preferred stock and any parity securities have been or contemporaneously are
declared and paid for all dividend periods terminating on or prior to the date
set for payment of the dividend.
110
<PAGE> 119
So long as any shares of convertible preferred stock are outstanding, Vista
will not:
- declare, pay or set apart for payment any dividend or other distribution
of cash or debt with respect to any junior securities;
- redeem, purchase or otherwise acquire for any cash or debt consideration
any shares ranking junior to the shares of convertible preferred stock,
or
- declare, pay or set apart for payment any dividend or distribution of
cash or debt with respect to any parity securities,
unless full cumulative dividends on all outstanding shares of convertible
preferred stock have been or contemporaneously are declared and paid in cash for
all dividend periods terminating on or prior to the date set for payment of the
dividend or distribution.
So long as any shares of convertible preferred stock are outstanding, Vista
will not redeem, purchase or otherwise acquire for any cash or debt
consideration any parity securities unless the convertible preferred stock shall
have been called for redemption, as provided below, and the full redemption
price shall have been or contemporaneously is paid in cash on or prior to the
date set for payment of the dividend or distribution.
COVENANTS AND RESTRICTIONS
So long as any shares of convertible preferred stock are outstanding:
- Vista shall at all times reserve and keep available for issuance the
number of authorized but unissued shares of Vista common stock as will be
sufficient to permit the conversion of all outstanding shares of
convertible preferred stock into shares of common stock;
- all shares of Vista common stock that may be issued upon exercise of the
conversion rights of shares of convertible preferred stock will, upon
issuance, be duly authorized, validly issued, fully-paid and
nonassessable;
- prior to the delivery of any securities which Vista shall be obligated to
deliver upon payment of dividends payable-in-kind or conversion of the
convertible preferred stock, Vista will endeavor to comply with all
federal and state securities laws and regulations; and
- Vista shall pay all taxes and other governmental charges, other than
income or franchise taxes, documentary stamp or similar issue or transfer
taxes that may be imposed with respect to the issue or delivery of the
convertible preferred stock or shares of common stock upon conversion of
the convertible preferred stock.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
Vista, before any payment or distribution of the assets of Vista shall be made
to or set apart for the holders of shares ranking junior to the shares of
convertible preferred stock, the holders of the shares of convertible preferred
stock shall be entitled to receive an amount in cash equal to $30 million in the
aggregate. Additionally, the holders shall be entitled to an amount in cash
equal to the full cumulative dividends accrued and unpaid up to the date of
payment, whether or not declared. If upon any liquidation, dissolution or
winding up of Vista, the assets of Vista, or proceeds, distributable among the
holders of the shares of convertible preferred stock are insufficient to pay in
full the amount payable upon liquidation with respect to the shares of
convertible preferred stock and any other shares ranking on a parity with the
convertible preferred stock, then the assets, or the proceeds from the assets,
will be distributed ratably among the holders mentioned above.
A consolidation or merger of Vista with another entity, or a sale, lease
exchange or transfer of all or any substantial part of Vista's assets for cash,
securities or other property will not be considered a liquidation, dissolution
or winding up, voluntary or involuntary, of Vista. After payment of the full
amount
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<PAGE> 120
of the liquidation preference to which the holders of shares of convertible
preferred stock are entitled, the holders will not be entitled to any further
participation in any distribution of assets of Vista.
REDEMPTION
Vista, at its option, may redeem outstanding shares of convertible
preferred stock, in whole or in part, on any business day if both:
- the average of the closing prices of Vista's common stock during any
period of at least 30 consecutive trading days during the preceding 60
trading days have exceeded 120% of the conversion price per share of
common stock into which the convertible preferred stock is convertible;
and
- the closing price per share of Vista's common stock on the trading day
immediately preceding the day on which such notice is given shall have
equaled or exceeded 110% of the conversion price per share of common
stock into which the convertible preferred stock is convertible.
The redemption price for the convertible preferred stock shall be equal to
$30 million in the aggregate, plus an amount equal to the aggregate dollar
amount of all accrued and unpaid dividends through the redemption date. The
redemption price shall be paid in cash from any source of funds legally
available.
Notice of redemption will be mailed at least 60 days but not more than 75
days before the redemption date to each holder of record of shares of
convertible preferred stock at the address shown on the books of Vista. Each
notice shall state:
- the redemption date;
- the redemption price;
- the conversion price;
- the place or places where certificates for shares of convertible
preferred stock are to be surrendered for payment of the redemption
price;
- that dividends on the shares of convertible preferred stock will cease to
accrue on the redemption date; and
- that the rights of holders to convert shares of convertible preferred
stock will terminate at the close of business on the business day
immediately preceding the redemption date unless Vista defaults in the
payment of the redemption price.
If the redemption is delayed for any reason, dividends shall continue to
accrue on the shares of convertible preferred stock and shall be added to and
become a part of the redemption price of the shares until the redemption price,
as adjusted, is paid in full.
If notice of redemption has been given and any holder of the convertible
preferred stock shall, before the close of business on the business day
immediately preceding the redemption date, give notice to Vista of the
conversion of any or all shares to be redeemed held by that holder, then:
- Vista shall not have the right to redeem those shares for which the
conversion notice has been given;
- the holder shall not be entitled to payment of the redemption price with
respect to those shares;
- the conversion of those shares shall become effective as set forth below;
and
- any funds that have been deposited for the payment of the redemption
price of those shares shall be returned to Vista immediately after the
conversion.
112
<PAGE> 121
VOTING RIGHTS
Except as indicated below or required by law or by any provision of Vista's
certificate of incorporation, the holders of shares of convertible preferred
stock shall vote together with the shares of Vista common stock as a single
class at any annual or special meeting of stockholders of Vista. Each holder of
shares of convertible preferred stock held by the holder on the record date
fixed for the meeting shall be entitled to the number of votes equal to the
whole number of shares of common stock into which the share is convertible
immediately after the close of business on the record date fixed for the
meeting. In all cases where holders of separate classes or series of Vista's
capital stock have the right to vote separately as a class, the holders of
convertible preferred stock shall be entitled to one vote for each share held by
them. Shares of convertible preferred stock acquired by a subsidiary of Vista
shall have no voting rights.
For so long as any shares of convertible preferred stock remain
outstanding, Vista shall not, without the affirmative vote or consent of the
holders of a majority of the shares of convertible preferred stock voting
together as a single class:
- authorize, create or issue, or increase the authorized or issued amount
of, any class or series of stock of senior securities, parity securities
or convertible preferred stock, except through payment of dividends
payable-in-kind on the convertible preferred stock;
- authorize, create or issue, or increase the authorized or issued amount
of any security convertible into or exchangeable for senior securities or
parity securities or reclassify or modify any junior securities so as to
become parity securities or senior securities; or
- merge or consolidate with or into any other person or permit any other
person to merge with or into Vista, unless;
-- each share of convertible preferred stock shall remain outstanding
and unaffected or shall be converted into or exchanged for
convertible preferred stock of the surviving entity, and, in the case
of triangular mergers, with conversion rights into the common equity
of the ultimate parent entity, having powers, preferences and
relative participating, optional and other rights, and
qualifications, limitations and restrictions identical to a share of
convertible preferred stock; and
-- the affirmative vote or consent of the holders of all the shares of
convertible preferred stock voting together as a single class shall
have been obtained if the exchange, merger or consolidation shall
result in the existence of senior securities or parity securities.
The voting rights provided above relating to mergers and consolidations
shall be exercisable only by the original holder of the convertible preferred
stock. The voting rights shall terminate on the first date on which the original
holder no longer owns shares of convertible preferred stock which constitute at
least 14.03% of the total issued and outstanding shares of common stock of
Vista.
CONVERSION
Each of the shares of convertible preferred stock shall be convertible at
the option of the holder of the shares into one share of Vista common stock,
subject to adjustment. A holder of convertible preferred stock may convert any
shares of convertible preferred stock that are the subject of a pending
registration with the Securities and Exchange Commission, but this conversion
shall be conditioned on the registration statement becoming effective.
The conversion price per share of common stock into which the convertible
preferred stock is convertible shall be subject to adjustment from time to time
as follows:
If Vista shall subdivide the outstanding shares of Vista common stock, or
combine the outstanding shares of Vista common stock into a smaller number of
shares, the conversion price shall be adjusted so that the adjusted conversion
price shall reflect the subdivision or combination.
113
<PAGE> 122
If Vista shall declare, order, pay or make any dividend or other
distribution to holders of Vista common stock payable in shares of Vista common
stock, the conversion price in effect immediately prior to the close of business
on the record date fixed for determination for holders entitled to receive the
dividend or distribution shall be reduced to a price determined by multiplying
the conversion price by a fraction:
- the numerator of which shall be the number of shares of Vista common
stock outstanding immediately prior to the dividend or distribution; and
- the denominator of which shall be the number of shares of Vista common
stock outstanding immediately after the dividend or distribution.
If Vista shall declare, order, pay or make any dividend or other
distribution to all holders of Vista common stock, other than a dividend payable
in shares of Vista common stock, then the conversion price in effect immediately
prior to the close of business on the record date fixed for the determination of
holders of Vista common stock entitled to receive the dividend or distribution
shall be reduced to a price determined by multiplying the conversion price by a
fraction:
- the numerator of which shall be the market price per share in effect as
of the record date less the value of the dividend or distribution
applicable to one share of Vista common stock; and
- the denominator of which shall be the market price per share as of the
record date.
If Vista issues or sells any shares of Vista common stock or any rights,
options or warrants to subscribe for or purchase shares of Vista common stock or
equivalent common stock or securities convertible into Vista common stock or
equivalent common stock less than the market price of the Vista common stock as
of the date of the issue or sale, the conversion price shall be reduced to the
conversion price obtained by multiplying the conversion price in effect
immediately prior to the issue or sale by a fraction:
- the numerator of which shall be the sum of the number of shares of Vista
common stock outstanding immediately prior to the issue or sale plus the
number of shares of Vista common stock which the aggregate offering price
of the total number of shares of Vista common stock and/or equivalent
common stock so to be offered would purchase at the market price; and
- the denominator of which shall be the sum of the number of shares of
Vista common stock outstanding immediately prior to the issue or sale
plus the number of additional shares of Vista common stock and/or
equivalent common stock to be offered for subscription or purchase.
No adjustment of the conversion price shall be made upon:
- the conversion or redemption of shares of convertible preferred stock;
- the payment of any stock dividend on the convertible preferred stock;
- the issuance of options to officers, directors and employees of Vista,
including any options that are issued and outstanding as of the original
issue date, provided that, with respect to all these options, the number
of shares of Vista common stock that may be subject to these options
shall be limited to 15% of Vista's fully diluted shares of common stock;
- the issuance and sale of Vista common stock upon exercise of any rights
or options referenced in the immediately preceding clause; or
- the issuance and sale of Vista common stock in an underwritten public
offering.
WARRANTS
PUBLIC WARRANTS. There are 2,252,670 Vista warrants that are publicly
traded on the American Stock Exchange under the symbol "VEI/WS." These warrants
are currently exercisable for 2,252,670 shares of
114
<PAGE> 123
Vista common stock at an exercise price of $4.00 per share. These warrants will
expire on November 1, 2002.
PRIVATE WARRANTS. In addition, there are 9,558,403 Vista warrants
outstanding that are not publicly traded. These warrants are currently
exercisable for 9,558,403 shares of Vista common stock at an exercise price of
$4.00 per share. These warrants will expire on November 1, 2002. In addition,
Vista has 175,000 warrants outstanding to acquire 175,000 shares of Vista common
stock with exercise prices ranging from $2.50 to $3.375 per share and which have
expiration dates ranging from January 31, 2000 to June 29, 2002.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and registrar
for the Vista common stock and the Vista warrants and will be the transfer agent
and registrar for the New Prize common stock and the New Prize warrants.
STOCK EXCHANGE LISTING
It is a condition of the merger that the shares of New Prize common stock
issuable in the merger and to be issued upon conversion of the New Prize
convertible preferred stock issuable in the merger be approved for listing on
the American Stock Exchange on or prior to the effective time, subject to
official notice of issuance.
LEGAL MATTERS
The validity of the New Prize common stock and convertible preferred stock
to be issued to Prize stockholders in the merger will be passed upon by Vinson &
Elkins L.L.P., counsel to Vista. It is a condition to the consummation of the
merger that Prize receive a tax opinion from Conner & Winters, A Professional
Corporation, stating that the merger constitutes a tax-free reorganization for
federal income tax purposes and that the opinion not be withdrawn. See "The
Merger -- Material U.S. Federal Income Tax Consequences of the Merger" and "The
Merger Agreement -- Conditions to the Merger" on pages 42 and 97, respectively.
EXPERTS
The consolidated financial statements of Vista for the three years ended
December 31, 1998, and the statements of revenues and direct operating expenses
of the acquisition of IP Petroleum Company, Inc. included in this document have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports, and are included in this document in reliance on
their reports given upon their authority as experts in accounting and auditing
in giving these reports.
The Statements of Revenues and Direct Operating Expenses of the Producing
Properties acquired by Prize Energy Corp. from Pioneer Natural Resources USA,
Inc. for each of the three years in the period ended December 31, 1998, included
in this document have been audited by Ernst & Young, LLP, independent auditors,
as set forth in their report on those statements, and are included in this
document in reliance upon their report given on their authority as experts in
accounting and auditing.
The consolidated balance sheets of Midland Resources, Inc. as of December
31, 1997 and 1996, and the consolidated statements of operations, stockholders'
equity and cash flows for each of the years then ended, have been included in
this document in reliance on the report of Grant Thornton LLP, independent
public accountants, given on the authority of that firm as experts in accounting
and auditing.
115
<PAGE> 124
FUTURE STOCKHOLDER PROPOSALS
Any proposals of holders of New Prize common stock or New Prize convertible
preferred stock intended to be presented at the annual meeting of stockholders
of New Prize to be held in 2000 must have been received by New Prize no later
than January 4, 2000, to be included in New Prize's proxy statement and form of
proxy relating to that meeting.
WHERE YOU CAN FIND MORE INFORMATION
Vista files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information Vista files at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549, or at the Commission's public reference rooms in New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Vista's filings with the Commission
are also available to the public from commercial document retrieval services and
at the web site maintained by the Commission at http://www.sec.gov.
Vista filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission New Prize common stock and New Prize
preferred stock to be issued to Prize stockholders in the merger. This document
is a part of that registration statement and constitutes a prospectus of Vista
in addition to being a proxy statement of each of Vista and Prize. As allowed by
the Securities and Exchange Commission rules, this document does not contain all
the information you can find in the registration statement or the exhibits to
the registration statement.
You should rely only on the information contained in this document to vote
on the merger. We have not authorized anyone to give any information that is
different from what is contained in this document. Neither the delivery of this
document nor the issuance of New Prize common stock or New Prize preferred stock
in the merger will create an implication that there has been no change in the
affairs of Vista or Prize since the date of this document or that the
information in this document is correct as of any time after the date of this
document.
116
<PAGE> 125
COMMONLY USED OIL AND GAS TERMS
The following list contains abbreviations and definitions of terms commonly
used in the oil and gas industry and this document. Unless otherwise indicated
in this document, natural gas volumes are stated at the legal pressure base of
the state or area in which the reserves are located and at 60 degrees
Fahrenheit.
"Bbl" means a barrel of 42 U.S. gallons of oil.
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion cubic feet of natural gas equivalent, which is
determined using the ratio of one Bbl of oil, condensate or natural gas liquids
to six Mcf of natural gas.
"BOE" means barrels of oil equivalent. BOEs are determined using the ratio
of six Mcf of natural gas to one Bbl of oil.
"BOPD" means barrels of oil per day.
"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"MBbl" means thousand barrels of oil.
"MBOE" means thousand barrels of oil equivalent.
"Mcf" means thousand cubic feet of natural gas.
"Mcfd" means thousand cubic feet of natural gas per day.
"MMBbl" means million barrels of oil.
"MMBOE" means million barrels of oil equivalent.
"MMBtu" means million British Thermal Units.
"MMcfd" means million cubic feet of natural gas per day.
"MMcf" means million cubic feet of natural gas.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for completion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless these
techniques have been proved effective by actual tests in the area and in the
same reservoir.
"Proved reserves" means those estimated quantities of crude oil and natural
gas that geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known oil and gas reservoirs under
existing economic and operating conditions. Proved reserves are limited to those
quantities of oil and gas that can be expected to be recoverable commercially at
current prices and costs, under existing regulatory practices and with existing
conventional equipment and operating methods.
117
<PAGE> 126
"PV-10" means the present value of estimated future revenues to be
generated from the production of proved reserves, net of estimated production
and future development costs, using prices and costs as of the effective date of
estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service,
future income tax expense and depreciation, depletion and amortization, and
discounted using an annual discount rate of 10%.
"Standardized Measure of Discounted Future Net Cash Flows" means PV-10
after income taxes.
118
<PAGE> 127
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEW PRIZE (PRO FORMA):
Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1999..................................... F-4
Unaudited Pro Forma Combined Condensed Statement of
Operations for the nine months ended September 30,
1999................................................... F-5
Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1998........ F-6
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements............................................. F-7
PRIZE ENERGY CORP. AND SUBSIDIARIES (PRO FORMA):
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30,
1999................................................... F-12
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1998........ F-13
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements................................... F-14
VISTA ENERGY RESOURCES, INC. AND SUBSIDIARIES (PRO FORMA):
Unaudited Pro Forma Combined Statement of Operations for
the year ended December 31, 1998....................... F-16
Notes to Unaudited Pro Forma Consolidated Financial
Statements............................................. F-17
VISTA ENERGY RESOURCES, INC. AND SUBSIDIARIES (HISTORICAL):
Report of Independent Public Accountants.................. F-19
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 and 1997............. F-20
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998 (unaudited) and the
years ended December 31, 1998, 1997 and 1996........... F-21
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1999
(unaudited) and the years ended December 31, 1998, 1997
and 1996............................................... F-22
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 (unaudited) and the
years ended December 31, 1998, 1997 and 1996........... F-23
Notes to Consolidated Financial Statements................ F-24
Report of Independent Public Accountants regarding the
I.P. Acquisition....................................... F-40
Statements of Revenues and Direct Operating Expense of the
I.P. Acquisition for the nine months ended September
30, 1998 and the years ended December 31, 1997 and
1996................................................... F-41
Notes to Statements of Revenues and Direct Operating
Expense of the I.P. Acquisition........................ F-42
Report of Independent Certified Public Accountants
regarding Midland Resources, Inc....................... F-45
Consolidated Balance Sheets of Midland Resources, Inc. as
of September 30, 1998 (unaudited) and December 31, 1997
and 1996............................................... F-46
Consolidated Statements of Operations of Midland
Resources, Inc. for the nine months ended September 30,
1998 and 1997 (unaudited) and the years ended December
31, 1997,
and 1996............................................... F-47
Consolidated Statements of Stockholders' Equity of Midland
Resources, Inc. for the nine months ended September 30,
1998 (unaudited) and the years ended December 31, 1997,
and 1996............................................... F-48
Consolidated Statements of Cash Flows of Midland
Resources, Inc. for the nine months ended September 30,
1998 and 1997 (unaudited) and the years ended December
31, 1997,
and 1996............................................... F-49
Notes to Consolidated Financial Statements of Midland
Resources, Inc......................................... F-50
</TABLE>
F-1
<PAGE> 128
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRIZE ENERGY CORP. AND SUBSIDIARIES (HISTORICAL):
Report of Independent Auditors............................ F-63
Unaudited Statements of Revenues and Direct Operating
Expenses for the six months ended June 30, 1999 and
the nine months ended September 30, 1998 and Audited
Statements of Revenues and Direct Operating Expenses
for the years ended December 31, 1998, 1997 and 1996
of the Producing Properties acquired by Prize Energy
Corp. from Pioneer Natural Resources USA, Inc. ....... F-64
Notes to Statements of Revenues and Direct Operating
Expenses.............................................. F-65
Unaudited Consolidated Balance Sheet as of September 30,
1999................................................... F-69
Unaudited Consolidated Statement of Operations for the
period beginning January 15, 1999 (Inception) and ended
September 30, 1999..................................... F-70
Unaudited Consolidated Statement of Stockholders' Equity
for the period beginning January 15, 1999 (Inception)
and ended September 30, 1999........................... F-71
Unaudited Consolidated Statement of Cash Flows for the
period beginning January 15, 1999 (Inception) and ended
September 30, 1999..................................... F-72
Notes to the Unaudited Consolidated Financial
Statements............................................. F-73
</TABLE>
F-2
<PAGE> 129
NEW PRIZE
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The accompanying Unaudited Pro Forma Combined Condensed Financial
Statements have been prepared by recording pro forma adjustments to the
Unaudited Pro Forma Condensed Consolidated Financial Statements of Prize Energy
Corp. (Prize) and Vista Energy Resources, Inc. (Vista). The accompanying
Unaudited Pro Forma Combined Condensed Balance Sheet as of September 30, 1999
assumes the merger of Prize and Vista occurred on September 30, 1999. The
Unaudited Pro Forma Combined Condensed Statement of Operations for the nine
months ended September 30, 1999 and the year ended December 31, 1998 have been
prepared assuming the merger occurred on January 1, 1998.
The Unaudited Pro Forma Combined Condensed Financial Statements are not
necessarily indicative of the financial position or results of operations that
would have occurred had the merger been effected on the assumed dates.
Additionally, future results may vary significantly from the results reflected
in the Unaudited Pro Forma Combined Condensed Statements of Operations due to
normal production declines, changes in prices, future transactions, and other
factors. These statements should be read in conjunction with the (i) Unaudited
Consolidated Financial Statements of Prize, (ii) the Audited Statement of
Revenues and Direct Operating Expenses for the year ended December 31, 1998 and
the Unaudited Statements of Revenues and Direct Operating Expenses for the six
months ended June 30, 1999, (iii) the Audited Financial Statements of Vista for
the year ended December 31, 1998, (iv) the unaudited financial statements of
Vista for the nine months ended September 30, 1999 and (v) the Unaudited Pro
Forma Condensed Financial Statements of Prize and Vista.
F-3
<PAGE> 130
NEW PRIZE
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
<TABLE>
<CAPTION>
NEW PRIZE
PRO FORMA COMBINED
VISTA PRIZE ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Cash............................................ $ 21 $ 9,733 $ -- $ 9,754
Accounts receivable............................. 4,322 21,890 -- 26,212
Other........................................... 273 647 -- 920
------- -------- ------- --------
Total current assets.................... 4,616 32,270 -- 36,886
Properties and equipment, at cost
Oil and gas properties.......................... 92,011 216,303 10,765(a) 319,079
Other........................................... 567 829 1,396
------- -------- ------- --------
92,578 217,132 10,765 320,475
Accumulated depletion, depreciation and
amortization.................................... (34,463) (4,646) 34,463(a) (4,646)
------- -------- ------- --------
58,115 212,486 45,228 315,829
Other assets...................................... 902 2,347 (599)(a) 2,650
------- -------- ------- --------
Total assets............................ $63,633 $247,103 $44,629 $355,365
======= ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........ $ 4,843 $ 21,922 $ 6,528(a) $ 33,293
Current Maturities of Debt...................... 1,324 1,324
------- -------- ------- --------
Total current liabilities............... 4,843 23,246 6,528 34,617
Long-term debt.................................... 52,634 139,000 -- 191,634
Deferred taxes.................................... 431 -- 19,028(a) 19,459
Other long-term liabilities....................... 205 -- -- 205
Stockholders' equity:
Convertible voting preferred stock.............. -- 30,450 -- 30,450
Common stock.................................... 164 -- (57)(b) 107
Treasury stock.................................. (212) -- -- (212)
Note receivable -- officer...................... -- (150) -- (150)
Paid-in capital................................. 25,071 49,343 (373)(b) 74,041
Retained earnings............................... (19,503) 5,214 19,503(b) 5,214
------- -------- ------- --------
Total stockholders' equity.............. 5,520 84,857 19,073 109,450
------- -------- ------- --------
Total liabilities and stockholders'
equity................................ $63,633 $247,103 $44,629 $355,365
======= ======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 131
NEW PRIZE
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
NEW PRIZE
PRO FORMA PRO FORMA COMBINED
VISTA PRIZE ADJUSTMENTS PRO FORMA
----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales.......................... $ 12,857 $57,218 $ -- $ 70,075
Costs and expenses
Lease operating expenses................... 4,656 17,406 -- 22,062
Exploration costs.......................... 53 -- -- 53
Depreciation, depletion and amortization... 3,594 12,493 1,811(c) 17,898
General and administrative................. 1,481 3,972 --(d) 5,453
----------- ------- ------- -----------
Total costs and expenses........... 9,784 33,871 1,811 45,466
----------- ------- ------- -----------
Operating income (loss)...................... 3,073 23,347 (1,811) 24,609
Other:
Interest expense, net...................... 3,040 8,085 -- 11,125
(Gain) loss on sale of assets.............. (147) -- -- (147)
Other...................................... (51) (116) -- (167)
----------- ------- ------- -----------
Total other........................ 2,842 7,969 -- 10,811
----------- ------- ------- -----------
Income before income tax..................... 231 15,378 (1,811) 13,798
Provision for income taxes................... 81 5,685 (665)(f) 5,101
----------- ------- ------- -----------
Net income (loss)............................ $ 150 $ 9,693 $(1,146) $ 8,697
=========== ======= ======= ===========
Less preferred dividends..................... -- (1,454) -- (1,454)
----------- ------- ------- -----------
Income available to common stockholders...... $ 150 $ 8,239 $(1,146) $ 7,243
=========== ======= ======= ===========
Earnings per Share
Basic...................................... $ 0.01 $ 0.68
Diluted.................................... $ 0.01 $ 0.59
=========== ===========
Weighted-average common shares outstanding --
basic...................................... 16,312,337 10,650,584
=========== ===========
Weighted-average common shares outstanding --
diluted.................................... 16,312,337 14,860,097
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 132
NEW PRIZE
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEW PRIZE
PRO FORMA PRO FORMA PRO FORMA COMBINED
VISTA PRIZE ADJUSTMENTS PRO FORMA
----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales........................ $ 17,202 $81,760 $ $ 98,962
Costs and expenses:
Lease operating expenses................. 8,076 27,001 35,077
Exploration costs........................ 161 -- 161
Depreciation, depletion, and
amortization.......................... 6,542 19,535 1,204(c) 27,281
General and administration............... 2,332 6,500 --(d) 8,832
Amortization of unit awards.............. 4,262 -- 4,262
Impairments of oil and gas properties.... 24,850 -- (24,850)(e) --
----------- ------- -------- -----------
Total costs and expenses......... 46,223 53,036 (23,646) 75,613
----------- ------- -------- -----------
Operating income (loss).................... (29,021) 28,724 23,646 23,349
Other:
Interest expense......................... 3,179 10,797 13,976
(Gain) loss on sale of assets............ 366 -- 366
----------- ------- -------- -----------
Total other...................... 3,545 10,797 -- 14,342
----------- ------- -------- -----------
Income before income tax................... (32,566) 17,927 23,646 9,007
Provision for income taxes................. (6,982) 6,628 3,684(f) 3,330
----------- ------- -------- -----------
Net (income) loss.......................... $ (25,584) $11,299 $ 19,962 $ 5,677
=========== ======= ======== ===========
Less preferred dividends................... -- (1,841) -- (1,841)
----------- ------- -------- -----------
Income Available to Common Stockholders.... $ (25,584) $ 9,458 $ 19,962 $ 3,836
=========== ======= ======== ===========
Earnings per Share:
Basic and Diluted........................ $ (1.57) $ 0.36
=========== ===========
Weighted-average common shares
outstanding.............................. 16,312,337 10,650,584
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 133
NEW PRIZE
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited pro forma combined condensed financial statements have been
prepared to give effect to the merger of Prize Energy Corp. (Prize) and Vista
Energy Resources, Inc. (Vista) to form an entity called New Prize. Under the
terms of the proposed merger, Vista will be the legal survivor. However, because
Prize's stockholders will control a majority of the voting shares of New Prize,
Prize is treated as the acquiror for accounting purposes. Concurrent with the
merger, Vista will effect a one-for-seven reverse stock split. The unaudited pro
forma combined condensed balance sheet as of September 30, 1999 is presented as
if the combination had occurred on that date. The unaudited pro forma combined
condensed statements of operations for the nine months ended September 30, 1999
and the year ended December 31, 1998 are presented as if the combination had
occurred on January 1, 1998.
The following is a description of the individual columns included in these
unaudited pro forma statements of operations.
Vista -- Represents the consolidated unaudited balance sheet of Vista
as of September 30, 1999 and the consolidated statement of operations for
the nine months ended September 30, 1999.
Prize -- Represents the consolidated unaudited balance sheet of Prize
as of September 30, 1999.
Vista Pro Forma -- Represents the unaudited pro forma consolidated
statement of operations for the year ended December 31, 1998 for Vista
assuming the Midland Resources and IP acquisitions had occurred on January
1, 1998.
Prize Pro Forma -- Represents the Prize unaudited pro forma
consolidated statements of operations for the nine months ended September
30, 1999 and for the year ended December 31, 1998 assuming the Pioneer
Acquisition, the Minerals sale and the Sunterra purchase had occurred on
January 1, 1998.
(2) PRO FORMA ADJUSTMENTS
(a) To record the purchase of Vista by Prize and the purchase price
allocation associated with the proposed merger. Under the terms of the merger,
Prize stockholders are effectively exchanging 16% of their interest in Prize for
an 84% interest in Vista. Prize is a private company with no readily
determinable market value. Thus, in order to determine the purchase price paid
by Prize, Prize management estimated the fair value of the 16% interest of Prize
exchanged for the 84% interest in Vista based on the estimated fair value of
Prize's oil and gas assets, its debt and other assets and liabilities as of
October 8, 1999. The preliminary purchase price is $82.3 million, including
liabilities assumed of $57.7 million. The purchase price was assigned to the
assets of Vista based on their fair value, resulting in current and other assets
of $4.9 million, oil and gas properties of $103.3 million, current liabilities
of $11.4 million, debt of $52.6 million, and deferred taxes of $19.5 million.
Purchase price adjustments include the recognition of severance for the
executive officers of Vista, de-recognition of Vista's deferred financing costs,
the accrual of Vista's hedge position at its fair value and adjustments to the
basis of oil and gas properties as well as the related deferred taxes as a
result of the merger. The increase to deferred taxes was principally due to the
increase in the carrying value of Vista's oil and gas properties as a result of
the purchase compared to the tax basis which is not increased as a result of the
purchase. There are no identifiable intangible assets related to the purchase.
Accordingly, all of the purchase price has been allocated to the tangible assets
and liabilities. Management believes the amount assigned to the acquired oil and
gas properties approximates the fair value of the properties and is less than
the expected undiscounted cash flows of the properties. Thus, no impairment is
indicated as of the purchase date. Management does not expect that there will be
significant changes to the purchase price allocation.
F-7
<PAGE> 134
NEW PRIZE
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
(b) To reflect the issuance of shares as a result of the merger, the
reversal of Vista's treasury stock which is being retired as a result of the
transaction, the reversal of Vista's retained earnings, and the effect on common
stock and paid-in capital of the one-for-seven reverse stock split.
(c) To record the change in depletion, depreciation, and amortization based
on the new basis in oil and gas properties resulting from the proposed merger.
(d) Although management expects to achieve some efficiencies in
consolidation of the general and administrative functions, firm plans have not
yet been determined.
(e) To eliminate the impairment charge as a result of the proposed merger
which establishes a new basis in the oil and gas properties.
(f) To adjust income tax expense based on the pro forma earnings before
income tax and an assumed tax rate of 37%.
In addition, it is expected that New Prize will also incur some
non-recurring costs as a result of the transaction which will not have a
continuing impact, and accordingly are excluded from the pro forma statements of
operations. As called for under the terms of the merger, the pro forma balance
sheet included an accrual of $1 million for the severance of the executive
officers of Vista. In addition, New Prize may also incur up to $325,000 in
severance costs related to other employees of Vista. New Prize may also incur
additional merger integration costs which have not yet been identified or
estimated. Further, New Prize is committed to indemnify the Vista officers and
directors and, accordingly, will purchase officers' and directors' insurance for
the officers and directors of Vista. The cost of the insurance is expected to be
less than $75,000. Because the severance costs and the directors' and officers'
insurance are not expected to have a continuing impact, no adjustments have been
included in the pro forma statements of operations for these costs.
(3) EARNINGS PER SHARE
The following table reconciles the historical shares outstanding to the pro
forma shares outstanding on September 30, 1999:
<TABLE>
<S> <C>
Outstanding common shares of Vista on September 30, 1999.... 16,312,337
Adjusted for the one-for-seven reverse stock split.......... 2,330,334
Common shares issued to Prize............................... 8,320,250
----------
Pro forma New Prize common shares outstanding as of
September 30, 1999........................................ 10,650,584
</TABLE>
Vista's historical book value per common share was $0.34 per share. Based
on the pro forma outstanding shares on September 30, 1999, New Prize's pro forma
book value per common share is $7.42.
For the purpose of calculating pro forma earnings per share, Vista's
historical weighted average shares outstanding were adjusted for the
one-for-seven reverse stock split, and the shares issued to Prize were assumed
to have been outstanding since January 1, 1998. For the nine months ended
September 30, 1999, the convertible preferred stock is dilutive and is included
in the diluted earnings per share calculation; however, for the year ended
December 31, 1998, the convertible preferred stock is antidilutive and is
excluded from the diluted earnings per share calculation. Because all other
potentially dilutive securities had exercise prices above the market price on
September 30, 1999, they have been excluded from the pro forma earnings per
share calculations as antidilutive except for the convertible preferred stock,
as noted
F-8
<PAGE> 135
NEW PRIZE
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
above. The following table reconciles pro forma basic and diluted earnings per
share for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------- ---------------- ---------
<S> <C> <C> <C>
Pro forma basic earnings per share:
Income available to common stockholders....... $7,243,000 10,650,584 $0.68
Effect of dilutive securities:
Convertible preferred shares.................. $1,454,000 4,209,513
Pro forma diluted earnings per share............ $8,697,000 14,860,097 $0.59
</TABLE>
(4) SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
The following table presents the pro forma estimate of the proved oil and
gas reserves as of September 30, 1999 for Prize and Vista combined.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
PRIZE VISTA NEW PRIZE
OIL & NGLS OIL & NGLS OIL & NGLS
(MBBL) (MBBL) (MBBL)
---------- ---------- ----------
<S> <C> <C> <C>
Proved reserves................................... 35,752 14,839 50,591
Proved developed reserves......................... 29,012 9,884 38,896
Proved undeveloped reserves....................... 6,740 4,955 11,695
</TABLE>
<TABLE>
<CAPTION>
PRIZE VISTA NEW PRIZE
GAS GAS GAS
(MMCF) (MMCF) (MMCF)
---------- ---------- ----------
<S> <C> <C> <C>
Proved reserves................................... 251,806 38,410 290,216
Proved developed reserves......................... 196,024 26,409 222,433
Proved undeveloped reserves....................... 55,782 12,001 67,783
</TABLE>
<TABLE>
<CAPTION>
PRIZE VISTA NEW PRIZE
MBOE MBOE MBOE
---------- ---------- ----------
<S> <C> <C> <C>
Proved reserves................................... 77,720 21,241 98,961
Proved developed reserves......................... 61,683 14,286 75,969
Proved undeveloped reserves....................... 16,037 6,955 22,992
</TABLE>
Estimated quantities of proved net reserves include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the effective date of the acquisition, under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells with existing equipment and operating methods. Proved
undeveloped reserves include those reserves expected to be recovered from new
wells on undrilled acreage or from existing wells on which a relatively major
expenditure is required for recompletion.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of the
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revisions of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. Reserve estimates are inherently imprecise and estimates of new
discoveries are more imprecise than those of
F-9
<PAGE> 136
NEW PRIZE
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
currently producing oil and gas properties. Accordingly, these estimates are
expected to change as additional information becomes available in the future.
The following is a summary of the pro forma standardized measure of
discounted future net cash flows for Prize and Vista combined related to the
proved oil and gas reserves. For these calculations, estimated future cash flows
from estimated future production or proved reserves were computed using oil and
gas prices as of September 30, 1999. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic life of the properties, and costs
were not escalated for the future. The information presented below should not be
viewed as an estimate of the fair value of the acquired interests, nor should it
be considered indicative of any future trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------
PRIZE VISTA NEW PRIZE
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows................................. $1,336,284 $ 444,514 $1,780,798
Future production and development costs............. (513,098) (169,259) (682,357)
Future income tax expense........................... (304,579) (101,844) (406,423)
---------- --------- ----------
518,607 173,411 692,018
Discounts of future net cash flows at 10% per
annum............................................. (235,095) (76,805) (311,900)
---------- --------- ----------
Standardized measure of discounted future net cash
flows............................................. $ 283,512 $ 96,606 $ 380,118
========== ========= ==========
</TABLE>
The weighted average prices of oil and gas at September 30, 1999 used in
the calculation of the standardized measure were $22.62 per barrel for oil,
$16.14 per barrel for NGLs and $2.35 per Mcf for gas, respectively.
F-10
<PAGE> 137
PRIZE ENERGY CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Unaudited Pro Forma Condensed Consolidated Financial
Statements have been prepared by recording pro forma adjustments to the
historical Unaudited Consolidated Financial Statements of Prize Energy Corp.
(Prize), the Audited Statement of Revenues and Direct Operating Expenses for the
year ended December 31, 1998 and the Unaudited Statement of Revenues and Direct
Operating Expenses for the six months ended June 30, 1999 for the producing
properties purchased by Prize from Pioneer Natural Resources USA, Inc.
(Pioneer). The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 1999 and the year ended
December 31, 1998 have been prepared assuming the purchase of properties from
Pioneer and the subsequent sale of the mineral interests occurred on January 1,
1998.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are not
necessarily indicative of the financial position or results of operations that
would have occurred had the transactions been effected on the assumed dates.
Additionally, future results may vary significantly from the results reflected
in the Unaudited Pro Forma Condensed Consolidated Statements of Operations due
to normal production declines, changes in prices, future transactions, and other
factors. These statements should be read in conjunction with the Unaudited
Consolidated Financial Statements of Prize, the Audited Statement of Revenues
and Direct Operating Expenses for the year ended December 31, 1998, and the
Unaudited Statement of Revenues and Direct Operating Expenses for the six months
ended June 30, 1999 for the producing properties acquired from Pioneer.
F-11
<PAGE> 138
PRIZE ENERGY CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRIZE ACQUIRED
JANUARY 15, 1999 PROPERTIES
(INCEPTION) SIX MONTHS
THROUGH ENDED
SEPTEMBER 30, JUNE 30, PRO FORMA PRO FORMA
1999 1999 ADJUSTMENTS PRIZE
---------------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales........................ $22,693 $35,119 $ (594)(a)(b) $57,218
Cost and expenses
Lease operating expenses................. 6,019 11,127 260(a)(b) 17,406
Depreciation, depletion and
amortization.......................... 4,646 -- 7,847(c) 12,493
General and administrative............... 722 -- 3,250(d) 3,972
------- ------- -------- -------
Total costs and expenses......... 11,387 11,127 11,357 33,871
------- ------- -------- -------
Operating income (loss).................... 11,306 23,992 (11,951) 23,347
Other
Interest (income) expense................ 3,101 -- 4,984(e) 8,085
Other.................................... (204) -- 88(b) (116)
------- ------- -------- -------
Total other...................... 2,897 -- 5,072 7,969
------- ------- -------- -------
Income before income tax................... 8,409 23,992 (17,023) 15,378
Provision for income tax................... 2,745 -- 2,940(f) 5,685
------- ------- -------- -------
Net Income................................. 5,664 23,992 (19,963) 9,693
======= ======= ======== =======
Less preferred dividends................... (450) -- (1,004)(g) (1,454)
------- ------- -------- -------
Income Available to Common Stockholders.... $ 5,214 $23,992 $(20,967) $ 8,239
======= ======= ======== =======
</TABLE>
See accompanying notes.
F-12
<PAGE> 139
PRIZE ENERGY CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
PROPERTIES ADJUSTMENTS PRIZE
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Oil and gas sales................................. $84,555 $ (2,795)(a)(b) $81,760
Cost and Expenses
Lease operating expenses.......................... 27,004 (3)(a)(b) 27,001
Depreciation, depletion, and amortization......... -- 19,535(c) 19,535
General and administration........................ -- 6,500(d) 6,500
------- ---------- -------
Total costs and expenses.................. 27,004 26,032 53,036
------- ---------- -------
Operating income.................................... 57,551 (28,827) 28,724
Other
Interest expense.................................. 10,797(e) 10,797
------- ---------- -------
Total other............................... -- 10,797 10,797
------- ---------- -------
Income before income tax............................ 57,551 (39,624) 17,927
Provision for income taxes.......................... 6,628(f) 6,628
------- ---------- -------
Net Income (Loss)................................... $57,551 $ (46,252) $11,299
======= ========== =======
Less preferred dividends............................ (1,841)(g) (1,841)
------- ---------- -------
Income Available to Common Stockholders............. $57,551 $ (48,093) $ 9,458
======= ========== =======
</TABLE>
See accompanying notes.
F-13
<PAGE> 140
PRIZE ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated financial statements of
Prize Energy Corp. (Prize) have been prepared to give effect to the 1999
acquisition of oil and gas properties from Pioneer Natural Resources USA, Inc.
(Pioneer), and the subsequent sale of certain mineral interests which were
included in the purchase from Pioneer and the purchase of the remaining
interests of Sunterra Petroleum LLC (Sunterra).
In July 1999, Prize sold a group of mineral interests for $32 million which
were acquired with the oil and gas properties purchased from Pioneer. The
properties were located outside Prize's principal operating area of Texas and
Oklahoma, and the sale was effective July 1, 1999. Accordingly, the properties
were assigned a value of $32 million when purchased and no gain or loss was
recognized on disposal.
Upon the formation of Prize, certain stockholders contributed a minority
investment in Sunterra. In July 1999, the Company purchased the remaining
interest in Sunterra. Prior to the purchase of the remaining interest, Prize's
investment in Sunterra was accounted for under the equity method. The pro forma
statements of operations assume the transactions had taken place on January 1,
1998.
The following is a description of the individual columns included in these
unaudited pro forma condensed consolidated financial statements.
Prize -- Represents the unaudited consolidated statement of operations
of Prize for the period January 15, 1999 (Inception) through September 30,
1999.
Acquired Properties -- Represents the revenues and direct operating
expenses of the oil and gas properties acquired from Pioneer for the year
ended December 31, 1998 and for the six months ended June 30, 1999.
(2) PRO FORMA ADJUSTMENTS
(a) To reduce the revenues and direct operating expenses associated with
the mineral interests acquired from Pioneer, which were subsequently sold.
(b) To increase revenues and direct operating expenses for Sunterra's
production and operating expenses and reverse the equity method income
recognized prior to the purchase of the remaining interest in Sunterra.
(c) To recognize depletion, depreciation, and amortization associated with
the Acquired Properties and the properties of Sunterra.
(d) To recognize estimated incremental general and administrative expense
necessary to administer the properties acquired in the Pioneer and Sunterra
acquisitions of approximately $6,500,000 for the year ended December 31, 1998
and $3,250,000 for the nine months ended September 30, 1999. In the aggregate,
these costs include the salary and benefits of an estimated 40 employees,
insurance coverage, office space, communication, accounting and legal costs.
(e) To record interest expense associated with the borrowings used to
finance the acquisition of the Acquired Properties and the debt assumed from
Sunterra based on the weighted average interest rate of 7.45% for 1998 and 6.84%
for nine months ended September 30, 1999.
(f) To adjust income tax expense based on the pro forma earnings before
income tax and an assumed tax rate of 37%.
(g) To reflect the dividends on the preferred stock issued to Pioneer as
partial consideration for the Acquired Properties. The preferred stock earns a
dividend of 6%, which is payable in additional preferred shares prior to January
1, 2002. Accordingly, this adjustment assumes that additional preferred shares
of 1,841 and 1,004 were issued in 1998 and the nine months ended September 30,
1999.
F-14
<PAGE> 141
VISTA ENERGY RESOURCES, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying Pro Forma Combined Financial Statements have been prepared
by recording pro forma adjustments to the historical Combined Financial
Statements of Vista Energy Resources, Inc. (the "Company"). The accompanying Pro
Forma Combined Statement of Operations for the year ended December 31, 1997, has
been prepared assuming that the Company consummated the I.P. Acquisition and the
Midland Resources, Inc. Merger (the "Midland Merger") on January 1, 1998.
The Pro Forma Combined Financial Statements are not necessarily indicative
of the financial position or results of operations that would have occurred had
the transactions been effected on the assumed dates. Additionally, future
results may vary significantly from the results reflected in the Pro Forma
Combined Statement of Operations due to normal production declines, changes in
prices, future transactions, and other factors. These statements should be read
in conjunction with the Company's audited Combined Financial Statements and the
related notes for the year ended December 31, 1998, and the statements of
revenues and direct operating expenses of the IP Acquisition for the period
ended September 30, 1998.
F-15
<PAGE> 142
VISTA ENERGY RESOURCES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VISTA MIDLAND I.P.
ENERGY (THROUGH (THROUGH PRO FORMA
RESOURCES OCT. 27, 1998) DEC. 17, 1998) ADJUSTMENTS PRO FORMA
------------ -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales................. $ 8,737,056 $ 3,488,625 $4,976,163 -- $ 17,201,844
------------ ----------- ---------- ----------- ------------
Total Revenues............. 8,737,056 3,488,625 4,976,163 -- 17,201,844
Costs and Expenses:
Lease Operating................... 4,398,384 2,235,848 1,094,695 347,473(a) 8,076,400
Exploration costs................. 32,077 129,224 161,301
Depreciation, depletion and
amortization.................... 3,014,707 1,253,364 -- 2,273,605(b) 6,541,676
General and administrative, net... 1,743,814 935,534 (347,473)(a) 2,331,875
Amortization of unit awards....... 4,262,089 -- 4,262,089
Impairments of oil and gas
properties...................... 24,849,632 -- 24,849,632
------------ ----------- ---------- ----------- ------------
Total costs and expenses... 38,300,703 4,553,970 1,094,695 2,273,605 46,222,973
------------ ----------- ---------- ----------- ------------
Total operating income
(loss)................... (29,563,647) (1,065,345) 3,881,468 (2,273,605) (29,021,129)
Interest and other income......... 117,578 117,420 234,998
Interest expense.................. (1,597,350) (574,136) -- (1,241,937)(c) (3,413,423)
Sale and Asset Gain (Loss)........ (317,293) (48,953) (366,246)
------------ ----------- ---------- ----------- ------------
Total Other................ (1,797,065) (505,669) -- (1,241,937) (3,544,671)
------------ ----------- ---------- ----------- ------------
Net income (loss) before taxes...... (31,360,712) (1,571,014) 3,881,468 (3,515,542) (32,565,800)
(Benefit) provision for taxes....... (6,560,351) (549,855) 128,074(d) (6,982,132)
------------ ----------- ---------- ----------- ------------
Net Income (Loss)................... $(24,800,361) $(1,021,159) $3,881,468 $(3,643,616) $(25,583,668)
============ =========== ========== =========== ============
Basic Net Loss Per Share............ $ (1.95) $ (1.57)
Weighted Average Shares
Outstanding....................... 12,687,308 16,312,337
</TABLE>
F-16
<PAGE> 143
VISTA ENERGY RESOURCES, INC.
NOTES TO (UNAUDITED) PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying pro forma consolidated statement of operations for the
year ended December 31, 1998, has been prepared assuming that the Company
consummated the I.P. Acquisition and the Midland Merger on January 1, 1998. The
pro forma consolidated statements of operations are not necessarily indicative
of the results of operations had the above described transaction occurred on the
assumed dates.
2. ACQUISITIONS:
IP Acquisition
On December 18, 1998, the Company acquired a group of producing oil and gas
properties from IP Petroleum Company, Inc. ("IP") and certain of IP's working
interest partners for a cash purchase price of $19,100,000 (the "I.P.
Acquisition").
The properties acquired consist of the sellers' War-Wink area leases
located in Ward and Winkler counties, Texas. The Company gained operatorship and
working interests ranging from 65% to 85% in 65 wells producing from the Cherry
Canyon member of the Delaware formation. Oil and gas production net to the
interests acquired by the Company was 650 barrels of oil and 2,150 thousand
cubic feet ("Mcf") of natural gas per day at the time of acquisition.
The acquisition was financed through borrowings under the Company's
$100,000,000 credit facility with BankBoston, N.A. The new facility was entered
into simultaneously with the closing of the IP Acquisition, and provides for a
three-year revolving credit facility which converts to a three-year term loan in
December 2001. The credit facility is secured by a priority first lien on
substantially all of the Company's oil and gas properties, and availability is
governed by a borrowing base originally set at $55.0 million. Outstanding debt
immediately after the closing was $49.4 million. Interest rates under the new
facility range from 125 basis points over London Interbank Offered Rate
("LIBOR") to 250 basis points over LIBOR based on borrowing base utilization.
Midland Merger
On October 28, 1998, the Merger and Conversion among Vista Resources
Partners, L.P., Midland Resources, Inc. and Vista Energy Resources, Inc. was
closed. As a result of the Conversion, Vista Resources Partners, L.P. became a
wholly-owned subsidiary of the Company, and as a result of the merger Midland
Resources also became a wholly-owned subsidiary of the Company. As a result of
the Conversion and the Midland Merger, security holders of Midland Resources
acquired 4,470,123 shares or 27.3 percent of the outstanding "Common Stock" of
the Company, and security holders of the Vista Partnership acquired 11,903,506
shares of Common Stock, or 72.7 percent.
Vista's weighted average shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE SHARES
SHARES ISSUED OUTSTANDING
------------- --------------
<S> <C> <C>
Vista Partnership........................................... 11,903,506 11,903,506
Midland Resources........................................... 4,470,123(2months) 783,802
---------- ----------
Total Issued and Outstanding 12/31/98............. 16,373,629 12,687,308
========== ==========
</TABLE>
F-17
<PAGE> 144
VISTA ENERGY RESOURCES, INC.
NOTES TO (UNAUDITED) PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
3. PRO FORMA ADJUSTMENTS:
Pro forma adjustments necessary to adjust the statement of operations for
the Midland Merger are as follows:
(a) To reclassify certain COPAS overhead charges to conform with the
financial statement presentation of Vista.
(b) To adjust depreciation, depletion and amortization expense for the
additional basis allocated to the oil and gas properties acquired and
accounted for using the successful efforts methods of accounting.
(c) To adjust interest expense to be reflective of the weighted
average interest rate received under Vista's Amended and Restated Credit
Agreement of 7.6%. The adjustment assumes the $19.1 million acquisition of
IP was completed at the beginning of the year. Interest expense for
Midland's borrowing was adjusted to Vista's borrowing rate.
(d) To record the provision for income taxes to reflect the change in
Vista's tax status from a partnership to a corporation and the pro forma
adjustments. The pro forma tax rate of 35% was the statutory rate used for
the periods presented.
4. EARNINGS PER SHARE:
Vista's pro forma earnings per share was calculated by dividing the total
shares outstanding at December 31, 1998 into the pro forma net loss for December
31, 1998. The computation of basic and diluted earnings (loss) was identical due
to the pro forma net loss and the antidilution of any potential common stock
equivalents.
F-18
<PAGE> 145
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Vista Energy Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Vista
Energy Resources, Inc. (a Delaware corporation) as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Vista Energy Resources, Inc.
as of December 31, 1998 and 1997, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 29, 1999
F-19
<PAGE> 146
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1999 1998 1997
------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 20,623 $ -- $ 527,129
Accounts receivables:
Oil and gas sales.............................. 3,685,493 1,498,727 1,113,302
Trade.......................................... 636,578 900,401 136,633
Other............................................. 273,365 262,218 83,519
------------ ------------ -----------
Total current assets...................... 4,616,059 2,661,346 1,860,583
Property and equipment:
Oil and gas properties, based on successful
efforts accounting............................. 92,010,743 86,970,665 27,943,634
Other............................................. 566,830 529,771 373,258
------------ ------------ -----------
92,577,573 87,500,436 28,316,892
Less accumulated depreciation, depletion and
amortization................................... (34,462,776) (30,956,448) (3,446,126)
------------ ------------ -----------
Property and equipment, net......................... 58,114,797 56,543,988 24,870,766
Other assets........................................ 901,607 537,983 304,754
------------ ------------ -----------
Total assets.............................. $ 63,632,463 $ 59,743,317 $27,036,103
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 4,380,516 $ 2,829,495 $ 1,439,451
Accrued expenses.................................. 462,633 259,117 --
------------ ------------ -----------
Total current liabilities................. 4,843,149 3,088,612 1,439,451
Long-term debt...................................... 52,633,740 50,730,894 17,900,000
Deferred tax liability.............................. 431,117 350,000 --
Other long-term liabilities......................... 205,116 205,116 --
Stockholders' equity:
Common stock, par value $.01 per share;
Authorized -- 50,000,000 shares; 16,373,629
issued and 16,312,337 outstanding at September
30, 1999 and December 31, 1998................. 163,736 163,736 --
Treasury stock -- 61,292 shares................... (212,070) (212,070) --
Additional paid in capital........................ 25,071,099 25,071,099 --
Retained earnings (deficit)....................... (19,503,424) (19,654,070) --
Partners' equity.................................. -- -- 7,696,652
------------ ------------ -----------
Total stockholders' equity................ 5,519,341 5,368,695 7,696,652
------------ ------------ -----------
Total liabilities and stockholders'
equity.................................. $ 63,632,463 $ 59,743,317 $27,036,103
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 147
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- --------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales.............. $12,856,692 $ 5,984,676 $ 8,737,056 $8,874,961 $5,537,720
----------- ----------- ------------ ---------- ----------
Total revenues......... 12,856,692 5,984,676 8,737,056 8,874,961 5,537,720
----------- ----------- ------------ ---------- ----------
COSTS AND EXPENSES:
Lease operating................ 4,655,601 2,777,877 4,398,384 3,688,695 2,544,567
Exploration costs.............. 52,850 25,458 32,077 97,211 273,843
Depreciation, depletion and
amortization................ 3,593,750 1,229,601 3,014,707 2,169,098 1,272,316
Impairment of oil and gas
properties.................. -- -- 24,849,632 -- --
General and administrative..... 1,480,879 1,184,641 1,743,814 987,020 581,048
Amortization of unit option
awards...................... -- 214,303 4,262,089 315,518 --
----------- ----------- ------------ ---------- ----------
Total costs and
expenses............. 9,783,080 5,431,880 38,300,703 7,257,542 4,671,774
----------- ----------- ------------ ---------- ----------
Operating income
(loss)............... 3,073,612 552,796 (29,563,647) 1,617,419 865,946
Gain (loss) on sale of
property.................... 147,141 (339,362) (317,293) (87,678) (56,738)
Interest income................ 8,172 -- 5,833 -- --
Interest expense............... (3,047,674) (1,070,123) (1,597,350) (1,048,009) (476,363)
Other income................... 50,512 60,907 111,745 115,949 61,437
----------- ----------- ------------ ---------- ----------
NET INCOME (LOSS) BEFORE TAXES... 231,763 (795,782) (31,360,712) 597,681 394,282
Income tax expense (benefit):
Current..................... -- N/A -- N/A N/A
Deferred.................... 81,117 N/A (6,560,351) N/A N/A
----------- ----------- ------------ ---------- ----------
NET INCOME (LOSS)................ $ 150,646 $ (795,782) $(24,800,361) $ 597,681 $ 394,282
=========== =========== ============ ========== ==========
Earnings (loss) per share:
Basic.......................... $ .01 $ (.07) $ (1.95) $ .05 $ .03
Diluted........................ $ .01 $ (.07) $ (1.95) $ .05 $ .03
=========== =========== ============ ========== ==========
Actual net income (loss)......... $ 150,646 $ (795,782) $(24,800,361) $ 597,681 $ 394,282
Pro forma tax expense
(benefit)................... N/A (278,524) N/A 211,720 139,284
----------- ----------- ------------ ---------- ----------
PRO FORMA NET INCOME (LOSS)...... $ 150,646 $ (517,258) $(24,800,361) $ 385,961 $ 254,998
=========== =========== ============ ========== ==========
Pro forma earnings (loss) per
share
Basic.......................... $ .01 $ (.04) $ (1.95) $ .03 $ .02
Diluted........................ $ .01 $ (.04) $ (1.95) $ .03 $ .02
Weighted average shares
outstanding (Note 10).......... 16,312,337 11,903,506 12,687,308 11,903,506 11,903,506
=========== =========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 148
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- TREASURY PAID IN RETAINED PARTNERS' STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL DEFICIT EQUITY EQUITY
----------- -------- --------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31,
1995........................ $ -- $ -- $ -- $ -- $ -- $ 6,389,171 $ 6,389,171
Net income.................. -- -- -- -- -- 394,282 394,282
----------- -------- --------- ----------- ------------ ----------- ------------
BALANCE at December 31,
1996...................... -- -- -- -- -- 6,783,453 6,783,453
Unite option awards......... -- -- -- -- -- 315,518 315,518
Net income.................. -- -- -- -- -- 597,681 597,681
----------- -------- --------- ----------- ------------ ----------- ------------
BALANCE at December 31,
1997...................... -- -- -- -- -- 7,696,652 7,696,652
Net loss through October 28,
1998...................... -- -- -- -- -- (5,146,291) (5,146,291)
Midland Merger.............. 16,373,628 163,736 (212,070) 25,071,099 -- (6,812,450) 18,210,315
Unit option awards.......... -- -- -- -- -- 4,262,089 4,262,089
Net loss subsequent to
Midland Merger............ -- -- -- -- (19,654,070) -- (19,654,070)
----------- -------- --------- ----------- ------------ ----------- ------------
BALANCE at December 31, 1998
(audited)................. 16,373,628 163,736.. (212,070) 25,071,099 (19,654,070) -- 5,368,695
Net income.................. -- -- -- -- 150,646 -- 150,646
----------- -------- --------- ----------- ------------ ----------- ------------
BALANCE at September 30,
1999 (unaudited).......... 16,373,628 $163,736 $(212,070) $25,071,099 $(19,503,424) -- $ 5,519,341
=========== ======== ========= =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 149
VISTA ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ 150,646 $ (795,782) $(24,800,361) $ 597,681 $ 394,282
Adjustments to reconcile net
income (loss) before taxes to
cash provided by operating
activities:
Impairment of oil and gas
properties.................... -- -- 24,849,632 -- --
Depreciation, depletion and
amortization.................. 3,506,328 1,229,601 3,014,707 2,169,098 1,272,316
Amortization of deferred
borrowing cost................ 87,422 -- -- -- --
Provision for income taxes...... 81,117 -- (6,560,351) -- --
Amortization of unit option
awards........................ -- 214,303 4,262,089 315,518 --
Other assets.................... (451,046) (444,426) 32,077 97,211 273,843
(Gain) loss on sale of
property...................... (147,141) 339,362 317,293 87,678 56,738
Changes in working capital
Decrease (increase) in accounts
receivable.................... (1,922,943) 253,189 (649,975) (365,595) (385,771)
Decrease (increase) in other
current assets................ (11,147) (373,597) (178,699) (10,594) (24,120)
Increase in non-current
assets........................ -- -- (391,100) -- --
Decrease (increase) in accounts
payable and accrued
expenses...................... 1,754,537 16,875 (520,550) 578,641 485,361
Decrease in other non-current
liabilities................... -- -- (30,395) -- --
----------- ----------- ------------ ------------ -----------
Net cash provided by (used
in) operating
activities............... 3,047,773 439,525 (655,633) 3,469,638 2,072,649
----------- ----------- ------------ ------------ -----------
Cash flows from investing
activities:
Additions to property and
equipment....................... (5,265,215) (2,427,927) (22,805,360) (13,038,815) (7,417,091)
Proceeds from sales of property
and equipment................... 335,219 544,364 548,364 390,000 390,371
Payments of organization cost..... -- -- -- -- (20,000)
----------- ----------- ------------ ------------ -----------
Net cash used in investing
activities............... (4,929,996) (1,883,563) (22,256,996) (12,648,815) (7,046,720)
----------- ----------- ------------ ------------ -----------
Cash flows from financing
activities:
Payment of borrowings............. (1,017,154) -- (31,446,022) (418,649) (400,000)
Proceeds from issuance of debt.... 2,920,000 1,000,000 53,831,522 9,703,572 5,415,077
Payments of debt issuance cost.... -- -- -- (95,828) --
----------- ----------- ------------ ------------ -----------
Net cash provided by
financing activities..... 1,902,846 1,000,000 22,385,500 9,189,095 5,015,077
----------- ----------- ------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents.................. 20,623 (444,038) (527,129) 9,918 41,006
Cash and cash equivalents:
Beginning of period............... -- 527,129 527,129 517,211 476,205
----------- ----------- ------------ ------------ -----------
End of period..................... $ 20,623 $ 83,091 $ -- $ 527,129 $ 517,211
=========== =========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 150
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Organization
Vista Energy Resources, Inc. and its subsidiaries (collectively, "Vista" or
the "Company") is a Delaware corporation whose common stock is listed and traded
on the American Stock Exchange. The Company was incorporated in May 1998 for the
purpose of continuing and consolidating the operations of Vista Resources
Partners, L.P., a Texas limited partnership (the "Vista Partnership"), and
Midland Resources, Inc., a publicly traded Texas corporation ("Midland
Resources"). The merger of the Vista Partnership and Midland Resources (the
"Midland Merger") was completed on October 28, 1998. The Company is an
independent oil and gas company engaged in the acquisition, exploration,
production and development of oil and natural gas primarily in the Permian Basin
of West Texas and Southeastern New Mexico and the onshore Gulf Coast region of
South Texas.
Vista Resources I, Inc., a Texas corporation (the "General Partner"), now a
wholly-owned subsidiary of the Company, serves as the sole general partner of
the Vista Partnership. Vista Resources, Inc., a wholly owned subsidiary of the
Company ("Vista Resources"), currently serves as the operator of properties in
which the Company or its subsidiaries acquires or otherwise owns operating
working interests.
On October 28, 1998, pursuant to the terms of an Exchange Agreement dated
June 15, 1998 (the "Exchange Agreement"), the Company acquired all of the
outstanding partnership interests of the Vista Partnership and all of the
outstanding shares of common stock of the General Partner in exchange for shares
of Common Stock of the Company (the "Conversion"). The Conversion was accounted
for as a transfer of assets and liabilities between affiliates under common
control and resulted in no change in carrying values of these assets and
liabilities. The Conversion and other transactions contemplated by the Exchange
Agreement were consummated immediately prior to the closing of the Midland
Merger. As a result of the Conversion and the Midland Merger, security holders
of Midland Resources acquired 4,470,123 shares or 27.3 percent of the
outstanding "Common Stock" of the Company, and security holders of the Vista
Partnership acquired 11,903,506 shares of Common Stock, or 72.7 percent.
Accordingly, the accompanying financial statements include the results of
operations of the Company and Midland Resources since October 28, 1998, and the
results of the Vista Partnership prior to that date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include financial
statements of the Company and its wholly-owned subsidiaries, including Midland
Resources, the General Partner, Vista Resources and Vista Resources Partners,
L.P. All significant intercompany transactions and balances have been eliminated
in preparation of the consolidated financial statements.
Cash and Cash Equivalents
All highly-liquid investments with original maturities of three months or
less are considered to be cash equivalents.
F-24
<PAGE> 151
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable
Trade receivables represent billings to other working interest owners for
their share of costs on wells for which the Company serves as the operator.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil
and gas properties whereby costs of productive wells, developmental dry holes
and productive leases are capitalized and amortized on a unit-of-production
basis over the respective properties' remaining proved reserves. Amortization of
capitalized costs of oil and gas properties is provided on a
property-by-property basis. Gains or losses are recorded on the sale of oil and
gas properties if the entire amortization base is sold.
Leasehold costs are capitalized when incurred. Unproved oil and gas
properties with significant acquisition costs are periodically assessed based on
actual drilling experience and future drilling plans and any impairment in value
is charged to exploration costs. The costs of unproved properties which are not
individually significant are assessed periodically in the aggregate based on
historical experience, and any impairment in value is charged to exploration
costs. The Company recorded $32,077 of such exploration costs in 1998, $0.1
million of such exploration costs in 1997 and $0.3 million of such exploration
costs in 1996. The costs of unproved properties which are determined to be
productive are transferred to proved oil and gas properties.
Exploration costs, such as geological and geophysical expenses and annual
delay rentals, are charged to expense as incurred. Exploratory drilling costs,
if any, including the costs, if any, of stratigraphic test wells, are initially
capitalized but charged to expense if and when the well is determined to be
unsuccessful or one year has passed, whichever comes first.
Impairment of Oil and Gas Properties
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS 121 requires that proved oil and
gas properties be assessed for an impairment in their carrying value whenever
events or changes in circumstances indicate that such carrying value may not be
recoverable. SFAS 121 requires that this assessment be performed by comparing
the undiscounted future net cash flows and net carrying value of oil and gas
properties. This assessment must generally be performed on a
property-by-property basis. For the year ended December 31, 1998, the Company
recognized an impairment of its oil and gas properties in the amount of $24.8
million due to the significant decline in oil and gas commodity prices realized
during 1998, coupled with the effect of applying purchase accounting to the
Midland Merger. No such impairment of the carrying value of oil and gas
properties was required in 1997 or 1996.
SFAS 121 requires that future revenue from the Company's oil and gas
production be estimated at prices at which management expects such products will
be sold. In evaluating its oil and gas properties for impairment at December 31,
1998, management has estimated such future product prices at levels which it
believes are reasonable and supportable, but which exceed the current market
prices for oil and gas. Any downward revisions to management's estimates of
product prices could result in additional impairments of its oil and gas
properties in future periods. Estimated future revenues were based on total
proved reserves.
Other Property and Equipment
Other property and equipment are comprised of furniture, office equipment,
fixtures and automobiles. These items are amortized on a straight-line basis
over their estimated useful lives, which range from five to seven years.
F-25
<PAGE> 152
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets are primarily comprised of deferred debt issuance costs and
are presented net of accumulated amortization in the financial statements. The
Company expensed all previously capitalized organization costs and the debt
issuance costs associated with its former bank financing with Union Bank of
California in accordance with SOP 98-5, "Reporting on the Costs of Start-Up
Activities" totalling $0.6 million. Deferred debt issuance costs associated with
the existing BankBoston, N.A. ("BankBoston") credit facility ($0.4 million) will
be amortized over the life of the related debt agreements.
Revenue Recognition Policy
Revenues are recorded when products have been delivered and services have
been performed. The Company uses the sales method to account for gas imbalances.
Under this method, revenue is recognized based on the cash received rather than
the Company's proportionate share of gas produced. The Company's imbalances at
year ended December 31, 1998, 1997 and 1996 were not significant.
Income Taxes
Prior to the Conversion, the results of operations of the Company were
included in the tax returns of its owners. As a result, tax strategies were
implemented that are not necessarily reflective of strategies the Company would
have implemented as a taxable entity. In addition, the tax net operating losses
generated by the Company during the period from its inception, September 21,
1995, to the date of the Conversion, October 28, 1998, will not be available to
the Company to offset future taxable income as such benefit accrued to the
owners.
In conjunction with the Conversion, the Company adopted SFAS 109,
"Accounting for Income Taxes." Under this method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in enacted tax rates is
recognized in income in the period that includes the enactment date. SFAS 109
requires that the net deferred tax liabilities of the Company on the date of the
Conversion be recognized as a component of income tax expense. The Company
recognized approximately $2.6 million in deferred tax liabilities and income tax
expense as of the date of the Conversion.
Upon the Conversion, the Company became taxable as a corporation. Pro forma
income tax information presented in the accompanying consolidated statements of
operations, reflects the income tax expense (benefit) and net income (loss) as
if all Vista Partnership income had been subject to corporate federal income
tax, exclusive of the effects of recording the Company's net deferred tax
liabilities upon the Conversion.
Supplemental Cash Flow Information
Cash paid for interest for the year ended December 31, 1998, 1997 and 1996
was $1.2 million, $0.7 million and $0.2 million, respectively. No amounts have
been paid for income taxes.
Financial Instruments
The Company uses derivatives on a limited basis to hedge against interest
rate and product prices risks, as opposed to their use for trading purposes. The
Company's policy is to ensure that a correlation exists between the financial
instruments and the Company's pricing in its sales contracts prior to entering
F-26
<PAGE> 153
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
into such contracts. Gains and losses on commodity futures contracts and other
price risk management instruments are recognized in oil and natural gas revenues
when the hedged transaction occurs. Cash flows related to derivative
transactions are included in operating activities.
Accounting for Stock Options
Upon the Conversion, the Company adopted the provisions of Account
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). In accordance with APB 25, no compensation will be recorded for
stock options or other stock-based awards that are granted with an exercise
price equal to or above the common stock price on the date of the grant. The
Company will, however, follow the disclosure requirements of SFAS 123,
"Accounting for Stock-Based Compensation" which requires the Company to present
pro forma disclosures of net income and earnings per share as if compensation
expense was recognized for employee stock options.
Credit and Performance Risks
Credit risk is the risk of loss as a result of nonperformance by financial
counterparties of their contractual obligations. Because the loss can occur at
some point in the future, a potential exposure is added to current replacement
value to arrive at a total expected credit exposure. Performance risk results
when a counterparty fails to fulfill its contractual obligation such as
commodity pricing or volume commitments. Typically these risk obligations are
defined within the trading agreements. The Company believes these credit and
performance risks are negligible.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents approximates
their fair value of those instruments due to their short maturity. The fair
value of the Company's long-term debt is based on the current rates offered to
the Company for debt with the same remaining maturity. The Company believes the
fair value of its long-term debt approximates its carrying value due to its
variable interest rate.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
and displaying of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general-purpose financial statements. For the
years ended December 31, 1998, 1997 and 1996, the Company reported no
differences between comprehensive income (loss) and net income (loss).
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires reporting of financial and
descriptive information about a company's reportable operating segments. The
Company has identified only one operating segment, which is the exploration and
production of oil and gas.
In June 1998, the FASB issued Statement of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
for fiscal years beginning after June 15, 2000. SFAS 133 requires that
derivatives be reported on the balance sheet at fair value and, if the
derivative is not designated as a hedging instrument, changes in fair value must
be recognized in earnings in the period of change. If the derivative is
designated as a hedge, and to the extent such hedge is determined to be
effective, changes in fair value are either offset by the change in fair value
of the hedged asset or liability (if applicable) or reported as a component of
other comprehensive income in the period of change, and subsequently recognized
in earnings when the offsetting hedged transaction occurs. The definition of
derivatives has also been expanded to include contracts that require physical
delivery of oil and gas if the
F-27
<PAGE> 154
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contract allows for net cash settlement. The Company primarily uses derivatives
to hedge product price and interest rate risks. These derivatives are recorded
at cost, and gains and losses on such derivatives are reported when the hedged
transaction occurs. Accordingly, adoption of SFAS 133 will have an impact on the
reported financial position of the Company, and although such impact has not
been determined, it is currently not believed to be material. Adoption of SFAS
133 should have no significant impact on reported earnings, but could materially
affect comprehensive income.
Reclassifications
Certain amounts in the prior periods' financial statements have been
reclassified to conform with the current year presentation.
Basis of Presentation -- September 30, 1999 Consolidated Financial Statements
In management's opinion, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the financial position as of
September 30, 1999 and related results of operations and cash flows for the nine
months ended September 30, 1999 and 1998 of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated in preparation of the consolidated financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted for the period ended September 30, 1999 and 1998
pursuant to the rules and regulations of the Securities and Exchange Commission.
Information as of September 30, 1999 or for the nine months ended September 30,
1999 or 1998 is unaudited.
3. SIGNIFICANT ACQUISITIONS OF OIL AND GAS PROPERTIES AND OTHER ASSETS
1999 Acquisitions
The Company made no material asset acquisitions during the first nine
months of 1999.
1998 Acquisitions
On October 28, 1998, the Company completed the Conversion and the Midland
Merger (see Note 1). The Company issued 4,470,123 shares of common stock and
995,375 warrants with an exercise price of $4.00 to the Midland Resources
shareholders and warrant holders and assumed 261,800 Midland Resources employee
options (which expired without exercise in February 1999). The Company also
assumed 2,522,670 Midland Resources warrants to effect the Midland Merger. In
connection with the Midland Merger, the Company issued 11,903,506 shares of
common stock and 8,563,028 warrants with an exercise price of $4.00 to the Vista
Partnership's existing partners so that the security holders of the Vista
Partnership would own 72.7 percent of the Company's outstanding stock and
warrants. The estimated value recorded for the consideration paid to the Midland
Resources shareholders was based on the market value of the Midland Resources
securities at the announcement of the Midland Merger on May 26, 1998. The
allocation of the purchase price for the assets acquired and liabilities assumed
was as follows:
<TABLE>
<S> <C>
Working capital....................................... $ (895,132)
Oil and gas properties................................ $ 37,296,391
Debt assumed.......................................... $(10,445,394)
Deferred income taxes................................. $ (6,910,351)
------------
Purchase Price.............................. $ 19,045,514
============
</TABLE>
F-28
<PAGE> 155
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
From the announcement of the Midland Merger in May 1998 to the closing in
October 1998, the trading price of the Midland Resources common stock declined.
In addition, oil prices decreased significantly from May 1998 to December 1998.
Accordingly, at December 31, 1998 the Company recorded a significant impairment
charge to the allocated value of oil and gas properties recorded in purchase
accounting for the Midland Merger. The total impairment recognized related to
the properties acquired from Midland Resources was approximately $22.2 million.
On December 18, 1998 (effective date of October 1, 1998), the Company
acquired working interests ranging from 65 percent to 85 percent in a group of
oil and gas producing leases from IP Petroleum Company, Inc. and certain of its
working interest partners. These leases are located primarily in the War-Wink
area of Ward and Winkler Counties, Texas, and the interests were acquired for a
purchase price of $19.1 million (the "IP Acquisition"). Collectively, the
Midland Merger and the IP Acquisition are referred to herein as the "1998
Acquisitions."
Pro Forma Condensed Statements of Operations
The following unaudited Pro Forma Condensed Combined Statements of
Operations for the years ended December 31, 1998 and 1997 give effect to the
1998 and 1997 Acquisitions as if the acquisitions had been consummated at
January 1, 1998 and 1997. The unaudited pro forma data is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred had the transactions been consummated at the
dates indicated, nor are they necessarily indicative of future operating
results.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Total Revenues............................................ $17,201,844 $25,366,211
Net income (loss)......................................... (25,583,668) 2,548,993
Basic Net income (loss)................................... (1.57) .16
Diluted Earnings per share................................ -- .09
</TABLE>
1997 Acquisitions
In addition to acquiring various additional small working interests and
overriding royalty interests in properties already owned and operated by the
Company, the Company closed two significant producing property acquisitions in
1997 (collectively, the "1997 Acquisitions"). In May 1997, the Company acquired
all of the interests of Coastal Oil and Gas Corporation in three producing
leases located in the Howard Glasscock Field, Howard County, Texas, for a net
purchase price of $1.1 million. The interests acquired were attributable to
leases in which the Company already owned interests and which were operated by
the Company.
Effective as of July 1, 1997, the Company acquired substantially all of the
producing oil and gas properties (representing working interests ranging from 25
percent to 100 percent in approximately 44 wells located in West Texas, South
Texas, East Texas and Southeastern New Mexico) from E.G. Operating, a division
of FGL, Inc., for a net purchase price of $6.1 million. All of the Company's
1997 acquisitions were funded through a combination of proceeds from long-term
borrowings and cash provided by operating activities.
F-29
<PAGE> 156
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 Acquisitions
In addition to acquiring various additional small working interests in oil
and gas properties already owned and operated by the Company, the Company closed
two significant producing property acquisitions in 1996 (collectively, the "1996
Acquisitions"). Effective as of June 1, 1996, the Company acquired 100 percent
of the working interest in two producing leases (14 wells) located in the Sharon
Ridge Field, Scurry County, Texas, for a net purchase price of $0.5 million.
Effective as of July 1, 1996, the Company acquired producing oil and gas
properties from Merit Energy Company and certain of its partnership affiliates
for a net purchase price of $4.1 million. All the Company's 1996 acquisitions
were funded through a combination of proceeds from long-term borrowings and cash
provided by operating activities.
All of the acquisitions described above (1998, 1997 and 1996) were
accounted for using the purchase method of accounting. Accordingly, results of
operations from these acquisitions are included in the accompanying financial
statements only as of the closing dates for each of the acquisitions involved.
4. SALE OF OIL AND GAS PROPERTIES
During 1998, the Company sold certain oil and gas properties for a total
net consideration of $0.5 million, which resulted in a recognized loss of $0.3
million. During 1997, the Company sold certain oil and gas properties for a
total net consideration of $0.4 million, which resulted in a recognized loss of
$0.1 million. During 1996, the Company sold certain oil and gas properties for a
total net consideration of $0.4 million, which resulted in a recognized loss of
$0.1 million. All of the properties sold in 1998, 1997 and 1996 were lower-end,
non-strategic, producing oil and gas leases located primarily in the Permian
Basin of West Texas.
5. OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth certain information regarding the aggregate
capitalized costs of oil and gas properties:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Proved properties......................................... $ 86,142,634 $27,797,268
Unproved properties....................................... 828,031 146,366
Accumulated depreciation, depletion and amortization...... (30,956,448) (3,396,901)
------------ -----------
Net Capitalized Cost............................ $ 56,014,217 $24,546,733
============ ===========
</TABLE>
The following table sets forth certain information regarding costs incurred
in connection with the Company's oil and gas producing activities:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Property Acquisitions:
Proved properties............................ $53,822,839 $ 7,217,464 $4,840,602
Unproved properties.......................... 681,665 19,295 --
Developmental costs.......................... 2,603,396 5,381,429 2,433,838
Exploration costs............................ 32,077 176,792 359,763
----------- ----------- ----------
$57,139,977 $12,794,980 $7,634,203
=========== =========== ==========
</TABLE>
F-30
<PAGE> 157
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
As of September 30, 1999, and December 31, 1998, respectively, $52.6
million and $49.9 million was outstanding under a $100 million revolving Credit
Agreement dated December 18, 1998, and accompanying note (the "Credit Facility")
with BankBoston subject to a borrowing base which is redetermined on a
semi-annual basis. The borrowing base at September 30, 1999 and December 31,
1998, respectively, was $55 million. The next scheduled borrowing base
redetermination is scheduled for February 28, 2000. Borrowings under the Credit
Facility are to be used for the acquisition and development of oil and gas
properties and for other Company purposes.
The Company has two options with respect to interest rate elections on
borrowings under the Credit Facility. The Company may either elect an interest
rate equal to (i) the Alternate Base Rate plus the Applicable Margin ("Prime
Basis") or (ii) a Eurodollar rate (i.e., London Interbank Offered Rate) plus the
Applicable Margin ("LIBOR Basis"). The Applicable Margin (as defined in the
Credit Facility) will be adjusted for Borrowing Base usage. The LIBOR Basis
option provides for one-, two-, three-, six- and twelve-month interest periods.
At September 30, 1999, and December 31, 1998, respectively, the effective
interest rate on the amount outstanding was 7.59 percent and 7.5 percent.
Unless otherwise extended by BankBoston, the Credit Facility converts to a
three-year fully amortizing term loan at December 15, 2001.
The obligations of the Company under the Credit Facility are secured by a
first lien deed of trust on the Company's interests in certain of its oil and
gas properties.
The Credit Facility contains two financial covenants including a minimum
current ratio, including available borrowings, of 1:1 and an interest coverage
to EBITDA test (2.0 to 1.0 for the four-fiscal quarter period ending December
31, 1998; 2.25 to 1.0 for the four-fiscal quarter period ending March 31, 1999;
and 2.5 to 1.0 for each four-fiscal quarter period thereafter). The Credit
Facility also includes covenants which, among other things, restrict the
incurrence of additional indebtedness and the sale or acquisition of oil and gas
properties above certain levels without the consent of the lender.
Effective as of December 23, 1997, the Company entered into an interest
rate swap accounted for as a hedge with any realized gains or losses
appropriately recorded as interest expense (See Note 12 for further discussion
of hedge accounting.). The swap consists of a $10 million notional amount of
indebtedness at a fixed swap rate of 6.02 percent three-month LIBOR for the
Company. The term of this swap ends on December 23, 1999. Effective as of
January 1, 1999, this interest rate swap was assigned to BankBoston. In
conjunction with such assignment the terms of the swap were modified to reduce
the fixed swap rate from 6.02 percent to 5.65 percent and to extend the term of
the swap until December 23, 2000, at the option of BankBoston.
In connection with the Midland Merger, the Company assumed a settlement
obligation with a former officer of Midland Resources. Under the settlement
agreement, the Company is obligated to pay the former officer $20,000 per month
until October 2003. The present value of this agreement is included in accounts
payable ($0.2 million) and long-term debt ($0.8 million) in the accompanying
consolidated financial statements.
F-31
<PAGE> 158
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt at December 31, 1998, are as
follows:
<TABLE>
<S> <C>
1999................................................... None
2000................................................... $ 196,132
2001................................................... 208,230
2002................................................... 16,852,680
2003................................................... 16,826,217
thereafter............................................. 16,647,635
-----------
Totals....................................... $50,730,894
===========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
Stock Option Plan
In October 1998, the Company adopted its 1998 Key Employee Stock Option
Plan (the "1998 Plan") for key employees of the Company. Under the 1998 Plan,
options to acquire up to 900,000 shares of common stock of the Company may be
granted and outstanding at any given time. The specific terms of grant and
exercise are determinable by the Compensation Committee of the Board of
Directors of the Company. No options were issued in 1998. The exercise price for
the options must not be less than the fair market value per common share at the
date of grant. The options vest over a three-year period (33 percent, 66 percent
and 100 percent) and expire five years from the date of grant.
Prior Vista Partnership Option Plan
Effective September 26, 1995, the board of directors of the General Partner
of the Vista Partnership adopted an original Option Plan (the "Plan") for
certain officers and employees of the Vista Partnership and its affiliates. The
Plan authorizes the grant of options to acquire units of limited partnership
interests in the Vista Partnership ("Units"). Effective April 1, 1997, the board
of directors of the General Partner of the Vista Partnership amended and
restated the Plan in order to provide for additional options to be added to the
Plan (the "Amended Plan"). As of December 31, 1997, the Amended Plan provided
for future awards of options of up to 165,000 Units.
The Amended Plan provided for the issuance of 1,580,321 options in six
separate series with an initial exercise price of $1 (series A-D or "$1
options") and $2 (series E-F or "$2 options") which were to be increased 10
percent per annum from the initial plan adoption date of September 26, 1995, for
the $1 options and April 1, 1997, for the $2 options. Option A series, covering
550,358 units, was to vest at a rate of one-third of the options at each of the
dates of April 1, 1998, 1999 and 2000. Option B, C, D and E series were to vest
on the dates that the board determines that the current value of partnership
units had increased by a factor of 3, 4, 5 and 6, respectively, or on the date
that such per unit amounts of cash or other assets have been or are authorized
to be distributed to the partners. Option B, C, D and E series covered 152,877;
159,826; 167,260 and 350,000 units, respectively.
Prior to the closing of the Midland Merger, all options under the Amended
Plan vested and such options were exercised by the option holders. At the
closing of the Midland Merger, the Units issued as a result of the exercise of
the options were exchanged for shares of Common Stock of the Company pursuant to
the Exchange Agreement (See Note 1). Accordingly, the Amended Plan was
terminated effective with the closing of the Midland Merger.
Prior to the closing of the Midland Merger, the Company accounted for the
Units issued under the Amended Plan under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Based on an estimated fair
value of $2 per unit, the Company recorded a noncash charge for the expected
value of the vested $1 options in the amount of $0.3 million for the year ended
December 31,
F-32
<PAGE> 159
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997. As a result of the exercise of the options, the exchange of the Units
received pursuant to such exercise under the Exchange Agreement and the
termination of the Amended Plan, the Company recorded a noncash charge in the
amount of $4.3 million for the year ended December 31, 1998. Had compensation
cost for the Amended Plan been determined consistent with SFAS 123, "Accounting
for Stock-Based Compensation," the Company would not have reported any
compensation cost related to the Amended Plan for any periods presented in the
accompanying Consolidated Statements of Operations.
401(k) Savings
The Company has a 401(k) profit sharing and savings plan (the "401(k)
Plan"). The initial plan was established by Midland Resources, however; upon
closing of the Midland Merger, the Company adopted the 401(k) Plan. Eligible
employees may make voluntary contributions to the 401(k) Plan. The amount
contributed by the employees to the 401(k) Plan are limited as specified by the
401(k) Plan. The Company may, at its discretion, make additional contributions
to the 401(k) Plan. The Company has historically made a profit sharing
contribution to the 401(k) Plan in an amount equal to the employees contribution
up to 3 percent of the employees gross salary. The Company incurred costs of $0,
$18,515, $24,086 and $32,926 in 1996, 1997, 1998 and the nine months ended
September 30, 1999, respectively, with respect to its defined contribution plan.
8. COMMITMENTS AND CONTINGENCIES
The Company leases 10,963 square feet of office space at 550 West Texas
Avenue, Suite 700 Midland, Texas from Fasken Center, Ltd. under an office lease
dated October 10, 1996 (as amended from time to time, the "Lease"). The Lease is
a non-cancelable operating office lease containing standard and customary lease
provisions and runs from January 1, 1997, through August 31, 2002. The annual
rental payments due under the Lease are as follows:
<TABLE>
<CAPTION>
PERIOD AMOUNT
- ------ --------
<S> <C>
September 1, 1997 -- August 31, 1998...................... $ 50,523
September 1, 1998 -- August 31, 1999...................... 71,284
September 1, 1999 -- August 31, 2000...................... 86,676
September 1, 2000 -- August 31, 2001...................... 86,676
September 1, 2001 -- August 31, 2002...................... 86,676
--------
$381,835
========
</TABLE>
The Company also has office space leased at 616 F. M. 1960 West, Suite 600,
Houston, Texas 77090. This lease space is space previously leased by Midland
Resources. The Company is currently attempting to sublease the space in Houston
since it conducts no operations in the Houston area. This lease expires in 2002
and the annual rental payments of $0.1 million are due until 2002.
Litigation
At December 31, 1998, the Company was a Defendant in a lawsuit filed on
July 31, 1995, styled Manna Oil & Gas, Inc., Dobbs Oil & Gas, Inc. v. Midland
Resources, Inc. , Miresco Inc., Midland Resources Operating Company, Inc., Cause
No. 40,677. The case involved disputes with a non-operating interest owner
concerning the operation of certain Gulf Coast properties located in Copano Bay,
Aransas County, Texas, wherein the Company owns a 68 percent working interest
and is the operator of the properties. The lawsuit was settled in February 1999
by the Company acquiring all of the interests of the Plaintiffs in the subject
properties for a net purchase price of $0.7 million.
F-33
<PAGE> 160
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and its subsidiaries are, from time to time, involved in
various other lawsuits and certain governmental proceedings arising in the
ordinary course of business.
9. SIGNIFICANT CUSTOMERS
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be significantly affected by changes in economic and other
conditions. In addition, the Company sells a significant portion of its oil and
natural gas revenue each year to a few customers. Oil and gas sales to three
purchasers in 1998 were approximately 10 percent, 14 percent and 18 percent of
total 1998 oil and gas revenues. Oil sales to three purchasers in 1997 were
approximately 20 percent, 19 percent and 18 percent of total 1997 oil and gas
revenues. Oil sales to two purchasers in 1996 were approximately 14 percent and
40 percent of total 1996 oil and natural gas revenues.
Management does not believe that the loss of any one customer would have a
significant impact on the Company's results of operations.
10. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted the provisions of SFAS
128, "Earnings Per Share," which prescribes standards for computing and
presenting earnings per share ("EPS") and supersedes APB Opinion 15, "Earnings
Per Share."
The computation of basic and diluted earnings (loss) per share were
identical for the nine months ended September 30, 1999, and for the years ended
December 31, 1998, 1997 and 1996 due to the following:
Options to purchase 261,800 shares of common stock were outstanding
since October 28, 1998, but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the Common Stock. All outstanding options expired in February
1999.
Warrants to purchase 12,081,073 shares of Common Stock were not
included in the computation of EPS as they are antidilutive as a result of
the Company's net loss for the year ended December 31, 1998. All of these
warrants, 11,811,073 of which expire on November 1, 2002, with the
remaining warrants expiring from March 1999 through June 2002, were still
outstanding at December 31, 1998. These warrants were not included in the
computation of diluted EPS for the nine months ended September 30, 1999
because the warrants' exercise price was greater than the average market
price of the common stock.
As the Conversion was not completed until October 28, 1998, there were
no potentially dilutive equity securities outstanding at either December
31, 1997 and 1996.
EPS has been calculated for all periods presented as if the Conversion
had been completed on January 1, 1996.
11. INCOME TAXES
Upon the Conversion, the Company became taxable as a corporation. Pro forma
income tax information and pro forma income (loss) presented in the accompanying
statements of operations, reflect the income tax expense (benefit) and net
income (loss) as if all Vista Partnership income had been subject to corporate
federal income tax prior to the Conversion.
F-34
<PAGE> 161
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate for the company was different than the
statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Income tax expense (benefit) at the Federal statutory rate
of 35 percent............................................... $(10,976,249)
Effect of change in tax status at Conversion................ 2,635,353
Unit option awards not deductible for Tax................... 1,491,731
Tax loss generated prior to Conversion...................... 288,814
------------
Income tax expense (benefit)................................ $ (6,560,351)
============
</TABLE>
Components of federal income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Current income tax.......................................... $ --
Deferred income tax expense (benefit)....................... (6,560,351)
-----------
Income tax expense (benefit)................................ $(6,560,351)
===========
</TABLE>
Deferred tax assets and liabilities are the result of temporary differences
between the financial statement carrying values and tax bases of assets and
liabilities. The Company's net deferred tax liabilities are recorded as a
long-term liability of $0.4 million as of December 31, 1998. Significant
components of net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred Tax Assets:
Net operating loss carryforward........................... $ 2,304,000
Deferred Tax Liabilities:
Book Property basis in excess of tax basis................ (2,654,000)
-----------
Net deferred tax liabilities.............................. $ (350,000)
===========
</TABLE>
As of December 31, 1998, the Company has estimated tax loss carryforwards
of approximately $6.6 million, which are scheduled to expire in 2001 through
2013.
12. FINANCIAL INSTRUMENTS
Commodity Price Hedging Instruments
The Company periodically uses derivative financial instruments to manage
crude oil and natural gas price risk. These instruments qualify as hedges under
generally accepted accounting principles and are properly recorded as
adjustments to oil and gas sales in the consolidated statements of operations.
In order to qualify for hedge accounting, each financial instrument must be
initially designated as a hedge, must appropriately reduce the price risk and
must have correlation to the commodity being hedged. If an instrument does not
qualify as a hedge, then it is accounted for as a speculative transaction. It is
the Company's policy not to engage in speculative transactions of this nature.
The Company's realized gains and losses attributable to its price risk
management activities were $(1.4) million, $0.9 million, $(0.2) million and
$(0.6) million for the nine months ended September 30, 1999, and the years ended
December 31, 1998, 1997 and 1996, respectively.
In the tables set forth below, "Transaction Date" is the date on which
Vista entered into the hedge. Vista typically enters into "swaps" or "collars."
A swap is a fixed-price hedge and a collar is a hedge that
F-35
<PAGE> 162
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has a ceiling price and a floor price. If the particular product price stays in
between the ceiling and the floor prices, then no payments are made by either
party under a collar. The terms "Put Floor Price" and "Call Ceiling Price" refer
to the prices at which Vista has hedged its production and are expressed in the
calendar monthly average of daily NYMEX closing prices for Light Sweet Crude Oil
or monthly NYMEX (Henry Hub) closing prices for natural gas. Volumes refer to
barrels of crude oil or Mcf of gas, where one Mcf is equivalent to one MMBtu.
The "Term" refers to the time period of the hedge.
Set forth below is the contract amount and material terms of all crude oil
hedging instruments held by the Company at December 31, 1998.
<TABLE>
<CAPTION>
PUT FLOOR PRICE CALL CEILING PRICE
TRANSACTION DATE TYPE TRANSACTION MONTHLY VOLUME PER BBL PER BBL TERM
- ---------------- ---------------- -------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
12-15-97 Collar 10,000 $18.50 $19.28 4-1-98 to 3-31-99
12-11-98 Swap 40,000 14.20 14.20 8-1-99 to 6-30-00
</TABLE>
Set forth below is the contract amount and material terms of all NYMEX
natural gas hedging instruments held by the Company at December 31, 1998.
<TABLE>
<CAPTION>
PUT FLOOR PRICE CALL CEILING PRICE
TRANSACTION DATE TYPE TRANSACTION MONTHLY VOLUME PER MCF PER MCF TERM
- ---------------- ---------------- -------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
8-20-98 Collar 40,000 $2.25 $2.45 1-1-99 to 12-31-99
11-12-98 Collar 50,000 2.25 2.51 1-1-99 to 12-31-99
8-20-98 Collar 40,000 2.17 2.34 1-1-99 to 12-31-99
12-28-98 Swap 50,000 2.01 2.01 1-1-99 to 12-31-99
</TABLE>
Set forth below is the contract amount and material terms of all crude oil
hedging instruments held by the Company at September 30, 1999.
<TABLE>
<CAPTION>
PUT FLOOR PRICE CALL CEILING PRICE
TRANSACTION DATE TYPE TRANSACTION MONTHLY VOLUME PER BBL PER BBL TERM
- ---------------- ---------------- -------------- --------------- ------------------ ------------------
<C> <C> <C> <C> <C> <S>
12-11-98 Swap 40,000 $14.20 $14.20 8-1-99 to 6-30-00
4-19-99 Collar 20,000 15.00 17.00 1-1-00 to 6-30-00
4-19-99 Collar 40,000 15.00 16.85 7-1-00 to 12-31-00
</TABLE>
Set forth below is the contract amount and material terms of all NYMEX
natural gas hedging instruments held by the Company at September 30, 1999.
<TABLE>
<CAPTION>
PUT FLOOR PRICE CALL CEILING PRICE
TRANSACTION DATE TYPE TRANSACTION MONTHLY VOLUME PER MCF PER MCF TERM
- ---------------- ---------------- -------------- --------------- ------------------ ------------------
<C> <C> <C> <C> <C> <S>
8-20-98 Collar 40,000 $2.25 $2.42 1-1-99 to 12-31-99
11-12-98 Collar 50,000 2.25 2.51 1-1-99 to 12-31-99
8-20-98 Collar 40,000 2.17 2.55 1-1-99 to 12-31-99
12-28-98 Swap 50,000 2.01 2.01 1-1-99 to 12-31-99
1-12-98 Swap 120,000 2.12 2.12 1-1-00 to 12-31-00
2-8-99 Swap 120,000 2.35 2.35 1-1-01 to 12-31-01
</TABLE>
The Company also hedges from time to time the basis for its natural gas
production which depends upon the location of its gas production. Such basis
hedges are immaterial to the financial performance of the Company. As of
December 31, 1998, the Company had hedged approximately 21 percent of estimated
1999 oil production and 68 percent of estimated 1999 natural gas production. As
of December 31, 1998, the Company had hedged 19 percent of estimated 2000 oil
production. Subsequent to December 31, 1998, the Company has hedged an
additional 22 percent of 1999 estimated oil production. Subsequent to December
31, 1998, the Company has hedged 42 percent of 2000 estimated natural gas
production and 44 percent of 2001 natural gas production.
F-36
<PAGE> 163
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Swap Agreement
Effective as of December 23, 1997, the Company entered into an interest
rate swap accounted for as a hedge with any realized gains or losses
appropriately recorded as interest expense. The swap consists of a $10 million
notional amount of indebtedness at a fixed swap rate of 6.02 percent based on
the three-month LIBOR for the Company. The term of this swap ends on December
23, 1999. Effective as of January 1, 1999, this interest rate swap was assigned
to BankBoston. In conjunction with such assignment the terms of the swap were
modified to reduce the fixed swap rate from 6.02 percent to 5.65 percent and to
extend the term of the swap until December 23, 2000, at the option of
BankBoston.
13. OIL AND GAS RESERVES INFORMATION (UNAUDITED)
The estimates of Vista'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 the
Financial Accounting Standards Board. Williamson Petroleum Consultants, Inc.
evaluated leases containing 97% of the estimated reserves owned by Vista as of
December 31, 1998, with the remaining 3% being evaluated by the Company. The
estimates as of December 31, 1997 and December 31, 1996 were prepared by the
Company, based on work done in conjunction with Williamson Petroleum
Consultants.
Future prices received for production and future production costs may vary,
perhaps significantly from the prices and costs assumed for purposes of these
estimates. There can be no assurance that the proved reserves will be developed
within the periods indicated or that prices and costs will remain constant.
There can be no assurance that actual production will equal the estimated
amounts used in the preparation of reserve projections. In accordance with the
Securities and Exchange Commission's guidelines, the Company's estimates of
future net cash flows from the Company's proved properties and the
representative value thereof are made using oil and natural gas prices in effect
as of the dates of the calendar year periods indicated and are held constant
throughout the life of the properties. Average prices used in estimating the
future net cash flows at December 31, 1998, 1997 and 1996 were as follows:
$10.64, $16.10 and $23.55 per barrel for oil, respectively, and $1.83, $2.01 and
$3.43 per Mcf for natural gas, respectively.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. Oil and gas reserve engineering is and must be
recognized as a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in any exact way, and estimates of other
engineers might differ materially from those shown below. The accuracy of any
reserve estimate is a function of the quality of available data and engineering
and estimates may justify revisions. Accordingly, reserves estimates are often
materially different from the quantities of oil and gas that are ultimately
recovered. Reserve estimates are integral in management's analysis of
impairments of oil and gas properties and the calculation of depreciation,
depletion and amortization on its properties.
F-37
<PAGE> 164
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited table sets forth proved oil and gas reserves at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- ---------------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves:
Beginning of year..... 7,216,559 11,295,325 4,540,419 7,185,636 2,230,190 4,837,030
Revisions of previous
Estimates.......... (1,669,606) (2,576,510) 1,304,819 (969,377) 548,009 (458,198)
Extensions and
Discoveries........ 465,458 4,182,533 1,161,953 -- 205,859 28,442
Purchase of minerals
in Place........... 5,118,101 20,024,034 762,282 6,206,929 1,838,595 3,339,214
Sale of minerals in
Place.............. (142,316) (28,925) (148,902) (343,565) (46,455) (126,680)
Production............ (529,426) (1,250,490) (403,812) (784,298) (235,779) (434,172)
---------- ---------- --------- ---------- --------- ---------
End of Year........... 10,458,770 31,645,967 7,216,759 11,295,325 4,540,419 7,185,636
========== ========== ========= ========== ========= =========
Proved Developed
Reserves:
Beginning of Year..... 3,559,850 7,909,902 3,092,149 5,510,499 1,352,870 3,893,360
---------- ---------- --------- ---------- --------- ---------
End of year........... 6,708,844 22,613,352 3,559,850 7,909,902 3,092,149 5,510,499
========== ========== ========= ========== ========= =========
</TABLE>
- ---------------
(1) Proved reserves have historically been revised upward as a result of
successful in-field drilling and implementation of secondary recovery
projects which result in the reclassification of "probable" reserves to the
"proved" category. Other less significant revisions occurred and are
attributable to properties Vista purchased which, as a result of additional
in-depth geological and engineering reviews, were determined to have
additional proved reserves (i.e., more than were originally identified at
the time of purchase). During 1998, negative reserve revisions were the
result of significantly lower prices from the previous year.
The following table sets forth the standardized measure of discounted
future net cash flows relating to proved reserves at December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows Relating to Proved Reserves:
Future cash flows........................ $170,551,299 $131,921,276 $125,076,627
Future costs:
Production............................ (69,536,325) (45,194,356) (47,139,363)
Development........................... (15,369,172) (12,371,206) (6,835,546)
Income Taxes............................. (10,032,197) -- --
------------ ------------ ------------
Future net cash flows.................... 75,613,605 74,355,714 71,101,718
10% discount factor...................... (25,376,691) (35,775,170) (30,250,175)
------------ ------------ ------------
Standardized measure of discounted future
net cash flows........................ $ 50,236,914 $ 38,580,544 $ 40,851,543
============ ============ ============
</TABLE>
F-38
<PAGE> 165
VISTA ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had the Company been a taxable entity at December 31, 1997, the future
income taxes would have been $14.1 million on an undiscounted basis and $7.8
million on a discounted basis, and the standardized measure of discounted future
net cash flows at December 31, 1997 would have been $37.0 million.
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved reserves for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Standardized Measure, Beginning of Year..... $ 38,580,544 $ 40,851,543 $17,242,730
Net change in sales price, net of
production costs....................... (17,336,320) (12,557,771) 6,601,987
Development costs incurred during the year
which previously estimated............. 3,000,000 5,073,000 2,033,000
Revisions of quantity estimates........... (6,361,075) 6,325,872 4,182,057
Extensions, discoveries and improved
recovery, net of future production and
development costs...................... 4,296,455 2,382,351 1,485,041
Accretion of discount..................... 3,858,054 4,085,154 1,724,273
Change in future development costs........ 4,484,697 (4,116,068) (2,598,316)
Change in timing and other................ (2,830,538) (5,394,793) (4,484,968)
Change in future income taxes............. -- -- --
Purchase of reserves in place............. 27,382,247 8,289,041 17,756,033
Sales of reserves in place................ (498,478) (1,171,519) (97,141)
Sales, net of production costs............ (4,338,672) (5,186,266) (2,993,153)
------------ ------------ -----------
Standardized measure, End of Year........... $ 50,236,914 $ 38,580,544 $40,851,543
============ ============ ===========
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On October 8, 1999, the Company and Prize Energy Corp., a Delaware
corporation ("Prize"), entered into a definitive agreement to merge the two
companies. The transaction will create a mid-size independent oil and gas
company with assets valued in excess of $450 million. The combined company's
focused growth strategy is concentrated on the acquisition and exploitation of
oil and gas properties in its core operating areas of the Permian Basin of West
Texas and Southeastern New Mexico, onshore Gulf Coast area of Texas and
Louisiana and the Mid-Continent area of Western Oklahoma and the Texas
panhandle.
Under the terms and conditions of the Agreement and Plan of Merger between
the Company and Prize, Prize would become a wholly-owned subsidiary of the
Company in exchange for 58.2 million shares of common stock of the Company (with
such number of shares being subject to adjustment in order to reflect a proposed
reverse stock split) and 27.7 million shares of to be created Series A 6%
Convertible Preferred Stock of the Company (with such number of shares being
subject to adjustment in order to reflect a proposed reverse stock split). The
Company's outstanding warrants will remain outstanding in accordance with their
terms. The transaction is to be structured as a reorganization for tax purposes
and will result in the current holders of common stock of the Company owning
approximately 16% of the outstanding common stock of the combined company and
the holders of common stock and preferred stock of Prize collectively owning (on
a fully converted basis) approximately 84% of the outstanding common stock of
the combined company upon completion of the merger.
The combined company will be headquartered in the Dallas, Texas area with
operating offices in Midland and Victoria, Texas and Elmore City, Oklahoma. The
combined company will have a capital structure consisting of approximately 74.6
million shares of common stock outstanding (with such number of shares being
subject to adjustment in order to reflect a proposed reverse stock split),
approximately $30 million of convertible preferred securities and approximately
$195 million of net long-term debt.
F-39
<PAGE> 166
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Vista Energy Resources, Inc.:
We have audited the accompanying statements of revenues and direct
operating expenses of the I.P. Acquisition (see Note 1) for the nine months
ended September 30, 1998, and the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of the management of Vista Energy
Resources, Inc. 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, such statements present fairly, in all material respects,
the revenues and direct operating expenses of the I.P. Acquisition described in
Note 1 for the nine months ended September 30, 1998, and the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 25, 1999
F-40
<PAGE> 167
I.P. ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998,
AND THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and gas.......................................... $4,244,847 $8,897,264 $7,782,319
Total Revenues............................... 4,244,847 8,897,264 7,782,319
---------- ---------- ----------
Direct Operating Expenses:
Lease operating and production taxes................. 950,695 1,762,352 1,411,343
---------- ---------- ----------
Total direct operating expenses.............. 950,695 1,762,352 1,411,343
---------- ---------- ----------
Excess of Revenues Over Direct Operating Expenses...... $3,294,152 $7,134,912 $6,370,976
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 168
I.P. ACQUISITION
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSE
1. BASIS OF PRESENTATION
On December 18, 1998, with an effective date of October 1, 1998, Vista
Energy Resources, Inc. (Vista or the Company) acquired working interests ranging
from 65 percent to 85 percent in a group of oil and gas producing leases from IP
Petroleum Company, Inc. and certain of its working interest partners. These
leases are located primarily in the War-Wink area of Ward and Winkler Counties,
Texas, and the interests were acquired for a purchase price of $19.1 million
(the "IP Acquisition").
The items of "direct operating expenses" included in the accompanying
statements of revenues and direct operating expense include all costs incurred
which are necessary for the production, marketing and distribution of the
products produced from the subject properties including costs and expenses of
field separation; treatment; dehydration; direct overhead charges, other than
costs associated with general corporate activities; pumper, roustabout and field
supervision labor; meter calibrations; engineering supervision charges; fuel and
electricity; valves, connections and other minor equipment repair; oil and
lubricants; major repairs, both downhole and surface; rental tools and
equipment; pipe inspection; trucking; reservoir testing; pressure testing; well
plugging; site remediation; operator bonding; insurance charges; salt water
disposal; water injection and pressure maintenance; gas compression; hot oil and
hot water treatments; filing fees; make-up water purchases; electrician charges;
mud and chemicals; pulling and workover units; other miscellaneous supplies and
services; and severance, ad valorem and other production related taxes and
charges. The accompanying statements of revenues and direct operating expenses
do not include costs associated with general corporate activities, interest
income or expense, a provision for depreciation, depletion and amortization or
any provision for income taxes because the subject properties acquired by Vista
from IP Petroleum, Inc. represent only a portion of a business and such items of
revenue, income, cost and expense are not necessarily indicative of the costs to
be incurred by Vista.
Historical financial information reflecting the financial position, results
of operations, and cash flows of the I.P. Acquisition are not presented because
the entire acquisition cost was assigned to the oil and gas property interests.
Accordingly, the historical statement of revenues and direct operating expenses
has been presented in lieu of the financial statements required under Rule 3-05
of Securities Exchange Commission Regulation S-X.
Revenue Recognition Policy
Revenues are recorded when products have been delivered and services have
been performed.
2. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Reserve information presented below has been estimated by Vista's internal
engineers using September 30, 1998 and December 31, 1997 and 1996, prices and
costs. Proved reserves are estimated quantities of crude oil and natural gas
which, based on geologic and engineering data, are estimated to be reasonably
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Because of inherent uncertainties and the limited nature of reservoir
data, such estimates are subject to change as additional information becomes
available.
STANDARDIZED MEASURE OF DISCOUNTED NET CASH FLOWS RELATING TO PROVED OIL AND GAS
RESERVES
The standardized measure of discounted future net cash flows ("Standardized
Measure") is prepared using assumptions required by the Financial Accounting
Standards Board. Such assumptions include the use of year-end prices for oil and
gas and year-end costs for estimated future development and production
expenditures to produce year-end estimated proved reserves. Discounted future
net cash flows are calculated using a 10% rate.
F-42
<PAGE> 169
I.P. ACQUISITION
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSE -- (CONTINUED)
Future prices received for production and future production costs may vary,
perhaps significantly from the prices and costs assumed for purposes of these
estimates. There can be no assurance that the proved reserves will be developed
within the periods indicated or that prices and costs will remain constant.
There can be no assurance that actual production will equal the estimated
amounts used in the preparation of reserve projections. In accordance with the
Securities and Exchange Commission's guidelines, the Company's estimates of
future net cash flows from the Company's proved properties and the
representative value thereof are made using oil and natural gas prices in effect
as of the dates of the calendar year periods indicated and are held constant
throughout the life of the properties. Weighted-average prices of oil and gas at
September 30, 1998, December 31, 1997, and December 31, 1996 used in estimating
future net cash flows were as follows: $13.38, $16.43 and $24.69 per barrel for
oil, respectively, and $2.17, $2.01 and $3.43 per Mcf for natural gas,
respectively.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. Oil and gas reserve engineering is and must be
recognized as a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in any exact way, and estimates of other
engineers might differ materially from those shown below. The accuracy of any
reserve estimate is a function of the quality of available data and engineering
and estimates may justify revisions. Accordingly, reserve estimates are often
materially different from the quantities of oil and gas that are ultimately
recovered. Reserve estimates are integral in management's analysis of
impairments of oil and gas properties and the calculation of depreciation,
depletion and amortization on its properties. Additionally, the Company did not
prepare any reserve information for the IP properties prior to September 30,
1998. Therefore, the previous years' reserves were estimated based on adjusting
the September 30, 1998 reserves for actual production and estimated additions to
proved reserves.
The following unaudited table sets forth proved oil and gas reserves at
September 30, 1998, December 31, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------
SEPTEMBER 30, 1998 1997 1996
---------------------- ---------------------- ----------------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves:
Beginning of year............... 3,874,336 11,089,341 4,202,083 12,219,092 4,492,833 12,981,557
Extension and Discoveries....... -- -- -- -- -- --
Production...................... (134,336) (551,341) (327,747) (1,129,751) (290,750) (762,465)
--------- ---------- --------- ---------- --------- ----------
End of Year..................... 3,740,000 10,538,000 3,874,336 11,089,341 4,202,083 12,219,092
========= ========== ========= ========== ========= ==========
Proved Developed Reserves:
Beginning of Year............... 1,331,336 5,395,341 1,459,083 5,725,092 949,833 3,287,557
End of year..................... 1,247,000 5,044,000 1,331,336 5,395,341 1,459,083 5,725,092
</TABLE>
F-43
<PAGE> 170
I.P. ACQUISITION
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSE -- (CONTINUED)
The following table sets forth the standardized measure of discounted
future net cash flows relating to proved reserves at September 30, 1998,
December 31, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows Relating to Proved Reserves:
Future cash flows........................ $ 67,444,000 $ 93,600,000 $155,455,000
Future costs:
Production............................ (20,628,000) (21,578,000) (23,341,000)
Development........................... (5,948,000) (6,248,000) (7,448,000)
------------ ------------ ------------
Future net cash flows.................... 40,868,000 65,774,000 124,666,000
10% discount factor...................... (14,802,000) (26,750,000) (56,995,000)
------------ ------------ ------------
Standardized measure of discounted future
net cash flows........................ $ 26,066,000 $ 39,024,000 $ 67,671,000
============ ============ ============
</TABLE>
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved reserves for the periods
ended September 30, 1998, December 31, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Standardized Measure, Beginning of Period... $ 39,024,000 $ 67,671,000 $37,095,000
Net change in sales price, net of
production costs....................... (13,730,000) (28,953,000) 25,284,000
Development costs incurred during the
period and changes in future
development costs...................... 178,000 651,000 2,401,000
Accretions of discount.................... 2,927,000 6,767,000 3,710,000
Change in timing and other................ 961,000 23,000 5,552,000
Sales, net of production costs............ (3,294,000) (7,135,000) (6,371,000)
------------ ------------ -----------
Standardized Measure, End of Period......... $ 26,066,000 $ 39,024,000 $67,671,000
============ ============ ===========
</TABLE>
F-44
<PAGE> 171
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-45
<PAGE> 172
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
SEPTEMBER 30, -------------------------
1998 1997 1996
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................. $ 37,404 $ 150,890 $ 366,677
Accounts receivable:
Oil and gas sales................................. 359,363 670,093 834,269
Related parties................................... -- 60,822 360,479
Sales of properties............................... -- 563,757 --
Property operations and other..................... 302,247 296,052 359,600
Property held for sale............................... -- 200,000 1,241,515
Reimbursable merger costs and other.................. 379,060 57,531 104,180
Deferred tax asset................................... 37,000 37,000 378,000
----------- ----------- -----------
Total current assets......................... 1,115,074 2,036,145 3,644,720
Property and equipment, at cost...................... 29,949,921 29,210,699 27,889,580
Less accumulated depreciation, depletion and
amortization...................................... 16,950,287 15,975,838 14,076,100
----------- ----------- -----------
Property and equipment, net.................. 12,999,634 13,234,861 13,813,480
Deferred tax asset................................... 1,441,271 1,011,193 --
Goodwill, net of amortization of $106,754 in 1997 and
$80,067 in 1996................................... 700,588 720,584 747,271
Contracts and leases, net of amortization of $84,352
in 1997 and $78,411 in 1996....................... -- 199,116 414,633
Non-current note receivable.......................... -- 302,490 317,759
Other assets......................................... 270,933 116,094 38,783
----------- ----------- -----------
Total assets................................. $16,527,500 $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................ 666,219 981,202 1,194,344
Drilling advances.................................... -- -- 393,254
----------- ----------- -----------
Total current liabilities.................... 1,566,219 1,564,683 3,268,428
Long-term debt......................................... 8,770,974 9,115,370 7,166,421
Deferred tax liability................................. -- -- 47,044
Payable for the purchase of subsidiary and other....... 205,116 221,404 317,493
----------- ----------- -----------
Total liabilities............................ 10,542,309 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.................... 4,470 4,463 4,401
Additional paid in capital........................... 8,505,716 8,487,801 7,898,199
Unearned compensation................................ (81,420) (164,516) --
Retained earnings (deficit).......................... (2,443,575) (1,608,722) 274,660
----------- ----------- -----------
Total stockholders' equity................... 5,985,191 6,719,026 8,177,260
----------- ----------- -----------
Total liabilities and stockholders' equity... $16,527,500 $17,620,483 $18,976,646
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
<PAGE> 173
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------
1998 1997 1997 1996
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue:
Oil and gas sales........................... $3,119,835 $4,758,502 $ 6,396,249 $6,958,491
Management income........................... -- -- -- 45,000
Property operations income.................. 77,216 89,792 119,012 111,862
Partnership income.......................... -- 101,260 72,275 --
Other....................................... 23,067 10,721 12,951 26,372
---------- ---------- ----------- ----------
Total operating revenue............. 3,220,118 4,960,275 6,600,487 7,141,725
Operating costs and expenses:
Oil and gas production...................... 1,988,305 2,293,627 3,088,886 2,981,837
Exploration costs:
Dry holes................................ 39,808 796,852 416,892
Geological and geophysical............... 4,709 378,153 52,682 349,963
Depreciation, depletion and amortization.... 1,027,447 973,706 1,964,658 1,306,287
Abandonment costs........................... -- -- 93,760 --
General and administrative.................. 752,647 1,199,841 1,451,404 1,295,298
Impairment of properties.................... -- 356,000 1,277,342 114,904
---------- ---------- ----------- ----------
Total operating costs and
expenses.......................... 3,812,916 5,201,327 8,725,584 6,465,181
---------- ---------- ----------- ----------
(592,798) (241,052) (2,125,097) 676,544
Other income and (expenses):
Gain (loss) on sale of property and
equipment................................ (48,953) 400,932 462,571 36,308
Interest income............................. 16,931 25,466 32,337 61,997
Other income................................ -- -- -- --
Interest expense............................ (640,113) (648,047) (970,430) (722,447)
---------- ---------- ----------- ----------
Total other income and expenses..... (672,135) (221,649) (475,522) (624,142)
---------- ---------- ----------- ----------
Income (loss) before income
taxes....................................... (1,264,933) (462,701) (2,600,619) 52,402
Income taxes:
Deferred federal income tax expense
(benefit)................................ (430,078) (163,108) (717,237) 30,280
---------- ---------- ----------- ----------
Net income (loss)............................. $ (834,855) $ (299,593) $(1,883,382) $ 22,122
========== ========== =========== ==========
Earnings (loss) per share:
Basic....................................... $ (0.19) $ (0.07) $ (0.42) $ 0.01
========== ========== =========== ==========
Diluted..................................... $ (0.19) $ (0.07) $ (0.42) $ 0.01
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-47
<PAGE> 174
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, 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)
Warrants exercised.............. 424 1,696
Stock options exercised......... 6,200 7 16,219
Amortization of stock-based
compensation (unaudited)...... -- -- -- -- -- -- 83,096
Net loss (unaudited)............ -- -- -- (834,853) -- -- --
--------- ------ ---------- ----------- -------- --------- ---------
Balance at September 30, 1998
(unaudited)................... 4,470,123 $4,470 $8,505,716 $(2,443,575) -- -- $ (81,420)
========= ====== ========== =========== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-48
<PAGE> 175
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------
1998 1997 1997 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (834,855) $ (299,593) $(1,883,382) $ 22,122
Depreciation, depletion and amortization.......... 1,027,447 973,706 1,964,658 1,306,287
Abandonments and exploratory dry holes............ -- -- 890,612 416,892
Impairment of properties.......................... -- 356,000 1,277,342 114,904
(Gain) loss on sale of properties and equipment... 48,953 (400,932) (462,571) (36,308)
Noncash stock-based compensation.................. 83,096 167,264 217,484 --
Deferred income tax expense (benefit)............. (430,078) (163,108) (717,237) 30,280
Partnership distributions in excess of income..... -- -- 45,875 --
(Increase) decrease in accounts receivable related
to operations................................... 407,371 251,269 166,902 (265,521)
Decrease (increase) in other current assets....... 248 53,092 22,610 (8,300)
Increase (decrease) in accounts payable and
accrued expenses related to operations.......... (400,777) 286,306 (213,142) 218,581
Decrease in note receivable....................... -- -- -- --
Other............................................. 40,998 37,222 84,310 94,704
---------- ----------- ----------- -----------
Net cash provided by operating activities......... (57,597) 1,261,226 1,393,461 1,893,641
Cash flows from investing activities:
Additions to oil and gas properties............... (699,387) (1,909,268) (2,588,150) (3,714,110)
Additions to other property and equipment......... -- -- (17,765) (40,554)
Investment in limited partnership................. -- (1,576,478) (1,536,130) --
Sale and salvage recoveries on oil and gas
properties...................................... 802,805 1,797,982 1,657,385 32,975
Sale of other property and equipment.............. -- -- 205,851 1,000
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............ (16,288) (95,214) (89,139) (1,217,280)
Loan origination costs and other.................. (12,761) (37,500) (119,219) --
Vista acquisition................................. (379,060) -- -- --
---------- ----------- ----------- -----------
Net cash used in investing activities............. (304,691) (1,459,999) (2,126,688) (5,274,271)
Cash flows from financing activities:
Net proceeds from warrants exercised.............. 17,922 130,525 45,712 9,191
Collections on note receivable from
officer/director................................ 258,757 10,468 -- --
Warrant redemptions............................... -- -- -- --
Net proceeds from options exercised............... -- -- 109,312 29,221
Borrowings on long-term debt...................... 720,000 1,856,250 2,617,250 3,770,000
Principal payments on long-term debt.............. (747,877) (1,745,367) (1,876,849) (983,067)
Drilling advances................................. -- 617,573 (393,254) 393,254
Other............................................. -- -- 15,269 14,098
Repayment of drilling advances.................... -- (1,001,214) -- --
---------- ----------- ----------- -----------
Net cash provided by financing activities......... 248,802 (131,765) 517,440 3,232,697
---------- ----------- ----------- -----------
Increase (decrease) in cash......................... (113,486) (330,538) (215,787) (147,933)
Cash, beginning of year............................. 150,890 366,677 366,677 514,610
---------- ----------- ----------- -----------
Cash, end of year................................... $ 37,404 $ 36,139 $ 150,890 $ 366,677
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-49
<PAGE> 176
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 and 1996.
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.
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. 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.
Other Property and Equipment
All other property and equipment is depreciated on the straight-line method
over lives ranging from 5 to 6 years.
F-50
<PAGE> 177
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and
4,395,414 in 1997 and 1996, 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 and 2,726,022 in 1997
and 1996, respectively.
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
F-51
<PAGE> 178
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and $50,092, in 1997
and 1996, 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 September 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 nine month periods are not necessarily indicative of the
results for a full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted for the period ended September 30, 1998 and 1997
pursuant to the rules and regulations of the Securities and Exchange Commission.
Information as of September 30, 1998 or for the nine months ended September 30,
1998 or 1997 is unaudited.
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-52
<PAGE> 179
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, 1996.
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Total revenue............................................... $7,749,621
==========
Net income (loss)........................................... $ (7,396)
==========
Loss per weighted average common share:
Basic..................................................... $ --
==========
Diluted................................................... $ --
==========
</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
F-53
<PAGE> 180
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduced at the rate of $120,000 per 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
F-54
<PAGE> 181
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$616,250 through year 2000. In 1997, stock-based compensation expense of
$217,484 was recognized in connection with these issuances.
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
----------- ---------
<S> <C> <C>
Net income (loss):
As reported............................................... $(1,883,382) $ 22,122
Pro forma................................................. (2,078,360) (245,366)
Earnings (loss) per share
As reported:
Basic.................................................. $ (0.42) $ 0.01
Diluted................................................ (0.42) 0.01
Pro forma:
Basic.................................................. $ (0.47) $ (0.06)
Diluted................................................ (0.47) (0.06)
</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-55
<PAGE> 182
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,
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, 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>
A summary of the status of stock purchase warrants at December 31, 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, 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>
F-56
<PAGE> 183
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.).
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.
F-57
<PAGE> 184
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.).
The Company leases its executive office space and a field office under
noncancellable operating leases expiring in 2002. Rental expense was $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.
F-58
<PAGE> 185
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes to the income taxes
computed using the federal statutory rate for the years 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
Amount computed using statutory tax......................... $(884,211) $17,817
Increase (reduction) in taxes resulting from:
Valuation allowance against tax loss carry-forwards....... 146,385 --
--------- -------
Nondeductible expenses.................................... 10,886 2,642
All other................................................. 9,703 9,821
Federal income tax (benefit)................................ $(717,237) $30,280
</TABLE>
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-59
<PAGE> 186
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
---------- ----------
<S> <C> <C>
Incurred directly:
Acquisition costs -- Proven properties.................... $ 57,116 $2,391,228
Acquisition costs -- Unproven properties.................. 296,928 922,607
Development costs......................................... 1,645,774 2,368,448
Exploration costs......................................... 849,534 766,855
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
----- -----
<S> <C> <C>
Depreciation, depletion and amortization:
Based on production....................................... $4.95 $2.91
</TABLE>
NOTE L. CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash paid during the year for:
Interest.................................................. $896,760 $625,948
Income taxes.............................................. -- --
Significant non-cash activities:
Issuance of stock for property............................ 52,625 --
Issuance of warrants to bank.............................. -- --
Note receivable from sale of building..................... -- --
Note payable from purchase of district office, warehouse
and yard............................................... -- --
Note receivable from officer/director for exercise of
warrants, net of note payable.......................... -- --
Treasury stock contributed to ESOP........................ -- 26,462
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 are based on evaluations prepared by E. Ralph Green and Associates,
Independent Petroleum Engineers.
F-60
<PAGE> 187
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, 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, 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
----------- ------------
<S> <C> <C>
Future cash inflows....................................... $76,605,194 $139,037,425
Future production costs................................... 34,210,308 51,857,027
Future development costs.................................. 8,039,963 7,231,324
Future income taxes(a).................................... 5,521,700 18,372,157
----------- ------------
Future net cash flows..................................... 28,833,223 61,576,917
Annual discount (10%) for estimated timing of cash
flows................................................... 13,251,251 29,984,568
----------- ------------
Standardized measure of discounted future net cash
flows................................................... $15,581,972 $ 31,592,349
=========== ============
</TABLE>
- ---------------
(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.
F-61
<PAGE> 188
MIDLAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in standardized measure of discounted future net cash flows from proved
reserves (UNAUDITED):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Sales of oil and gas produced, net of production costs.... $ (2,398,872) $(4,722,529)
Net changes in price and production....................... (20,928,554) 19,074,149
Previously estimated development costs incurred........... -- 35,190
Revisions of estimated future development costs........... (202,755) (84,478)
Revision of quantity estimates............................ (2,752,686) 167,303
Purchases of minerals-in-place............................ -- 840,715
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
Net change in income taxes................................ 6,042,379 (4,838,537)
Accretion of discount..................................... 3,981,784 1,768,766
Changes in timing of estimated cash flows and other....... 64,047 348,981
------------ -----------
Changes in standardized measure........................... (16,010,377) 17,291,641
Standardized measure, beginning of year................... 31,592,349 14,300,708
------------ -----------
Standardized measure, end of year......................... $ 15,581,972 $31,592,349
============ ===========
</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-62
<PAGE> 189
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Prize Energy Corp.
We have audited the accompanying statements of revenues and direct
operating expenses for the producing properties acquired by Prize Energy Corp.
from Pioneer Natural Resources USA, Inc. (Acquired Properties) for the years
ended December 31, 1998, 1997 and 1996. These statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these 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 accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and are not
intended to be a complete presentation of the revenues and expenses of the
Acquired Properties.
In our opinion, the statements referred to above present fairly, in all
material respects, the operating revenues and direct operating expenses of the
Acquired Properties for the years ended December 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Fort Worth, Texas
September 3, 1999
F-63
<PAGE> 190
PRODUCING PROPERTIES ACQUIRED BY PRIZE ENERGY CORP.
FROM PIONEER NATURAL RESOURCES USA, INC.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, SEPTEMBER 30, -----------------------------------------
1999 1998 1998 1997 1996
----------- ------------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Crude sales............. $13,554,676 $24,617,029 $30,576,824 $ 49,697,127 $ 49,728,421
Natural gas sales....... 19,050,159 37,742,857 48,485,086 74,836,148 67,395,820
Natural gas liquids
sales................ 2,513,683 4,395,463 5,493,151 3,477,148 720,329
----------- ----------- ----------- ------------ ------------
35,118,518 66,755,349 84,555,061 128,010,423 117,844,570
Direct operating expenses:
Lease operating
expenses............. 7,356,807 14,296,894 18,318,306 22,561,641 15,295,109
Oil and gas production
taxes................ 3,769,505 5,877,843 8,685,884 11,293,089 9,975,825
----------- ----------- ----------- ------------ ------------
11,126,312 20,174,737 27,004,190 33,854,730 25,270,934
----------- ----------- ----------- ------------ ------------
Revenues in excess of
direct operating
expenses................ $23,992,206 $46,580,612 $57,550,871 $ 94,155,693 $ 92,573,636
=========== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-64
<PAGE> 191
PRODUCING PROPERTIES ACQUIRED BY PRIZE ENERGY CORP.
FROM PIONEER NATURAL RESOURCES USA, INC.
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION
Pursuant to the terms of a Purchase and Sale Agreement dated May 16, 1999
and effective as of July 1, 1999, Prize Energy Corp. (the Company) completed the
acquisition of interests in certain oil and gas producing properties (Acquired
Properties), primarily located in Texas, Louisiana, and Oklahoma from Pioneer
Natural Resources USA, Inc. (Pioneer), for a total of $242 million, including
transaction costs, payable in cash and 6% convertible preferred stock.
The oil and gas revenues and direct operating expenses presented herein
relate only to the interests in the Acquired Properties and do not represent all
of the oil and gas operations of Pioneer. Oil and gas revenues of the Acquired
Properties are recorded on the entitlements method. Direct operating expenses
include all costs incurred which are necessary for the production, marketing and
distribution of the products produced from the subject properties including,
without limitation, costs and expenses of field separation; treatment;
dehydration; direct overhead charges (other than costs associated with general
corporate activities); pumper, roustabout and field supervision labor; meter
calibrations; engineering supervision charges; fuel and electricity; valves,
connections and other minor equipment repair; oil and lubricants; major repairs;
rental tools and equipment; pipe inspection; trucking; reservoir testing;
pressure testing; well plugging; site remediation; operator bonding; insurance
charges; salt water disposal; water injection and pressure maintenance; gas
compression; hot oil and hot water treatments; filing fees; make-up water
purchases; electrician charges; mud and chemicals; pulling and workover units;
other miscellaneous supplies and services; and severance, ad valorem and other
production related taxes and charges. In addition, lease operating expenses are
net of gas plant processing fees and oil and gas production taxes include
production and severance taxes and ad valorem taxes associated with the
properties. Direct operating expenses do not include charges for depletion,
depreciation, amortization and abandonment; federal and state income taxes;
interest; or corporate general and administrative expenses. The oil and gas
revenues and direct operating expenses for the periods presented may not be
indicative of the results of future operations of the properties acquired.
2. SUBSEQUENT EVENT
Effective July 1, 1999, the Company sold certain mineral interests included
in the properties purchased from Pioneer to Blackstone Minerals Co., LP for $32
million. The revenues and direct operating expenses associated with these
properties included in the Statements of Revenues and Direct Operating Expenses
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, SEPTEMBER 30, ------------------------------------
1999 1998 1998 1997 1996
----------- ------------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................... $1,911,604 $4,007,254 $5,136,967 $7,189,442 $8,578,608
Direct operating expenses... 259,018 600,493 793,131 1,115,379 1,037,518
---------- ---------- ---------- ---------- ----------
Revenues in excess of direct
operating expenses........ $1,652,586 $3,406,761 $4,343,836 $6,074,063 $7,541,090
========== ========== ========== ========== ==========
</TABLE>
3. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
Estimated quantities of proved net reserves include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the effective date of the acquisition, under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells with existing
F-65
<PAGE> 192
PRODUCING PROPERTIES ACQUIRED BY PRIZE ENERGY CORP.
FROM PIONEER NATURAL RESOURCES USA, INC.
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
equipment and operating methods. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or from
existing wells on which a relatively major expenditure is required for
recompletion.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
The following tables present the proved oil and gas reserves of the
Acquired Properties and a rollforward of the changes in proved reserves for
1998, 1997 and 1996. Because reserve data prior to December 31, 1998 is not
available, these tables assume that the only change in reserve quantities was
due to production.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
1998
-------------------------------------
OIL & NGLS GAS
(BBL) (MCF) BOE
---------- ----------- ----------
<S> <C> <C> <C>
Proved reserves................................. 26,051,394 224,026,656 63,389,170
Proved developed reserves....................... 23,136,377 193,193,545 55,335,301
Proved undeveloped reserves..................... 2,915,017 30,833,111 8,053,869
</TABLE>
<TABLE>
<CAPTION>
OIL & NGLS GAS
(BBL) (MCF) BOE
---------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1998........................ 29,185,695 248,955,853 70,678,337
Production...................................... 3,134,301 24,929,197 7,289,167
---------- ----------- ----------
Balance, December 31, 1998...................... 26,051,394 224,026,656 63,389,170
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
OIL & NGLS GAS
(BBL) (MCF) BOE
---------- ----------- ----------
<S> <C> <C> <C>
Proved reserves................................. 29,185,695 248,955,853 70,678,337
Proved developed reserves....................... 25,916,897 214,699,528 61,700,152
Proved undeveloped reserves..................... 3,268,798 34,256,325 8,978,185
</TABLE>
F-66
<PAGE> 193
PRODUCING PROPERTIES ACQUIRED BY PRIZE ENERGY CORP.
FROM PIONEER NATURAL RESOURCES USA, INC.
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
<TABLE>
<CAPTION>
OIL & NGLS GAS
(BBL) (MCF) BOE
---------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1997........................ 31,871,511 279,645,952 78,479,170
Production...................................... 2,685,816 30,690,099 7,800,833
---------- ----------- ----------
Balance, December 31, 1997...................... 29,185,695 248,955,853 70,678,337
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
OIL & NGLS GAS
(BBL) (MCF) BOE
---------- ----------- ----------
<S> <C> <C> <C>
Proved reserves................................. 31,871,511 279,645,952 78,479,170
Proved developed reserves....................... 28,301,902 241,166,669 68,496,347
Proved undeveloped reserves..................... 3,569,609 38,479,283 9,982,823
</TABLE>
<TABLE>
<CAPTION>
OIL & NGLS GAS
(BBL) (MCF) BOE
---------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1996........................ 33,968,220 308,308,358 85,352,946
Production...................................... 2,096,709 28,662,406 6,873,777
---------- ----------- ----------
Balance, December 31, 1996...................... 31,871,511 279,645,952 78,479,170
========== =========== ==========
</TABLE>
F-67
<PAGE> 194
PRODUCING PROPERTIES ACQUIRED BY PRIZE ENERGY CORP.
FROM PIONEER NATURAL RESOURCES USA, INC.
NOTES TO STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
The following tables are a summary of the standardized measure of
discounted future net cash flows related to the proved oil and gas reserves of
the Acquired Properties and a rollforward of the standardized measure for 1998,
1997 and 1996. Similar to the preceding tables on reserve quantities, because
reserve data prior to December 31, 1998 is not available, the tables assume that
the only change in reserve quantities was due to production. For these
calculations, estimated future cash flows from the future production of proved
reserves were computed using oil and gas prices as of the end of each year. The
estimates for 1997 and 1996 cash flows also assume that differentials between
published prices, development and production costs and decline curve estimates
are consistent with these estimates as of December 31, 1998. Future development
and production costs attributable to proved reserves were estimated assuming
that conditions existing in 1998 would continue over the economic life of the
properties, and costs were not escalated for the future. The Acquired Properties
are not a separate tax paying entity. Accordingly, the standardized measure of
discounted future net cash flows from proved reserves is presented before
deduction of federal income taxes. The information presented below should not be
viewed as an estimate of the fair value of the acquired interests, nor should it
be considered indicative of any future trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Future cash inflows.......................... $ 621,543,244 $ 903,476,000 $1,299,819,214
Future production and development costs...... (267,522,684) (287,390,214) (309,018,817)
Discounts of future net cash flows at 10% per
annum...................................... (154,852,977) (270,121,156) (454,194,337)
------------- ------------- --------------
Standardized measure of discounted future net
cash flows................................. $ 199,167,583 $ 345,964,630 $ 536,606,060
============= ============= ==============
Standardized measure of discounted future net
cash flows, beginning of year.............. $ 345,964,430 $ 536,606,060 $ 566,261,726
Oil and gas sales net of production costs.... (57,550,871) (94,155,693) (92,573,636)
Development costs, accretion of discount,
etc. ...................................... (89,245,976) (96,485,737) 62,917,970
------------- ------------- --------------
Standardized measure of discounted future net
cash flows, end of year.................... $ 199,167,583 $ 345,964,630 $ 536,606,060
============= ============= ==============
</TABLE>
The weighted-average prices of oil and gas at December 31, 1998, 1997 and
1996 used in the calculation of the Standardized Measure were $9.63, $15.18 and
$23.46 per barrel, respectively, for oil, $6.52, $10.32 and $15.95 per barrel,
respectively, for NGL's, and $1.76, $2.06 and $2.28 per MCF, respectively, for
gas.
Development costs for the year ended December 31, 1998, the nine months
ended September 30, 1998 and the six months ended June 30, 1999 were
$21,138,128, $20,064,416 and $629,864, respectively. Exploration costs and
incremental general and administrative costs were insignificant for all periods
presented.
F-68
<PAGE> 195
PRIZE ENERGY CORP.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash...................................................... $ 9,732,819
Accounts receivable -- trade.............................. 5,904,822
Accounts receivable -- oil and gas........................ 15,984,715
Other..................................................... 647,491
------------
Total Current Assets.............................. 32,269,847
Properties and Equipment, at cost:
Oil and gas properties.................................... 216,303,494
Other..................................................... 828,930
------------
217,132,424
Less accumulated depreciation and depletion............... (4,646,622)
------------
212,485,802
Other assets................................................ 2,347,457
------------
Total Assets...................................... $247,103,106
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 21,922,401
Current maturities of long-term debt...................... 1,323,691
------------
Total Current Liabilities......................... 23,246,092
Long-term debt.............................................. 139,000,000
Commitments and contingencies:
Stockholders' Equity:
Convertible voting preferred stock: authorized
shares -- 10,000, issued and outstanding
shares -- 2,342........................................ 30,450,000
Common stock, $.01 par value: authorized shares -- 20,000,
issued and outstanding shares -- 4,979................. 50
Note receivable -- officer................................ (150,000)
Paid-in capital........................................... 49,342,854
Retained earnings......................................... 5,214,110
------------
Total Stockholders' Equity........................ 84,857,014
------------
Total Liabilities and Stockholders' Equity........ $247,103,106
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE> 196
PRIZE ENERGY CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 15, 1999
(INCEPTION) THROUGH
SEPTEMBER 30, 1999
-------------------
<S> <C>
Total Revenues.............................................. $22,692,680
Expenses:
Lease operating expenses.................................. 3,740,714
Production taxes.......................................... 2,277,453
Depreciation, depletion, and amortization................. 4,646,622
General and administrative................................ 721,719
-----------
Total Costs and Expenses.......................... 11,386,508
-----------
Operating Income (Loss)..................................... 11,306,172
-----------
Other:
Interest (income) expense................................. 3,101,426
Other..................................................... (204,046)
-----------
Total Other....................................... 2,897,380
-----------
Income Before Income Taxes.................................. 8,408,792
Provision For Income Taxes.................................. 2,744,682
-----------
Net Income.................................................. $ 5,664,110
-----------
Preferred dividend.......................................... (450,000)
Income available to common stockholders..................... $ 5,214,110
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE> 197
PRIZE ENERGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
JANUARY 15, 1999 (INCEPTION) THROUGH SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE VOTING
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- --------------- NOTE RECEIVABLE- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT OFFICER CAPITAL EARNINGS TOTAL
------ ----------- ------ ------ ---------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock..... -- $ -- 4,979 $50 $(250,000) $49,342,854 $ -- $49,092,904
Issuance of preferred
stock...................... 2,308 30,000,000 -- -- -- -- -- 30,000,000
Preferred dividends.......... 34 450,000 -- -- -- -- (450,000) --
Repayment of note
receivable................. -- -- 100,000 -- -- 100,000
Net income................... -- -- -- -- 5,664,110 5,664,110
----- ----------- ----- --- --------- ----------- ---------- -----------
Balance as of September 30,
1999....................... 2,342 $30,450,000 4,979 $50 $(150,000) $49,342,854 $5,214,110 $84,857,014
===== =========== ===== === ========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-71
<PAGE> 198
PRIZE ENERGY CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 15, 1999
(INCEPTION)
THROUGH
SEPTEMBER 30, 1999
------------------
<S> <C>
Operating Activities
Net income................................................ $ 5,664,110
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation, depletion and amortization............... 4,646,622
Amortization of loan origination fees.................. 86,943
Undistributed earnings of equity investee.............. (88,347)
Changes in operating assets and liabilities:
Accounts receivable.................................. (21,186,096)
Other current assets................................. (647,491)
Accounts payable and accrued liabilities............. 21,204,568
-------------
Cash Provided by Operating Activities....................... 9,680,309
Investing Activities
Acquisition of net assets................................. (211,257,678)
Purchase of properties and equipment...................... (2,535,390)
Proceeds from the sale of Mineral Interest................ 32,000,000
-------------
Cash Used by Investing Activities........................... (181,793,068)
Financing Activities
Proceeds from issuance of common stock.................... 45,464,078
Repayment of notes receivable from shareholder............ 100,000
Borrowings under credit facilities........................ 171,000,000
Repayment of credit facilities............................ (32,284,100)
Loan origination fees..................................... (2,434,400)
-------------
Cash Provided by Financing Activities....................... 181,845,578
-------------
Increase in Cash............................................ 9,732,819
Cash, Beginning of Period................................... --
-------------
Cash, End of Period......................................... $ 9,732,819
=============
Non-cash Transactions:
Issuance of common stock for investment in LLC.............. $ 3,628,826
=============
Convertible preferred stock issued as consideration in
acquisition............................................... $ 30,000,000
=============
Preferred dividends paid in kind............................ $ 450,000
=============
Issuance of common stock to officer for note receivable..... $ 250,000
=============
Net assets of LLC acquired less equipment conveyed as
partial consideration..................................... $ 608,092
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
<PAGE> 199
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Prize Energy Corp. (the Company) was formed on January 15, 1999 and is a
Delaware corporation engaged in the development and production of proved oil and
gas properties. The Company's corporate headquarters is located in Grapevine,
Texas with oil and gas producing properties primarily located in Texas,
Louisiana, and Oklahoma.
The consolidated financial statements presented herein at September 30,
1999 and for the period January 15, 1999 (Inception) through September 30, 1999
are unaudited; however, all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the period have been made and are of a normal
recurring nature. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of the interim
periods are not necessarily indicative of results to be expected for the full
year.
The Company was initially formed through the contribution of cash and a
minority investment in a limited liability company for the purpose of acquiring
oil and gas properties. Pursuant to the terms of a Purchase and Sale Agreement
(Purchase Agreement) dated May 16, 1999, on June 29, 1999 the Company completed
the acquisition of interests in certain oil and gas producing properties,
primarily located in Texas, Louisiana, and Oklahoma from affiliates of Pioneer
Natural Resources USA, Inc. (Pioneer), for a total purchase price of $242
million, including transaction costs, paid in cash and 6% convertible voting
preferred stock. The acquisition closed on June 29, 1999, and per the terms of
the Purchase Agreement the Company began operating the properties on July 1,
1999.
Subsequent to the purchase from Pioneer and effective July 1, 1999, Prize
sold a group of mineral interests which were acquired with the oil and gas
properties purchased from Pioneer for $32 million. The properties were located
outside Prize's principal operating areas of Texas, Oklahoma and New Mexico.
Accordingly, the properties were assigned a value of $32 million when purchased,
and no gain or loss was recognized on disposal.
At inception, certain stockholders contributed a minority investment in a
limited liability company, Sunterra Petroleum LLC (Sunterra). Subsequently, the
Company purchased the remaining interest in Sunterra in exchange for $750,000, a
gas plant and the assumption of Sunterra's debt. The total consideration paid
for Sunterra during the year was $6,378,826, plus the assumed debt of
$1,607,791.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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.
OIL AND GAS PROPERTIES
Concurrent with its recent purchase of oil and gas properties, the Company
follows the successful efforts method of accounting for its oil and gas
properties whereby costs of productive wells, developmental dry holes and
productive leases are capitalized and amortized on a unit-of-production basis
over the
F-73
<PAGE> 200
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
respective properties' remaining proved reserves. Amortization of capitalized
costs of oil and gas properties are provided on a common area basis.
Leasehold cost is capitalized when incurred. Though no significant unproved
acreage has been acquired to date, unproved oil and gas properties with
significant acquisition costs will be periodically assessed and any impairment
in value charged to expense. The costs of unproved properties, which are not
individually significant, will be assessed periodically in the aggregate based
on historical experience, and any impairment in value will be charged to
expense. The costs of unproved properties that are determined to be productive
will be transferred to proved oil and gas properties.
Exploration costs, such as geological and geophysical expenses and annual
delay rentals, will be charged to expense as incurred. Exploratory drilling
costs, if any, including the costs of stratigraphic test wells, will be
initially capitalized but charged to expense if and when the well is determined
to be unsuccessful.
The acquisition costs of proved properties are depleted by the
unit-of-production method based on estimated proved oil and gas reserves.
Capitalized exploratory drilling costs which result in the discovery of proved
reserves and development costs are amortized by the unit-of production method
based on estimated proved developed oil and gas reserves. Gas is converted to
equivalent barrels at the rate of six MCF of gas to one barrel of oil.
Other property and equipment is recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to five
years. Expenditures for repairs and maintenance are charged to expense as
incurred; betterments which materially prolong the lives of the assets are
capitalized.
IMPAIRMENT OF OIL AND GAS PROPERTIES
The Company has evaluated its oil and gas properties under the provisions
of Statement of Financial Accounting Standards 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). SFAS 121 requires that proved oil and gas properties be assessed for
an impairment in their carrying value whenever events or changes in
circumstances indicate that such carrying value may not be recoverable. SFAS 121
requires that this assessment be performed by comparing the undiscounted future
net cash flows and net carrying value of oil and gas properties. For the period
ended September 30, 1999, there was no impairment of the Company's oil and gas
properties.
INCOME TAXES
Income taxes are provided using the liability method in accordance with
FASB Statement No. 109, "Accounting for Income Taxes." At September 30, 1999,
there were no significant temporary differences or deferred income taxes.
REVENUE RECOGNITION
The Company uses the sales method of accounting for oil and gas revenues.
Under the sales method, revenues are recognized based on actual volumes of oil
and natural gas sold to purchasers.
DERIVATIVES
The Company has entered into derivative contracts to hedge a portion of the
price risk of its future production and its interest rate risk. Changes in value
of financial instruments, utilized to hedge commodity price and interest rate
risk are recognized in the statement of operations when the underlying
transactions are recognized.
F-74
<PAGE> 201
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
The Company's criteria for a derivative instrument to qualify for hedge
accounting treatment are as follows:
- The timing or duration and characteristics of the underlying exposure
must have been identified with reasonable certainty;
- Changes in the value of the derivative must correlate to a high degree
with changes in the present value of the exposure;
- The derivative has been designated as a hedge or is a synthetic
alteration of a specific asset, liability or anticipated transaction; and
- The derivative instrument either: (a) reduces exposure of net income or
cash flow to fluctuations caused by movements in commodity prices or
interest rates; or (b) alters the profile of the Company's interest rate
exposure to achieve a resulting overall exposure in line with policy
guidelines.
For any termination of derivatives receiving hedge accounting treatment,
gains and losses will be deferred when the relating underlying exposures remain
outstanding and will be included in the measurement of the related transaction
or balance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable and accounts payable approximate their fair value.
Management believes the carrying amount of the Company's long-term debt also
approximates fair value because the interest rates applicable to the debt
presently approximate current market rates. See Notes 2 and 6 for the fair value
of the Company's derivative positions.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in years beginning
after June 15, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company has not yet determined what effect Statement No. 133 will have on the
earnings and financial position of the Company.
2. CREDIT FACILITIES
In connection with the acquisition of the Pioneer Properties, the Company
entered into a $250 million credit facility (Senior Facility) and a $13 million
senior subordinated credit facility (Subordinated Facility) with a bank. The
Senior Facility provides for a $250 million revolving line of credit reduced by
outstanding letters of credit. The Company may request letters of credit up to
an aggregate of $5 million with an additional supplemental letter of credit (as
defined by the credit agreement) of $5 million. At June 30, 1999, there were no
amounts outstanding under the letters of credit. The revolver converts to a term
loan on June 29, 2002 with quarterly principal payments after that date. The
Senior Facility is due June 30, 2006, with interest payable quarterly at either
the bank's prime rate or eurodollar rate plus a margin as defined in the
agreement. At September 30, 1999, $139 million was outstanding. The Subordinated
Facility provided for a single advance of $13 million.
F-75
<PAGE> 202
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
The bank credit facilities have various restrictions including a limit on
incurred debt and asset dispositions. Borrowings under the credit facility are
secured by substantially all of the Company's assets. The Subordinated Facility
is guaranteed in full by a stockholder. In conjunction with the sale of mineral
interests in July 1999, the Company repaid the Subordinated Facility in full.
The Company is required to pay a commitment fee on the revolving credit
facility ranging from .25% to .5% based on a ratio of outstanding credit to the
borrowing base and a letter of credit fee ranging from 1.25% to 1.875% based on
a ratio of the average daily amount outstanding during the quarter to the
borrowing base. Both fees terminate upon conversion of the revolver to a term
loan.
In July 1999, the Company entered into two interest rate protection
agreements with its bank (the "Swap Agreements") to modify the interest
characteristics of an aggregate principal amount of $100 million of the
revolving line of credit from a variable rate to a fixed rate. The Swap
Agreements require the Company to pay a fixed rate interest obligation of 5.76%
and 6.07%, respectively, and receive an interest obligation based on variable
LIBOR rates. The Swap Agreements terminate on July 2, 2000 and 2001,
respectively. At September 30, 1999, the Swap Agreements had a fair value (loss)
of $(93,334).
The Company assumed $1,607,791 when it purchased the remaining interest of
Sunterra. At September 30, 1999 the amount outstanding was $1,323,691, which was
paid in full subsequent to September 30, 1999.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999.................................................. $ 1,323,691
2000.................................................. --
2001.................................................. --
2002.................................................. 26,062,500
2003.................................................. 34,750,000
Thereafter............................................ 78,187,500
------------
$140,323,691
============
</TABLE>
3. CAPITAL STOCK
In conjunction with the Purchase Agreement, the Company amended its
Certificate of Incorporation to create a convertible preferred class of capital
stock. Effective with the amendment, the Company has the authority to issue
30,000 shares of capital stock, consisting of 10,000 shares of convertible
voting preferred stock and 20,000 shares of common stock.
The convertible voting preferred stock is redeemable at the Company's
option in whole or in part, at any time subsequent to the Company becoming a
publicly traded company provided the average of the closing prices of the
Company's common stock during any period of at least 30 consecutive trading days
shall exceed 120% of the conversion price of the preferred stock. The redemption
price is payable in cash equal to $13,000 per share adjusted for any stock
splits, combination, or adjustments plus accrued dividends. The preferred stock
is also convertible into one share of common stock at any time, in whole or in
part, at the option of the stockholder, subject to anti-dilution adjustments
defined in the agreement. Accordingly, 2,308 shares of common stock have been
reserved for issuance upon conversion. The preferred stock earns cumulative
dividends at 6%, payable quarterly. Unpaid dividends on preferred stock accrue
interest at 6%. Prior to January 1, 2002, all dividends will be paid in kind
with additional shares of preferred stock. Accordingly, 34 shares were issued as
a dividend in kind on September 30, 1999. Beginning January 1, 2002, dividends
may be paid in shares or cash at the option of the Company.
F-76
<PAGE> 203
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
The preferred stockholder has the right to elect one-third of the Company's
board of directors provided the preferred stockholder continues to own at least
30% of the outstanding common stock (computed on an "as-converted" basis) or
prior to an initial public offering, the preferred stockholder continues to own
at least 60% of the initially issued preferred shares. If the preferred
stockholder's ownership falls below these levels and provided the preferred
stockholder owns at least 16.7% of the outstanding common stock (computed on an
"as-converted" basis), the preferred stockholder will have the right to elect
one-sixth of the Company's board of directors. Preferred and common stockholders
vote as a single class except for those matters for which a separate class vote
of the preferred stock is specifically required under Delaware law.
Each stockholder agrees that it will not sell any portion of preferred or
common stock unless the Company is given the right to purchase all of the shares
offered by the stockholders at the offered price. In the event the Company does
not purchase the shares, the other stockholders have the right to purchase a
proportionate number of shares at the same price and on the same terms.
At any time after January 1, 2002, the preferred stockholder will have the
right to require that the Company initiate an initial public offering for a
gross offering price of at least $35 million. At any time after the earlier of
the first anniversary of the initial public offering or secondary offering, the
preferred stockholder has the right to require registration of the shares owned
by the preferred stockholder. Additionally, the preferred stockholder has been
granted unlimited piggyback rights, subject to limitations imposed by the
underwriters. During the period the preferred stockholder continues to own at
least 80% of the shares of preferred stock or underlying common stock initially
issued, the stockholder will have the right to joint participation in
significant opportunities, as defined by a joint participation agreement.
4. STOCK OPTIONS
The Company has instituted a stock option plan (the Option Plan) for key
employees. Under the Option Plan, the Board of Directors has the authority to
grant to key employees of the Company options to purchase shares of the
Company's common stock. Each unit vests ratably over a three year period
commencing on the date of grant and the holders have five years to exercise the
options. Upon exercise, the holder is to pay a cash amount equal to $13,053 per
share subject to adjustment as defined by the Option Plan. The maximum number of
shares that may be issued is 1,286 shares, with a proportionate adjustment to
reflect any stock splits, reverse splits, or retirement. Total outstanding
options as of September 30, 1999 were 1,286. Accordingly, 1,286 shares of common
stock have been reserved for issuance upon exercise.
The Company applies APB 25 and related interpretations in accounting for
its stock option awards. Accordingly, no compensation expense has been
recognized for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with Statement of Financial
Accounting Standards 123, "Accounting for Stock-Based Compensation" (SFAS 123),
the Company's net income would have been approximately $5,420,000 for the period
from inception (January 15, 1999) to September 30, 1999.
Under SFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1999:
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Risk-free interest rate..................................... 5.94%
Expected life............................................... 5 years
</TABLE>
At September 30, 1999, the options have a remaining contractual life of
four years and nine months and the weighted-average fair value of the options
granted during the period ended September 30, 1999 was $300.81 each.
F-77
<PAGE> 204
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
The Company has obligations under noncancelable operating leases for
certain equipment and office space expiring in various years through 2003.
Minimum annual rental commitments at September 30, 1999 are:
<TABLE>
<S> <C>
1999..................................................... $ 56,000
2000..................................................... 223,000
2001..................................................... 223,000
2002..................................................... 223,000
2003..................................................... 112,000
--------
$837,000
========
</TABLE>
The Company is involved in various litigation and other contingencies
arising in the normal course of business primarily related to matters involving
the properties purchased from Pioneer. Based on currently available information,
management believes that any possible liability from these actions will not be
material to the Company's financial position or results of operations. However,
there can be no assurances that future costs would not be material to results of
operations of the Company for a particular period. In addition, the Company's
estimates of future costs are subject to change as circumstances change and
additional information becomes available during the course of litigation.
6. DERIVATIVES
During June 1999, the Company entered into commodity price hedge agreements
to protect against price declines which may be associated with the volatility in
oil and gas spot prices. The commodity price hedges were achieved through the
purchase of over the counter costless collars and swaps by the Company. The
Company's positions are with highly rated and prominent counterparties. Thus,
management believes the credit risk associated with these positions is minimal,
and no collateral is required by the Company or the counterparties.
Set forth below is the contract amount and material terms of all natural
gas hedging instruments held by the Company at September 30, 1999 (daily volumes
are expressed in thousand cubic feet (Mcf) and all prices are expressed in the
daily NYMEX closing prices for natural gas at actual index prices).
<TABLE>
<CAPTION>
FAIR
VALUE (LOSS) AT
TYPE DAILY PUT FLOOR PRICE CALL CEILING SEPTEMBER 30,
TRADE DATE TRANSACTION VOLUME PER MCF PRICE PER MCF TERM 1999
- ---------- ----------- ------ --------------- ------------- ----------- ----------------
<C> <C> <C> <S> <C> <C> <C>
6/14/99.. Collar 10,000 $2.30 $2.57 7/99 - 6/01 $(930,644)
6/22/99.. Collar 5,000 2.10 2.42 8/99 - 7/01 (656,523)
6/22/99.. Collar 5,000 2.15 2.43 8/99 - 7/01 (678,331)
6/30/99.. Collar 5,000 2.37 2.58 9/99 - 8/01 (620,924)
7/01/99.. Collar 5,000 2.295/1.995 2.64 9/99 - 8/01 (558,650)
</TABLE>
Set forth below is the contract amount and material terms of all crude oil
hedging instruments held by the Company at September 30, 1999 (daily volumes are
expressed in barrels (Bbls) and all prices are expressed in the daily NYMEX
closing prices for crude oil).
<TABLE>
<CAPTION>
FAIR
VALUE (LOSS) AT
TYPE DAILY PUT FLOOR PRICE CALL CEILING PRICE SEPTEMBER 30,
TRADE DATE TRANSACTION VOLUME PER BBL PER BBL TERM 1999
- ---------- ----------- ------ --------------- ------------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
6/14/99.. Swap 1,500 $17.44 $17.44 7/99 - 7/01 $(3,173,933)
6/18/99.. Collar 1,000 17.00 19.00 8/99 - 7/01 $(1,599,104)
7/01/99.. Collar 500 17.15 20.05 9/99 - 9/01 $ (642,799)
</TABLE>
F-78
<PAGE> 205
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
Beginning July 1, 1999, the Company is committed to pay an advisory fee of
$150,000 per year to a stockholder.
8. SUBSEQUENT EVENTS
On October 8, 1999, the Company entered into a merger agreement with Vista
Energy Resources, Inc. (Vista), an independent oil and gas development and
production company. Though the Company's shareholders will exchange their shares
for new shares of Vista, the stockholders of the Company will have an 84%
controlling interest in the merged company, and the Company will be treated as
having acquired Vista. The completion of the merger is contingent upon
shareholder approval by both companies.
9. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
The following table presents the Company's estimate of the proved oil and
gas reserves as of September 30, 1999.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL AND NGLS GAS
(MBBL) (MMCF) MBOE
------------ ------- ------
<S> <C> <C> <C>
Proved reserves............................................. 35,752 251,806 77,720
Proved developed reserves................................... 29,012 196,024 61,683
Proved undeveloped reserves................................. 6,740 55,782 16,037
</TABLE>
Estimated quantities of proved net reserves include only those quantities
that can be expected to be commercially recoverable at prices and costs in
effect at the effective date of the acquisition, under existing regulatory
practices and with conventional equipment and operating methods. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells with existing equipment and operating methods. Proved
undeveloped reserves include those reserves expected to be recovered from new
wells on undrilled acreage or from existing wells on which a relatively major
expenditure is required for recompletion.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of the
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revisions of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
The following is a summary of the Company's standardized measure of
discounted future net cash flows related to the proved oil and gas reserves. For
these calculations, estimated future cash flows from estimated future production
or proved reserves were computed using oil and gas prices as of June 30, 1999.
Future development and production costs attributable to the proved reserves were
estimated assuming that existing conditions would continue over the economic
life of the properties, and costs were not escalated
F-79
<PAGE> 206
PRIZE ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
for the future. The information presented below should not be viewed as an
estimate of the fair value of the acquired interests, nor should it be
considered indicative of any future trends.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
(IN THOUSANDS)
<S> <C>
Future cash inflows......................................... $1,336,284
Future production and development costs..................... (513,098)
Future income tax expense................................... (304,579)
----------
518,607
Discounts of future net cash flows at 10% per annum......... (235,095)
----------
Standardized measure of discounted future net cash flows.... $ 283,512
</TABLE>
The weighted average prices of oil and gas at September 30, 1999 used in
the calculation of the standardized measure were $22.62 per barrel for oil,
$16.14 per barrel for NGLs and $2.35 per Mcf for gas, respectively.
F-80
<PAGE> 207
ANNEX A
AGREEMENT
AND
PLAN OF MERGER
AMONG
VISTA ENERGY RESOURCES, INC. ("PARENT"),
PEC ACQUISITION CORP. ("MERGER SUB")
AND
PRIZE ENERGY CORP. ("PRIZE")
OCTOBER 8, 1999
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TABLE OF CONTENTS
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ARTICLE 1
DEFINITIONS................................................. A-1
1.1 Defined Terms.................................... A-1
1.2 References and Titles............................ A-8
ARTICLE 2
THE MERGER.................................................. A-8
2.1 The Merger....................................... A-8
2.2 Effect of the Merger............................. A-8
2.3 Governing Instruments, Directors and Officers of
the Surviving Corporation............................. A-9
2.4 Effect on Securities............................. A-9
2.5 Exchange of Certificates......................... A-10
2.6 Closing.......................................... A-11
2.7 Effective Time of the Merger..................... A-11
2.8 Taking of Necessary Action; Further Action....... A-11
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PRIZE..................... A-11
3.1 Organization..................................... A-11
3.2 Other Equity Interests........................... A-11
3.3 Authority and Enforceability..................... A-11
3.4 No Violations.................................... A-12
3.5 Consents and Approvals........................... A-12
3.6 Financial Statements............................. A-12
3.7 Capital Structure................................ A-13
3.8 No Undisclosed Liabilities....................... A-13
3.9 Indemnification.................................. A-13
3.10 Absence of Certain Changes or Events............. A-14
3.11 Compliance with Laws, Material Agreements and
Permits............................................... A-15
3.12 Governmental Regulation.......................... A-15
3.13 Litigation....................................... A-15
3.14 No Restrictions.................................. A-16
3.15 Audits and Settlements........................... A-16
3.16 Taxes............................................ A-16
3.17 Employee Benefit Plans........................... A-17
3.18 Employment Contracts and Benefits................ A-19
3.19 Labor Matters.................................... A-19
3.20 Accounts Receivable.............................. A-19
3.21 Insurance........................................ A-19
3.22 Intangible Property.............................. A-20
3.23 Title to Assets.................................. A-20
3.24 Oil and Gas Operations........................... A-20
3.25 Financial and Commodity Hedging.................. A-20
3.26 Environmental Matters............................ A-20
3.27 Books and Records................................ A-21
3.28 Brokers.......................................... A-22
3.29 Year 2000 Compliance............................. A-22
3.30 Powers of Attorney; Authorized Signatories....... A-22
3.31 Vote Required.................................... A-22
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3.32 Gas Imbalances........................................ A-22
3.33 Royalties........................................ A-22
3.34 Prepayments...................................... A-22
3.35 Disclosure and Investigation..................... A-22
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... A-23
4.1 Organization..................................... A-23
4.2 Other Equity Interests........................... A-23
4.3 Authority and Enforceability..................... A-23
4.4 No Violations.................................... A-23
4.5 Consents and Approvals........................... A-24
4.6 SEC Documents.................................... A-24
4.7 Financial Statements............................. A-24
4.8 Capital Structure................................ A-24
4.9 No Undisclosed Liabilities....................... A-25
4.10 Indemnification.................................. A-25
4.11 Absence of Certain Changes or Events............. A-25
4.12 Compliance with Laws, Material Agreements and
Permits............................................... A-27
4.13 Governmental Regulation.......................... A-27
4.14 Litigation....................................... A-27
4.15 Interim Operations of Merger Sub................. A-27
4.16 No Restrictions.................................. A-28
4.17 Audits and Settlements........................... A-28
4.18 Taxes............................................ A-28
4.19 Employee Benefit Plans........................... A-29
4.20 Employment Contracts and Benefits................ A-31
4.21 Labor Matters.................................... A-31
4.22 Accounts Receivable.............................. A-31
4.23 Insurance........................................ A-31
4.24 Intangible Property.............................. A-32
4.25 Title to Assets.................................. A-32
4.26 Oil and Gas Operations........................... A-32
4.27 Financial and Commodity Hedging.................. A-32
4.28 Environmental Matters............................ A-32
4.29 Books and Records................................ A-33
4.30 Brokers.......................................... A-34
4.31 Year 2000 Compliance............................. A-34
4.32 Powers of Attorney; Authorized Signatories....... A-34
4.33 Vote Required.................................... A-34
4.34 Gas Imbalances................................... A-34
4.35 Royalties........................................ A-34
4.36 Prepayments...................................... A-34
4.37 Disclosure and Investigation..................... A-34
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ARTICLE 5
COVENANTS................................................... A-34
5.1 Conduct of Business by Parent Pending Closing.... A-34
5.2 Conduct of Business by Prize Pending Closing..... A-36
5.3 Access to Assets, Personnel and Information...... A-38
5.4 No Solicitation.................................. A-40
5.5 Prize Stockholders Meeting....................... A-41
5.6 Parent Stockholders Meeting...................... A-41
5.7 Registration Statement and Proxy
Statement/Prospectus.................................. A-41
5.8 Stock Exchange Listing........................... A-43
5.9 Additional Arrangements.......................... A-43
5.10 Agreements of Affiliates......................... A-43
5.11 Public Announcements............................. A-43
5.12 Notification of Certain Matters.................. A-43
5.13 Payment of Expenses.............................. A-44
5.14 Registration Rights.............................. A-44
5.15 Indemnification and Insurance.................... A-44
5.16 Severance Plan................................... A-45
5.17 Amendment of Parent Certificate of
Incorporation......................................... A-45
5.18 Authorization of Parent Preferred Stock.......... A-45
5.19 Joint Participation Agreement.................... A-46
5.20 Voting and Shareholders Agreement................ A-46
5.21 Bylaws........................................... A-46
5.22 Pioneer Voting Agreement......................... A-46
ARTICLE 6
CONDITIONS.................................................. A-46
6.1 Conditions to Each Party's Obligation to Effect
the Merger............................................ A-46
6.2 Conditions to Obligations of Parent and Merger
Sub................................................... A-47
6.3 Conditions to Obligation of Prize................ A-47
ARTICLE 7
TERMINATION................................................. A-49
7.1 Termination Rights............................... A-49
7.2 Effect of Termination............................ A-50
7.3 Fees and Expenses................................ A-50
ARTICLE 8
MISCELLANEOUS............................................... A-50
8.1 Nonsurvival of Representations and Warranties.... A-50
8.2 Amendment........................................ A-50
8.3 Notices.......................................... A-50
8.4 Counterparts..................................... A-50
8.5 Severability..................................... A-50
8.6 Entire Agreement; No Third Party Beneficiaries... A-51
8.7 Applicable Law................................... A-51
8.8 No Remedy in Certain Circumstances............... A-51
8.9 Assignment....................................... A-51
8.10 Waivers.......................................... A-51
8.11 Confidentiality Agreement........................ A-51
8.12 Section 2.03..................................... A-52
8.13 Incorporation.................................... A-52
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SCHEDULES
Parent Disclosure Schedule
Prize Disclosure Schedule
EXHIBITS
5.10 Form of Affiliate Letter
5.14 Form of Restated Registration Rights Agreement
5.16 Vista Energy Resources, Inc. Severance Benefit
Plan
5.18 Parent Preferred Stock Designation
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and entered
into as of the 8th day of October, 1999, by and among VISTA ENERGY RESOURCES,
INC. , a Delaware corporation ("Parent"); PEC ACQUISITION CORP., a Delaware
corporation ("Merger Sub"); and PRIZE ENERGY CORP., a Delaware corporation
("Prize").
Recitals
A. Parent and Prize desire to effect a merger of Merger Sub with and into
Prize (the "Merger").
B. The board of directors of Parent has appointed a special committee of
one independent director (the "Special Committee") to consider the Merger.
C. The Special Committee, with the advice and assistance of Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated ("Dain Rauscher Wessels"), and
independent legal counsel, has recommended (subject to the satisfaction of the
conditions precedent set forth herein) that the board of directors of Parent
approve this Agreement and the transactions contemplated hereby.
D. The board of directors of Parent has determined it advisable and in the
best interests of Parent's stockholders to consummate the Merger, upon the terms
and subject to the conditions set forth herein.
E. The boards of directors of Merger Sub and Prize have determined it
advisable and in the best interests of Merger Sub's and Prize's stockholders,
respectively, to consummate the Merger, upon the terms and subject to the
conditions set forth herein.
F. For federal income tax purposes, it is intended that the Merger qualify
as a "reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
G. Parent, Merger Sub and Prize (the "Parties") desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, for and in consideration of the Recitals and the mutual
covenants and agreements set forth in this Agreement, the Parties hereby agree
as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, each of the following terms
has the meaning given in this Section 1.1 or in the Section referred to below:
"Affiliate" means, with respect to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with such Person. The
term "control" (including the terms "controlled by" and "under common control
with") means the possession, directly or indirectly, of the actual power to
direct or cause the direction of the management policies of a Person, whether
through the ownership of stock, by contract, credit arrangement or otherwise.
"Agreement" means this Agreement and Plan of Merger, as amended,
supplemented and/or modified from time to time.
"Alternative Proposal" has the meaning specified in Section 5.4(b).
"AMEX" means The American Stock Exchange.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, and any successor federal and state statutes
and any regulations promulgated thereunder, and any foreign statutes and
regulations modeled thereon.
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"CERCLIS" means the Comprehensive Environmental Response, Compensation and
Liability Information System List.
"Certificate of Merger" means the certificate of merger, prepared and
executed in accordance with the applicable provisions of the DGCL, filed with
the Secretary of State of the State of Delaware to effect the Merger.
"Closing" means the closing of the Merger and the consummation of the other
transactions contemplated by this Agreement.
"Closing Date" means the date on which the Closing occurs, which date shall
be the first business day following the day on which all of the conditions
provided for in Article 6 have been satisfied or waived as provided therein (or
such later date as is agreed upon by the Parties).
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" means the letter agreement dated September 14,
1999, between Prize and Parent relating to Prize's furnishing of information to
Parent and Parent's furnishing of information to Prize in connection with
Parent's and Prize's evaluation of the possibility of the Merger.
"DGCL" means the Delaware General Corporation Law, as amended.
"Dain Rauscher Wessels" has the meaning specified in the Recitals of this
Agreement.
"Defensible Title" means such right, title and interest that is (a)
evidenced by an instrument or instruments filed of record in accordance with the
conveyance and recording laws of the applicable jurisdiction to the extent
necessary to prevail against competing claims of bona fide purchasers for value
without notice, and (b) subject to Permitted Encumbrances, free and clear of all
Liens, claims, infringements, burdens and other defects.
"Disclosure Schedule" means, as applicable, the Prize Disclosure Schedule
or the Parent Disclosure Schedule.
"Dissenting Stockholder" means a holder of Prize Common Stock or Prize
Preferred Stock who has validly perfected appraisal rights under Section 262 of
the DGCL.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Effective Time" has the meaning specified in Section 2.7.
"Environmental Law" means any federal, state, local or foreign statute,
code, ordinance, rule, regulation, policy, guideline, permit, consent, approval,
license, judgment, order, writ, decree, common law, injunction or other
authorization in effect on the date hereof, at the Closing Date, or at a
previous time applicable to the operations of the Prize Companies or the Parent
Companies, as applicable: (a) relating to emissions, discharges, releases or
threatened releases of Hazardous Materials into the natural environment,
including into ambient air, soil, sediments, land surface or subsurface,
buildings or facilities, surface water, groundwater, publicly-owned treatment
works, septic systems or land; (b) relating to the generation, treatment,
storage, disposal, use, handling, manufacturing, recycling, transportation or
shipment of Hazardous Materials; (c) relating to occupational health and safety;
or (d) otherwise relating to the pollution of the environment, solid waste
handling treatment or disposal, operation or reclamation of oil and gas
operations or mines, reclamation or remediation activities, or protection of
environmentally sensitive areas.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles, as recognized by the
U.S. Financial Accounting Standards Board (or any generally recognized
successor).
"Governmental Action" means any authorization, application, approval,
consent, exemption, filing, license, notice, registration, permit or other
requirement of, to or with any Governmental Authority.
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"Governmental Authority" means any national, state, county or municipal
government, domestic or foreign, any agency, board, bureau, commission, court,
department or other instrumentality of any such government, or any arbitrator in
any case that has jurisdiction over any of the Prize Companies or the Parent
Companies or any of their respective properties or assets.
"Hazardous Material" means (a) any "hazardous substance," as defined by
CERCLA; (b) any "hazardous waste" or "solid waste," in either case as defined by
RCRA; (c) any solid, hazardous, dangerous or toxic chemical, material, waste or
substance, within the meaning of and regulated by any Environmental Law; (d) any
radioactive material, including any naturally occurring radioactive material,
and any source, special or byproduct material as defined in 42 U.S.C. 2011 et
seq. and any amendments or authorizations thereof; (e) any asbestos-containing
materials in any form or condition; (f) any polychlorinated biphenyls in any
form or condition; or (g) petroleum, petroleum hydrocarbons or any fraction or
byproducts thereof.
"Hydrocarbons" means oil, condensate, gas, casinghead gas and other liquid
or gaseous hydrocarbons.
"Indemnified Parties" has the meaning specified in Section 5.15.
"Joint Participation Agreement" means that certain Joint Participation
Agreement dated as of June 29, 1999, between Prize and Pioneer, as the same may
be amended from time to time in accordance with its terms.
"Lien" means any lien, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, encumbrance, rights of a vendor under
any title retention or conditional sale agreement, or lease or other arrangement
substantially equivalent thereto.
"Material Adverse Effect" means: (a) when used with respect to Prize, a
result or consequence that would materially adversely affect the condition
(financial or otherwise), results of operations or business of the Prize
Companies (taken as a whole) or the aggregate value of their assets, would
materially impair the ability of the Prize Companies (taken as a whole) to own,
hold, develop and operate their assets, or would impair Prize's ability to
perform its obligations hereunder or consummate the transactions contemplated
hereby; and (b) when used with respect to Parent, a result or consequence that
would materially adversely affect the condition (financial or otherwise),
results of operations or business of the Parent Companies (taken as a whole) or
the aggregate value of their assets, would materially impair the ability of the
Parent Companies (taken as a whole) to own, hold, develop and operate their
assets, or would impair Parent's or Merger Sub's ability to perform its
respective obligations hereunder or consummate the transactions contemplated
hereby.
"Merger" has the meaning specified in the Recitals to this Agreement.
"Merger Consideration" means the shares of Parent Common Stock and Parent
Preferred Stock to be issued in connection with the Merger.
"Merger Sub" has the meaning specified in the introductory paragraph of
this Agreement.
"Merger Sub Common Stock" means the common stock, par value $.01 per share,
of Merger Sub.
"Oil and Gas Interest(s)" means: (a) direct and indirect interests in and
rights with respect to oil, gas, mineral and related properties and assets of
any kind and nature, direct or indirect, including working, royalty and
overriding royalty interests, production payments, operating rights, net profits
interests, other non-working interests and non-operating interests; (b)
interests in and rights with respect to Hydrocarbons and other minerals or
revenues therefrom and contracts in connection therewith and claims and rights
thereto (including oil and gas leases, operating agreements, unitization and
pooling agreements and orders, division orders, transfer orders, mineral deeds,
royalty deeds, oil and gas sales, exchange and processing contracts and
agreements and, in each case, interests thereunder), surface interests, fee
interests, reversionary interests, reservations and concessions; (c) easements,
rights of way, licenses, permits, leases, and other interests associated with,
appurtenant to, or necessary for the operation of any of the foregoing; and (d)
interests in equipment and machinery (including well equipment and machinery),
oil
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and gas production, gathering, transmission, compression, treating, processing
and storage facilities (including tanks, tank batteries, pipelines and gathering
systems), pumps, water plants, electric plants, gasoline and gas processing
plants, refineries and other tangible personal property and fixtures associated
with, appurtenant to, or necessary for the operation of any of the foregoing.
References in this Agreement to the "Oil and Gas Interests of Prize" or "Prize's
Oil and Gas Interests" mean the collective Oil and Gas Interests of the Prize
Companies. References in this Agreement to the "Oil and Gas Interests of Parent"
or "Parent's Oil and Gas Interests" mean the collective Oil and Gas Interests of
the Parent Companies.
"Ownership Interests" means, as applicable: (a) the ownership interests of
Prize in its assets, as set forth in the reserve report dated July 1, 1999,
prepared by Prize; or (b) the ownership interests of Parent in its assets, as
set forth in the reserve report dated July 1, 1999, prepared by Parent.
"Parent" has the meaning specified in the introductory paragraph of this
Agreement.
"Parent Bank Credit Agreement" means the Credit Agreement, dated December
18, 1998, between Parent, as borrower, BankBoston, N.A., as administrative
agent, certain other agents, and various banks, as lenders (as amended and
supplemented).
"Parent Certificate" means a certificate representing shares of Parent
Common Stock.
"Parent Common Stock" means the common stock, par value $.01 per share, of
Parent.
"Parent Companies" means Parent and each of the Parent Subsidiaries.
"Parent Disclosure Schedule" means the Parent Disclosure Schedule attached
hereto and any documents listed on such Parent Disclosure Schedule and expressly
incorporated therein by reference.
"Parent Employee Benefit Plans" has the meaning specified in Section
4.19(a).
"Parent Financial Statements" means the audited and unaudited consolidated
financial statements of Parent and its subsidiaries (including the related
notes) included (or incorporated by reference) in Parent's Annual Report on Form
10-K for the year ended December 31, 1998, and Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, in each case as filed with the SEC.
"Parent Material Agreement(s)" means (a) the Parent Bank Credit Agreement,
(b) any agreement or contract, written or oral, between any of the Parent
Companies and Natural Gas Partners II, L.P. and/or Natural Gas Partners III,
L.P. or any Affiliate thereof, (c) any hedging agreement to which any of the
Parent Companies is a party or by which any of its assets is bound, (d) any
agreement, contract, commitment or understanding, written or oral, granting any
Person registration, purchase or sale rights with respect to any security of any
Parent Company, (e) any agreement, contract, commitment or understanding,
written or oral, granting any Person a right of indemnification and/or
contribution by any Parent Company, (f) any voting agreement relating to any
security of any Parent Company, and/or (g) any other written or oral agreement,
contract, commitment or understanding to which any of the Parent Companies is a
party, by which any of the Parent Companies is directly or indirectly bound, or
to which any asset of any of the Parent Companies may be subject, outside the
ordinary course of business of the Parent Companies, in each case as amended or
supplemented.
"Parent Meeting" means the meeting of the stockholders of Parent called for
the purpose of voting on the Prize Proposal, or any adjournment thereof.
"Parent Permits" has the meaning specified in Section 4.12.
"Parent Preferred Stock" means the Series A 6% Convertible Preferred Stock,
par value $.01, of Parent, to be authorized as described in Section 5.18.
"Parent Preferred Stock Designation" means the Certificate of Designation
with respect to the Parent Preferred Stock referred to in Section 5.18.
"Parent Representative" means any director, officer, employee, agent,
advisor (including legal, accounting and financial advisors), Affiliate or other
representative of any of the Parent Companies.
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"Parent SEC Documents" has the meaning specified in Section 4.6.
"Parent Subsidiary(ies)" means those entities identified as subsidiaries of
Parent on the Parent Disclosure Schedule.
"Parent Warrants" means the common stock purchase warrants (issued and
outstanding on the date hereof) described in the Parent Disclosure Schedule,
each currently representing the right to purchase one share of Parent Common
Stock at the exercise price described in the Parent Disclosure Schedule.
"Parties" has the meaning specified in the Recitals to this Agreement.
"Permitted Encumbrances" means: (a) Liens for Taxes, assessments or other
governmental charges or levies if the same shall not at the particular time in
question be due and delinquent or (if foreclosure, distraint, sale or other
similar proceedings shall not have been commenced or, if commenced, shall have
been stayed) are being contested in good faith by appropriate proceedings and if
any of the Prize Companies or the Parent Companies, as applicable, shall have
set aside on its books such reserves (segregated to the extent required by sound
accounting practices) as may be required by or consistent with GAAP and, whether
reserves are set aside or not, are listed on the applicable Disclosure Schedule;
(b) Liens of carriers, warehousemen, mechanics, laborers, materialmen,
landlords, vendors, workmen and operators arising by operation of law in the
ordinary course of business or by a written agreement existing as of the date
hereof and necessary or incident to the exploration, development, operation and
maintenance of Hydrocarbon properties and related facilities and assets for sums
not yet due or being contested in good faith by appropriate proceedings, if any
of the Prize Companies or the Parent Companies, as applicable, shall have set
aside on its books such reserves (segregated to the extent required by sound
accounting practices) as may be required by or consistent with GAAP and, whether
reserves are set aside or not, are listed on the applicable Disclosure Schedule,
to the extent that such are in existence as of the date hereof; (c) Liens
incurred in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other social security legislation
(other than ERISA) which would not and will not, individually or in the
aggregate, result in a Material Adverse Effect on the Prize Companies or the
Parent Companies, as applicable; (d) Liens incurred in the ordinary course of
business to secure the performance of bids, tenders, trade contracts, leases,
statutory obligations, surety and appeal bonds, performance and repayment bonds
and other obligations of a like nature which would not and will not,
individually or in the aggregate, result in a Material Adverse Effect on the
Prize Companies or the Parent Companies, as applicable; (e) Liens, easements,
rights-of-way, restrictions, servitudes, permits, conditions, covenants,
exceptions, reservations and other similar encumbrances incurred in the ordinary
course of business or existing on property and not materially impairing the
value of the assets of any of the Prize Companies or any of the Parent
Companies, as applicable, or interfering with the ordinary conduct of the
business of any of the Prize Companies or any of the Parent Companies, as
applicable, or rights to any of their assets; (f) Liens arising pursuant to
Section 9.319 of the Texas Business and Commerce Code and all other similar
Liens created or arising by operation of law to secure a party's obligations as
a purchaser of oil and gas; (g) all rights to consent by, required notices to,
filings with, or other actions by Governmental Authorities to the extent
customarily obtained subsequent to closing; (h) farmout, carried working
interest, joint operating, unitization, royalty, overriding royalty, sales and
similar agreements relating to the exploration or development of, or production
from, Hydrocarbon properties entered into in the ordinary course of business and
not in violation of Section 5.1(b), provided the effect thereof of any of such
in existence as of the date hereof on the working and net revenue interest of
the Prize Companies or the Parent Companies, as applicable, has been properly
reflected in its respective Ownership Interests; (i) any defects, irregularities
or deficiencies in title to easements, rights-of-way or other surface use
agreements that do not materially adversely affect the value of any asset of any
of the Prize Companies or any of the Parent Companies, as applicable, by an
amount in excess of $50,000; (j) Liens arising under or created pursuant to the
Parent Bank Credit Agreement or the Prize Bank Credit Agreement, as applicable;
and (k) Liens described on the applicable Disclosure Schedule.
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"Person" means any natural person, corporation, company, limited or general
partnership, joint stock company, joint venture, association, limited liability
company, trust, bank, trust company, land trust, business trust or other entity
or organization, whether or not a Governmental Authority.
"Pioneer" means Pioneer Natural Resources USA, Inc., a Delaware
corporation.
"Prize" has the meaning set forth in the introductory paragraph hereof.
"Prize Adjusted Outstanding Shares" means the sum of (a) the number of
shares of Prize Common Stock outstanding immediately before the Effective Time,
plus (b) the Prize Preferred Conversion Shares.
"Prize Bank Credit Agreement" means the Senior Credit Agreement, dated as
of June 29, 1999, between Prize Energy Resources, L.P., a Prize Subsidiary, as
borrower, and BankBoston, N.A., as administrative agent, certain other agents,
and various banks, as lenders (as amended and supplemented).
"Prize Certificate" means a certificate representing shares of Prize Common
Stock or Prize Preferred Stock.
"Prize Common Stock" means the common stock, par value $.01 per share, of
Prize.
"Prize Companies" means Prize and each of the Prize Subsidiaries.
"Prize Conversion Amount" means the number (rounded to the eighth decimal
place) equal to the product of (a) the number of shares of Parent Common Stock
outstanding immediately before the Effective Time (excluding shares issued
between the date of this Agreement and the Effective Time as a result of the
exercise of Parent Warrants), after giving effect to the reverse stock split
contemplated in Section 5.17, times (b) 5.25.
"Prize Disclosure Schedule" means the Prize Disclosure Schedule attached
hereto and any documents listed on such Prize Disclosure Schedule and expressly
incorporated therein by reference.
"Prize Employee Benefit Plans" has the meaning specified in Section
3.17(a).
"Prize Financial Statements" means the draft statements of revenues and
direct operating expenses of producing properties acquired by Prize from Pioneer
and its affiliate for the years ended December 31, 1996, 1997 and 1998 and for
the six months ended June 30, 1998 and 1999, as attached to that certain letter
from Prize to Parent dated the date of this Agreement.
"Prize Material Agreement(s)" means (a) the Prize Bank Credit Agreement,
(b) any agreement or contract, written or oral, between any of the Prize
Companies and Natural Gas Partners V, L.P. or any Affiliate thereof, (c) any
hedging agreement to which any of the Prize Companies is a party or by which any
of its assets is bound, (d) any agreement or contract between Pioneer and any
Prize Company, (e) any agreement, contract, commitment or understanding, written
or oral, granting any Person registration, purchase or sale rights with respect
to any security of any Prize Company, (f) any agreement, contract, commitment or
understanding, written or oral, granting any Person a right of indemnification
and/or contribution by any Prize Company, (g) any voting agreement relating to
any security of any Parent Company, and/or (h) any other written or oral
agreement, contract, commitment or understanding to which any of the Prize
Companies is a party, by which any of the Prize Companies is directly or
indirectly bound, or to which any asset of any of the Prize Companies may be
subject, outside the ordinary course of business of any of the Prize Companies,
in each case as amended and supplemented as of the date hereof.
"Prize Meeting" means the meeting of the stockholders of Prize called for
the purpose of voting on the Prize Proposal or any adjournment thereof.
"Prize Permits" has the meaning specified in Section 3.11.
"Prize Preferred Conversion Shares" means the number of shares of Prize
Common Stock that the holders of the Prize Preferred Stock would be entitled to
acquire, assuming conversion of all outstanding shares of Prize Preferred Stock
immediately before the Effective Time.
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"Prize Preferred Stated Value" means the Stated Value of each share of
Parent Preferred Stock as of the Effective Date, which shall be equal to (a)
$13,000, divided by (b) the Prize Stock Conversion Number (rounded to the
nearest one-hundredth of a cent).
"Prize Preferred Stock" means the Series A 6% Convertible Preferred Stock,
par value $.01 per share, of Prize.
"Prize Proposal" means: (a) as to Parent and Prize, the proposal to approve
this Agreement and the Merger, which proposal is to be presented to the
stockholders of Prize and Parent in the Proxy Statement/ Prospectus, and (b) as
to Parent only, the proposal to approve amendments to the certificate of
incorporation of Parent, and other matters, as required under Section 5.17,
which proposal is to be presented to the stockholders of Parent in the Proxy
Statement/Prospectus.
"Prize Representative" means any director, officer, employee, agent,
advisor (including legal, accounting and financial advisors), Affiliate or other
representative of any of the Prize Companies.
"Prize Stock Conversion Number" means such number of shares of Parent
Common Stock or Parent Preferred Stock, as applicable (rounded to the eighth
decimal place), that is equal to (a) the Prize Conversion Amount, divided by (b)
the Prize Adjusted Outstanding Shares.
"Prize Stock Option" means an option (issued and outstanding immediately
prior to the Effective Time) to acquire shares of Prize Common Stock granted
pursuant to the Prize Energy Corp. Amended and Restated Option Plan effective as
of June 29, 1999.
"Prize Subsidiary(ies)" means those entities identified as subsidiaries of
Prize on the Prize Disclosure Schedule.
"Proxy Statement/Prospectus" means a joint proxy statement in definitive
form relating to the Prize Meeting and the Parent Meeting, which proxy statement
will be included as a prospectus in the Registration Statement.
"Prize Voting and Shareholders Agreement" means that certain Amended and
Restated Voting and Shareholders Agreement dated as of June 29, 1999, among
Prize and its stockholders, as the same may be amended from time to time in
accordance with its terms.
"RCRA" means the Resource Conservation and Recovery Act, as amended, and
any successor federal and state statutes and any regulations promulgated
thereunder, and any foreign statutes and regulations modeled thereon.
"Registration Rights Agreement" means a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit 5.14, to be entered into at
the Closing among Parent, the holders of shares of Prize Common Stock, the
holders of shares of Prize Preferred Stock and certain holders of shares of
Parent Common Stock and Parent Warrants.
"Registration Statement" means the Registration Statement on Form S-4 to be
filed by Parent in connection with the issuance of Parent Common Stock and
Parent Preferred Stock pursuant to the Merger.
"Reserve Data Value" means the 10% present value of the proved reserves
contained in Parent's Oil and Gas Interests, as shown on the July 1, 1999,
reserve report of Parent.
"Responsible Officer" means, with respect to any entity, the Chairman,
Chief Executive Officer, President or Chief Operating Officer of such entity.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Committee" has the meaning specified in the Recitals to this
Agreement.
"Superior Proposal" has the meaning specified in Section 5.4(c).
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"Surviving Corporation" has the meaning specified in Section 2.2.
"Tax Returns" has the meaning specified in Section 3.16(a).
"Taxes" means taxes of any kind, levies or other like assessments, customs,
duties, imposts, charges or fees, including income, gross receipts, ad valorem,
value added, excise, real or personal property, asset, sales, use, federal
royalty, license, payroll, transaction, capital, net worth and franchise taxes,
estimated taxes, withholding, employment, social security, workers'
compensation, utility, severance, production, unemployment compensation,
occupation, premium, windfall profits, transfer and gains taxes and other
governmental taxes imposed or payable to the United States or any state, local
or foreign governmental subdivision or agency thereof, and in each instance such
term shall include any interest, penalties or additions to tax attributable to
any such tax, including penalties for the failure to file any Tax Return or
report.
"Third-Party Consent" means the consent or approval of any Person other
than any of the Prize Companies, any of the Parent Companies or any Governmental
Authority.
"Year 2000 Compliance" means that (a) no value for current date will cause
any interruption in operation; (b) date-based functionality will behave
consistently for dates prior to, during and after year 2000; (c) in all
interfaces and data storage, the first two digits in the year of any date are
specified either explicitly or by unambiguous algorithms; (d) year 2000 will be
recognized as a leap year; and (e) the year "00" will be read and correctly
interpreted as the year "2000."
1.2 References and Titles. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections and other subdivisions refer to the
corresponding Exhibits, Schedules, Articles, Sections, subsections and other
subdivisions of or to this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections or other
subdivisions of this Agreement are for convenience only, do not constitute any
part of this Agreement, and shall be disregarded in construing the language
hereof. The words "this Agreement," "herein," "hereby," "hereunder" and
"hereof," and words of similar import, refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited. The words "this
Article," "this Section" and "this subsection," and words of similar import,
refer only to the Article, Section or subsection hereof in which such words
occur. The word "or" is not exclusive, and the word "including" (in its various
forms) means including without limitation. Pronouns in masculine, feminine or
neuter genders shall be construed to state and include any other gender, and
words, terms and titles (including terms defined herein) in the singular form
shall be construed to include the plural and vice versa, unless the context
otherwise requires.
As used in the representations and warranties contained in this Agreement,
the phrase "to the knowledge" of the representing Party shall mean that
Responsible Officers of such Party, individually or collectively, either (a)
know that the matter being represented and warranted is true and accurate or (b)
have no reason, after reasonable inquiry, to believe that the matter being
represented and warranted is not true and accurate.
ARTICLE 2
THE MERGER
2.1 The Merger. Subject to the terms and conditions set forth in this
Agreement, at the Effective Time, Merger Sub shall be merged with and into Prize
in accordance with the provisions of this Agreement.
2.2 Effect of the Merger. Upon the effectiveness of the Merger, the
separate existence of Merger Sub shall cease, and Prize, as the surviving
corporation in the Merger (the "Surviving Corporation"), shall continue its
corporate existence under the laws of the State of Delaware. The Merger shall
have the effects specified in this Agreement and the DGCL.
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2.3 Governing Instruments, Directors and Officers of the Surviving
Corporation.
(a) The certificate of incorporation of Prize, as in effect immediately
prior to the Effective Time, shall be the certificate of incorporation of the
Surviving Corporation until duly amended in accordance with its terms and
applicable law.
(b) The bylaws of Prize, as in effect immediately prior to the Effective
Time, shall be the bylaws of the Surviving Corporation until duly amended in
accordance with their terms and applicable law.
(c) The directors and officers of Prize at the Effective Time shall be the
directors and officers, respectively, of the Surviving Corporation from the
Effective Time until their respective successors have been duly elected or
appointed in accordance with the certificate of incorporation and bylaws of the
Surviving Corporation and applicable law.
2.4 Effect on Securities.
(a) Merger Sub Common Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof, each share of Merger
Sub Common Stock issued and outstanding immediately prior to the Effective Time
shall remain issued and outstanding and shall continue as one share of common
stock of the Surviving Corporation and each certificate evidencing ownership of
any such shares shall continue to evidence ownership of the same number of
shares of the capital stock of the Surviving Corporation.
(b) Parent Common Stock and Warrants. At the Effective Time, each share of
Parent Common Stock and each Parent Warrant then issued and outstanding shall
remain issued, outstanding and unchanged.
(c) Prize Securities.
(i) Prize Common Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder thereof, each share of
Prize Common Stock that is issued and outstanding immediately prior to the
Effective Time (other than shares of Prize Common Stock held by Dissenting
Stockholders) shall be converted into the right to receive shares of
validly issued, fully paid and nonassessable Parent Common Stock, with each
such share of Prize Common Stock being converted into that number of shares
of validly issued, fully paid and nonassessable Parent Common Stock equal
to the Prize Stock Conversion Number. Each share of Prize Common Stock,
when so converted, shall automatically be canceled and retired, shall cease
to exist and shall no longer be outstanding; and the holder of any Prize
Certificate representing any such shares shall cease to have any rights
with respect thereto, except the right to receive the shares of Parent
Common Stock to be issued in exchange therefor, upon the surrender of such
Prize Certificate.
(ii) Prize Preferred Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof, each share
of Prize Preferred Stock that is issued and outstanding at the Effective
Time (other than shares of Prize Preferred Stock held by Dissenting
Stockholders) shall be converted into the right to receive a number of
shares of validly issued, fully paid and nonassessable Parent Preferred
Stock equal to the Prize Stock Conversion Number. Each share of Prize
Preferred Stock, when so converted, shall automatically be canceled and
retired, shall cease to exist and shall no longer be outstanding; and the
holder of any Prize Certificate representing such shares shall cease to
have any rights with respect thereto, except the right to receive the
shares of Parent Preferred Stock to be exchanged therefor, upon surrender
of such Prize Certificate.
(iii) Prize Stock Options. All Prize Stock Options shall remain
outstanding following the Effective Time. At the Effective Time, by virtue
of the Merger and without any action on the part of Prize, Parent or any
holder of a Prize Stock Option, each Prize Stock Option shall be assumed by
Parent in such manner that Parent is a corporation assuming a stock option
in a transaction to which Section 424(a) of the Code applies within the
meaning of Section 424 of the Code or, to the extent that Section 424 of
the Code does not apply to any Prize Stock Option, would be such a
corporation were said Section 424 applicable to such option. Each Prize
Stock Option assumed by Parent shall be
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exercisable on the same terms and conditions as apply immediately prior to
the Effective Time, except that each Prize Stock Option shall be
exercisable for that number of shares of Parent Common Stock (rounded to
the nearest whole share) into which the number of shares of Prize Common
Stock subject to such Prize Stock Option immediately prior to the Effective
Time would be converted under paragraph (i) of this Section 2.4(c) and the
option price per share of Parent Common Stock shall be an amount equal to
the option price per share of Prize Common Stock subject to such Prize
Stock Option in effect immediately prior to the Effective Time divided by
the Prize Stock Conversion Number (the option price per share, as so
determined, being rounded to the nearest full cent). No payment shall be
made for fractional interests.
(iv) Shares of Dissenting Stockholders. Any issued and outstanding
shares of Prize Common Stock and Prize Preferred Stock held by a Dissenting
Stockholder shall be converted into the right to receive such consideration
as may be determined to be due to such Dissenting Stockholder pursuant to
the DGCL; provided, however, shares of Prize Common Stock and Prize
Preferred Stock outstanding at the Effective Time and held by a Dissenting
Stockholder who shall, after the Effective Time, withdraw his, her or its
demand for appraisal or lose his, her or its right of appraisal as provided
in the DGCL, shall be deemed to be converted, as of the Effective Time,
into the right to receive the shares of Parent Common Stock or Parent
Preferred Stock, as applicable, in accordance with the procedures specified
in Section 2.5(b). Prize shall give Parent (A) prompt notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served pursuant to the DGCL received by Prize, and (B) the
opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the DGCL. Prize will not voluntarily make any
payment with respect to any demands for appraisal and will not, except with
the prior written consent of Parent, settle or offer to settle any such
demands.
(v) Other. Except as provided in this Section 2.4(c) or as otherwise
agreed to by the Parties: (A) the provisions of any other plan, program or
arrangement providing for the issuance or grant of any other interest in
respect of the capital stock of the Prize Companies shall become null and
void at the Effective Time, and (B) the Prize Companies shall use all
reasonable efforts to ensure that, following the Effective Time, no holder
of options or rights or any participant in any plan, program or arrangement
shall have any right thereunder to acquire any equity securities of the
Prize Companies, Merger Sub, Parent or any direct or indirect subsidiary
thereof.
2.5 Exchange of Certificates.
(a) Exchange of Certificates. At or following the Closing, each holder of
shares of Prize Common Stock or of Prize Preferred Stock shall exchange the
Prize Certificates representing such shares for certificates representing that
number of shares of Parent Common Stock or Parent Preferred Stock which such
holder is entitled to receive as a result of the Merger.
(b) No Further Ownership Rights in Prize Common Stock or Prize Preferred
Stock. All shares of Parent Common Stock issued upon the surrender for exchange
of shares of Prize Common Stock or Prize Preferred Stock in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Prize Common Stock and Prize Preferred
Stock. After the Effective Time, there shall be no further registration of
transfers on the Surviving Corporation's stock transfer books of the shares of
Prize Common Stock or Prize Preferred Stock that were outstanding immediately
prior to the Effective Time. If, after the Effective Time, a Prize Certificate
is presented to the Surviving Corporation for any reason, it shall be canceled
and exchanged for shares of Parent Common Stock or Parent Preferred Stock, as
applicable, into which such shares were converted at the Effective Time.
(c) Treatment of Fractional Shares. No Parent Certificates or scrip
representing fractional shares of Parent Common Stock or Parent Preferred Stock
shall be issued in the Merger. In lieu of any fractional share of Parent Common
Stock or Parent Preferred Stock to which a holder of Prize Common Stock or Prize
Preferred Stock would otherwise be entitled, such holder, upon surrender of a
Prize Certificate as
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described in this Section 2.5, shall receive one whole share of Parent Common
Stock or Parent Preferred Stock, as applicable.
(d) Lost, Stolen, or Destroyed Prize Certificates. If any Prize Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Prize Certificate to be lost, stolen or
destroyed and, if required by Parent, the posting by such Person of a bond, in
such reasonable amount as Parent may direct, as indemnity against any claim that
may be made against it with respect to such Prize Certificate, Parent shall
issue in exchange for such lost, stolen or destroyed Prize Certificate the
shares of Parent Common Stock deliverable with respect thereto pursuant to this
Agreement.
2.6 Closing. The Closing shall take place on the Closing Date at such time
and place as is agreed upon by Parent and Prize.
2.7 Effective Time of the Merger. The Merger shall become effective
immediately when the Certificate of Merger is accepted for filing by the
Secretary of State of Delaware or at such time thereafter as is provided in the
Certificate of Merger (the "Effective Time"). The Certificate of Merger shall be
filed, and the Effective Time shall occur, on the Closing Date; provided,
however, that the Certificate of Merger may be filed prior to the Closing Date
or prior to the Closing so long as it provides for an effective time that occurs
on the Closing Date immediately after the Closing.
2.8 Taking of Necessary Action; Further Action. Each of Parent, Merger
Sub, and Prize shall use all reasonable efforts to take all such actions as may
be necessary or appropriate in order to effectuate the Merger under the DGCL as
promptly as commercially practicable. If, at any time after the Effective Time,
any further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
both Merger Sub and Prize, the officers and directors of the Surviving
Corporation are fully authorized, in the name of the Surviving Corporation or
otherwise to take, and shall take, all such lawful and necessary action.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PRIZE
Prize hereby represents and warrants to Parent and Merger Sub as follows:
3.1 Organization. Each of the Prize Companies: (a) is a corporation or, as
applicable, a limited partnership or limited liability company, duly organized,
validly existing and in good standing under the laws of its state of
incorporation or formation; (b) has the requisite power and authority to own,
lease and operate its properties and to conduct its business as it is presently
being conducted; and (c) is duly qualified to do business as a foreign
corporation, limited partnership or limited liability company, as applicable,
and is in good standing, in each jurisdiction where the character of the
properties owned or leased by it or the nature of its activities makes such
qualification necessary (except where any failure to be so qualified as a
foreign corporation, limited partnership or limited liability company or to be
in good standing would not, individually or in the aggregate, have a Material
Adverse Effect on Prize). Accurate and complete copies of the certificate of
incorporation, bylaws, minute books and/or other organizational documents of
each of the Prize Companies have heretofore been delivered to Parent. Prize has
no corporate or other subsidiaries other than the Prize Subsidiaries.
3.2 Other Equity Interests. None of the Prize Companies owns any equity
interest in any general or limited partnership, corporation or limited liability
company other than as set forth on the Prize Disclosure Schedule (other than
joint venture, joint operating, other ownership arrangements and tax
partnerships entered into in the ordinary course of business that, individually
or in the aggregate, are not material to the operations or business of the Prize
Companies, taken as a whole).
3.3 Authority and Enforceability. Prize has the requisite corporate power
and authority to enter into and deliver this Agreement and (with respect to
consummation of the Merger, subject to the valid
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approval of the Prize Proposal by the stockholders of Prize) to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and (with respect to consummation of the Merger, subject to the valid approval
of the Prize Proposal by the stockholders of Prize) the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Prize, including approval by the board
of directors of Prize, and no other corporate proceedings on the part of Prize
are necessary to authorize the execution or delivery of this Agreement or (with
respect to consummation of the Merger, subject to the valid approval of the
Prize Proposal by the stockholders of Prize) to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Prize and (with respect to the Merger, subject to the valid
approval of the Prize Proposal by the stockholders of Prize and assuming that
this Agreement constitutes a valid and binding obligation of Parent and Merger
Sub) constitutes a valid and binding obligation of Prize, enforceable against
Prize in accordance with its terms.
3.4 No Violations. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby and compliance by
Prize with the provisions hereof will not, conflict with, result in any
violation of or default (with or without notice or lapse of time or both) under,
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of any of the Prize Companies
under, any provision of (a) the certificate of incorporation, bylaws or any
other organizational documents of any of the Prize Companies, (b) any loan or
credit agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or other agreement or instrument applicable to any of the
Prize Companies (other than any such conflict, violation, default, right, loss
or Lien that may arise under the Prize Bank Credit Agreement), or (c) assuming
the consents, approvals, authorizations, permits, filings and notifications
referred to in Section 3.5 are duly and timely obtained or made, any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to any of
the Prize Companies or any of their respective properties or assets, other than,
in the case of clause (b) or (c) above, any such conflict, violation, default,
right, loss or Lien that, individually or in the aggregate, would not have a
Material Adverse Effect on Prize.
3.5 Consents and Approvals. No consent, approval, order or authorization
of, registration, declaration or filing with, or permit from, any Governmental
Authority is required by or with respect to any of the Prize Companies in
connection with the execution and delivery of this Agreement by Prize or the
consummation by Prize of the transactions contemplated hereby, except for the
following: (a) any such consent, approval, order, authorization, registration,
declaration, filing or permit which the failure to obtain or make would not,
individually or in the aggregate, have a Material Adverse Effect on Prize or
Parent; (b) the filing of the Certificate of Merger with the Secretary of State
of the State of Delaware pursuant to the provisions of the DGCL; and (c) such
filings and approvals as may be required by any applicable state securities,
"blue sky" or takeover laws or Environmental Laws. No Third-Party Consent is
required by or with respect to any of the Prize Companies in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (x) any such Third-Party Consent which the
failure to obtain would not, individually or in the aggregate, have a Material
Adverse Effect on Prize or Parent, (y) the valid approval of the Prize Proposal
by the stockholders of Prize, and (z) any consent, approval or waiver required
by the terms of the Prize Bank Credit Agreement.
3.6 Financial Statements. The Prize Financial Statements were prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, for the absence of notes) and fairly present, in accordance with
applicable requirements of GAAP (in the case of the unaudited statements,
subject to normal, recurring adjustments), the revenues and direct operating
expenses of the properties acquired by Prize from Pioneer and its affiliate for
the periods presented therein.
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3.7 Capital Structure.
(a) The authorized capital stock of Prize consists of 20,000 shares of
Prize Common Stock and 5,000 shares of Prize Preferred Stock.
(b) There are issued and outstanding (i) 4,979.201 shares of Prize Common
Stock, (ii) 2,342.308 shares of Prize Preferred Stock, and (iii) Prize Stock
Options relating to 1,285.922 shares of Prize Common Stock. No shares of Prize
Common Stock are held by Prize as treasury stock.
(c) Except as set forth in Section 3.7(b), there are outstanding (i) no
shares of capital stock or other voting securities of Prize, (ii) no securities
of Prize or any other Person convertible into or exchangeable or exercisable for
shares of capital stock or other voting securities of Prize, and (iii) no
subscriptions, options, warrants, calls, rights (including preemptive rights),
commitments, understandings or agreements to which any of the Prize Companies is
a party or by which it is bound obligating Prize to issue, deliver, sell,
purchase, redeem or acquire shares of capital stock or other voting securities
of Prize (or securities convertible into or exchangeable or exercisable for
shares of capital stock or other voting securities of Prize) or obligating Prize
to grant, extend or enter into any such subscription, option, warrant, call,
right, commitment, understanding or agreement.
(d) All outstanding shares of Prize capital stock are validly issued, fully
paid and nonassessable and not subject to any preemptive right.
(e) All outstanding shares of capital stock and other voting securities of
each of the corporate Prize Subsidiaries are (i) validly issued, fully paid and
nonassessable and not subject to any preemptive right, and (ii) owned by the
Prize Companies, free and clear of all Liens, claims and options of any nature
(except for Permitted Encumbrances). There are outstanding (y) no securities of
any Prize Subsidiary or any other Person convertible into or exchangeable or
exercisable for shares of capital stock, other voting securities or other equity
interests of such Prize Subsidiary, and (z) no subscriptions, options, warrants,
calls, rights (including preemptive rights), commitments, understandings or
agreements to which any Prize Subsidiary is a party or by which it is bound
obligating such Prize Subsidiary to issue, deliver, sell, purchase, redeem or
acquire shares of capital stock, other voting securities or other equity
interests of such Prize Subsidiary (or securities convertible into or
exchangeable or exercisable for shares of capital stock, other voting securities
or other equity interests of such Prize Subsidiary) or obligating any Prize
Subsidiary to grant, extend or enter into any such subscription, option,
warrant, call, right, commitment, understanding or agreement.
(f) Except as set forth in the Prize Disclosure Schedule, there is no
stockholder agreement, voting trust or other agreement or understanding to which
Prize is a party or by which it is bound relating to the voting of any shares of
the capital stock of any of the Prize Companies.
3.8 No Undisclosed Liabilities. There are no liabilities of any of the
Prize Companies of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, that are reasonably likely to have a
Material Adverse Effect on Prize, other than (a) liabilities adequately provided
for in the Prize Financial Statements, (b) liabilities incurred in the ordinary
course of business subsequent to June 30, 1999, (c) liabilities under this
Agreement, and (d) liabilities set forth on the Prize Disclosure Schedule.
3.9 Indemnification. Except as set forth in the Prize Disclosure Schedule,
none of the Prize Companies has any presently effective indemnification
obligation (whether or not a claim has been asserted thereunder) to any Person
other than its present or former directors, officers, employees or agents, as
permitted by sec. 145 of the DGCL, or in the ordinary course of business.
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3.10 Absence of Certain Changes or Events. Except as set forth in the
Prize Disclosure Schedule or as specifically contemplated by this Agreement,
since June 30, 1999, none of the Prize Companies has done any of the following:
(a) Discharged or satisfied any Lien or paid any obligation or
liability, absolute or contingent, other than current liabilities incurred
and paid in the ordinary course of business and consistent with past
practices;
(b) Paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, stock or other securities
from its stockholders or other securityholders, made any loans or advances
or guaranteed any loans or advances to any Person (other than loans,
advances or guaranties made in the ordinary course of business and
consistent with past practices), or otherwise incurred or suffered to exist
any liabilities (other than current liabilities incurred in the ordinary
course of business and consistent with past practices);
(c) Except for Permitted Encumbrances, suffered or permitted any Lien
to arise or be granted or created against or upon any of its assets;
(d) Canceled, waived or released any rights or claims against, or
indebtedness owed by, third parties;
(e) Amended its certificate of incorporation, bylaws or other
organizational documents;
(f) Made or permitted any amendment, supplement, modification or
termination of, or any acceleration under, any Prize Material Agreement;
(g) Sold, leased, transferred, assigned or otherwise disposed of (i)
any Oil and Gas Interests of Prize that, individually or in the aggregate,
had a value of $500,000 or more, or (ii) any other assets that,
individually or in the aggregate, had a value at the time of such lease,
transfer, assignment or disposition of $500,000 or more (and, in each case
where a sale, lease, transfer, assignment or other disposition was made, it
was made for fair consideration in the ordinary course of business);
provided, however, that this Section 3.10(g) shall not apply to the sale of
Hydrocarbons in the ordinary course of business;
(h) Made any investment in or contribution, payment, advance or loan
to any Person (other than investments, contributions, payments or advances,
or commitments with respect thereto, less than $500,000 in the aggregate,
made in the ordinary course of business and consistent with past
practices);
(i) Paid, loaned or advanced (other than the payment, advance or
reimbursement of expenses in the ordinary course of business) any amounts
to, or sold, transferred or leased any of its assets to, or entered into
any other transaction with, any of its Affiliates other than the Prize
Companies;
(j) Made any material change in any of the accounting principles
followed by it or the method of applying such principles;
(k) Entered into any material transaction (other than this Agreement)
except in the ordinary course of business and consistent with past
practices;
(l) Increased benefits or benefit plan costs or changed bonus,
insurance, pension, compensation or other benefit plan or arrangement or
granted any bonus or increase in wages, salary or other compensation or
made any other change in employment terms to any officer, director or
employee of any of the Prize Companies (except in the ordinary course of
business);
(m) Issued any note, bond or other debt security or created, incurred,
assumed, or guaranteed any indebtedness for borrowed money or capitalized
lease obligation involving more than $500,000 in the aggregate (other than
pursuant to the Prize Bank Credit Agreement);
(n) Delayed or postponed the payment of accounts payable or other
liabilities (except in the ordinary course of business);
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(o) Canceled, compromised, waived or released any right or claim (or
series of related rights and claims) involving more than $500,000 (except
in the ordinary course of business);
(p) Issued, sold, or otherwise disposed of any of its capital stock or
other equity interest or granted any option, warrant, or other right to
purchase or obtain (including upon conversion, exchange, or exercise) any
of its capital stock or other equity interest;
(q) Made any loan to, or entered into any other transaction with, any
of its directors, officers or employees (except in the ordinary course of
business);
(r) Made or pledged to make any charitable or other capital
contribution outside the ordinary course of business;
(s) Made or committed to make capital expenditures in excess of
$20,000,000 in the aggregate;
(t) Made any change in any material Tax election or the manner Taxes
are reported;
(u) Entered into any swap, hedging or similar arrangement which
remains open;
(v) Accelerated the vesting period of any outstanding option or
warrant;
(w) Otherwise been involved in any other material occurrence, event,
incident, action, failure to act, or transaction involving any of the Prize
Companies (except in the ordinary course of business);
(x) Agreed, whether in writing or otherwise, to do any of the
foregoing; or
(y) Suffered any Material Adverse Effect (other than changes or
trends, including changes or trends in commodity prices, generally
prevalent in or affecting the oil and gas industry).
3.11 Compliance with Laws, Material Agreements and Permits. None of the
Prize Companies is in violation of, or in default in any material respect under,
and no event has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under: (a) its certificate of
incorporation, bylaws or other organizational documents, (b) any applicable law,
rule, regulation, ordinance, order, writ, decree or judgment of any Governmental
Authority, or (c) any Prize Material Agreement, except (in the case of clause
(b) or (c) above) for any violation or default that would not, individually or
in the aggregate, have a Material Adverse Effect on Prize. Each of the Prize
Companies has obtained and holds all permits, licenses, variances, exemptions,
orders, franchises, approvals and authorizations of all Governmental Authorities
necessary for the lawful conduct of its business and the lawful ownership, use
and operation of its assets ("Prize Permits"), except for Prize Permits which
the failure to obtain or hold would not, individually or in the aggregate, have
a Material Adverse Effect on Prize. None of the Prize Permits will be adversely
affected by the consummation of the transactions contemplated under this
Agreement or requires any filing or consent in connection therewith. Each of the
Prize Companies is in compliance with the terms of its Prize Permits, except
where the failure to comply would not, individually or in the aggregate, have a
Material Adverse Effect on Prize. No investigation or review by any Governmental
Authority with respect to any of the Prize Companies is pending or, to the
knowledge of Prize, threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on Prize. To
the knowledge of Prize, no other party to any Prize Material Agreement is in
material breach of the terms, provisions or conditions of such Prize Material
Agreement.
3.12 Governmental Regulation. No Prize Company is subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940 or any state public
utilities laws.
3.13 Litigation. Except as set forth in the Prize Disclosure Schedule: (a)
no litigation, arbitration, investigation or other proceeding of any
Governmental Authority is pending or, to the knowledge of Prize, threatened
against any of the Prize Companies or their respective assets which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on Prize; and (b) no Prize Company is subject to any outstanding
injunction, judgment, order, decree or ruling (other than routine oil and gas
field regulatory orders). There is no litigation, proceeding or investigation
pending or, to the knowledge of
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Prize, threatened against or affecting any of the Prize Companies that questions
the validity or enforceability of this Agreement or any other document,
instrument or agreement to be executed and delivered by Prize in connection with
the transactions contemplated hereby.
3.14 No Restrictions. Except as set forth in the Prize Disclosure
Schedule, none of the Prize Companies is a party to: (a) any agreement,
indenture or other instrument that contains restrictions with respect to the
payment of dividends or other distributions with respect to its capital, other
than the Prize Bank Credit Agreement; (b) any financial arrangement with respect
to or creating any indebtedness to any Person (other than indebtedness (i)
reflected in the Prize Financial Statements, (ii) under the Prize Bank Credit
Agreement, or (iii) incurred in the ordinary course of business since June 30,
1999), unless such indebtedness would not and will not, individually or in the
aggregate, result in a Material Adverse Effect on the Prize Companies; (c) any
agreement, contract or commitment relating to the making of any advance to, or
investment in, any Person (other than restrictions under the Prize Bank Credit
Agreement and advances in the ordinary course of business); (d) any guaranty or
other contingent liability with respect to any indebtedness or obligation of any
Person (other than (i) guaranties pursuant to the Prize Bank Credit Agreement,
(ii) guaranties undertaken in the ordinary course of business, and (iii) the
endorsement of negotiable instruments for collection in the ordinary course of
business); or (e) any agreement, contract or commitment limiting in any respect
its ability to compete with any Person or otherwise conduct business of any line
or nature.
3.15 Audits and Settlements. Except as set forth in the Prize Disclosure
Schedule, none of the Prize Companies is a party or subject to any (a)
unresolved or incomplete Tax audit or settlement or (b) other audit conducted by
any other Person (other than Ernst & Young LLP, independent accountants of
Prize) pursuant to a contractual or legal right.
3.16 Taxes.
(a) Each of the Prize Companies and any affiliated, combined or unitary
group of which any such entity is or was a member has (i) timely filed all
federal, state, local and foreign returns, declarations, reports, estimates,
information returns and statements ("Tax Returns") required to be filed by it
with respect to any Taxes; (ii) timely paid all Taxes that are due and payable
(except for Taxes that are being contested in good faith by appropriate
proceedings and for which sufficient reserves have been established) for which
any of the Prize Companies may be liable; (iii) complied with all applicable
laws, rules and regulations relating to the payment and withholding of Taxes;
and (iv) timely withheld from employee wages and paid over to the proper
governmental authorities all amounts required to be so withheld and paid over.
(b) Except as set forth in the Prize Disclosure Schedule: (i) no audits or
other administrative or court proceedings are presently pending with regard to
any federal, state or local income or franchise Taxes for which any of the Prize
Companies would be liable; and (ii) there are no pending requests for rulings
from any taxing authority, no outstanding subpoenas or requests for information
by any taxing authority with respect to any Taxes, no proposed reassessments by
any taxing authority of any property owned or leased, and no agreements in
effect to extend the time to file any Tax Return or the period of limitations
for the assessment or collection of any Taxes for which any of the Prize
Companies would be liable.
(c) Except as set forth in the Prize Disclosure Schedule: (i) there are no
Liens on any of the assets of the Prize Companies for unpaid Taxes, other than
Liens for Taxes not yet due and payable; (ii) no Prize Company has any liability
under Treasury Regulation sec. 1.1502-6 or any analogous state, local or foreign
law by reason of having been a member of any consolidated, combined or unitary
group, other than the affiliated group of which Prize is the common parent
corporation; (iii) no Prize Company has ever been included in an affiliated
group of corporations within the meaning of Section 1504 of the Code other than
the current affiliated group of which Prize is the common parent corporation;
and (iv) no Prize Company is or has been a party to any Tax sharing agreement
between related corporations.
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(d) The amount of liability for unpaid Taxes of the Prize Companies does
not, in the aggregate, materially exceed the amount of the liability accruals
for Taxes reflected on the Prize Financial Statements.
(e) Prize has not filed or been required to file any Tax Returns.
(f) Except as set forth in the Prize Disclosure Schedule: (i) no Prize
Company is required to treat any of its assets as owned by another person for
federal income tax purposes or as tax-exempt bond financed property or
tax-exempt use property within the meaning of Section 168 of the Code; (ii) no
Prize Company has entered into any compensatory agreement which would result in
a nondeductible expense pursuant to Section 280G of the Code; (iii) no election
has been made under Section 338 of the Code and no events have occurred which
would result in a deemed election under Section 338 of the Code with respect to
any Prize Company; (iv) no election has been made under Section 341(f) of the
Code with respect to any Prize Company; (v) no Prize Company has participated in
any international boycott as defined in Code Section 999; (vi) there are no
outstanding balances of deferred gain or loss accounts with respect to any Prize
Company under Treas. Reg. sec.sec. 1.1502-13 or 1.1502-13T; (vii) no Prize
Company has made or will make any election under Treas. Reg. sec. 1.502-20(g)(1)
with respect to the reattribution of net operating losses; (viii) no Prize
Company is subject to any arrangement treated as a partnership for federal
income tax purposes; and (ix) no Prize Company has or has ever conducted branch
operations in any foreign country within the meaning of Treas. Reg.
sec. 1.367(a)-6T.
(g) The books and records of Prize contain accurate and complete
information with respect to: (i) all material Tax elections in effect with
respect to the Prize Companies; (ii) the current Tax basis of the assets of the
Prize Companies; (iii) any excess loss accounts of any Prize Company; (iv) the
current and accumulated earnings and profits of Prize; (v) the net operating
losses and net capital losses of the Prize Companies, the years that such net
operating and net capital losses expire, and any restrictions to which such net
operating and net capital losses are subject under any provision of the Code or
consolidated return regulations; (vi) Tax credit carryovers of the Prize
Companies; and (vii) any overall foreign losses to the Prize Companies under
Section 904(f) of the Code.
(h) No shareholder of Prize that is a foreign corporation or a nonresident
alien individual has owned as much as five percent of the outstanding stock of
Prize at any time during the five year period ending on the date hereof.
3.17 Employee Benefit Plans.
(a) The Prize Disclosure Schedule sets forth a complete and accurate list
of each of the following which is or has been sponsored, maintained or
contributed to by Prize or any trade or business, whether or not incorporated (a
"Prize ERISA Affiliate"), or in which any employee or co-employee of any of the
Prize Companies participates or is covered, that together with Prize would be
considered affiliated with Prize under Section 414(b), (c), (m) or (o) of the
Code or Section 4001(b)(1) of ERISA for the benefit of any person who, as of the
Closing, is a current or former employee or subcontractor of Prize or any Prize
ERISA Affiliate: (i) each "employee benefit plan," as such term is defined in
Section 3(3) of ERISA (each, a "Prize Plan"); and (ii) each personnel policy,
stock option plan, bonus plan or arrangement, incentive award plan or
arrangement, vacation policy, severance pay plan, policy, program or agreement,
deferred compensation agreement or arrangement, executive compensation or
supplemental income arrangement, retiree benefit plan or arrangement, fringe
benefit program or practice (whether or not taxable), employee loan, consulting
agreement, employment agreement and each other employee benefit plan, agreement,
arrangement, program, practice or understanding which is not described in
Section 3.17(a)(i) (each, a "Prize Benefit Program or Agreement") (such Prize
Plans and Prize Benefit Programs or Agreements are sometimes collectively
referred to in this Agreement as the "Prize Employee Benefit Plans").
(b) True, correct and complete copies of each of the Prize Plans and
related trusts, if applicable, including all amendments thereto, have been
furnished or made available to Parent. There has also been furnished or made
available to Parent, with respect to each Prize Plan required to file such
report and
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description, the report on Form 5500 for the past three years, to the extent
applicable, and the most recent summary plan description. True, correct and
complete copies or descriptions of all Prize Benefit Programs or Agreements have
also been furnished or made available to Parent.
(c) Except as otherwise set forth on the Prize Disclosure Schedule: (i)
neither Prize nor any Prize ERISA Affiliate contributes to or has an obligation
to contribute to, nor has at any time contributed to or had an obligation to
contribute to, a multiemployer plan within the meaning of Section 3(37) of ERISA
or any other plan subject to Title IV of ERISA; (ii) each of Prize and the Prize
ERISA Affiliates has performed all obligations, whether arising by operation of
law or by contract, including ERISA and the Code, required to be performed by it
in connection with the Prize Employee Benefit Plans, and, to the knowledge of
Prize, there have been no defaults or violations by any other party to the Prize
Employee Benefit Plans; (iii) all reports, returns, notices, disclosures and
other documents relating to the Prize Plans required to be filed with or
furnished to governmental entities, plan participants or plan beneficiaries have
been timely filed or furnished in accordance with applicable law, and each Prize
Employee Benefit Plan has been administered in compliance with its governing
written documents; (iv) each of the Prize Plans intended to be qualified under
Section 401 of the Code satisfies the requirements of such Section and has
received a favorable determination letter from the Internal Revenue Service (the
"IRS") regarding such qualified status and has not been amended, operated or
administered in a way which would adversely affect such qualified status; (v)
there are no actions, suits or claims pending (other than routine claims for
benefits) or, to the knowledge of Prize, contemplated or threatened against, or
with respect to, any of the Prize Employee Benefit Plans or their assets; (vi)
each trust maintained in connection with each Prize Plan, which is qualified
under Section 401 of the Code, is tax exempt under Section 501 of the Code;
(vii) all contributions required to be made to the Prize Employee Benefit Plans
have been made timely; (viii) no accumulated funding deficiency, whether or not
waived, within the meaning of Section 302 of ERISA or Section 412 of the Code
has been incurred, and there has been no termination or partial termination of
any Prize Plan within the meaning of Section 411(d)(3) of the Code; (ix) no act,
omission or transaction has occurred which could result in imposition on Prize
or any Prize ERISA Affiliate of (A) breach of fiduciary duty liability damages
under Section 409 of ERISA, (B) a civil penalty assessed pursuant to subsections
(c), (i) or (1) of Section 502 of ERISA or (C) a tax imposed pursuant to Chapter
43 of Subtitle D of the Code; (x) to the knowledge of Prize, there is no matter
pending with respect to any of the Prize Plans before the IRS, the Department of
Labor or the Pension Benefit Guaranty Corporation (the "PBGC"); (xi) each of the
Prize Employee Benefit Plans complies, in form and operation, with the
applicable provisions of the Code and ERISA; (xii) each Prize Employee Benefit
Plan may be unilaterally amended or terminated in its entirety without any
liability or other obligation; (xiii) Prize and the Prize ERISA Affiliates have
no liabilities or other obligations, whether actual or contingent, under any
Prize Employee Benefit Plan for post-employment benefits of any nature (other
than COBRA continuation coverage); and (xiv) neither Prize nor any of the Prize
ERISA Affiliates or any present or former director, officer, employee or other
agent of Prize or any of the Prize ERISA Affiliates has made any written or oral
representations or promises to any present or former director, officer, employee
or other agent concerning his or her terms, conditions or benefits of
employment, including the tenure of any such employment or the conditions under
which such employment may be terminated by Prize, any of the Prize ERISA
Affiliates or Parent which will be binding upon or enforceable against Parent or
Prize after the Effective Time.
(d) Except as otherwise set forth on the Prize Disclosure Schedule, no
employee is currently on a leave of absence due to sickness or disability and no
claim is pending or expected to be made by an employee, former employee or
independent contractor for workers' compensation benefits.
(e) With respect to the Prize Employee Benefit Plans, there exists no
condition or set of circumstances in connection with any of the Prize Companies
that could be expected to result in liability reasonably likely to have a
Material Adverse Effect on Prize under ERISA, the Code or any other applicable
law. With respect to the Prize Employee Benefit Plans, individually and in the
aggregate, there are no unfunded benefit obligations which have not been
accounted for by reserves, or otherwise properly
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footnoted in accordance with GAAP, on the financial statements of the Prize
Companies, which obligations are reasonably likely to have a Material Adverse
Effect on Prize.
(f) Except as set forth in the Prize Disclosure Schedule, neither the
execution or delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in any payment becoming due to any employee or
group of employees of any of the Prize Companies.
3.18 Employment Contracts and Benefits. Except as set forth in the Prize
Disclosure Schedule or otherwise provided for in any Prize Employee Benefit
Plan: (a) none of the Prize Companies is subject to or obligated under any
consulting, employment, severance, termination or similar arrangement, any
employee benefit, incentive or deferred compensation plan with respect to any
Person, or any bonus, profit sharing, pension, stock option, stock purchase or
similar plan or other arrangement or other fringe benefit plan entered into or
maintained for the benefit of employees of any of the Prize Companies or any
other Person; and (b) no employee of any of the Prize Companies or any other
Person owns, or has any right granted by any of the Prize Companies to acquire,
any interest in any of the assets or business of any of the Prize Companies.
3.19 Labor Matters.
(a) No employees of any of the Prize Companies are represented by any labor
organization. No labor organization or group of employees of any of the Prize
Companies has made a demand for recognition or certification as a union or other
labor organization, and there are no representation or certification proceedings
or petitions seeking a representation or certification proceeding presently
pending or threatened in writing to be brought or filed with the National Labor
Relations Board or any other labor relations tribunal or authority. There are no
organizing activities involving any of the Prize Companies pending with any
labor organization or group of employees of any of the Prize Companies.
(b) Each of the Prize Companies is in material compliance with all laws,
rules, regulations and orders relating to the employment of labor, including all
such laws, rules, regulations and orders relating to wages, hours, collective
bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of income Tax withholding, Social
Security Taxes, Medicare Taxes and similar Taxes, except where the failure to
comply would not, individually or in the aggregate, have a Material Adverse
Effect on Prize.
3.20 Accounts Receivable. Except as set forth in the Prize Disclosure
Schedule: (a) all of the accounts, notes and loans receivable that have been
recorded on the books of the Prize Companies are bona fide and represent
accounts, notes and loans receivable validly due for goods sold or services
rendered and are reasonably expected to be collected in full within 90 days
after the applicable invoice or note maturity date (other than such accounts,
notes and loans receivable that, individually or in the aggregate, do not have a
book value as of the date hereof in excess of $500,000); (b) except for
Permitted Encumbrances, all of such accounts, notes and loans receivable are
free and clear of any and all Liens and other adverse claims and charges, and
none of such accounts, notes or loans receivable is subject to any offset or
claim of offset; and (c) none of the obligors on such accounts, notes or loans
receivable has given notice to any of the Prize Companies that it will or may
refuse to pay the full amount or any portion thereof.
3.21 Insurance. Each of the Prize Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or pursuant to
prudent self-insurance programs) in such amounts and covering such risks as are
in accordance with normal industry practice for companies engaged in businesses
similar to those of the Prize Companies and owning properties in the same
general area in which the Prize Companies conduct their businesses. None of such
insurance coverage was obtained through the use of false or misleading
information or the failure to provide the insurer with all information requested
in order to evaluate the liabilities and risks insured. There is no material
default with respect to any provision contained in any such policy or binder,
and none of the Prize Companies has failed to give any notice or present any
claim under any such policy or binder in due and timely fashion. There are no
billed but unpaid premiums past due under any such policy or binder. Except as
set forth in the Prize
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Disclosure Schedule: (a) there are no outstanding claims under any such policies
or binders and, to the knowledge of Prize, there has not occurred any event that
might reasonably form the basis of any claim against or relating to any of the
Prize Companies that is not covered by any of such policies or binders; (b) no
notice of cancellation or non-renewal of any such policies or binders has been
received; and (c) there are no performance bonds outstanding with respect to any
of the Prize Companies.
3.22 Intangible Property. There are no material trademarks, trade names,
patents, service marks, brand names, computer programs, databases, industrial
designs, copyrights or other intangible property that are necessary for the
operation, or continued operation, of the business of any of the Prize Companies
or for the ownership and operation, or continued ownership and operation, of any
of their assets, for which the Prize Companies do not hold valid and continuing
authority in connection with the use thereof.
3.23 Title to Assets. The Prize Companies (individually or collectively)
have Defensible Title to all Oil and Gas Interests of Prize included or
reflected in Prize's Ownership Interests and all of their other assets. Each Oil
and Gas Interest included or reflected in Prize's Ownership Interests entitles
the Prize Companies (individually or collectively) to receive not less than the
undivided interest set forth in (or derived from) the Ownership Interests of
Prize of all Hydrocarbons produced, saved and sold from or attributable to such
Oil and Gas Interest, and the portion of the costs and expenses of operation and
development of such Oil and Gas Interest that is borne or to be borne by the
Prize Companies (individually or collectively) is not greater than the undivided
interest set forth in (or derived from) Prize's Ownership Interests.
3.24 Oil and Gas Operations. Except as set forth in the Prize Disclosure
Schedule:
(a) All wells included in the Oil and Gas Interests of Prize have been
drilled and (if completed) completed, operated and produced in accordance
with generally accepted oil and gas field practices and in compliance in
all material respects with applicable oil and gas leases and applicable
laws, rules and regulations, except where any failure or violation could
not reasonably be expected to have a Material Adverse Effect on Prize; and
(b) Proceeds from the sale of Hydrocarbons produced from Prize's Oil
and Gas Interests are being received by the Prize Companies in a timely
manner and are not being held in suspense for any reason (except in the
ordinary course of business).
3.25 Financial and Commodity Hedging. The Prize Disclosure Schedule
accurately summarizes as of the date hereof the outstanding Hydrocarbon and
financial hedging positions of the Prize Companies (including fixed price
controls, collars, swaps, caps, hedges and puts).
3.26 Environmental Matters. Except as set forth in the Prize Disclosure
Schedule:
(a) Each of the Prize Companies has conducted its business and
operated its assets, and is conducting its business and operating its
assets, in material compliance with all Environmental Laws;
(b) None of the Prize Companies has been notified by any Governmental
Authority or other third party that any of the operations or assets of any
of the Prize Companies is the subject of any investigation or inquiry by
any Governmental Authority or other third party evaluating whether any
material remedial action is needed to respond to a release or threatened
release of any Hazardous Material or to the improper storage or disposal
(including storage or disposal at offsite locations) of any Hazardous
Material;
(c) None of the Prize Companies and, to Prize's knowledge, no other
Person has filed any notice under any federal, state or local law
indicating that (i) any of the Prize Companies is responsible for the
improper release into the environment, or the improper storage or disposal,
of any Hazardous Material, or (ii) any Hazardous Material is improperly
stored or disposed of upon any property of any of the Prize Companies or
any property formerly owned, leased or operated by any of the Prize
Companies;
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(d) None of the Prize Companies has any material contingent liability
in connection with (i) the release or threatened release into the
environment at, beneath or on any property now or previously owned, leased
or operated by any of the Prize Companies, or (ii) the storage or disposal
of any Hazardous Material;
(e) None of the Prize Companies has received any claim, complaint,
notice, inquiry or request for information involving any matter which
remains unresolved as of the date hereof with respect to any alleged
violation of any Environmental Law or regarding potential liability under
any Environmental Law relating to or in connection with operations or
conditions of any facilities or property (including off-site storage or
disposal of any Hazardous Material from such facilities or property)
currently or formerly owned, leased or operated by any of the Prize
Companies;
(f) No property now or previously owned, leased or operated by any of
the Prize Companies is listed on the National Priorities List pursuant to
CERCLA or on the CERCLIS or on any other federal or state list as sites
requiring investigation or cleanup;
(g) All underground storage tanks and solid waste storage, treatment
and/or disposal facilities owned or operated by any of the Prize Companies
are used and operated in material compliance with Environmental Laws;
(h) None of the Prize Companies is transporting, has transported, or
is arranging or has arranged for the transportation of any Hazardous
Material to any location which is listed on the National Priorities List
pursuant to CERCLA, on the CERCLIS, or on any similar federal or state list
or which is the subject of federal, state or local enforcement actions or
other investigations that may lead to material claims against any of the
Prize Companies for removal or remedial work, contribution for removal or
remedial work, damage to natural resources or personal injury, including
claims under CERCLA;
(i) The Prize Companies have obtained all material permits, licenses,
approvals and other authorizations that are required with respect to the
operation of the Prize Companies' properties and assets under the
Environmental Laws and are in material compliance with all terms and
conditions of such required permits, licenses, approvals and
authorizations;
(j) There are no polychlorinated biphenyls or asbestos located in, at,
on or under any facility or real property owned, leased or operated by any
of the Prize Companies that require removal, decontamination or abatement
pursuant to Environmental Laws;
(k) There are no past or present events, conditions, circumstances,
activities, practices, incidents or actions that could reasonably be
expected to interfere with or prevent material compliance by any of the
Prize Companies with any Environmental Law, or that could reasonably be
expected to give rise to any material liability under the Environmental
Laws;
(l) No Lien has been recorded against any property, facility or assets
currently owned by any of the Prize Companies under any Environmental Law;
and
(m) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not affect the
validity or require the transfer of any permits, licenses or approvals held
by any of the Prize Companies under any Environmental Law, and will not
require any notification, disclosure, registration, reporting, filing,
investigation or remediation under any Environmental law.
3.27 Books and Records. All books, records and files of the Prize
Companies (including those pertaining to Prize's Oil and Gas Interests, wells
and other assets, those pertaining to the production, gathering, transportation
and sale of Hydrocarbons, and corporate, accounting, financial and employee
records): (a) have been prepared, assembled and maintained in accordance with
usual and customary policies and procedures; and (b) fairly and accurately
reflect the ownership, use, enjoyment and operation by the Prize Companies of
their respective assets. Each of the Prize Companies maintains a system of
internal accounting controls sufficient to provide reasonable assurance that:
(x) transactions are accurately
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and promptly recorded; (y) transactions are executed in accordance with
management's specific or general authorization; and (z) access to its books,
records and assets is permitted only in accordance with management's general or
specific authorization.
3.28 Brokers. No broker, finder, investment banker or other Person is or
will be, in connection with the transactions contemplated by this Agreement,
entitled to any brokerage, finder's or other fee or compensation based on any
arrangement or agreement made by or on behalf of Prize and for which Parent or
any of the Prize Companies will have any obligation or liability.
3.29 Year 2000 Compliance. None of the Prize Companies will suffer a
Material Adverse Effect attributable to a lack of Year 2000 Compliance in any
system, process or equipment owned or utilized by any of the Prize Companies, or
any other aspect of their businesses or operations, or any system, process or
equipment of any of their material customers, suppliers or vendors.
3.30 Powers of Attorney; Authorized Signatories. The Prize Disclosure
Schedule lists: (a) the names and addresses of all Persons holding powers of
attorney on behalf of any of the Prize Companies; and (b) the names of all banks
and other financial institutions in which any of the Prize Companies currently
have one or more bank accounts or safe deposit boxes, along with the account
numbers and the names of all persons authorized to draw on such accounts or to
have access to such safe deposit boxes.
3.31 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of each of the Prize Common Stock and the Prize Preferred
Stock is a sufficient vote of the holders of any class or series of Prize
capital stock or other voting securities to approve this Agreement, the Merger
and the transactions contemplated hereby.
3.32 Gas Imbalances. Except as set forth on the Prize Disclosure Schedule,
none of the Prize Companies has received any deficiency payment under any gas
contract for which any Person has a right to take deficiency gas from any Prize
Company, nor have any of the Prize Companies received any payment for production
which is subject to refund or recoupment out of future production.
3.33 Royalties. To the knowledge of Prize, as to wells not operated by a
Prize Company, and without qualification as to knowledge, as to all wells
operated by a Prize Company, all royalties, overriding royalties, compensatory
royalties and other payments due from or in respect of production with respect
to Prize's Oil and Gas Interests, have been or will be, prior to the Effective
Time, properly and correctly paid or provided for in all material respects,
except for those for which a Prize Company has a valid right to suspend.
3.34 Prepayments. Except as set forth in the Prize Disclosure Schedule, no
prepayment for Hydrocarbon sales has been received by any of the Prize Companies
for Hydrocarbons which have not been delivered.
3.35 Disclosure and Investigation. No representation or warranty of Prize
set forth in this Agreement contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein not misleading.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby jointly and severally represent and warrant to
Prize as follows:
4.1 Organization. Each of the Parent Companies: (a) is a corporation or,
as applicable, a limited partnership or limited liability company, duly
organized, validly existing and in good standing under the laws of its state of
incorporation or formation; (b) has the requisite power and authority to own,
lease and operate its properties and to conduct its business as it is presently
being conducted; and (c) is duly qualified to do business as a foreign
corporation, limited partnership or limited liability company, as applicable,
and is in good standing, in each jurisdiction where the character of the
properties owned or leased by it or the nature of its activities makes such
qualification necessary (except where any failure to be so qualified as a
foreign corporation, limited partnership or limited liability company or to be
in good standing would not, individually or in the aggregate, have a Material
Adverse Effect on Parent). Accurate and complete copies of the certificate or
articles of incorporation, bylaws, minute books and/or other organizational
documents of each of the Parent Companies have heretofore been delivered to
Prize. Parent has no corporate or other subsidiaries other than the Parent
Subsidiaries.
4.2 Other Equity Interests. None of the Parent Companies owns any equity
interest in any general or limited partnership, corporation or limited liability
company other than as set forth on the Parent Disclosure Schedule (other than
joint venture, joint operating, other ownership arrangements and tax
partnerships entered into in the ordinary course of business that, individually
or in the aggregate, are not material to the operations or business of the
Parent Companies, taken as a whole).
4.3 Authority and Enforceability. Each of Parent and Merger Sub has the
requisite corporate power and authority to enter into and deliver this Agreement
and (with respect to consummation of the transactions included in the Prize
Proposal, subject to the valid approval of the Prize Proposal by the
stockholders of Parent) to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and (with respect to consummation of
the transactions included in the Prize Proposal, subject to the valid approval
of the Prize Proposal by the stockholders of Parent) the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Parent and Merger Sub, including
approval by the board of directors of Parent and the board of directors and the
sole stockholder of Merger Sub, and no other corporate proceedings on the part
of Parent or Merger Sub are necessary to authorize the execution or delivery of
this Agreement or (with respect to consummation of the transactions included in
the Prize Proposal, subject to the valid approval of the Prize Proposal by the
stockholders of Parent) to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Parent and Merger
Sub and (with respect to consummation of the transactions included in the Prize
Proposal, subject to the valid approval of the Prize Proposal by the
stockholders of Parent, and assuming that this Agreement constitutes a valid and
binding obligation of Prize) constitutes a valid and binding obligation of each
of Parent and Merger Sub, enforceable against each of them in accordance with
its terms.
4.4 No Violations. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby and compliance by
Parent and Merger Sub with the provisions hereof will not, conflict with, result
in any violation of or default (with or without notice or lapse of time or both)
under, give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of any of the Parent Companies
under, any provision of (a) the certificate of incorporation, bylaws or any
other organizational documents of any of the Parent Companies, (b) any loan or
credit agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or other agreement or instrument applicable to any of the
Parent Companies (other than any such conflict, violation, default, right, loss
or Lien that may arise under the Parent Bank Credit Agreement), or (c) assuming
the consents, approvals, authorizations, permits, filings and notifications
referred to in Section 4.5 are duly and timely obtained or made, any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to any of
the Parent Companies or any of their respective properties or assets, other
than, in the case of clause (b) or
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(c) above, any such conflict, violation, default, right, loss or Lien that,
individually or in the aggregate, would not have a Material Adverse Effect on
Parent.
4.5 Consents and Approvals. No consent, approval, order or authorization
of, registration, declaration or filing with, or permit from, any Governmental
Authority is required by or with respect to any Parent Company in connection
with the execution and delivery of this Agreement by Parent and Merger Sub or
the consummation by Parent and Merger Sub of the transactions contemplated
hereby, except for the following: (a) any such consent, approval, order,
authorization, registration, declaration, filing or permit which the failure to
obtain or make would not, individually or in the aggregate, have a Material
Adverse Effect on Parent or Prize; (b) the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware pursuant to the provisions
of the DGCL; (c) the filing with the SEC of the Registration Statement and such
reports under Section 13(a) of the Exchange Act and such other compliance with
the Exchange Act and the Securities Act and the rules and regulations of the SEC
thereunder as may be required in connection with this Agreement and the
transactions contemplated hereby and the obtaining from the SEC of such orders
as may be so required; (d) the filing with the AMEX of a listing application
relating to the shares of Parent Common Stock to be issued pursuant to the
Merger, upon conversion of the Parent Preferred Stock, and upon exercise of the
Prize Stock Options, and the obtaining from the AMEX of its approval thereof;
and (e) such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws or Environmental Laws. No Third-Party
Consent is required by or with respect to any of the Parent Companies in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (x) any such Third-Party
Consent which the failure to obtain would not, individually or in the aggregate,
have a Material Adverse Effect on Parent or Prize, (y) the valid approval of the
Prize Proposal by the stockholders of Parent, and (z) any consent, approval or
waiver required by the terms of the Parent Bank Credit Agreement.
4.6 SEC Documents. Parent has provided to Prize a true and complete copy
of each report, schedule, registration statement and definitive proxy statement
filed by Parent with the SEC since December 31, 1998 (the "Parent SEC
Documents"), which are all the documents (other than preliminary material) that
Parent filed or was required to file with the SEC since such date. As of their
respective dates, the Parent SEC Documents complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Documents, and none of the Parent SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.7 Financial Statements. The Parent Financial Statements were prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly
present, in accordance with applicable requirements of GAAP (in the case of the
unaudited statements, subject to normal, recurring adjustments), the
consolidated financial position of Parent and the Parent Subsidiaries as of
their respective dates and the consolidated results of operations and the
consolidated cash flows of Parent and the Parent Subsidiaries for the periods
presented therein.
4.8 Capital Structure.
(a) The authorized capital stock of Parent consists of 50,000,000 shares of
Parent Common Stock. The authorized capital stock of Merger Sub consists of
1,000 shares of Merger Sub Common Stock.
(b) There are issued and outstanding 16,367,328 shares of Parent Common
Stock. Twelve million six thousand seventy-three (12,006,073) shares of Parent
Common Stock are issuable upon exercise of outstanding Parent Warrants. Six
thousand three hundred (6,300) shares of Parent Common Stock are held by Parent
as treasury stock.
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(c) Except as set forth in Section 4.8(b) and except for the Parent
Warrants described in the Parent Disclosure Schedule, there are outstanding (i)
no shares of capital stock or other voting securities of Parent, (ii) no
securities of Parent or any other Person convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities of Parent,
and (iii) no options issued or outstanding under the Parent Key Employees Stock
Option Plan or any other subscriptions, options, warrants, calls, rights
(including preemptive rights), commitments, understandings or agreements to
which any of the Parent Companies is a party or by which it is bound obligating
Parent to issue, deliver, sell, purchase, redeem or acquire shares of capital
stock or other voting securities of Parent (or securities convertible into or
exchangeable or exercisable for shares of capital stock or other voting
securities of Parent) or obligating Parent to grant, extend or enter into any
such subscription, option, warrant, call, right, commitment, understanding or
agreement.
(d) All outstanding shares of Parent capital stock are, and (when issued)
the shares of Parent Common Stock to be issued pursuant to the Merger, upon the
conversion of shares of Parent Preferred Stock to be issued in the Merger, and
upon exercise of the Prize Options (following consummation of the Merger) will
be, validly issued, fully paid and nonassessable and not subject to any
preemptive right.
(e) One thousand (1,000) shares of Merger Sub Common Stock are issued and
outstanding, all of which are owned by Parent. All outstanding shares of capital
stock and other voting securities of Merger Sub and of each of the other
corporate Parent Subsidiaries are (i) validly issued, fully paid and
nonassessable and not subject to any preemptive right, and (ii) owned by the
Parent Companies, free and clear of all Liens, claims and options of any nature
(except Permitted Encumbrances). There are outstanding (y) no securities of any
Parent Subsidiary or any other Person convertible into or exchangeable or
exercisable for shares of capital stock, other voting securities or other equity
interests of such Parent Subsidiary, and (z) no subscriptions, options,
warrants, calls, rights (including preemptive rights), commitments,
understandings or agreements to which any Parent Subsidiary is a party or by
which it is bound obligating such Parent Subsidiary to issue, deliver, sell,
purchase, redeem or acquire shares of capital stock, other voting securities or
other equity interests of such Parent Subsidiary (or securities convertible into
or exchangeable or exercisable for shares of capital stock, other voting
securities or other equity interests of such Parent Subsidiary) or obligating
any Parent Subsidiary to grant, extend or enter into any such subscription,
option, warrant, call, right, commitment, understanding or agreement.
(f) Except as set forth in the Parent Disclosure Schedule, there is no
stockholder agreement, voting trust or other agreement or understanding to which
Parent is a party or by which it is bound relating to the voting of any shares
of the capital stock of any of the Parent Companies.
4.9 No Undisclosed Liabilities. There are no liabilities of any of the
Parent Companies of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, that are reasonably likely to have a
Material Adverse Effect on Parent, other than (a) liabilities adequately
provided for in the Parent Financial Statements, (b) liabilities incurred in the
ordinary course of business subsequent to June 30, 1999, (c) liabilities under
this Agreement, and (d) liabilities set forth on the Parent Disclosure Schedule.
4.10 Indemnification. Except as set forth in the Parent Disclosure
Schedule, none of the Parent Companies has any presently effective
indemnification obligation (whether or not a claim has been asserted thereunder)
to any Person other than its present or former directors, officers, employees or
agents, as permitted by sec.145 of the DGCL, or in the ordinary course of
business.
4.11 Absence of Certain Changes or Events. Except as otherwise set forth
in the Parent Disclosure Schedule or as specifically contemplated by this
Agreement, since June 30, 1999, none of the Parent Companies has done any of the
following:
(a) Discharged or satisfied any Lien or paid any obligation or
liability, absolute or contingent, other than current liabilities incurred
and paid in the ordinary course of business and consistent with past
practices;
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(b) Paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, stock or other securities
from its stockholders or other securityholders, made any loans or advances
or guaranteed any loans or advances to any Person (other than loans,
advances or guaranties made in the ordinary course of business and
consistent with past practices), or otherwise incurred or suffered to exist
any liabilities (other than current liabilities incurred in the ordinary
course of business and consistent with past practices);
(c) Except for Permitted Encumbrances, suffered or permitted any Lien
to arise or be granted or created against or upon any of its assets;
(d) Canceled, waived or released any rights or claims against, or
indebtedness owed by, third parties;
(e) Amended its certificate or articles of incorporation, bylaws or
other organizational documents;
(f) Made or permitted any amendment, supplement, modification or
termination of, or any acceleration under, any Parent Material Agreement;
(g) Sold, leased, transferred, assigned or otherwise disposed of (i)
any Oil and Gas Interests of Parent that, individually or in the aggregate,
were assigned a value in the Reserve Data Value of $100,000 or more, or
(ii) any other assets that, individually or in the aggregate, had a value
at the time of such lease, transfer, assignment or disposition of $100,000
or more (and, in each case where a sale, lease, transfer, assignment or
other disposition was made, it was made for fair consideration in the
ordinary course of business); provided, however, that this Section 4.11(g)
shall not apply to the sale of Hydrocarbons in the ordinary course of
business;
(h) Made any investment in or contribution, payment, advance or loan
to any Person (other than investments, contributions, payments or advances,
or commitments with respect thereto, less than $100,000 in the aggregate,
made in the ordinary course of business and consistent with past
practices);
(i) Paid, loaned or advanced (other than the payment, advance or
reimbursement of expenses in the ordinary course of business) any amounts
to, or sold, transferred or leased any of its assets to, or entered into
any other transaction with, any of its Affiliates other than the Parent
Companies;
(j) Made any material change in any of the accounting principles
followed by it or the method of applying such principles;
(k) Entered into any material transaction (other than this Agreement)
except in the ordinary course of business and consistent with past
practices;
(l) Increased benefits or benefit plan costs or changed bonus,
insurance, pension, compensation or other benefit plan or arrangement or
granted any bonus or increase in wages, salary or other compensation or
made any other change in employment terms to any officer, director or
employee of any of the Parent Companies (except in the ordinary course of
business);
(m) Issued any note, bond or other debt security or created, incurred,
assumed or guaranteed any indebtedness for borrowed money or capitalized
lease obligation involving more than $100,000 in the aggregate (other than
pursuant to the Parent Bank Credit Agreement);
(n) Delayed or postponed the payment of accounts payable or other
liabilities (except in the ordinary course of business);
(o) Canceled, compromised, waived or released any right or claim (or
series of related rights and claims) involving more than $100,000 (except
in the ordinary course of business);
(p) Issued, sold, or otherwise disposed of any of its capital stock or
other equity interest or granted any option, warrant, or other right to
purchase or obtain (including upon conversion, exchange, or exercise) any
of its capital stock or other equity interest;
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(q) Made any loan to, or entered into any other transaction with, any
of its directors, officers or employees (except in the ordinary course of
business);
(r) Made or pledged to make any charitable or other capital
contribution outside the ordinary course of business;
(s) Made or committed to make capital expenditures in excess of
$4,000,000 in the aggregate;
(t) Made any change in any material Tax election or the manner Taxes
are reported;
(u) Entered into any swap, hedging or similar arrangement which
remains open;
(v) Accelerated the vesting period of any outstanding option or
warrant;
(w) Otherwise been involved in any other material occurrence, event,
incident, action, failure to act, or transaction involving any of the
Parent Companies (except in the ordinary course of business);
(x) Agreed, whether in writing or otherwise, to do any of the
foregoing; or
(y) Suffered any Material Adverse Effect (other than changes or
trends, including changes or trends in commodity prices, generally
prevalent in or affecting the oil and gas industry).
4.12 Compliance with Laws, Material Agreements and Permits. None of the
Parent Companies is in violation of, or in default in any material respect
under, and no event has occurred that (with notice or the lapse of time or both)
would constitute a violation of or default under: (a) its certificate or
articles of incorporation, bylaws or other organizational documents, (b) any
applicable law, rule, regulation, ordinance, order, writ, decree or judgment of
any Governmental Authority, or (c) any Parent Material Agreement, except (in the
case of clause (b) or (c) above) for any violation or default that would not,
individually or in the aggregate, have a Material Adverse Effect on Parent. Each
of the Parent Companies has obtained and holds all permits, licenses, variances,
exemptions, orders, franchises, approvals and authorizations of all Governmental
Authorities necessary for the lawful conduct of its business and the lawful
ownership, use and operation of its assets ("Parent Permits"), except for Parent
Permits which the failure to obtain or hold would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. None of the Parent Permits
will be adversely affected by the consummation of the transactions contemplated
under this Agreement or requires any filing or consent in connection therewith.
Each of the Parent Companies is in compliance with the terms of its Parent
Permits, except where the failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. No investigation or review
by any Governmental Authority with respect to any of the Parent Companies is
pending or, to the knowledge of Parent, threatened, other than those the outcome
of which would not, individually or in the aggregate, have a Material Adverse
Effect on Parent. To the knowledge of Parent, no other party to any Parent
Material Agreement is in material breach of the terms, provisions or conditions
of such Parent Material Agreement.
4.13 Governmental Regulation. No Parent Company is subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940 or any state public
utilities laws.
4.14 Litigation. Except as set forth in the Parent Disclosure Schedule:
(a) no litigation, arbitration, investigation or other proceeding of any
Governmental Authority is pending or, to the knowledge of Parent, threatened
against any of the Parent Companies or their respective assets which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on Parent; and (b) no Parent Company is subject to any outstanding
injunction, judgment, order, decree or ruling (other than routine oil and gas
field regulatory orders). There is no litigation, proceeding or investigation
pending or, to the knowledge of Parent, threatened against or affecting any of
the Parent Companies that questions the validity or enforceability of this
Agreement or any other document, instrument or agreement to be executed and
delivered by Parent in connection with the transactions contemplated hereby.
4.15 Interim Operations of Merger Sub. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated by this Agreement and
has not engaged in any business or activity (or
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conducted any operations) of any kind, entered into any agreement or arrangement
with any person or entity, or incurred, directly or indirectly, any liabilities
or obligations, except in connection with its incorporation, the negotiation of
this Agreement, the Merger and the transactions contemplated hereby.
4.16 No Restrictions. Except as set forth in the Parent Disclosure
Schedule, none of the Parent Companies is a party to: (a) any agreement,
indenture or other instrument that contains restrictions with respect to the
payment of dividends or other distributions with respect to its capital, other
than the Parent Bank Credit Agreement and antidilution adjustments under the
Parent Warrants; (b) any financial arrangement with respect to or creating any
indebtedness to any Person (other than indebtedness (i) reflected in the Parent
Financial Statements, (ii) under the Parent Bank Credit Agreement, or (iii)
incurred in the ordinary course of business since June 30, 1999) unless such
indebtedness would not and will not, individually or in the aggregate, result in
a Material Adverse Effect on the Parent Companies; (c) any agreement, contract
or commitment relating to the making of any advance to, or investment in, any
Person (other than restrictions under the Parent Bank Credit Agreement and
advances in the ordinary course of business); (d) any guaranty or other
contingent liability with respect to any indebtedness or obligation of any
Person (other than (i) guaranties pursuant to the Parent Bank Credit Agreement,
(ii) guaranties undertaken in the ordinary course of business, and (iii) the
endorsement of negotiable instruments for collection in the ordinary course of
business); or (e) any agreement, contract or commitment limiting in any respect
its ability to compete with any Person or otherwise conduct business of any line
or nature.
4.17 Audits and Settlements. Except as set forth in the Parent Disclosure
Schedule, none of the Parent Companies is a party or subject to any (a)
unresolved or incomplete Tax audit or settlement or (b) other audit conducted by
any other Person (other than Arthur Andersen LLP, independent accountants of
Parent) pursuant to a contractual or legal right.
4.18 Taxes.
(a) Each of the Parent Companies and any affiliated, combined or unitary
group of which any such entity is or was a member has: (i) timely filed all Tax
Returns required to be filed by it with respect to any Taxes; (ii) timely paid
all Taxes that are due and payable (except for Taxes that are being contested in
good faith by appropriate proceedings and for which sufficient reserves have
been established) for which any of the Parent Companies may be liable; (iii)
complied with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes; and (iv) timely withheld from employee wages and paid
over to the proper governmental authorities all amounts required to be so
withheld and paid over.
(b) Except as set forth in the Parent Disclosure Schedule: (i) no audits or
other administrative or court proceedings are presently pending with regard to
any federal, state or local income or franchise Taxes for which any of the
Parent Companies would be liable; and (ii) there are no pending requests for
rulings from any taxing authority, no outstanding subpoenas or requests for
information by any taxing authority with respect to any Taxes, no proposed
reassessments by any taxing authority of any property owned or leased, and no
agreements in effect to extend the time to file any Tax Return or the period of
limitations for the assessment or collection of any Taxes for which any of the
Parent Companies would be liable.
(c) Except as set forth in the Parent Disclosure Schedule: (i) there are no
Liens on any of the assets of the Parent Companies for unpaid Taxes, other than
Liens for Taxes not yet due and payable; (ii) no Parent Company has any
liability under Treasury Regulation sec.1.1502-6 or any analogous state, local
or foreign law by reason of having been a member of any consolidated, combined
or unitary group, other than the affiliated group of which Parent is the common
parent corporation; (iii) no Parent Company has ever been included in an
affiliated group of corporations within the meaning of Section 1504 of the Code
other than the current affiliated group of which Parent is the common parent
corporation; and (iv) no Parent Company is or has been a party to any Tax
sharing agreement between related corporations.
(d) The amount of liability for unpaid Taxes of the Parent Companies does
not, in the aggregate, materially exceed the amount of the liability accruals
for Taxes reflected on the Parent Financial Statements.
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(e) Parent has made available to Prize complete copies of all Tax Returns
filed by the Parent Companies with respect to any Taxes and all Tax audit
reports, work papers, statements of deficiencies, and closing or other
agreements with respect thereto with respect to Tax years 1997 and 1998.
(f) Except as set forth in the Parent Disclosure Schedule: (i) no Parent
Company is required to treat any of its assets as owned by another person for
federal income tax purposes or as tax-exempt bond financed property or
tax-exempt use property within the meaning of Section 168 of the Code; (ii) no
Parent Company has entered into any compensatory agreement which would result in
a nondeductible expense pursuant to Section 280G of the Code; (iii) no election
has been made under Section 338 of the Code and no events have occurred which
would result in a deemed election under Section 338 of the Code with respect to
any Parent Company; (iv) no election has been made under Section 341(f) of the
Code with respect to any Parent Company; (v) no Parent Company has participated
in any international boycott as defined in Code Section 999; (vi) there are no
outstanding balances of deferred gain or loss accounts with respect to any
Parent Company under Treas. Reg. sec.sec. 1.1502-13 or 1.1502-13T; (vii) no
Parent Company has made or will make any election under Treas. Reg.
sec. 1.502-20(g)(1) with respect to the reattribution of net operating losses;
(viii) no Parent Company is subject to any arrangement treated as a partnership
for federal income tax purposes; and (ix) no Parent Company has or has ever
conducted branch operations in any foreign country within the meaning of Treas.
Reg. sec. 1.367(a)-6T.
(g) The books and records of Parent contain accurate and complete
information with respect to: (i) all material Tax elections in effect with
respect to the Parent Companies; (ii) the current Tax basis of the assets of the
Parent Companies; (iii) any excess loss accounts of any Parent Company; (iv) the
current and accumulated earnings and profits of Parent; (v) the net operating
losses and net capital losses of the Parent Companies, the years that such net
operating and net capital losses expire, and any restrictions to which such net
operating and net capital losses are subject under any provision of the Code or
consolidated return regulations; (vi) Tax credit carryovers of the Parent
Companies; and (vii) any overall foreign losses to the Parent Companies under
Section 904(f) of the Code.
(h) No shareholder of Parent that is a foreign corporation or a nonresident
alien individual has owned as much as five percent of the outstanding stock of
Parent at any time during the five year period ending on the date hereof.
4.19 Employee Benefit Plans.
(a) The Parent Disclosure Schedule sets forth a complete and accurate list
of each of the following which is or has been sponsored, maintained or
contributed to by Parent or any trade or business, whether or not incorporated
(a "Parent ERISA Affiliate"), that together with Parent would be considered
affiliated with Parent or any Parent ERISA Affiliate under Section 414(b), (c),
(m) or (o) of the Code or Section 4001(b)(1) of ERISA for the benefit of any
person who, as of the Closing, is a current or former employee or subcontractor
of Parent: (i) each "employee benefit plan," as such term is defined in Section
3(3) of ERISA (each, a "Parent Plan"); and (ii) each personnel policy, stock
option plan, bonus plan or arrangement, incentive award plan or arrangement,
vacation policy, severance pay plan, policy, program or agreement, deferred
compensation agreement or arrangement, executive compensation or supplemental
income arrangement, retiree benefit plan or arrangement, fringe benefit program
or practice (whether or not taxable), employee loan, consulting agreement,
employment agreement and each other employee benefit plan, agreement,
arrangement, program, practice or understanding which is not described in
Section 4.19(a)(i) (each, a "Parent Benefit Program or Agreement") (such Parent
Plans and Parent Benefit Programs or Agreements are sometimes collectively
referred to in this Agreement as the "Parent Employee Benefit Plans").
(b) True, correct and complete copies of each of the Parent Plans and
related trusts, if applicable, including all amendments thereto, have been
furnished or made available to Prize. There has also been furnished or made
available to Prize, with respect to each Parent Plan required to file such
report and description, the report on Form 5500 for the past three years, to the
extent applicable, and the most recent summary plan description. True, correct
and complete copies or descriptions of all Parent Benefit Programs or Agreements
have also been furnished or made available to Prize.
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(c) Except as otherwise set forth on the Parent Disclosure Schedule: (i)
neither Parent nor any Parent ERISA Affiliate contributes to or has an
obligation to contribute to, nor has at any time contributed to or had an
obligation to contribute to, a multiemployer plan within the meaning of Section
3(37) of ERISA or any other plan subject to Title IV of ERISA; (ii) each of
Parent and the Parent ERISA Affiliates has performed all obligations, whether
arising by operation of law or by contract, including ERISA and the Code,
required to be performed by it in connection with the Parent Employee Benefit
Plans, and, to the knowledge of Parent, there have been no defaults or
violations by any other party to the Parent Employee Benefit Plans; (iii) all
reports, returns, notices, disclosures and other documents relating to the
Parent Plans required to be filed with or furnished to governmental entities,
plan participants or plan beneficiaries have been timely filed or furnished in
accordance with applicable law, and each Parent Employee Benefit Plan has been
administered in compliance with its governing written documents; (iv) each of
the Parent Plans intended to be qualified under Section 401 of the Code
satisfies the requirements of such Section and has received a favorable
determination letter from the IRS regarding such qualified status and has not
been amended, operated or administered in a way which would adversely affect
such qualified status; (v) there are no actions, suits or claims pending (other
than routine claims for benefits) or, to the knowledge of Parent, contemplated
or threatened against, or with respect to, any of the Parent Employee Benefit
Plans or their assets; (vi) each trust maintained in connection with each Parent
Plan, which is qualified under Section 401 of the Code, is tax exempt under
Section 501 of the Code; (vii) all contributions required to be made to the
Parent Employee Benefit Plans have been made timely; (viii) no accumulated
funding deficiency, whether or not waived, within the meaning of Section 302 of
ERISA or Section 412 of the Code has been incurred, and there has been no
termination or partial termination of any Parent Plan within the meaning of
Section 411(d)(3) of the Code; (ix) no act, omission or transaction has occurred
which could result in imposition on Parent or any Parent ERISA Affiliate of (A)
breach of fiduciary duty liability damages under Section 409 of ERISA, (B) a
civil penalty assessed pursuant to subsections (c), (i) or (1) of Section 502 of
ERISA or (C) a tax imposed pursuant to Chapter 43 of Subtitle D of the Code; (x)
to the knowledge of Parent, there is no matter pending with respect to any of
the Parent Plans before the IRS, the Department of Labor or the PBGC; (xi) each
of the Parent Employee Benefit Plans complies, in form and operation, with the
applicable provisions of the Code and ERISA; (xii) each Parent Employee Benefit
Plan may be unilaterally amended or terminated in its entirety without any
liability or other obligation; (xiii) Parent and the Parent ERISA Affiliates
have no liabilities or other obligations, whether actual or contingent, under
any Parent Employee Benefit Plan for post-employment benefits of any nature
(other than COBRA continuation coverage and severance benefits under Parent's
Severance Benefit Plan referred to in Section 5.16); and (xiv) neither Parent
nor any of the Parent ERISA Affiliates or any present or former director,
officer, employee or other agent of Parent or any of the Parent ERISA Affiliates
has made any written or oral representations or promises to any present or
former director, officer, employee or other agent concerning his or her terms,
conditions or benefits of employment, including the tenure of any such
employment or the conditions under which such employment may be terminated by
Parent, any of the Parent ERISA Affiliates or Prize which will be binding upon
or enforceable against Parent or Prize after the Effective Time.
(d) Except as otherwise set forth on the Parent Disclosure Schedule, no
employee is currently on a leave of absence due to sickness or disability and no
claim is pending or expected to be made by an employee, former employee or
independent contractor for workers' compensation benefits.
(e) Except as set forth in the Parent Disclosure Schedule: (i) with respect
to the Parent Employee Benefit Plans, there exists no condition or set of
circumstances in connection with any of the Parent Companies that could be
expected to result in liability reasonably likely to have a Material Adverse
Effect on Parent under ERISA, the Code or any other applicable law; and (ii)
with respect to the Parent Employee Benefit Plans, individually and in the
aggregate, there are no unfunded benefit obligations which have not been
accounted for by reserves, or otherwise properly footnoted in accordance with
GAAP, on the financial statements of the Parent Companies, which obligations are
reasonably likely to have a Material Adverse Effect on Parent.
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(f) Except as set forth in the Parent Disclosure Schedule, neither the
execution or delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in any payment becoming due to any employee or
group of employees of any of the Parent Companies.
4.20 Employment Contracts and Benefits. Except as set forth in the Parent
Disclosure Schedule or otherwise provided for in any Parent Employee Benefit
Plan: (a) none of the Parent Companies is subject to or obligated under any
consulting, employment, severance, termination or similar arrangement, any
employee benefit, incentive or deferred compensation plan with respect to any
Person, or any bonus, profit sharing, pension, stock option, stock purchase or
similar plan or other arrangement or other fringe benefit plan entered into or
maintained for the benefit of employees of any of the Parent Companies or any
other Person; and (b) no employee of any of the Parent Companies or any other
Person owns, or has any right granted by any of the Parent Companies to acquire,
any interest in any of the assets or business of any of the Parent Companies.
4.21 Labor Matters.
(a) No employees of any of the Parent Companies are represented by any
labor organization. No labor organization or group of employees of any of the
Parent Companies has made a demand for recognition or certification as a union
or other labor organization, and there are no representation or certification
proceedings or petitions seeking a representation or certification proceeding
presently pending or threatened in writing to be brought or filed with the
National Labor Relations Board or any other labor relations tribunal or
authority. There are no organizing activities involving any of the Parent
Companies pending with any labor organization or group of employees of any of
the Parent Companies.
(b) Each of the Parent Companies is in material compliance with all laws,
rules, regulations and orders relating to the employment of labor, including all
such laws, rules, regulations and orders relating to wages, hours, collective
bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of income Tax withholding, Social
Security Taxes, Medicare Taxes and similar Taxes, except where the failure to
comply would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
4.22 Accounts Receivable. Except as set forth in the Parent Disclosure
Schedule: (a) all of the accounts, notes and loans receivable that have been
recorded on the books of the Parent Companies are bona fide and represent
accounts, notes and loans receivable validly due for goods sold or services
rendered and are reasonably expected to be collected in full within 90 days
after the applicable invoice or note maturity date (other than such accounts,
notes and loans receivable that, individually or in the aggregate, do not have a
book value as of the date hereof in excess of $200,000); (b) except for
Permitted Encumbrances, all of such accounts, notes and loans receivable are
free and clear of any and all Liens and other adverse claims and charges, and
none of such accounts, notes or loans receivable is subject to any offset or
claim of offset; and (c) none of the obligors on such accounts, notes or loans
receivable has given notice to any of the Parent Companies that it will or may
refuse to pay the full amount or any portion thereof.
4.23 Insurance. Each of the Parent Companies maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or pursuant to
prudent self-insurance programs) in such amounts and covering such risks as are
in accordance with normal industry practice for companies engaged in businesses
similar to those of the Parent Companies and owning properties in the same
general area in which the Parent Companies conduct their businesses. Each of the
Parent Companies may terminate each of its insurance policies or binders at or
after the Closing and will incur no penalties or other material costs in doing
so. None of such insurance coverage was obtained through the use of false or
misleading information or the failure to provide the insurer with all
information requested in order to evaluate the liabilities and risks insured.
There is no material default with respect to any provision contained in any such
policy or binder, and none of the Parent Companies has failed to give any notice
or present any claim under any such policy or binder in due and timely fashion.
There are no billed but unpaid premiums past due under any such policy or
binder. Except as set forth in the Parent Disclosure Schedule: (a) there are no
outstanding claims under any such policies or binders and, to the knowledge of
Parent, there has not
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occurred any event that might reasonably form the basis of any claim against or
relating to any of the Parent Companies that is not covered by any of such
policies or binders; (b) no notice of cancellation or non-renewal of any such
policies or binders has been received; and (c) there are no performance bonds
outstanding with respect to any of the Parent Companies.
4.24 Intangible Property. There are no material trademarks, trade names,
patents, service marks, brand names, computer programs, databases, industrial
designs, copyrights or other intangible property that are necessary for the
operation, or continued operation, of the business of any of the Parent
Companies, or for the ownership and operation, or continued ownership and
operation, of any of their assets, for which the Parent Companies do not hold
valid and continuing authority in connection with the use thereof.
4.25 Title to Assets. The Parent Companies (individually or collectively)
have Defensible Title to all Oil and Gas Interests of Parent included or
reflected in Parent's Ownership Interests and all of their other assets. Each
Oil and Gas Interest included or reflected in the Parent's Ownership Interests
entitles the Parent Companies (individually or collectively) to receive not less
than the undivided interest set forth in (or derived from) Parent's Ownership
Interests of all Hydrocarbons produced, saved and sold from or attributable to
such Oil and Gas Interest, and the portion of the costs and expenses of
operation and development of such Oil and Gas Interest that is borne or to be
borne by Parent Companies (individually or collectively) is not greater than the
undivided interest set forth in (or derived from) Parent's Ownership Interests.
4.26 Oil and Gas Operations. Except as set forth in the Parent Disclosure
Schedule:
(a) All wells included in the Oil and Gas Interests of Parent have
been drilled and (if completed) completed, operated and produced in
accordance with generally accepted oil and gas field practices and in
compliance in all material respects with applicable oil and gas leases and
applicable laws, rules and regulations, except where any failure or
violation could not reasonably be expected to have a Material Adverse
Effect on Parent; and
(b) Proceeds from the sale of Hydrocarbons produced from Parent's Oil
and Gas Interests are being received by the Parent Companies in a timely
manner and are not being held in suspense for any reason (except in the
ordinary course of business).
4.27 Financial and Commodity Hedging. The Parent Disclosure Schedule
accurately summarizes the currently outstanding Hydrocarbon and financial
hedging positions of the Parent Companies (including fixed price controls,
collars, swaps, caps, hedges and puts).
4.28 Environmental Matters. Except as set forth in the Parent Disclosure
Schedule:
(a) Each of the Parent Companies has conducted its business and
operated its assets, and is conducting its business and operating its
assets, in material compliance with all Environmental Laws;
(b) None of the Parent Companies has been notified by any Governmental
Authority or other third party that any of the operations or assets of any
of the Parent Companies is the subject of any investigation or inquiry by
any Governmental Authority or other third party evaluating whether any
material remedial action is needed to respond to a release or threatened
release of any Hazardous Material or to the improper storage or disposal
(including storage or disposal at offsite locations) of any Hazardous
Material;
(c) None of the Parent Companies and, to Parent's knowledge, no other
Person has filed any notice under any federal, state or local law
indicating that (i) any of the Parent Companies is responsible for the
improper release into the environment, or the improper storage or disposal,
of any Hazardous Material; or (ii) any Hazardous Material is improperly
stored or disposed of upon any property of any of the Parent Companies or
any property formerly owned, leased or operated by any of the Parent
Companies;
(d) None of the Parent Companies has any material contingent liability
in connection with (i) the release or threatened release into the
environment at, beneath or on any property now or
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previously owned, leased or operated by any of the Parent Companies, or
(ii) the storage or disposal of any Hazardous Material;
(e) None of the Parent Companies has received any claim, complaint,
notice, inquiry or request for information involving any matter which
remains unresolved as of the date hereof with respect to any alleged
violation of any Environmental Law or regarding potential liability under
any Environmental Law relating to or in connection with operations or
conditions of any facilities or property (including off-site storage or
disposal of any Hazardous Material from such facilities or property)
currently or formerly owned, leased or operated by any of the Parent
Companies;
(f) No property now or previously owned, leased or operated by any of
the Parent Companies is listed on the National Priorities List pursuant to
CERCLA or on the CERCLIS or on any other federal or state list as sites
requiring investigation or cleanup;
(g) All underground storage tanks and solid waste storage, treatment
and/or disposal facilities owned or operated by any of the Parent Companies
are used and operated in material compliance with Environmental Laws;
(h) None of the Parent Companies is transporting, has transported, is
arranging or has arranged for the transportation of any Hazardous Material
to any location which is listed on the National Priorities List pursuant to
CERCLA, on the CERCLIS, or on any similar federal or state list or which is
the subject of federal, state or local enforcement actions or other
investigations that may lead to material claims against any of the Parent
Companies for removal or remedial work, contribution for removal or
remedial work, damage to natural resources or personal injury, including
claims under CERCLA;
(i) The Parent Companies have obtained all material permits, licenses,
approvals and other authorizations that are required with respect to the
operation of the Parent Companies' properties and assets under the
Environmental Laws and are in material compliance with all terms and
conditions of such required permits, licenses, approvals and
authorizations;
(j) There are no polychlorinated biphenyls or asbestos located in, at,
on or under any facility or real property owned, leased or operated by any
of the Parent Companies that require removal, decontamination or abatement
pursuant to Environmental Laws;
(k) There are no past or present events, conditions, circumstances,
activities, practices, incidents or actions that could reasonably be
expected to interfere with or prevent material compliance by any of the
Parent Companies with any Environmental Law, or that could reasonably be
expected to give rise to any material liability under the Environmental
Laws;
(l) No Lien has been recorded against any property, facility or assets
currently owned by any of the Parent Companies under any Environmental Law;
and
(m) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not affect the
validity or require the transfer of any permits, licenses or approvals held
by any of the Parent Companies under any Environmental Law, and will not
require any notification, disclosure, registration, reporting, filing,
investigation or remediation under any Environmental law.
4.29 Books and Records. All books, records and files of the Parent
Companies (including those pertaining to Parent's Oil and Gas Interests, wells
and other assets, those pertaining to the production, gathering, transportation
and sale of Hydrocarbons, and corporate, accounting, financial and employee
records): (a) have been prepared, assembled and maintained in accordance with
usual and customary policies and procedures; and (b) fairly and accurately
reflect the ownership, use, enjoyment and operation by the Parent Companies of
their respective assets. Each of the Parent Companies maintains a system of
internal accounting controls sufficient to provide reasonable assurance that:
(x) transactions are accurately and promptly recorded; (y) transactions are
executed in accordance with management's specific or general
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authorization; and (z) access to its books, records and assets is permitted only
in accordance with management's general or specific authorization.
4.30 Brokers. Except for Dain Rauscher Wessels, which has been retained by
the Special Committee and whose fees will be paid by Parent, no broker, finder,
investment banker or other Person is or will be, in connection with the
transactions contemplated by this Agreement, entitled to any brokerage, finder's
or other fee or compensation based on any arrangement or agreement made by or on
behalf of Parent and for which Parent or any of the Parent Companies will have
any obligation or liability.
4.31 Year 2000 Compliance. None of the Parent Companies will suffer a
Material Adverse Effect attributable to a lack of Year 2000 Compliance in any
system, process or equipment owned or utilized by any of the Parent Companies,
or any other aspect of their businesses or operations, or any system, process or
equipment of any of their material customers, suppliers or vendors.
4.32 Powers of Attorney; Authorized Signatories. The Parent Disclosure
Schedule lists: (a) the names and addresses of all Persons holding powers of
attorney on behalf of any of the Parent Companies; and (b) the names of all
banks and other financial institutions in which any of the Parent Companies
currently have one or more bank accounts or safe deposit boxes, along with the
account numbers and the names of all persons authorized to draw on such accounts
or to have access to such safe deposit boxes.
4.33 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Parent Common Stock is the only vote of the holders of
any class or series of Parent capital stock or other voting securities necessary
to approve this Agreement, the Merger and the transactions contemplated hereby.
4.34 Gas Imbalances. Except as set forth on the Parent Disclosure
Schedule, none of the Parent Companies has received any deficiency payment under
any gas contract for which any Person has a right to take deficiency gas from
any Parent Company, nor have any of the Parent Companies received any payment
for production which is subject to refund or recoupment out of future
production.
4.35 Royalties. To the knowledge of Parent, as to wells not operated by a
Parent Company, and without qualification as to knowledge, as to all wells
operated by a Parent Company, all royalties, overriding royalties, compensatory
royalties and other payments due from or in respect of production with respect
to Parent's Oil and Gas Interests, have been or will be, prior to the Effective
Time, properly and correctly paid or provided for in all material respects,
except for those for which a Parent Company has a valid right to suspend.
4.36 Prepayments. Except as set forth in the Parent Disclosure Schedule,
no prepayment for Hydrocarbon sales has been received by any of the Parent
Companies for Hydrocarbons which have not been delivered.
4.37 Disclosure and Investigation. No representation or warranty of Parent
or Merger Sub set forth in this Agreement contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein not misleading.
ARTICLE 5
COVENANTS
5.1 Conduct of Business by Parent Pending Closing. Parent covenants and
agrees with Prize that, from the date of this Agreement until the Effective
Time, each of the Parent Companies will conduct its business only in the
ordinary and usual course consistent with past practices. Notwithstanding the
preceding sentence, Parent covenants and agrees with Prize that, except as
specifically contemplated in this Agreement, from the date of this Agreement
until the Effective Time, without the prior written consent of Prize:
(a) None of the Parent Companies will (i) amend its certificate or
articles of incorporation, bylaws or other organizational documents; (ii)
split, combine or reclassify any of its outstanding
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capital stock; (iii) declare, set aside or pay any dividends or other
distributions (whether payable in cash, property or securities) with
respect to its capital stock; (iv) issue, sell or agree to issue or sell
any securities or other equity interests, including its capital stock, any
rights, options or warrants to acquire its capital stock, or securities
convertible into or exchangeable or exercisable for its capital stock
(other than shares of Parent Common Stock issued pursuant to the exercise
of any Parent Warrant outstanding on the date of this Agreement); (v)
purchase, cancel, retire, redeem or otherwise acquire any of its
outstanding capital stock or other securities or other equity interests;
(vi) merge or consolidate with, or transfer all or substantially all of its
assets to, any other Person; (vii) liquidate, wind-up or dissolve (or
suffer any liquidation or dissolution); or (viii) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing.
(b) None of the Parent Companies will (i) acquire any corporation,
partnership or other business entity or any interest therein (other than
interests in joint ventures, joint operation or ownership arrangements or
tax partnerships acquired in the ordinary course of business); (ii) sell,
lease or sublease, transfer or otherwise dispose of or mortgage, pledge or
otherwise encumber any Oil and Gas Interests of Parent that were assigned a
value in the Reserve Data Value in excess of $100,000, individually, or any
other assets that have a value at the time of such sale, lease, sublease,
transfer or disposition in excess of $100,000, individually (except that
this clause shall not apply to the sale of Hydrocarbons in the ordinary
course of business or to encumbrances under the Parent Bank Credit
Agreement); (iii) farm-out any Oil and Gas Interest of Parent or interest
therein; (iv) sell, transfer or otherwise dispose of or mortgage, pledge or
otherwise encumber any securities of any other Person (including any
capital stock or other securities or equity interest in any Parent
Subsidiary); (v) make any material loans, advances or capital contributions
to, or investments in, any Person (other than loans or advances in the
ordinary course of business); (vi) enter into any Parent Material Agreement
or any other agreement not terminable by any of the Parent Companies upon
notice of 30 days or less and without penalty or other obligation; or (vii)
enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing.
(c) None of the Parent Companies will (i) permit to be outstanding at
any time under the Parent Bank Credit Agreement indebtedness for borrowed
money in excess of $55,000,000; (ii) incur any indebtedness for borrowed
money other than under the Parent Bank Credit Agreement; (iii) incur any
other obligation or liability (other than liabilities incurred in the
ordinary course of business); (iv) assume, endorse (other than endorsements
of negotiable instruments in the ordinary course of business), guarantee or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the liabilities or obligations of any other Person; or (v)
enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing.
(d) The Parent Companies will operate, maintain and otherwise deal
with the Oil and Gas Interests of Parent in accordance with good and
prudent oil and gas field practices and in accordance with all applicable
oil and gas leases and other contracts and agreements and all applicable
laws, rules and regulations.
(e) None of the Parent Companies shall resign, transfer or otherwise
voluntarily relinquish any right it has as of the date of this Agreement,
as operator of any Oil and Gas Interest of Parent.
(f) None of the Parent Companies will (i) enter into, or otherwise
become liable or obligated under or pursuant to (1) any employee benefit,
pension or other plan (whether or not subject to ERISA), (2) any other
stock option, stock purchase, incentive or deferred compensation plan or
arrangement or other fringe benefit plan, or (3) any consulting,
employment, severance, termination or similar agreement with any Person, or
amend or extend any such plan, arrangement or agreement; (ii) except for
payments made pursuant to any Parent Employee Benefit Plan or any other
plan, agreement or arrangement described in the Parent Disclosure Schedule,
grant, or otherwise become liable for or obligated to pay, any severance or
termination payment, bonus or increase in compensation or benefits (other
than payments, bonuses or increases that are mandated by the terms of
agreements existing as of the date hereof or that are paid in the ordinary
course of business,
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consistent with past practices, and not individually or in the aggregate
material in amount) to, or forgive any indebtedness of, any employee or
consultant of any of the Parent Companies; or (iii) enter into any
contract, agreement, commitment or arrangement to do any of the foregoing.
(g) None of the Parent Companies will create, incur, assume or permit
to exist any Lien on any of its assets, except for Permitted Encumbrances.
(h) The Parent Companies will (i) keep and maintain accurate books,
records and accounts; (ii) maintain in full force and effect the policies
or binders of insurance described in Section 4.23; (iii) pay all Taxes,
assessments and other governmental charges imposed upon any of their assets
or with respect to their franchises, business, income or assets before any
penalty or interest accrues thereon; (iv) pay all claims (including claims
for labor, services, materials and supplies) that have become due and
payable and which by law have or may become a Lien upon any of their assets
prior to the time when any penalty or fine shall be incurred with respect
thereto or any such Lien shall be imposed thereon; and (v) comply in all
material respects with the requirements of all applicable laws, rules,
regulations and orders of any Governmental Authority, obtain or take all
Governmental Actions necessary in the operation of their businesses, and
comply with and enforce the provisions of all Parent Material Agreements,
including paying when due all rentals, royalties, expenses and other
liabilities relating to their businesses or assets; provided, however,
Parent will not be in violation of this Section 5.1(h) if any of the Parent
Companies incurs obligations for penalties and interest in connection with
gross production tax reporting in the ordinary course of business; and
provided further, that the Parent Companies may contest the imposition of
any such Taxes, assessments and other governmental charges, any such claim,
or the requirements of any applicable law, rule, regulation or order or any
Parent Material Agreement if done so in good faith by appropriate
proceedings and if adequate reserves are established in accordance with
GAAP.
(i) The Parent Companies will at all times preserve and keep in full
force and effect their corporate existence and rights and franchises
material to their performance under this Agreement, except where the
failure to do so would not have a Material Adverse Effect on Parent.
(j) None of the Parent Companies will engage in any practice, take any
action or permit by inaction any of the representations and warranties
contained in Article 4 to become untrue, except: (i) the Parent Companies
may make or commit to make capital expenditures as described in the Parent
Disclosure Schedule, not to exceed $5,000,000 in the aggregate; and (ii)
the Parent Companies may enter into fully covered commodity swap, hedging
and similar arrangements.
5.2 Conduct of Business by Prize Pending Closing. Prize covenants and
agrees with Parent and Merger Sub that, from the date of this Agreement until
the Effective Time, each of the Prize Companies will conduct its business only
in the ordinary and usual course consistent with past practices. Notwithstanding
the preceding sentence, Prize covenants and agrees with Parent and Merger Sub
that, except as specifically contemplated in this Agreement, from the date of
this Agreement until the Effective Time, without the prior written consent of
Parent:
(a) None of the Prize Companies will: (i) amend its certificate of
incorporation or bylaws; (ii) split, combine or reclassify any of its
outstanding capital stock; (iii) declare, set aside or pay any dividends or
other distributions (whether payable in cash, property or securities) with
respect to its capital stock (other than dividends payable in kind on the
Prize Preferred Stock, with the final dividend payment being made
immediately before the Closing); (iv) issue, sell or agree to issue or sell
any securities or other equity interests, including its capital stock, any
rights, options or warrants to acquire its capital stock, or securities
convertible into or exchangeable or exercisable for its capital stock
(other than shares of Prize Common Stock issued pursuant to the exercise of
any Prize Stock Option or the conversion of any shares of Prize Preferred
Stock and shares of Prize Preferred Stock issued as dividends on the Prize
Preferred Stock); (v) purchase, cancel, retire, redeem or otherwise acquire
any of its outstanding capital stock or other securities or other equity
interests; (vi) merge or consolidate with, or transfer all or substantially
all of its assets to, any other Person; (vii) liquidate,
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wind-up or dissolve (or suffer any liquidation or dissolution); or (viii)
enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing.
(b) None of the Prize Companies will (i) acquire any corporation,
partnership or other business entity or any interest therein (other than
interests in joint ventures, joint operation or ownership arrangements or
tax partnerships acquired in the ordinary course of business) having an
acquisition price in excess of $500,000; (ii) sell, lease or sublease,
transfer or otherwise dispose of or mortgage, pledge or otherwise encumber
any Oil and Gas Interests of Prize that have a value in excess of $500,000,
individually, or any other assets that have a value at the time of such
sale, lease, sublease, transfer or disposition in excess of $500,000,
individually (except that this clause shall not apply to (A) the sale of
Hydrocarbons in the ordinary course of business, (B) transfers under the
Exploration Agreement entered into or to be entered into with Costilla
Energy, Inc. ("Costilla"), or (C) encumbrances under the Prize Bank Credit
Agreement); (iii) farm-out any Oil and Gas Interest of Prize having a value
in excess of $500,000 or interest therein (other than pursuant to the
Exploration Agreement with Costilla); (iv) sell, transfer or otherwise
dispose of or mortgage, pledge or otherwise encumber any securities of any
other Person (including any capital stock or other securities or equity
interest in any Prize Subsidiary, but excluding the Costilla common stock
held by the Prize Companies); (v) make any material loans, advances or
capital contributions to, or investments in, any Person (other than loans
or advances in the ordinary course of business) in an aggregate amount in
excess of $500,000; (vi) enter into any Prize Material Agreement; or (vii)
enter into any contract, agreement, commitment or arrangement with respect
to any of the foregoing.
(c) None of the Prize Companies will (i) permit to be outstanding at
any time under the Prize Bank Credit Agreement indebtedness for borrowed
money in excess of $150,000,000; (ii) incur any indebtedness for borrowed
money other than under the Prize Bank Credit Agreement; (iii) incur any
other obligation or liability (other than liabilities incurred in the
ordinary course of business); (iv) assume, endorse (other than endorsements
of negotiable instruments in the ordinary course of business), guarantee or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the liabilities or obligations of any other Person in an
amount in excess of $500,000; or (v) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing.
(d) The Prize Companies will operate, maintain and otherwise deal with
the Oil and Gas Interests of Prize in accordance with good and prudent oil
and gas field practices and in accordance with all applicable oil and gas
leases and other contracts and agreements and all applicable laws, rules
and regulations.
(e) None of the Prize Companies shall voluntarily resign, transfer or
otherwise relinquish any right it has as of the date of this Agreement, as
operator of any Oil and Gas Interest of Prize, except as required by law,
regulation or contract.
(f) None of the Prize Companies will (i) enter into, or otherwise
become liable or obligated under or pursuant to: (1) any employee benefit,
pension or other plan (whether or not subject to ERISA), (2) any other
stock option, stock purchase, incentive or deferred compensation plan or
arrangement or other fringe benefit plan, or (3) any consulting,
employment, severance, termination or similar agreement with any Person, or
amend or extend any such plan, arrangement or agreement; (ii) except for
payments made pursuant to any Prize Employee Benefit Plan or any other
plan, agreement or arrangement described in the Prize Disclosure Schedule,
grant, or otherwise become liable for or obligated to pay, any severance or
termination payment, bonus or increase in compensation or benefits (other
than payments, bonuses or increases that are mandated by the terms of
agreements existing as of the date hereof or that are paid in the ordinary
course of business, consistent with past practices, and not individually or
in the aggregate material in amount) to, or forgive any indebtedness of,
any employee or consultant; or (iii) enter into any contract, agreement,
commitment or arrangement to do any of the foregoing.
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(g) None of the Prize Companies will create, incur, assume or permit
to exist any Lien on any of its assets, except for Permitted Encumbrances.
(h) The Prize Companies will (i) keep and maintain accurate books,
records and accounts; (ii) maintain in full force and effect the policies
or binders of insurance described in Section 3.21; (iii) pay all Taxes,
assessments and other governmental charges imposed upon any of their assets
or with respect to their franchises, business, income or assets before any
penalty or interest accrues thereon; (iv) pay all claims (including claims
for labor, services, materials and supplies) that have become due and
payable and which by law have or may become a Lien upon any of their assets
prior to the time when any penalty or fine shall be incurred with respect
thereto or any such Lien shall be imposed thereon; and (v) comply in all
material respects with the requirements of all applicable laws, rules,
regulations and orders of any Governmental Authority, obtain or take all
Governmental Actions necessary in the operation of their businesses, and
comply with and enforce the provisions of all Prize Material Agreements,
including paying when due all rentals, royalties, expenses and other
liabilities relating to their businesses or assets; provided, however,
Prize will not be in violation of this Section 5.2(h) if any of the Prize
Companies incurs obligations for penalties and interest in connection with
gross production tax reporting in the ordinary course of business; and
provided further, that the Prize Companies may contest the imposition of
any such Taxes, assessments and other governmental charges, any such claim,
or the requirements of any applicable law, rule, regulation or order or any
Prize Material Agreement if done so in good faith by appropriate
proceedings and if adequate reserves are established in accordance with
GAAP.
(i) The Prize Companies will at all times preserve and keep in full
force and effect their corporate existence and rights and franchises
material to their performance under this Agreement, except where the
failure to do so would not have a Material Adverse Effect on Prize.
(j) None of the Prize Companies will engage in any practice, take any
action or permit by inaction any of the representations and warranties
contained in Article 3 to become untrue, except: (i) the Prize Companies
may make or commit to make capital expenditures as described in the Prize
Disclosure Schedule, not to exceed $20,000,000 in the aggregate; and (ii)
the Prize Companies may enter into fully covered commodity swap, hedging
and similar arrangements.
5.3 Access to Assets, Personnel and Information.
(a) From the date hereof until the Effective Time, Parent shall: (i) afford
to Prize and the Prize Representatives, at Prize's sole risk and expense,
reasonable access to any of the assets, books and records, contracts, employees,
representatives, agents and facilities of the Parent Companies; and (ii) upon
request, furnish promptly to Prize (at Prize's expense) a copy of any file,
book, record, contract, permit, correspondence, or other written information,
document or data concerning any of the Parent Companies (or any of their
respective assets) that is within the possession or control of any of the Parent
Companies.
(b) From the date hereof until the Effective Time, Prize shall: (i) afford
to Parent and the Parent Representatives, at Parent's sole risk and expense,
reasonable access to any of the assets, books and records, contracts, employees,
representatives, agents and facilities of the Prize Companies; and (ii) upon
request, furnish promptly to Parent (at Parent's expense) a copy of any file,
book, record, contract, permit, correspondence, or other written information,
document or data concerning any of the Prize Companies (or any of their
respective assets) that is within the possession or control of any of the Prize
Companies.
(c) Prize and the Prize Representatives shall, at Prize's sole risk and
expense, have the right to make an environmental and physical assessment of the
assets of the Parent Companies and, in connection therewith, shall have the
right to enter and inspect such assets and all buildings and improvements
thereon, conduct soil and water tests and borings and generally conduct such
tests, examinations, investigations and studies as Prize deems necessary,
desirable or appropriate for the preparation of engineering or other reports
relating to such assets, their condition and the presence of Hazardous Materials
and compliance with Environmental Laws. Parent shall be provided not less than
24 hours prior notice of such activities, and Parent Representatives shall have
the right to witness all such tests and
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investigations. Prize shall (and shall cause the Prize Representatives to) keep
any data or information acquired by any such examinations and the results of any
analyses of such data and information strictly confidential and will not (and
will cause the Prize Representatives not to) disclose any of such data,
information or results to any Person unless otherwise required by law or
regulation and then only after written notice to Parent of the determination of
the need for disclosure. Prize shall indemnify, defend and hold the Parent
Companies and the Parent Representatives harmless from and against any and all
claims to the extent arising out of or as a result of the activities of Prize
and the Prize Representatives on the assets of the Parent Companies in
connection with conducting such environmental and physical assessment, except to
the extent of and limited by the negligence or willful misconduct of any of the
Parent Companies or any Parent Representative.
(d) Parent and the Parent Representatives shall, at Parent's sole risk and
expense, have the right to make an environmental and physical assessment of the
assets of the Prize Companies and, in connection therewith, shall have the right
to enter and inspect such assets and all buildings and improvements thereon,
conduct soil and water tests and borings and generally conduct such tests,
examinations, investigations and studies as Parent deems necessary, desirable or
appropriate for the preparation of engineering or other reports relating to such
assets, their condition and the presence of Hazardous Materials and compliance
with Environmental Laws. Prize shall be provided not less than 24 hours prior
notice of such activities, and Prize Representatives shall have the right to
witness all such tests and investigations. Parent shall (and shall cause the
Parent Representatives to) keep any data or information acquired by any such
examinations and the results of any analyses of such data and information
strictly confidential and will not (and will cause the Parent Representatives
not to) disclose any of such data, information or results to any Person unless
otherwise required by law or regulation and then only after written notice to
Prize of the determination of the need for disclosure. Parent shall indemnify,
defend and hold the Prize Companies and the Prize Representatives harmless from
and against any and all claims to the extent arising out of or as a result of
the activities of Parent and the Parent Representatives on the assets of the
Prize Companies in connection with conducting such environmental and physical
assessment, except to the extent of and limited by the negligence or willful
misconduct of any of the Prize Companies or any Prize Representative.
(e) From the date hereof until the Effective Time, Parent will fully and
accurately disclose, and will cause each Parent Subsidiary to fully and
accurately disclose, to Prize and the Prize Representatives all information that
is (i) reasonably requested by Prize or any of the Prize Representatives, (ii)
known to any of the Parent Companies, and (iii) relevant in any manner or degree
to the value, ownership, use, operation, development or transferability of the
assets of any of the Parent Companies.
(f) From the date hereof until the Effective Time, Prize will fully and
accurately disclose, and will cause each Prize Subsidiary to fully and
accurately disclose, to Parent and the Parent Representatives all information
that is (i) reasonably requested by Parent or any of the Parent Representatives,
(ii) known to any of the Prize Companies, and (iii) relevant in any manner or
degree to the value, ownership, use, operation, development or transferability
of the assets of any of the Prize Companies.
(g) From the date hereof until the Effective Time, each of Parent and Prize
shall: (i) furnish to the other, promptly upon receipt or filing (as the case
may be), a copy of each communication between such Party and the SEC after the
date hereof relating to the Merger or the Registration Statement and each
report, schedule, registration statement or other document filed by such Party
with the SEC after the date hereof relating to the Merger or the Registration
Statement; and (ii) promptly advise the other of the substance of any oral
communications between such Party and the SEC relating to the Merger or the
Registration Statement.
(h) Prize will (and will cause the Prize Subsidiaries and the Prize
Representatives to) fully cooperate in all reasonable respects with Parent and
the Parent Representatives in connection with Parent's examinations, evaluations
and investigations described in this Section 5.3. Parent will (and will cause
the Parent Subsidiaries and the Parent Representatives to) fully cooperate in
all reasonable respects with Prize
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and the Prize Representatives in connection with Prize's examinations,
evaluations and investigations described in this Section 5.3.
(i) Prize will not (and will cause the Prize Subsidiaries and the Prize
Representatives not to), and Parent will not (and will cause the Parent
Subsidiaries and the Parent Representatives not to), use any information
obtained pursuant to this Section 5.3 for any purpose unrelated to the
consummation of the transactions contemplated by this Agreement.
(j) Notwithstanding anything in this Section 5.3 to the contrary: (i) Prize
shall not be obligated under the terms of this Section 5.3 to disclose to Parent
or the Parent Representatives, or grant Parent or the Parent Representatives
access to, information that is within the possession or control of any of the
Prize Companies but subject to a valid and binding confidentiality agreement
with a third party without first obtaining the consent of such third party, and
Prize, to the extent reasonably requested by Parent, will use its reasonable
efforts to obtain any such consent; and (ii) Parent shall not be obligated under
the terms of this Section 5.3 to disclose to Prize or the Prize Representatives,
or grant Prize or the Prize Representatives access to, information that is
within the possession or control of any of the Parent Companies but subject to a
valid and binding confidentiality agreement with a third party without first
obtaining the consent of such third party, and Parent, to the extent reasonably
requested by Prize, will use its reasonable efforts to obtain any such consent.
5.4 No Solicitation.
(a) Immediately following the execution of this Agreement, Parent will (and
will direct and instruct each of the Parent Representatives to) terminate any
and all existing activities, discussions and negotiations with third parties
(other than Prize) with respect to any possible transaction involving the
acquisition of Parent Common Stock or any material portion of the assets,
business or equity interests of any of the Parent Companies or the merger or
other business combination of any of the Parent Companies with or into any such
third party.
(b) Parent will not (and will direct and instruct the Parent
Representatives not to) solicit, initiate or knowingly encourage the submission
of, any offer or proposal to acquire all or any part of the Parent Common Stock
or all or any material portion of the assets or business of any of the Parent
Companies (other than the transactions contemplated by this Agreement), whether
by merger, purchase of assets, tender offer, exchange offer or otherwise (an
"Alternative Proposal"); provided, however, that: (i) if Parent or any Parent
Representative shall receive an Alternative Proposal, then Parent and the Parent
Representatives may enter into discussions or negotiations with respect to such
Alternative Proposal with the Person presenting such Alternative Proposal and
provide information to such Person if the board of directors of Parent
determines in good faith, after considering the advice of its legal counsel,
that such action is required in order for the board of directors of Parent to
act in a manner consistent with its fiduciary duties under applicable law, and
(ii) to the extent applicable, taking and disclosing to its stockholders a
position as contemplated by Rule 14e-2 promulgated under the Exchange Act or
from making any other disclosure to its stockholders with regard to an
Alternative Proposal, if the board of directors of Parent determines in good
faith, after considering the advice of its legal counsel, that such other
disclosure is required in order for the board of directors of Parent to act in a
manner consistent with its fiduciary duties under applicable law.
(c) If Parent or any Parent Representative receives an Alternative Proposal
and the board of directors of Parent determines in good faith, after considering
the advice of its legal counsel and financial advisor, that the Alternative
Proposal is a Superior Proposal, then the board of directors of Parent may
approve and recommend such Superior Proposal and, in connection therewith,
withdraw or modify its approval or recommendation of this Agreement and the
Merger. As used herein, a "Superior Proposal" means an Alternative Proposal
which the board of directors of Parent determines in good faith to be more
favorable to Parent's stockholders from a financial point of view than the
Merger.
(d) Nothing in this Section 5.4 shall permit Parent to terminate this
Agreement except as specifically provided in Section 7.1.
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5.5 Prize Stockholders Meeting. Prize shall take all action necessary in
accordance with applicable law and its certificate of incorporation and bylaws
to convene a meeting of its stockholders as promptly as practicable after the
date hereof for the purpose of voting on the Prize Proposal. The board of
directors of Prize shall recommend approval of the Prize Proposal and shall take
all lawful action to solicit such approval, including timely mailing the Proxy
Statement/Prospectus to the stockholders of Prize. Notwithstanding the above,
however, the following shall be conditions to the mailing of the Proxy
Statement/Prospectus to the stockholders of Prize:
(a) Prize shall have received an opinion (acceptable in form and
substance to Prize) from Conner & Winters, A Professional Corporation (or
such other firm as is reasonably acceptable to Prize), to the effect that
(i) the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, (ii) each
of Parent, Prize and Merger Sub will be a party to such reorganization
within the meaning of Section 368(b) of the Code, (iii) no gain or loss
will be recognized by Parent, Prize or Merger Sub as a result of the
Merger, and (iv) no gain or loss will be recognized by a stockholder of
Prize as a result of the Merger with respect to the shares of Prize Common
Stock converted into shares of Parent Common Stock or shares of Prize
Preferred Stock converted into shares of Parent Preferred Stock in the
Merger, and such opinion shall not have been withdrawn, revoked or
modified. Such opinion may be based upon representations of the Parties and
stockholders of the Parties.
(b) Prize shall have received a letter from each of Arthur Andersen
LLP and Ernst & Young LLP, independent public accountants, respectively, to
Parent and Prize, addressed to Parent and Prize, dated as of the date the
Proxy Statement/Prospectus is first mailed to Prize's stockholders, in form
and substance reasonably satisfactory to Prize, in connection with such
accountants' review of certain financial and accounting matters contained
in the Proxy Statement/Prospectus and the Registration Statement.
5.6 Parent Stockholders Meeting. Parent shall take all action necessary in
accordance with applicable law and its certificate of incorporation and bylaws
to convene a meeting of its stockholders as promptly as practicable after the
date hereof for the purpose of voting on the Prize Proposal and any other
matters required to be approved by the stockholders of Parent in connection with
consummation of the Merger. Subject to its fiduciary duties and Section 5.4, the
board of directors of Parent shall recommend approval of the Prize Proposal and
other matters and shall take all lawful action to solicit such approval,
including timely mailing the Proxy Statement/Prospectus to the stockholders of
Parent. Notwithstanding the above, however, the following shall be conditions to
the mailing of the Proxy Statement/Prospectus to the stockholders of Parent:
(a) Parent shall have received an opinion from Dain Rauscher Wessels
or another firm of investment bankers or financial advisors selected by the
Special Committee (which opinion shall be reasonably acceptable in form and
substance to the Special Committee) to the effect that the Merger is fair
to Parent and its stockholders from a financial point of view, and such
opinion shall not have been withdrawn, revoked or modified.
(b) Parent shall have received a letter from each of Arthur Andersen
LLP and Ernst & Young LLP, independent public accountants, respectively, to
Parent and Prize, addressed to Parent and Prize, dated as of the date the
Proxy Statement/Prospectus is first mailed to Parent's stockholders, in
form and substance reasonably satisfactory to Parent, in connection with
such accountants' review of certain financial and accounting matters
contained in the Proxy Statement/Prospectus and the Registration Statement.
5.7 Registration Statement and Proxy Statement/Prospectus.
(a) Parent and Prize shall cooperate and promptly prepare the Registration
Statement to enable Parent to file the Registration Statement with the SEC, as
preliminary proxy material, as soon as practicable after the date hereof and in
any event not later than 45 days after the date hereof. Parent shall use all
reasonable efforts, and Prize shall cooperate with Parent (including furnishing
all information
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concerning Prize and the holders of Prize Common Stock and Prize Preferred Stock
as may be reasonably requested by Parent), to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing. Parent shall use all reasonable efforts, and Prize shall cooperate
with Parent, to obtain any necessary state securities laws or "blue sky"
permits, approvals and registrations in connection with the issuance of Parent
Common Stock and Parent Preferred Stock pursuant to the Merger.
(b) Parent will cause the Registration Statement (including the Proxy
Statement/Prospectus), at the time it becomes effective under the Securities
Act, to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and regulations
of the SEC thereunder.
(c) Prize hereby covenants and agrees with Parent that: (i) the
Registration Statement (at the time it becomes effective under the Securities
Act and at the Effective Time) will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (provided, however, that
this clause (i) shall apply only to information contained in the Registration
Statement that was supplied by Prize for inclusion therein); and (ii) the Proxy
Statement/Prospectus (at the time it is first mailed to stockholders of Prize
and Parent, at the time of the Prize Meeting and the Parent Meeting, and at the
Effective Time) will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading (provided, however, that this clause (ii) shall apply only
to information contained in the Proxy Statement/Prospectus that was supplied by
Prize for inclusion therein). If, at any time prior to the Effective Time, any
event with respect to Prize, or with respect to other information supplied by
Prize for inclusion in the Registration Statement, occurs and such event is
required to be described in an amendment to the Registration Statement, Prize
shall promptly notify Parent of such occurrence and shall cooperate with Parent
in the preparation and filing of such amendment. If, at any time prior to the
Effective Time, any event with respect to Prize, or with respect to other
information included in the Proxy Statement/Prospectus, occurs and such event is
required to be described in a supplement to the Proxy Statement/Prospectus,
Prize shall promptly notify Parent of such occurrence and shall cooperate with
Parent in the preparation, filing and dissemination of such supplement.
(d) Parent hereby covenants and agrees with Prize that: (i) the
Registration Statement (at the time it becomes effective under the Securities
Act and at the Effective Time) will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (provided, however, that
this clause (i) shall not apply to information contained in the Registration
Statement that was supplied by Prize for inclusion therein); and (ii) the Proxy
Statement/Prospectus (at the time it is first mailed to stockholders of Prize
and Parent, at the time of the Prize Meeting and the Parent Meeting, and at the
Effective Time) will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading (provided, however, that this clause (ii) shall not apply
to information contained in the Proxy Statement/Prospectus that was supplied by
Prize for inclusion therein). If, at any time prior to the Effective Time, any
event with respect to Parent, or with respect to other information included in
the Registration Statement, occurs and such event is required to be described in
an amendment to the Registration Statement, such event shall be so described and
such amendment shall be promptly prepared and filed. If, at any time prior to
the Effective Time, any event with respect to Parent, or with respect to other
information supplied by Parent for inclusion in the Proxy Statement/Prospectus,
occurs and such event is required to be described in a supplement to the Proxy
Statement/Prospectus, Parent shall promptly notify Prize of such occurrence and
shall cooperate with Prize in the preparation, filing and dissemination of such
supplement.
(e) Neither the Registration Statement nor the Proxy Statement/Prospectus
nor any amendment or supplement thereto will be filed or disseminated to the
stockholders of Prize or Parent without the approval of both Parent and Prize.
Parent shall advise Prize, promptly after it receives notice thereof, of
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the time when the Registration Statement has become effective under the
Securities Act, the issuance of any stop order with respect to the Registration
Statement, the suspension of the qualification of the Parent Common Stock
issuable in connection with the Merger for offering or sale in any jurisdiction,
or any comments or requests for additional information received from the SEC,
whether orally or in writing, with respect to the Registration Statement.
5.8 Stock Exchange Listing. Parent shall cause the shares of Parent Common
Stock to be issued in the Merger, upon conversion of the Parent Preferred Stock
to be issued in the Merger and upon exercise of the Prize Options to be approved
for listing on the AMEX, subject to official notice of issuance, prior to the
Closing Date.
5.9 Additional Arrangements. Subject to the terms and conditions herein
provided, each of Prize and Parent shall take, or cause to be taken, all action
and shall do, or cause to be done, all things necessary, appropriate or
desirable under any applicable laws and regulations or under applicable
governing agreements to consummate and make effective the transactions
contemplated by this Agreement, including using all reasonable efforts to obtain
all necessary waivers, consents and approvals and effecting all necessary
registrations and filings. Each of Prize and Parent shall take, or cause to be
taken, all action or shall do, or cause to be done, all things necessary,
appropriate or desirable to cause the covenants and conditions applicable to the
transactions contemplated hereby to be performed or satisfied as soon as
practicable. In addition, if any Governmental Authority shall have issued any
order, decree, ruling or injunction, or taken any other action that would have
the effect of restraining, enjoining or otherwise prohibiting or preventing the
consummation of the transactions contemplated hereby, each of Prize and Parent
shall use its reasonable efforts to have such order, decree, ruling or
injunction or other action declared ineffective as soon as practicable.
5.10 Agreements of Affiliates. At least 10 days prior to the Effective
Time, Prize shall cause to be prepared and delivered to Parent a list
identifying all Persons who, at the time of the Prize Meeting, may be deemed to
be "affiliates" of Prize as that term is used in paragraphs (c) and (d) of Rule
145 under the Securities Act. Prize shall use all reasonable efforts to cause
each Person who is identified as an Affiliate of Prize in such list to execute
and deliver to Parent, on or prior to the Closing Date, a written agreement, in
the form attached hereto as Exhibit 5.10. Parent shall be entitled to place
legends as specified in such agreements on the Parent Certificates representing
the Parent Common Stock or Parent Preferred Stock to be issued to such Persons
in the Merger.
5.11 Public Announcements. Prior to the Closing, Prize and Parent will
consult with each other before issuing any press release or otherwise making any
public statement with respect to the transactions contemplated by this Agreement
and shall not issue any press release or make any such public statement prior to
obtaining the approval of the other Party; provided, however, that such approval
shall not be required where such release or announcement is required by
applicable law or exchange rule or regulation; and provided further, that either
Prize or Parent may respond to inquiries by the press or others regarding the
transactions contemplated by this Agreement, so long as such responses are
consistent with such Party's previously issued press releases.
5.12 Notification of Certain Matters. Prize shall give prompt notice to
Parent of any of the following: (a) any representation or warranty contained in
Article 3 being untrue or inaccurate when made; (b) the occurrence of any event
or development that would cause (or could reasonably be expected to cause) any
representation or warranty contained in Article 3 to be untrue or inaccurate on
the Closing Date; and (c) any failure of Prize to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. Parent shall give prompt notice to Prize of any of the following: (x)
any representation or warranty contained in Article 4 being untrue or inaccurate
when made; (y) the occurrence of any event or development that would cause (or
could reasonably be expected to cause) any representation or warranty contained
in Article 4 to be untrue or inaccurate on the Closing Date; and (z) any failure
of Parent to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.
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5.13 Payment of Expenses. Each Party shall pay its own expenses incident
to preparing for, entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby, whether or not the Merger
shall be consummated, except that: (a) the fee for filing the Registration
Statement with the SEC and the costs and expenses associated with printing the
Proxy Statement/ Prospectus and complying with any applicable state securities
or "blue sky" laws shall be borne by Parent; and (b) the costs and expenses
associated with mailing the Proxy Statement/Prospectus to the stockholders of
(i) Prize, and soliciting the votes of the stockholders of Prize, shall be borne
by Prize, and (ii) Parent, and soliciting the votes of the stockholders of
Parent, shall be borne by Parent.
5.14 Registration Rights. At the Closing, Parent shall, and shall use
reasonable efforts to cause each of the parties to that certain Restated
Registration Rights Agreement for Vista Holders dated as of October 28, 1998, by
and among Parent and the security holders named therein to, execute and deliver
the Registration Rights Agreement. Prize shall use reasonable efforts to cause
each of the holders of Prize Common Stock and of Prize Preferred Stock to
execute and deliver the Registration Rights Agreement.
5.15 Indemnification and Insurance.
(a) Parent and Prize agree that all rights to indemnification now existing
in favor of any officers, directors, employees, controlling stockholders or
agents of any of the Parent Companies or any of the Prize Companies, as provided
in their respective charters or bylaws (or similar organizational documents),
and any existing indemnification agreements or arrangements of any of the Parent
Companies or any of the Prize Companies, shall survive the Merger and shall
continue in full force and effect for a period of not less than six years from
the Effective Time (or such longer period as may be provided in any existing
indemnification agreement between any of the Parent Companies or any of the
Prize Companies, and any current or former officer or director thereof);
provided, that, in the event any claim or claims are asserted or made within
such six-year period, all rights to indemnification in respect of any such claim
or claims shall continue until final disposition of any and all such claims.
(b) From and after the Effective Time, Parent shall, for a period of six
years after the Effective Time, indemnify, defend and hold harmless each person
who is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, employee, controlling
stockholder or agent of any of the Parent Companies or any of the Prize
Companies (collectively, the "Indemnified Parties") against all losses, expenses
(including attorneys' fees), claims, damages, liabilities and amounts that are
paid in settlement with the approval of the indemnifying party (which approval
shall not be unreasonably withheld) of, or otherwise in connection with, any
threatened or actual claim, action, suit, proceeding or investigation (a
"Claim"), based in whole or in part on or arising in whole or in part out of the
fact that the Indemnified Party (or the person controlled by the Indemnified
Party) is or was a director, officer, employee, controlling stockholder or agent
(including a trustee or fiduciary of any Parent Employee Benefit Plan) and
pertaining to any matter existing or arising out of actions or omissions
occurring at or prior to the Effective Time (including any Claim arising out of
this Agreement or any of the transactions contemplated hereby), whether asserted
or claimed prior to, at or after the Effective Time, in each case to the fullest
extent permitted under Delaware law, and shall pay any expenses, as incurred, in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the fullest extent permitted under Delaware law. In
determining whether an Indemnified Party is entitled to indemnification under
this Section 5.15, if requested by such Indemnified Party, such determination
shall be made by special, independent counsel selected by Parent and approved by
the Indemnified Party (which approval shall not be unreasonably withheld), and
who has not otherwise performed services for Parent or any of its Affiliates
within the last three years (other than in connection with such matters).
Without limiting the foregoing, in the event any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Party or Parties
(whether arising before or after the Effective Time): (i) such Indemnified Party
or Parties may retain Parent's regularly engaged independent legal counsel or
counsel satisfactory to them and reasonably satisfactory to Parent, and Parent
shall pay all reasonable fees and expenses of such counsel for the Indemnified
Party or Parties as promptly as statements therefor are received; and (ii)
Parent will use all reasonable best efforts to assist in the vigorous defense of
any such matter, provided that Parent shall not be liable for any settlement
effected without its
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prior written consent, which consent shall not unreasonably be withheld. In the
event of any Claim, any Indemnified Party wishing to claim indemnification will
promptly notify Parent thereof (provided, that failure to so notify Parent will
not affect the obligations of Parent except to the extent that Parent shall have
been prejudiced as a result of such failure) and shall deliver to Parent the
undertaking contemplated by Section 145(e) of the DGCL, but without any
requirement for the posting of a bond. Without limiting the foregoing, in the
event any such Claim is brought against any of the Indemnified Parties, such
Indemnified Party or Parties may retain only one law firm (plus one local
counsel, if necessary) to represent them with respect to each such matter unless
the use of counsel chosen to represent the Indemnified Parties would present
such counsel with a conflict of interest, or the representation of all of the
Indemnified Parties by the same counsel would be inappropriate due to actual or
potential differing interests between them, in which case such additional
counsel as may be required (as shall be reasonably determined by the Indemnified
Parties and Parent) may be retained by the Indemnified Parties at the cost and
expense of Parent and Parent shall pay all reasonable fees and expenses of such
counsel for such Indemnified Parties. Parent shall use such counsel for such
Indemnified Parties. Parent shall use all reasonable best efforts to assist in
the vigorous defense of any such Claim; provided, that Parent shall not be
liable for any settlement effected without its written consent, which consent,
however, shall not be unreasonably withheld. Notwithstanding the foregoing,
nothing contained in this Section 5.15 shall be deemed to grant any right to any
Indemnified Party which is not permitted to be granted to an officer, director,
employee, controlling stockholder or agent of Parent under Delaware law,
assuming for such purposes that Parent's certificate of incorporation and bylaws
provide for the maximum indemnification permitted by law.
(c) From and after the Effective Time, Parent shall cause to be maintained
in effect for not less than six years from the Effective Time the current
policies of the directors' and officers' liability insurance maintained by
Parent; provided, that (i) Parent may substitute therefor policies of at least
the same coverage containing terms and conditions which are no less
advantageous; (ii) such substitution shall not result in gaps or lapses in
coverage with respect to matters occurring prior to the Effective Time; and
(iii) Parent shall not be required to pay an annual premium in excess of 200% of
the last annual premium paid by Parent prior to the date hereof and if Parent is
unable to obtain the insurance required by this Section 15(c) it shall obtain as
much comparable insurance as possible for an annual premium equal to such
maximum amount.
(d) Following the Merger, if Parent or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any Person or Persons, then, and in each such case, proper provision
shall be made so that the successors and assigns of Parent and any of their
successors and assigns, assume the obligations of the Parties and Parent set
forth in this Section 5.15.
(e) This Section 5.15 shall survive the consummation of the Merger at the
Effective Time, is intended to benefit Parent and the Indemnified Parties (each
of whom may enforce the provisions of this Section 5.15) and shall be binding on
the successors and assigns of Parent.
5.16 Severance Plan. After the Closing, Parent shall take such action as
may be necessary to promptly pay the severance payments due under Parent's
Severance Plan, a copy of which is attached as Exhibit 5.16. The provisions of
this Section 5.16 are intended to be for the benefit of, and shall be
enforceable by, the Parties and each person entitled to receive a severance
payment pursuant to the terms of Parent's Benefit Severance Plan.
5.17 Amendment of Parent Certificate of Incorporation. Effective
immediately prior to the Closing, Parent shall amend its certificate of
incorporation to effect a one-for-seven reverse stock split of all issued and
outstanding shares of Parent Common Stock, an increase in the number of
authorized shares of Parent Common Stock to an aggregate of 40,000,000 shares
and otherwise as Parent and Prize may agree.
5.18 Authorization of Parent Preferred Stock. Prior to the Closing, Parent
shall take all such actions as may be required to authorize for issuance the
Parent Preferred Stock, including approval by the
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board of directors of Parent of the Parent Preferred Stock Designation in
substantially the form of Exhibit 5.18 and the filing thereof in accordance with
the DGCL.
5.19 Joint Participation Agreement. At the Closing, Prize shall assign to
Parent all of the rights, and Parent shall assume all of the obligations, of
Prize under the Joint Participation Agreement.
5.20 Voting and Shareholders Agreement. At the Closing, the Prize Voting
and Shareholders Agreement shall be terminated and Parent shall execute an
agreement having substantially the same terms and conditions as the Prize Voting
and Shareholders Agreement in effect immediately prior to the Effective Time
with the holders of shares of the Prize Common Stock and the Prize Preferred
Stock which are being converted into shares of Parent Common Stock and Parent
Preferred Stock, respectively, in the Merger, except revised to reflect that the
IPO (as defined in the Prize Voting and Shareholders Agreement) has already
occurred.
5.21 Bylaws. At the Closing, Parent shall adopt a new set of bylaws which
are substantially the same as the bylaws of Prize as in effect immediately prior
to the Effective Time.
5.22 Pioneer Voting Agreement. The Parties acknowledge that Prize and
Pioneer are entering into an Agreement to Vote under which Pioneer is agreeing
to vote all of its shares of Prize Preferred Stock in favor of approval of the
Merger. Prize agrees that, at the request of Parent, Prize shall make reasonable
efforts to enforce its rights against Pioneer in the event of a breach of such
Agreement to Vote by Pioneer.
ARTICLE 6
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each Party to effect the Merger shall be subject to
the satisfaction, at or prior to the Closing Date, of the following conditions,
any or all of which may be waived in whole or in part by both Parent and Prize:
(a) Stockholder Approval. The Prize Proposal shall have been duly and
validly approved and adopted by a vote of a majority of the shares of Prize
Common Stock and Prize Preferred Stock voting as separate classes and
otherwise as required by the DGCL and the certificate of incorporation and
bylaws of Prize. The Prize Proposal shall have been duly and validly
approved and adopted by the stockholders of Parent, all as required by the
DGCL and the certificate of incorporation and bylaws of Parent.
(b) Other Approvals. All consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time from any
Governmental Authority or other Person in connection with the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby by Prize, Parent and Merger Sub shall have been made or
obtained (as the case may be), except where the failure to obtain such
consents, approvals, permits and authorizations would not be reasonably
likely to result in a Material Adverse Effect on Parent or Prize or to
materially adversely affect the consummation of the Merger.
(c) Securities Law Matters. The Registration Statement shall have been
declared effective by the SEC under the Securities Act and shall be
effective at the Effective Time, and no stop order suspending such
effectiveness shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend such effectiveness shall have been
initiated and be continuing, and all necessary approvals under state
securities laws relating to the issuance or trading of the shares of Parent
Common Stock to be issued in the Merger shall have been received.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however, that,
prior to invoking this condition, each Party shall have complied fully with
its obligations under
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Section 5.9 and, in addition, shall use all reasonable efforts to have any
such decree, ruling, injunction or order vacated, except as otherwise
contemplated by this Agreement.
(e) Accountants' Letter. Parent and Prize shall have received a letter
from Arthur Andersen LLP and Ernst & Young LLP, immediately prior to the
Effective Date, in form and substance reasonably satisfactory to each of
Parent and Prize, dated as of the Effective Date, which letter shall
address matters as are customary for transactions similar to those
contemplated in this Agreement.
(f) AMEX Listing. The shares of Parent Common Stock to be issued in
the Merger, upon conversion of the Parent Preferred Stock to be issued in
the Merger, and upon exercise of the Prize Options shall have been
authorized for listing on the AMEX, subject to official notice of issuance.
6.2 Conditions to Obligations of Parent and Merger Sub. The obligations of
Parent and Merger Sub to effect the Merger are subject to the satisfaction of
the following conditions, any or all of which may be waived in whole or in part
by Parent and Merger Sub:
(a) Representations and Warranties. The representations and warranties
of Prize set forth in Article 3 shall be true and correct in all material
respects (provided that any representation or warranty contained therein
that is qualified by a materiality standard or a Material Adverse Effect
qualification shall not be further qualified hereby) as of the date of this
Agreement and (except to the extent such representation or warranty speaks
as of an earlier date) as of the Closing Date as though made on and as of
that time, and Parent shall have received a certificate signed by a
Responsible Officer of Prize to such effect.
(b) Performance of Covenants and Agreements by Prize. Prize shall have
performed in all material respects all covenants and agreements required to
be performed by it under this Agreement at or prior to the Closing Date,
and Parent shall have received a certificate signed by a Responsible
Officer of Prize to such effect.
(c) Letters from Prize Affiliates. Parent shall have received from
each Person named in the list referred to in Section 5.10 an executed copy
of the agreement described in Section 5.10.
(d) No Material Adverse Change. From the date of this Agreement
through the Closing, there shall not have occurred any change in the
condition (financial or otherwise), operations or business of any of the
Prize Companies that would have or would be reasonably likely to have a
Material Adverse Effect on Prize (other than changes, including changes in
commodity prices, generally affecting the oil and gas industry).
(e) Fairness Opinion. The fairness opinion described in Section 5.6(a)
shall have been delivered and shall not have been withdrawn, revoked or
modified.
(f) Legal Opinion. Parent and Merger Sub shall have received an
opinion of Conner & Winters, A Professional Corporation, dated the Closing
Date, in form and substance reasonably acceptable to Parent, covering the
subjects set forth in Sections 3.1, 3.3, 3.4, 3.5 and 3.7.
6.3 Conditions to Obligation of Prize. The obligation of Prize to effect
the Merger is subject to the satisfaction of the following conditions, any or
all of which may be waived in whole or in part by Prize:
(a) Representations and Warranties. The representations and warranties
of Parent and Merger Sub set forth in Article 4 shall be true and correct
in all material respects (provided that any representation or warranty
contained therein that is qualified by a materiality standard or a Material
Adverse Effect qualification shall not be further qualified hereby) as of
the date of this Agreement and (except to the extent such representation or
warranty speaks as of an earlier date) as of the Closing Date as though
made on and as of that time, and Prize shall have received a certificate
signed by a Responsible Officer of Parent to such effect.
(b) Performance of Covenants and Agreements by Parent and Merger
Sub. Parent and Merger Sub shall have performed in all material respects
all covenants and agreements required to be
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performed by them under this Agreement at or prior to the Closing Date, and
Prize shall have received a certificate signed by a Responsible Officer of
Parent to such effect.
(c) Tax Opinion. The tax opinion described in Section 5.5(a) shall not
have been withdrawn, revoked or modified.
(d) No Material Adverse Change. From the date of this Agreement
through the Closing, there shall not have occurred any change in the
condition (financial or otherwise), operations or business of any of the
Parent Companies that would have or would be reasonably likely to have a
Material Adverse Effect on Parent (other than changes, including changes in
commodity prices, generally affecting the oil and gas industry).
(e) Resignations. Prize shall have received the written resignations,
effective the Closing Date, of all officers and members of the boards of
directors of each of the Parent Companies (except those designated by
Prize).
(f) Registration Rights Agreement. Parent, Natural Gas Partners II,
L.P., Natural Gas Partners III, L.P. and the three most senior executives
of Parent shall have executed and delivered the Registration Rights
Agreement.
(g) Delivery of Transfer Instructions. Parent shall have delivered to
its authorized transfer agent an irrevocable letter of instruction in a
form reasonably satisfactory to Prize authorizing and directing the
transfer to holders of shares of Prize Common Stock and/or of Prize
Preferred Stock one or more Parent Certificates representing those shares
of Parent Common Stock and/or of Parent Preferred Stock to be issued to
such holders as Merger Consideration upon surrender of such holders'
certificates representing such shares of Prize Common Stock and/or of Prize
Preferred Stock.
(h) Legal Opinion. Prize shall have received an opinion of Vinson &
Elkins L.L.P., dated the Closing Date, in form and substance reasonably
acceptable to Prize, covering the subjects set forth in Sections 4.1, 4.3,
4.4, 4.5 and 4.8.
(i) Joint Participation Agreement. Parent shall have assumed the
obligations of Prize under the Joint Participation Agreement as described
in Section 5.19.
(j) Voting and Shareholders Agreement. Parent shall have executed and
delivered the Voting and Shareholders Agreement as described in Section
5.20.
(k) Bylaws. Parent shall have adopted a new set of bylaws as described
in Section 5.21.
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ARTICLE 7
TERMINATION
7.1 Termination Rights. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval of the Prize Proposal by the stockholders of Prize and/or Parent,
respectively:
(a) By mutual written consent of Parent and Prize;
(b) By either Prize or Parent if (i) the Merger has not been
consummated by February 1, 2000 (provided, however, that the right to
terminate this Agreement pursuant to this clause (i) shall not be available
to any Party whose breach of any representation or warranty or failure to
perform any covenant or agreement under this Agreement has been the cause
of or resulted in the failure of the Merger to occur on or before such
date); (ii) any Governmental Authority shall have issued an order, decree
or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable (provided, however, that
the right to terminate this Agreement pursuant to this clause (ii) shall
not be available to any Party until such Party has used all reasonable
efforts to remove such injunction, order or decree); (iii) the Prize
Proposal shall not have been approved by the required vote of the Prize
stockholders at the Prize Meeting; or (iv) the Prize Proposal shall not
have been approved by the required vote of the Parent stockholders at the
Parent Meeting;
(c) By Parent if (i) there has been a breach in any material respect
of the representations and warranties made by Prize in Article 3 (provided,
however, that any representation or warranty contained therein that is
qualified by a materiality standard or a Material Adverse Effect
qualification shall not be further qualified hereby, and provided, further,
that Parent shall not be entitled to terminate this Agreement pursuant to
this clause (i) unless Parent has given Prize notice of such breach and
Prize has failed to cure such breach within 10 days following such notice,
but in any event not later than February 1, 2000), and the condition
described in Section 6.2(a), other than the provision thereof relating to
the certificate signed by a Responsible Officer of Prize, would not be
satisfied if the Closing were to occur on the day on which Parent gives
Prize notice of such termination; or (ii) Prize has failed to comply in any
material respect with any of its covenants or agreements contained in this
Agreement and such failure has not been, or cannot be, cured within 10 days
after notice and demand for cure thereof, but in any event not later than
February 1, 2000;
(d) By Prize if (i) there has been a breach in any material respect of
the representations and warranties made by Parent and Merger Sub in Article
4 (provided, however, that any representation or warranty contained therein
that is qualified by a materiality standard or a Material Adverse Effect
qualification shall not be further qualified hereby, and provided, further,
that Prize shall not be entitled to terminate this Agreement pursuant to
this clause (i) unless Prize has given Parent notice of such breach and
Parent has failed to cure such breach within 10 days following such notice,
but in any event not later than February 1, 2000), and the condition
described in Section 6.3(a), other than the provision thereof relating to
the certificate signed by a Responsible Officer of Parent, would not be
satisfied if the Closing were to occur on the day on which Prize gives
Parent notice of such termination; or (ii) Parent or Merger Sub has failed
to comply in any material respect with any of its respective covenants or
agreements contained in this Agreement, and, in either such case, such
failure has not been, or cannot be, cured within 10 days after notice and
demand for cure thereof, but in any event not later than February 1, 2000;
(e) By Parent if Parent is prepared to enter into a binding definitive
agreement to effect a Superior Proposal; or
(f) By Prize if the board of directors of Parent shall have failed to
recommend adoption of the Prize Proposal at the time the Proxy
Statement/Prospectus is first mailed to stockholders of Parent or shall
have amended or withdrawn any such recommendation and such recommendation
is not reinstated in its prior form within five business days after such
amendment or withdrawal.
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7.2 Effect of Termination. If this Agreement is terminated by either Prize
or Parent pursuant to the provisions of Section 7.1, this Agreement shall
forthwith become void except for, and there shall be no further obligation on
the part of any party hereto or its respective Affiliates, directors, officers
or stockholders except pursuant to, the provisions of Sections 5.3 (but only to
the extent of the confidentiality and indemnification provisions contained
therein), 5.7(c), 5.7(d), 5.11, 5.13 and 7.3, Article 8 and the Confidentiality
Agreement (which shall continue pursuant to their terms); provided, however,
that a termination of this Agreement shall not relieve any Party hereto from any
liability for damages incurred as a result of a breach by such Party of its
representations, warranties, covenants, agreements or other obligations
hereunder occurring prior to such termination.
7.3 Fees and Expenses. If this Agreement is terminated pursuant to Section
7.1(e), Parent shall promptly, but in no event later than one business day after
termination of this Agreement (a) pay to Prize, as a non-accountable
reimbursement to Prize and its Affiliates for all reasonable out-of-pocket fees,
costs and expenses incurred by any of them in connection with the transactions
contemplated by this Agreement an amount equal to $400,000, and (b) pay to Prize
an additional fee equal to $1,100,000, each such amount to be paid in same day
funds.
ARTICLE 8
MISCELLANEOUS
8.1 Nonsurvival of Representations and Warranties. None of the
representations or warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the consummation of the
Merger.
8.2 Amendment. This Agreement may be amended by the Parties at any time
before or after approval of the Prize Proposal by the stockholders of Parent and
Prize; provided, however, that, after any such approval, no amendment shall be
made that by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by a written
instrument signed by an authorized representative of each of the Parties.
8.3 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and either delivered personally (effective upon
delivery), by facsimile transmission (effective on the next day after
transmission), by recognized overnight delivery service (effective on the next
day after delivery to the service), or by registered or certified mail, postage
prepaid and return receipt requested (effective on the fifth business day after
the date of mailing), at the following addresses or facsimile transmission
numbers (or at such other address(es) or facsimile transmission number(s) for a
Party as shall be specified by like notice):
(a) If to Parent or Merger Sub: Vista Energy Resources, Inc., 550 West
Texas Avenue, Suite 700, Midland, Texas 79701, Attention: C. Randall Hill,
Chief Executive Officer (facsimile transmission number: (915) 688-0589),
with a copy (which shall not constitute notice) to Vinson & Elkins L.L.P.,
2001 Ross Avenue, Suite 3700, Dallas, Texas 75201-2975 Attention: A.
Winston Oxley (facsimile transmission number: (214) 999-7891).
(b) If to Prize: Prize Energy Corp, 20 E. 5th Street, Suite 1400,
Tulsa, Oklahoma 74103, Attention: Philip B. Smith, Chairman (facsimile
transmission number: 918-582-1547), with a copy (which shall not constitute
notice) to Robert A. Curry, Conner & Winters, 15 East 5th Street, Suite
3700, Tulsa, Oklahoma 74103-4344 (facsimile transmission number:
918-586-8548).
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the Parties and delivered to the other Parties, it being understood that all
Parties need not sign the same counterpart.
8.5 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability
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without rendering invalid or unenforceable the remaining terms and provisions of
this Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(together with the Confidentiality Agreement and the documents and instruments
delivered by the Parties in connection with this Agreement) (a) constitutes the
entire agreement and supersedes all other prior agreements and understandings,
both written and oral, among the Parties with respect to the subject matter
hereof; and (b) except as provided in Article 2 and Sections 5.3(c), 5.3(d),
5.15 and 5.16, is solely for the benefit of the Parties and their respective
successors, legal representatives and assigns and does not confer on any other
Person any rights or remedies hereunder.
8.7 Applicable Law. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Delaware regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
8.8 No Remedy in Certain Circumstances. Each Party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable, or order any Party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby, unless the foregoing inconsistent action or the failure to
take any action constitutes a material breach of this Agreement or makes this
Agreement impossible to perform, in which case this Agreement shall terminate
pursuant to Article 7. Except as otherwise contemplated by this Agreement, to
the extent that a Party took an action inconsistent herewith or failed to take
action consistent herewith or required hereby pursuant to an order or judgment
of a court or other competent Governmental Authority, such Party shall not incur
any liability or obligation unless such Party breached its obligations under
Section 5.9 or did not in good faith seek to resist or object to the imposition
or entering of such order or judgment.
8.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the Parties (whether by
operation of law or otherwise) without the prior written consent of the other
Parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the Parties and their respective
successors and assigns.
8.10 Waivers. At any time prior to the Effective Time, the Parties may, to
the extent legally allowed: (a) extend the time for the performance of any of
the obligations or other acts of the other Parties, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto, and (c) waive performance of any of the covenants or
agreements, or satisfaction of any of the conditions, contained herein. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only if set forth in a written instrument signed by an authorized representative
of such Party. Except as provided in this Agreement, no action taken pursuant to
this Agreement, including any investigation by or on behalf of any Party, shall
be deemed to constitute a waiver by the Party taking such action of compliance
with any representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any Party of a breach of any provision hereof shall not
operate or be construed as a waiver of any prior or subsequent breach of the
same or any other provisions hereof.
8.11 Confidentiality Agreement. The Confidentiality Agreement shall remain
in full force and effect following the execution of this Agreement until
terminated as described in Section 7.2, is hereby incorporated herein by
reference and shall constitute a part of this Agreement for all purposes;
provided, however, that any standstill provisions contained therein will,
effective as of the Closing, be deemed to have been waived to the extent
necessary for the Parties to consummate the Merger in accordance with the terms
of this Agreement. Any and all information received by Parent and Prize pursuant
to the terms and provisions of this Agreement shall be governed by the
applicable terms and provisions of the Confidentiality Agreement.
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8.12 Section 2.03. The Parties acknowledge and represent that the board of
directors of each Party has approved the terms of this Agreement and the
consummation of the transactions contemplated herein and that such approval is
sufficient to render the restrictions on business combinations set forth in
Section 2.03 of the DGCL inapplicable to the transactions contemplated herein.
8.13 Incorporation. Exhibits and Schedules referred to herein are attached
to and by this reference incorporated herein for all purposes.
[This space is intentionally left blank.]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representatives, on the date first written above.
<TABLE>
<S> <C>
"Prize" "Parent"
PRIZE ENERGY CORP. VISTA ENERGY RESOURCES, INC.
By: /s/ PHILIP B. SMITH By: /s/ C. RANDALL HILL
- -------------------------------------------- --------------------------------------------
Philip B. Smith C. Randall Hill
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
"Merger Sub"
PEC ACQUISITION CORP.
By: /s/ C. RANDALL HILL
--------------------------------------------
C. Randall Hill
President
</TABLE>
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ANNEX B
[Dain Rauscher Wessels Letterhead]
October 8, 1999
PRIVILEGED AND CONFIDENTIAL
Special Committee of the Board of Directors
and the Board of Directors of
Vista Energy Resources, Inc.
c/o Vista Energy Resources, Inc.
550 West Texas Avenue
Suite 700
Midland, Texas 79701
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the existing holders of common stock, par value $0.01 per share
("Common Stock"), of Vista Energy Resources, Inc., a Delaware corporation (the
"Company"), of the consideration to be issued by the Company as set forth in the
latest draft of the Agreement and Plan of Merger, dated October 7, 1999 (the
"Merger Agreement"), by and among the Company; PEC Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of the Company ("Merger Sub"); and Prize
Energy Corp., a Delaware corporation ("Prize"). Pursuant to the Merger
Agreement, Merger Sub shall be merged with and into Prize (the "Merger"), with
the separate corporate existence of Merger Sub ceasing to exist and Prize being
the surviving corporation. As a result of the Merger, (i) the holders of shares
of common stock, par value $0.01 per share, of Prize ("Prize Common Stock") will
receive that number of shares of Common Stock equal to the Prize Stock
Conversion Number (as defined in the Merger Agreement) for each share of Prize
Common Stock, and (ii) the holders of shares of the Series A 6% Convertible
Preferred Stock, par value $0.01 per share, of Prize ("Prize Preferred Stock")
will receive that number of shares of a newly created class of preferred stock
of the Company ("Company Preferred Stock") equal to the Prize Stock Conversion
Number for each share of Prize Preferred Stock. The Company Preferred Stock will
have substantially the same preferences, rights and terms as the Prize Preferred
Stock. The terms and conditions of the Merger are set forth more fully in the
Merger Agreement.
In connection with our review of the Merger, and in arriving at our opinion
described below, we have reviewed business and financial information relating to
the Company and Prize. We have, among other things: (i) reviewed the Merger
Agreement and related documents; (ii) reviewed the Annual Report on Form 10-K
for the year ended December 31, 1998 and the Quarterly Reports on Form 10-Q and
related unaudited financial information for certain interim periods, including
the six months ended June 30, 1999, of the Company; (iii) reviewed the Proxy
Statement filed on Schedule 14A dated May 3, 1999, of the Company; (iv) reviewed
the audited statements of revenues and direct operating expenses of producing
properties acquired by Prize from affiliates of Pioneer Natural Resources
Company ("Pioneer") for the years ended December 31, 1996, 1997 and 1998,
prepared by Prize and audited by Ernst & Young LLP, independent public
accountants; (v) reviewed the unaudited statements of revenues and direct
operating expenses of producing properties acquired by Prize from affiliates of
Pioneer for the six months ended June 30, 1998 and 1999, prepared by Prize; (vi)
reviewed the unaudited consolidated balance sheet of Prize at June 30, 1999,
prepared by Prize; (vii) reviewed the Company's proved oil and gas reserves and
the standardized measure of discounted future net cash flows relating to proved
oil and gas reserves as of January 1, 1999, estimated by Williamson Petroleum
Consultants, Inc., independent petroleum engineers, and adjusted by Company
management to July 1, 1999; (viii) reviewed Prize's proved oil and gas reserves
and the standardized measure of discounted future net cash flows relating to
proved oil and gas reserves as of July 1, 1999, estimated by Prize management;
(ix) met with certain members of the Company's and Prize's senior management to
discuss their respective operations, historical financial statements and future
prospects and their views of the business, operational and strategic benefits,
potential synergies and other
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implications of the business, operational and strategic benefits, potential
synergies and other implications of the Merger; (x) reviewed certain operating
and financial information of the Company and Prize, including projections and
operating assumptions, provided to us by the Company's and Prize's management
relating to their respective businesses and prospects; (xi) reviewed the
projected consolidated financial statements for the Company, Prize and the pro
forma combined company for the years ending December 31, 1999 and 2000, as
prepared by the Company's and Prize's management; (xii) reviewed the projected
consolidated balance sheet for the Company, Prize and the pro forma combined
company at December 31, 1999, as prepared by the Company's and Prize's
management; (xiii) reviewed historical market prices and trading volumes for the
Company Common Stock; (xiv) reviewed publicly available financial data and stock
market performance data of publicly held companies that we deemed generally
comparable to the pro forma combined company; and (xv) reviewed the financial
terms of certain business combinations of comparable exploration and production
companies. In addition, we have considered such other information and have
conducted such other analyses and investigations as we deemed appropriate under
the circumstances.
In connection with our review, we have not independently verified any of
the foregoing information, and we have relied upon such information being
complete and accurate in all material respects. We have assumed, with your
consent, that the financial forecasts provided to us and discussed with us have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the senior managements of the Company and Prize as to
the respective expected future performance of the Company and Prize, and of the
combined companies subsequent to the proposed Merger. In addition, we have not
conducted a physical inspection or made an independent evaluation or appraisal
of the assets of the Company or Prize, nor have we been furnished with any such
evaluation or appraisal. In rendering our opinion, we have assumed that in the
course of obtaining the necessary regulatory and governmental approvals for the
proposed Merger, no restriction will be imposed that will have a material
adverse effect on the contemplated benefits of the proposed Merger. Our opinion
is based on circumstances as they exist and can be evaluated on, and the
information made available to us at, the date hereof.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. We will receive a fee for our
services in connection with rendering our opinion. In the ordinary course of our
business, we may actively trade the securities of the Company for our own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
It is understood that this letter is for the information of the Special
Committee of the Board of Directors of the Company and the Board of Directors of
the Company in connection with their consideration of the Merger and is not to
be quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other document used in connection with
the offering or sale of securities, nor shall this letter be used for any other
purposes, without Dain Rauscher Wessels' prior written consent. We understand
and agree that this letter will be reprinted in its entirety in the proxy
statement sent to the holders of Common Stock in connection with the Merger
("Proxy Statement") and that we will have the opportunity to review and comment
on all descriptions thereof in the Proxy Statement prior to the filing of the
Proxy Statement, the registration statement and any supplements and amendments
thereto, with the Securities and Exchange Commission and prior to its
dissemination to holders of Common Stock.
Our opinion does not address the merits of the underlying decision by the
Company to engage in the Merger, and does not constitute a recommendation to any
holder of Common Stock as to how such holder should vote on the approval and
adoption of the Merger Agreement or any matter related thereto. We are not
expressing any opinion herein as to the prices at which the Common Stock will
trade following the announcement or consummation of the Merger.
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Based upon our experience as investment bankers and subject to the
foregoing, including the various assumptions and limitations set forth herein,
it is our opinion that as of the date hereof the consideration to be issued by
the Company pursuant to the Merger is fair, from a financial point of view, to
the existing holders of Common Stock.
Very truly yours,
/s/ Dain Rauscher Wessels
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
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ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
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therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, inter alia, authorizes
a corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding (other than an action by or in the right of the corporation) because
the person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise against expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the suit or proceeding if the person acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful. Similar indemnity is authorized
against expenses (including attorneys fees) actually and reasonably incurred in
defense or settlement of any pending, completed or threatened action or suit by
or in the right of the corporation if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and provided further that (unless a court of competent
jurisdiction otherwise provides) the person shall not have been adjudged liable
to the corporation. The indemnification may be made only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any capacity,
or arising out of his status as such, whether or not the corporation would
otherwise have the power to indemnify him.
Article Twelfth of Vista's Certificate of Incorporation provides as
follows:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (1) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (2)
for acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, (3) under Section 174 of the DGCL,
as the same exists or as such provision may hereafter be amended,
supplemented or replaced, or (4) for any transaction from which the
director derived an improper personal benefit. Any repeal or amendment of
this Article Twelfth by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation arising from an act or
omission occurring prior to the time of such repeal or amendment. In
addition to the circumstances in which a director of the Corporation is not
personally liable as set forth in the foregoing provisions of this Article
Twelfth, a director shall not be liable to the Corporation or its
stockholders to such further extent as permitted by any law hereafter
enacted, including without limitation any subsequent amendment to the DGCL.
Notwithstanding any other provisions of this Certificate of Incorporation
or any provision of law that might otherwise permit a lesser or no vote,
but in addition to any affirmative vote of the holders of any particular
class or series of the capital stock of the Corporation required by law or
by this Certificate of Incorporation, the affirmative vote of the holders
of not less than two-thirds in voting power of the shares of the
Corporation then entitled to be voted in an election of directors, voting
together for a single class, shall be required to amend or repeal or to
adopt any provision inconsistent with this Article Twelfth.
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Article Eleventh of Vista's Certificate of Incorporation provides as
follows:
The Corporation shall indemnify any person who was, is, or is
threatened to be made a party to a proceeding (as hereinafter defined) by
reason of the fact that he or she (1) is or was a director or officer of
the Corporation or (2) while a director or officer of the Corporation, is
or was serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another foreign or domestic Corporation, limited liability
company, association, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise, entity or organization,
to the fullest extent permitted under the DGCL, as the same exists or may
hereafter be amended. Such right shall be a contract right as such shall
run to the benefit of any director or officer who is elected and accepts
the position of director or officer of the Corporation or elects to
continue to serve as a director or officer of the Corporation while this
Article Eleventh is in effect. Any repeal or amendment of this Article
Eleventh shall be prospective only and shall not limit the rights of any
such director or officer or the obligations of the Corporation with respect
to any claim arising from or related to the services of such director or
officer in any of the foregoing capacities prior to any such repeal or
amendment to this Article Eleventh. Such right shall include the right to
be paid by the Corporation expenses (including attorneys' fees) incurred in
defending any such proceeding in advance of its final disposition to the
maximum extent permitted under the DGCL, as the same exists or may
hereafter be amended. If a claim for indemnification or advancement of
expenses hereunder is not paid in full by the Corporation within sixty days
after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover
the unpaid amount of the claim, and, if successful in whole or in part, the
claimant shall also be entitled to be paid the expenses of prosecuting such
claim. It shall be a defense to any such action that such indemnification
is not permitted under the DGCL, but the burden of proving such defense
shall be on the Corporation. Neither the failure of the Corporation
(including its board of directors or any committee thereof, independent
legal counsel or stockholders) to have made its determination prior to the
commencement of such action that indemnification of the claimant is
permissible in the circumstances nor an actual determination by the
Corporation (including its board of directors or any committee thereof,
independent legal counsel or stockholders) that such indemnification is not
permissible shall be a defense to the action or create a presumption that
such indemnification is not permissible. In the event of the death of any
person having a right of indemnification under the forgoing provisions,
such right shall inure to the benefit of his or her heirs, executors,
administrators, and personal representatives. The rights conferred above
shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, bylaw, resolution of stockholders or
directors, agreement or otherwise.
The Corporation may additionally indemnify any employee or agent of
the Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal in such an action,
suit or proceeding, and any inquiry or investigation that could lead to
such an action, suit or proceeding.
INDEMNIFICATION AGREEMENTS
Vista has entered into indemnification agreements with each of its
directors and officers. These agreements require Vista to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law and to advance expenses in connection with certain claims
against directors and officers.
Under the terms of the Indemnification Agreements, Vista has agreed to
indemnify and hold harmless its directors and officers against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages or liabilities arising out of the fact that he or she is or was
a director or officer of Vista or any of its subsidiaries.
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The Indemnification Agreements also include provisions that specify the
procedures and presumptions that are to be employed to determine whether an
indemnitee is entitled to indemnification thereunder. In some cases, the nature
of the procedures specified in the Indemnification Agreements varies depending
on whether there has occurred a "Change of Control" (as defined in the
Indemnification Agreements) of Vista.
Vista maintains in effect director's and officer's liability insurance
policies providing customary coverage for its directors and officers against
losses resulting from wrongful acts committed by them in their capacities as
directors and officers of Vista.
The above discussion of Vista's Certificate of Incorporation and of Section
145 of the Delaware General Corporation Law is not intended to be exhaustive and
is respectively qualified in its entirety by the Vista Certificate of
Incorporation and such statute.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<C> <S>
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of October 8,
1999, among Vista Energy Resources, Inc., PEC Acquisition
Corp. and Prize Energy Corp. (included as Annex A to the
Proxy Statement/Prospectus).
2.2 -- First Amendment to Agreement and Plan of Merger, dated as
of January 5, 2000, among Vista Energy Resources, Inc.,
PEC Acquisition Corp. and Prize Energy Corp.
*3.1 -- Certificate of Incorporation of Vista Energy Resources,
Inc.
*3.2 -- Bylaws of Vista Energy Resources, Inc.
*4.1 -- Specimen Stock Certificate for the Common Stock, par
value $.01 per share, of Vista Energy Resources, Inc.
+4.2 -- Form of Registration Rights Agreement by and among Vista
Energy Resources, Inc., certain securityholders of Vista
Energy Resources, Inc. and stockholders of Prize Energy
Corp.
*4.3 -- Registration Rights Agreement, dated as of October 28,
1998, by and among Vista Energy Resources, Inc. and
certain securityholders of Vista Resources I, Inc. and
Vista Resources Partners, L.P.
*4.4 -- Registration Rights Agreement, dated as of October 28,
1998, by and among Vista Energy Resources, Inc. and
certain securityholders of Midland Resources, Inc.
*4.5 -- Warrant Agreement dated as of October 28, 1998, among
Vista Energy Resources, Inc. and American Stock Transfer
and Trust Company.
+4.6 -- Warrant Agreement dated as of November 1, 1990, among
Midland Resources, Inc. and Stock Transfer Company of
America, Inc.
4.7 -- Form of Certificate of Designation, Voting Powers and
Rights of Series A 6% Convertible Preferred Stock of
Vista Energy Resources, Inc.
5.1 -- Opinion of Vinson & Elkins L.L.P. regarding legality of
securities being registered.
8.1 -- Opinion of Conner & Winters, A Professional Corporation,
regarding tax matters.
*10.1 -- Contract Operating Agreement, effective as of June 1,
1998, by and between Vista Resources, Inc. and Midland
Resources Operating Company, Inc.
*10.2 -- Warley Settlement Agreement, dated May 22, 1998, between
Midland Resources, Inc. and Deas H. Warley III.
</TABLE>
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<TABLE>
<CAPTION>
<C> <S>
*10.3 -- Release and Hold Harmless Agreement, dated May 22, 1998,
between Marilyn D. Wade, Deas H. Warley III and Midland
Resources, Inc.
*10.4 -- Advisory Services Agreement between Vista Energy
Resources, Inc., Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P.
**10.5 -- Credit Agreement, dated December 18, 1998, by and between
Vista Resources Partners, L.P. and Midland Resources,
Inc., as borrowers, Vista Energy Resources, Inc., as
guarantor, BankBoston, N.A., as administrative agent, and
certain financial institutions.
*10.6 -- Vista Energy Resources, Inc. 1998 Key Employee Stock
Option Plan.
*10.7 -- Midland Option Exercise Agreement.
*10.8 -- Indemnification Agreement, dated as of October 28, 1998,
by and between Vista Energy Resources, Inc. and each of
its directors and executive officers.
*10.9 -- Indemnification Agreement, dated as of October 28, 1998,
by and between Vista Energy Resources, Inc. and each of
the directors and executive officers of Midland
Resources, Inc.
*10.10 -- Termination Agreement, dated May 22, 1998, by and among
Vista Energy Resources, Inc., Midland Resources, Inc. and
Howard E. Ehler.
*10.11 -- Termination Agreement, dated May 22, 1998, by and among
Vista Energy Resources, Inc., Midland Resources, Inc. and
Marilyn D. Wade.
*10.12 -- Office Lease dated October 10, 1996, between Vista
Resources, Inc. and Fasken Center, Ltd.
*10.13 -- Lease Amendment dated September 18, 1997, between Vista
Resources, Inc. and Fasken Center, Ltd.
***10.14 -- Vista Energy Resources, Inc. Severance Benefit Plan,
Effective October 8, 1999.
***10.15 -- Consulting and Termination Agreement, dated as of October
8, 1999, by and among Prize Energy Corp., Vista Energy
Resources, Inc. and C. Randall Hill.
***10.16 -- Consulting and Termination Agreement, dated as of October
8, 1999, by and among Prize Energy Corp., Vista Energy
Resources, Inc. and Steven D. Gray.
***10.17 -- Consulting and Termination Agreement, dated as of October
8, 1999, by and among Prize Energy Corp., Vista Energy
Resources, Inc. and R. Cory Richards.
+10.18 -- Form of Assignment and Assumption Agreement by and
between Vista Energy Resources, Inc. and Prize Energy
Corp. relating to the Joint Participation Agreement by
and between Prize Energy Corp. and Pioneer Natural
Resources USA, Inc.
*10.19 -- Vista Energy Resources, Inc. 1998 Key Employee Stock
Option Plan.
+12.1 -- Ratio of Earnings to Fixed Charges.
**21.1 -- Subsidiaries of Vista Energy Resources, Inc.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Grant Thornton LLP.
23.3 -- Consent of Ernst & Young LLP.
23.4 -- Consent of Williamson Petroleum Consultants, Inc.
+23.5 -- Consent of Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated.
23.6 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1).
23.7 -- Consent of Conner & Winters, A Professional Corporation
(included in Exhibit 8.1).
+24.1 -- Power of Attorney.
</TABLE>
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<TABLE>
<CAPTION>
<C> <S>
99.1 -- Opinion dated October 8, 1999, of Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated (included as
Annex B to the Proxy Statement/Prospectus).
+99.2 -- Consent of Philip B. Smith as a Person About to Become a
Director.
+99.3 -- Consent of Lon C. Kile as a Person About to Become a
Director.
+99.4 -- Consent of Scott D. Sheffield as a Person About to Become
a Director.
+99.5 -- Consent of Mark L. Withrow as a Person About to Become a
Director.
99.6 -- Form of Proxy for Stockholders of Vista Energy Resources,
Inc.
99.7 -- Form of Proxy for Stockholders of Prize Energy Corp.
</TABLE>
- ---------------
+ Previously filed
* Included in the Registrant's Registration Statement on Form S-4, as amended
(File No. 333-58495), initially filed on July 2, 1998, and incorporated
herein by reference.
** Included in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
*** Included in the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by reference.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (i) and (ii) do not apply if the
registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 277
(d)(i) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus that is a part of this
registration statement, by any person who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form; and
(ii) That every prospectus (1) that is filed pursuant to paragraph (i)
immediately preceding, or (2) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act, and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-6
<PAGE> 278
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Midland, State of Texas,
on the 6th day of January, 2000.
VISTA ENERGY RESOURCES, INC.
By: /s/ C. RANDALL HILL
----------------------------------
C. Randall Hill
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ C. RANDALL HILL Chairman of the Board, Chief January 6, 2000
- --------------------------------------------------- Executive Officer and Chief
C. Randall Hill Financial Officer (Principal
Executive Officer and
Principal Accounting Officer)
* Director, President and Chief January 6, 2000
- --------------------------------------------------- Operating Officer
Steven D. Gray
* Director January 6, 2000
- ---------------------------------------------------
Kenneth A. Hersh
* Director January 6, 2000
- ---------------------------------------------------
David R. Albin
* Director January 6, 2000
- ---------------------------------------------------
John S. Foster
* Director January 6, 2000
- ---------------------------------------------------
John Q. Adams
*By: /s/ C. RANDALL HILL
---------------------------------------------
C. Randall Hill
Attorney-in-fact
</TABLE>
II-7
<PAGE> 279
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<C> <S>
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of October 8,
1999, among Vista Energy Resources, Inc., PEC Acquisition
Corp. and Prize Energy Corp. (included as Annex A to the
Proxy Statement/Prospectus).
2.2 -- First Amendment to Agreement and Plan of Merger, dated as
of January 5, 2000, among Vista Energy Resources, Inc.,
PEC Acquisition Corp. and Prize Energy Corp.
*3.1 -- Certificate of Incorporation of Vista Energy Resources,
Inc.
*3.2 -- Bylaws of Vista Energy Resources, Inc.
*4.1 -- Specimen Stock Certificate for the Common Stock, par
value $.01 per share, of Vista Energy Resources, Inc.
+4.2 -- Form of Registration Rights Agreement by and among Vista
Energy Resources, Inc., certain securityholders of Vista
Energy Resources, Inc. and stockholders of Prize Energy
Corp.
*4.3 -- Registration Rights Agreement, dated as of October 28,
1998, by and among Vista Energy Resources, Inc. and
certain securityholders of Vista Resources I, Inc. and
Vista Resources Partners, L.P.
*4.4 -- Registration Rights Agreement, dated as of October 28,
1998, by and among Vista Energy Resources, Inc. and
certain securityholders of Midland Resources, Inc.
*4.5 -- Warrant Agreement dated as of October 28, 1998, among
Vista Energy Resources, Inc. and American Stock Transfer
and Trust Company.
+4.6 -- Warrant Agreement dated as of November 1, 1990, among
Midland Resources, Inc. and Stock Transfer Company of
America, Inc.
4.7 -- Form of Certificate of Designation, Voting Powers and
Rights of Series A 6% Convertible Preferred Stock of
Vista Energy Resources, Inc.
5.1 -- Opinion of Vinson & Elkins L.L.P. regarding legality of
securities being registered.
8.1 -- Opinion of Conner & Winters, A Professional Corporation,
regarding tax matters.
*10.1 -- Contract Operating Agreement, effective as of June 1,
1998, by and between Vista Resources, Inc. and Midland
Resources Operating Company, Inc.
*10.2 -- Warley Settlement Agreement, dated May 22, 1998, between
Midland Resources, Inc. and Deas H. Warley III.
*10.3 -- Release and Hold Harmless Agreement, dated May 22, 1998,
between Marilyn D. Wade, Deas H. Warley III and Midland
Resources, Inc.
*10.4 -- Advisory Services Agreement between Vista Energy
Resources, Inc., Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P.
**10.5 -- Credit Agreement, dated December 18, 1998, by and between
Vista Resources Partners, L.P. and Midland Resources,
Inc., as borrowers, Vista Energy Resources, Inc., as
guarantor, BankBoston, N.A., as administrative agent, and
certain financial institutions.
*10.6 -- Vista Energy Resources, Inc. 1998 Key Employee Stock
Option Plan.
*10.7 -- Midland Option Exercise Agreement.
*10.8 -- Indemnification Agreement, dated as of October 28, 1998,
by and between Vista Energy Resources, Inc. and each of
its directors and executive officers.
*10.9 -- Indemnification Agreement, dated as of October 28, 1998,
by and between Vista Energy Resources, Inc. and each of
the directors and executive officers of Midland
Resources, Inc.
*10.10 -- Termination Agreement, dated May 22, 1998, by and among
Vista Energy Resources, Inc., Midland Resources, Inc. and
Howard E. Ehler.
</TABLE>
<PAGE> 280
<TABLE>
<CAPTION>
<C> <S>
*10.11 -- Termination Agreement, dated May 22, 1998, by and among
Vista Energy Resources, Inc., Midland Resources, Inc. and
Marilyn D. Wade.
*10.12 -- Office Lease dated October 10, 1996, between Vista
Resources, Inc. and Fasken Center, Ltd.
*10.13 -- Lease Amendment dated September 18, 1997, between Vista
Resources, Inc. and Fasken Center, Ltd.
***10.14 -- Vista Energy Resources, Inc. Severance Benefit Plan,
Effective October 8, 1999.
***10.15 -- Consulting and Termination Agreement, dated as of October
8, 1999, by and among Prize Energy Corp., Vista Energy
Resources, Inc. and C. Randall Hill.
***10.16 -- Consulting and Termination Agreement, dated as of October
8, 1999, by and among Prize Energy Corp., Vista Energy
Resources, Inc. and Steven D. Gray.
***10.17 -- Consulting and Termination Agreement, dated as of October
8, 1999, by and among Prize Energy Corp., Vista Energy
Resources, Inc. and R. Cory Richards.
+10.18 -- Form of Assignment and Assumption Agreement by and
between Vista Energy Resources, Inc. and Prize Energy
Corp. relating to the Joint Participation Agreement by
and between Prize Energy Corp. and Pioneer Natural
Resources USA, Inc.
*10.19 -- Vista Energy Resources, Inc. 1998 Key Employee Stock
Option Plan.
+12.1 -- Ratio of Earnings to Fixed Charges.
**21.1 -- Subsidiaries of Vista Energy Resources, Inc.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Grant Thornton LLP.
23.3 -- Consent of Ernst & Young LLP.
23.4 -- Consent of Williamson Petroleum Consultants, Inc.
+23.5 -- Consent of Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated.
23.6 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1).
23.7 -- Consent of Conner & Winters, A Professional Corporation
(included in Exhibit 8.1).
+24.1 -- Power of Attorney.
99.1 -- Opinion dated October 8, 1999, of Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated (included as
Annex B to the Proxy Statement/Prospectus).
+99.2 -- Consent of Philip B. Smith as a Person About to Become a
Director.
+99.3 -- Consent of Lon C. Kile as a Person About to Become a
Director.
+99.4 -- Consent of Scott D. Sheffield as a Person About to Become
a Director.
+99.5 -- Consent of Mark L. Withrow as a Person About to Become a
Director.
99.6 -- Form of Proxy for Stockholders of Vista Energy Resources,
Inc.
99.7 -- Form of Proxy for Stockholders of Prize Energy Corp.
</TABLE>
- ---------------
+ Previously filed.
* Included in the Registrant's Registration Statement on Form S-4, as amended
(File No. 333-58495), initially filed on July 2, 1998, and incorporated
herein by reference.
** Included in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
*** Included in the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by reference.
<PAGE> 1
EXHIBIT 2.2
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT (this "First Amendment") to the Agreement and Plan of
Merger dated as of October 8, 1999 (the "Agreement"), among Vista Energy
Resources, Inc., ("Parent"), PEC Acquisition Corp. ("Merger Sub") and Prize
Energy Corp.("Prize") is entered into as of January 5, 2000, by and among
Parent, Merger Sub and Prize.
RECITALS:
WHEREAS, the parties to the Agreement desire to amend the Agreement as
provided herein pursuant to Section 8.2 of the Agreement;
WHEREAS, any capitalized term used herein, and not otherwise defined
herein, shall have the meaning set forth in the Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in the Agreement
and in this First Amendment, the parties hereto, intending to be legally bound
hereby, hereby agree that Section 7.1 of the Agreement shall be changed in its
entirety to read as follows:
"7.1 TERMINATION RIGHTS. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval of the Prize Proposal by the stockholders of Prize and/or Parent,
respectively:
(a) By mutual written consent of Parent and Prize;
(b) By either Prize or Parent if (i) the Merger has
not been consummated by February 29, 2000 (provided, however,
that the right to terminate this Agreement pursuant to this
clause (i) shall not be available to any Party whose breach of
any representation or warranty or failure to perform any
covenant or agreement under this Agreement has been the cause
of or resulted in the failure of the Merger to occur on or
before such date); (ii) any Governmental Authority shall have
issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting
the Merger and such order, decree, ruling or other action
shall have become final and nonappealable (provided, however,
that the right to terminate this Agreement pursuant to this
clause (ii) shall not be available to any Party until such
<PAGE> 2
Party has used all reasonable efforts to remove such
injunction, order or decree); (iii) the Prize Proposal shall
not have been approved by the required vote of the Prize
stockholders at the Prize Meeting; or (iv) the Prize Proposal
shall not have been approved by the required vote of the
Parent stockholders at the Parent Meeting;
(c) By Parent if (i) there has been a breach in any
material respect of the representations and warranties made by
Prize in Article 3 (provided, however, that any representation
or warranty contained therein that is qualified by a
materiality standard or a Material Adverse Effect
qualification shall not be further qualified hereby, and
provided, further, that Parent shall not be entitled to
terminate this Agreement pursuant to this clause (i) unless
Parent has given Prize notice of such breach and Prize has
failed to cure such breach within 10 days following such
notice, but in any event not later than February 29, 2000),
and the condition described in Section 6.2(a), other than the
provision thereof relating to the certificate signed by a
Responsible Officer of Prize, would not be satisfied if the
Closing were to occur on the day on which Parent gives Prize
notice of such termination; or (ii) Prize has failed to comply
in any material respect with any of its covenants or
agreements contained in this Agreement and such failure has
not been, or cannot be, cured within 10 days after notice and
demand for cure thereof, but in any event not later than
February 29, 2000;
(d) By Prize if (i) there has been a breach in any
material respect of the representations and warranties made by
Parent and Merger Sub in Article 4 (provided, however, that
any representation or warranty contained therein that is
qualified by a materiality standard or a Material Adverse
Effect qualification shall not be further qualified hereby,
and provided, further, that Prize shall not be entitled to
terminate this Agreement pursuant to this clause (i) unless
Prize has given Parent notice of such breach and Parent has
failed to cure such breach within 10 days following such
notice, but in any event not later than February 29, 2000),
and the condition described in Section 6.3(a), other than the
provision thereof relating to the certificate signed by a
Responsible Officer of Parent, would not be satisfied if the
Closing were to occur on the day on which Prize gives Parent
notice of such termination; or (ii) Parent or Merger Sub has
failed to comply in any material respect with any of its
respective covenants or agreements contained in this
Agreement, and, in either such case, such failure has not
been, or cannot be, cured within 10 days after notice and
demand for cure thereof, but in any event not later than
February 29, 2000;
(e) By Parent if Parent is prepared to enter into a
binding definitive agreement to effect a Superior Proposal; or
(f) By Prize if the board of directors of Parent
shall have failed to recommend adoption of the Prize Proposal
at the time the Proxy Statement/Prospectus is first mailed to
stockholders of Parent or shall have amended
2
<PAGE> 3
or withdrawn any such recommendation and such recommendation
is not reinstated in its prior form within five business days
after such amendment or withdrawal."
This First Amendment shall be governed in all respects, including
validity, interpretation and effect, by the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
Except as herein specifically amended or supplemented, the Agreement
shall continue in full force and effect in accordance with its terms.
This First Amendment may be executed and delivered (including by
facsimile transmission) in one or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
[Remainder of page intentionally left blank]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
executed by their duly authorized representatives, on the date first written
above.
"Prize"
PRIZE ENERGY CORP.
By: /s/ PHILIP B. SMITH
---------------------------------------
Philip B. Smith
Chairman and Chief Executive Officer
"Parent"
VISTA ENERGY RESOURCES, INC.
By: /s/ C. RANDALL HILL
---------------------------------------
C. Randall Hill
Chairman and Chief Executive Officer
"Merger Sub"
PEC ACQUISITION CORP.
By: /s/ C. RANDALL HILL
---------------------------------------
C. Randall Hill
President
<PAGE> 1
EXHIBIT 4.7
FORM OF
CERTIFICATE OF DESIGNATION, VOTING POWERS AND
RIGHTS OF SERIES A 6% CONVERTIBLE
PREFERRED STOCK OF VISTA ENERGY RESOURCES, INC.
Vista Energy Resources, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "CORPORATION"), DOES HEREBY
CERTIFY:
That, pursuant to authority conferred upon the Board of Directors by
the Corporation's Certificate of Incorporation, as amended, and pursuant to the
provisions of Section 151 of the Delaware General Corporation Law, as amended,
the Board of Directors, by written consent dated _______, ____, unanimously
adopted the following resolution providing for the creation and issuance of a
series of shares of the Corporation's authorized preferred stock designated as
"Series A 6% Convertible Preferred Stock":
RESOLVED, that a new series of the Corporation's authorized but
unissued preferred stock be, and the same hereby is, established and designated,
and that the designation and amount thereof, and the relative rights,
preferences, qualifications, limitations and restrictions thereof, are as
follows:
SECTION 1. DESIGNATION, NUMBER OF SHARES AND STATED VALUE OF SERIES A
PREFERRED STOCK. There is hereby authorized and established a series of the
Corporation's preferred stock, par value $0.01 per share, that shall be
designated as "Series A 6% Convertible Preferred Stock" ("SERIES A PREFERRED"),
and the number of shares constituting such series shall be 5,000,000. Such
number of shares may be increased, but not decreased, by resolution adopted by
the Board of Directors of the Corporation. The "STATED VALUE" per share of
Series A Preferred initially shall be equal to $_________ (which amount shall be
proportionately adjusted in the case of recapitalizations, stock splits, stock
dividends, combinations of shares or similar matters directly affecting the
Series A Preferred).
SECTION 2. DEFINITIONS. In addition to the definitions set forth
elsewhere herein, the following terms shall have the meanings indicated:
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in New York, New York, are authorized or
obligated by law or executive order to close.
"CLOSING PRICE" with respect to a particular security on any Trading
Day shall mean the last reported sales price, regular way, for such security on
such Trading Day, or, in case no sale takes place on such day, the average of
the closing bid and ask prices, regular way, on such Trading Day, in either case
as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the American Stock
Exchange or the New York Stock Exchange or, if not listed or admitted to trading
on the American Stock Exchange or the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect
<PAGE> 2
to securities listed on the principal national securities exchange on which such
security is listed or admitted to trading or, if such security is not listed or
admitted to trading on any national securities exchange, the last quoted price
as reported by The Nasdaq Stock Market or such other system then in use.
"COMMON STOCK" shall mean the common stock, par value $0.01 per share,
of the Corporation.
"CONVERSION PRICE" shall mean the conversion price per share of Common
Stock into which Series A Preferred is convertible, as such conversion price may
be adjusted pursuant to Section 9 hereof. The initial Conversion Price shall be
$_____________.
"JUNIOR SECURITIES" means the Common Stock or any other series of stock
issued by the Corporation ranking junior to the Series A Preferred in payment of
dividends or distributions or upon liquidation, dissolution or winding-up of the
Corporation.
"MARKET PRICE" per share of Common Stock as of any date shall mean (i)
if the Common Stock is listed or admitted to trading on a national securities
exchange or The Nasdaq Stock Market, the average of the daily Closing Prices for
a period of 30 consecutive Trading Days ending on such date, or (ii) if the
Common Stock is not then so listed or admitted, the fair market value per share
of the Common Stock as reasonably determined by an investment banking firm
mutually acceptable to the Corporation and the holders of shares of Series A
Preferred.
"ORIGINAL ISSUE DATE" shall mean the date on which shares of Series A
Preferred are first issued.
"PARITY SECURITY" means any class or series of stock issued by the
Corporation ranking on a parity with the Series A Preferred in payment of
dividends or distributions or upon liquidation, dissolution or winding-up of the
Corporation.
"PAYABLE-IN-KIND" or "PAID-IN-KIND" when used in reference to any
dividend payable on the shares of Series A Preferred means payment of the
dividend by issuance of that number of additional shares of Series A Preferred
that has an aggregate Stated Value equal to the dollar amount of such dividend
then payable. In lieu of any fractional share of Series A Preferred Stock to
which a holder of Series A Preferred Stock would otherwise be entitled, such
holder shall receive the nearest whole share of Series A Preferred Stock (i.e.
if less than .5 rounded down, and if .5 or more rounded up). Shares of Series A
Preferred issued as dividends Payable-in-Kind shall be duly authorized, validly
issued and nonassessable and, upon issuance, shall have rights (including
without limitation dividend, voting, conversion and redemption rights) identical
to the outstanding shares of Series A Preferred in respect of which they are
issued.
2
<PAGE> 3
"PERSON" means any individual, corporation, association, partnership,
joint venture, limited liability company, trust, estate, or other entity or
organization.
"SENIOR SECURITIES" means any class or series of stock, or any class or
series of debt or debt security convertible or exchangeable into any class or
series of stock, issued by the Corporation ranking senior to the Series A
Preferred in payment of dividends or distributions or upon liquidation,
dissolution or winding-up of the Corporation.
"TRADING DAY" with respect to any security means (i) if such security
is listed or admitted for trading on any national securities exchange, a day on
which such national securities exchange is open for trading, or (ii) if such
security is not listed or admitted to trading on any national securities
exchange, a Business Day.
"UNDERLYING COMMON STOCK" means at any time, with respect to any share
of Series A Preferred, the aggregate number of shares of Common Stock into which
such share is then convertible pursuant to Section 9 hereof.
SECTION 3. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of outstanding shares of Series A Preferred
shall be entitled to receive, as and when declared by the Corporation,
out of funds of the Corporation legally available for the payment of
dividends, preferential quarterly dividends at the times and at the
rates provided for in this Section 3. Dividends on shares of the Series
A Preferred shall be cumulative and shall accrue whether or not there
shall be (at the time such dividend becomes payable or at any other
time) profits, surplus or other funds of the Corporation legally
available for the payment of dividends.
(b) Dividends shall accrue on each outstanding share of Series
A Preferred at the rate of six percent (6%) per annum of the Stated
Value (the "DIVIDEND RATE") of such share. Dividends shall be payable
quarterly, in arrears, as of the last Business Day of each December,
March, June and September, commencing with ____________ (each, a
"REGULAR DIVIDEND PAYMENT DATE"). Dividends shall also be payable on
any Redemption Date and on the final distribution date relating to the
dissolution, liquidating or winding up of the Corporation (each such
date, together with each Regular Dividend Payment Date, is a "DIVIDEND
PAYMENT DATE").
(c) Dividends on outstanding shares of Series A Preferred
shall be Payable-in-Kind during the period (the "EXCLUSIVE PIK PERIOD")
beginning on the Original Issue Date and ending on the earlier of (i)
the Dividend Payment Date on December 31, 2001, and (ii) the
liquidation, dissolution or winding up of the Corporation (in
connection with the bankruptcy or insolvency of the Corporation or
otherwise). After the Exclusive PIK Period, dividends on the shares of
Series A Preferred shall be Payable-in-Kind or, at the Corporation's
option, payable in cash.
3
<PAGE> 4
(d) The amount of dividends payable on each Dividend Payment
Date shall be determined by applying the Dividend Rate from but
excluding the immediately preceding Dividend Payment Date (or from but
excluding the date of issuance of shares of Series A Preferred, with
respect to the first dividend period) to and including the Dividend
Payment Date.
(e) Notwithstanding the foregoing or anything else herein to
the contrary, however, dividends payable on any Redemption Date (as
defined in Section 6(c) hereof) or the final distribution date relating
to the dissolution, liquidation or winding up of the Corporation, shall
be payable in cash only. If a Dividend Payment Date does not occur on a
Regular Dividend Payment Date, dividends shall be calculated on the
basis of the actual number of days elapsed from but excluding the
immediately preceding Regular Dividend Payment Date to and including
such non-Regular Dividend Payment Date. Dividends payable on the shares
of Series A Preferred for any period of less than a full quarterly
dividend period shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
(f) Dividends payable on each Dividend Payment Date shall be
paid to record holders of the shares of Series A Preferred as they
appear on the books of the Corporation at the close of business on the
10th Business Day immediately preceding the respective Dividend Payment
Date or on such other record date as may be fixed by the Board of
Directors of the Corporation in advance of a Dividend Payment Date,
provided that no such record date shall be less than 10 nor more than
60 calendar days preceding such Dividend Payment Date.
(g) So long as any shares of Series A Preferred are
outstanding:
(i) No dividend or other distribution shall be
declared or paid, or set apart for payment, on or in respect
of, any Junior Securities (other than dividends or
distributions payable in shares of Junior Securities or in
rights to purchase Junior Securities), nor shall any Junior
Securities be redeemed, purchased or otherwise acquired for
any consideration (or any money be paid to a sinking fund or
otherwise set apart for the purchase or redemption of any such
Junior Securities) unless full cumulative dividends on all
outstanding shares of Series A Preferred and any Parity
Securities have been or contemporaneously are declared and
paid for all dividend periods terminating on or prior to the
date set for payment of such dividend.
(ii) No dividend or other distribution, except as
described in the next succeeding sentence, shall be declared
or paid, or set apart for payment, on or in respect of, Series
A Preferred or any Parity Securities for any period unless
full cumulative dividends on all outstanding shares of Series
A Preferred and any Parity Securities have been or
contemporaneously are declared and paid for all dividend
periods terminating on or prior to the date set for payment of
such dividend. When dividends are not paid in full, as
aforesaid, on the shares of Series A Preferred and any Parity
Securities, all dividends declared upon such Parity Securities
shall be declared and paid pro rata so that the amounts of
dividends per share declared and paid on the
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<PAGE> 5
shares of Series A Preferred and such Parity Securities shall
in all cases bear to each other the same ratio that unpaid
dividends per share on the Series A Preferred and on such
Parity Securities bear to each other.
(iii) No shares of Series A Preferred or any Parity
Securities shall be redeemed, purchased or otherwise acquired
for any consideration (or any money be paid to a sinking fund
or otherwise set apart for the purchase or redemption of any
such Parity Security) by the Corporation unless the full
cumulative dividends on all outstanding shares of Series A
Preferred shall have been or contemporaneously are declared
and paid for all dividend periods terminating on or prior to
the date on which such redemption, purchase or other payment
is to occur.
(iv) No dividend or other distribution of cash or
debt shall be declared or paid, or set apart for payment, on
or in respect of, any Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired for
any cash or debt consideration (or any money or debt paid to a
sinking fund or otherwise set apart for the purchase or
redemption of any Junior Securities) unless full cumulative
dividends on all outstanding shares of Series A Preferred have
been or contemporaneously are declared and paid in cash for
all dividend periods terminating on or prior to the date set
for payment of such dividend or distribution.
(v) No dividend or other distribution of cash or debt
shall be declared or paid, or set apart for payment, on or in
respect of, any Parity Securities unless full cumulative
dividends on all outstanding shares of Series A Preferred have
been or contemporaneously are declared and paid in cash for
all dividend periods terminating on or prior to the date set
for payment of such dividend or distribution. No Parity
Securities be redeemed, purchased or otherwise acquired for
any cash or debt consideration (or any money or debt paid to a
sinking fund or otherwise set apart for the purchase or
redemption of any Parity Securities) unless the Series A
Preferred shall have been called for redemption pursuant to
Section 6 hereof and the full Redemption Price (as defined in
Section 6(b) hereof) shall have been or contemporaneously is
paid in cash on or prior to the date set for payment of such
dividend or distribution.
SECTION 4. CERTAIN COVENANTS AND RESTRICTIONS. So long as any shares of
Series A Preferred are outstanding:
(a) The Corporation shall at all times reserve and keep
available for issuance upon the conversion of the shares of Series A
Preferred as provided in Section 6 and Section 9 hereof, respectively,
such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the conversion of all outstanding shares
of Series A Preferred and all other securities and instruments
convertible into shares of Common Stock, and shall take all reasonable
action within its power required to increase the authorized number of
shares of Common Stock necessary to permit the conversion of all
outstanding shares of Series A
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<PAGE> 6
Preferred and all such other securities and instruments convertible
into shares of Common Stock.
(b) The Corporation covenants and agrees that all shares of
Common Stock that may be issued upon exercise of the conversion rights
of shares of Series A Preferred will, upon issuance, be duly
authorized, valid issued, fully-paid and nonassessable.
(c) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon payment of dividends
Payable-in-Kind or conversion of the Series A Preferred, the
Corporation will endeavor to comply with all federal and state
securities laws and regulations thereunder requiring the registration
of such securities with, or any approval of or consent to the delivery
of such securities by, any governmental authority.
(d) The Corporation shall pay all taxes and other governmental
charges (other than any income or franchise taxes), documentary stamp
or similar issue or transfer taxes that may be imposed with respect to
the issue or delivery of the Series A Preferred (or any other
securities issued on account of the Series A Preferred pursuant hereto)
or shares of Common Stock upon conversion of Series A Preferred or
payment of dividends Payable-in-Kind as provided herein or otherwise.
The Corporation shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of
any certificate for shares of Common Stock in any name other than that
of the registered holder of the shares of the Series A Preferred
surrendered in connection with the conversion thereof or otherwise,
and, in such case, the Corporation shall not be required to issue or
deliver any stock certificate until such tax or other charge has been
paid, or it has been established to the Corporation's satisfaction that
no tax or other charge is due.
SECTION 5. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding-up
of the Corporation (in connection with the bankruptcy or insolvency of
the Corporation or otherwise), whether voluntary or involuntary, before
any payment or distribution of the assets of the Corporation (whether
capital or surplus) shall be made to or set apart for the holders of
shares of any Junior Securities, the holders of the shares of Series A
Preferred shall be entitled to receive an amount per share in cash
equal to the Stated Value per share held by them, plus an amount in
cash equal to the full cumulative dividends accrued and unpaid thereon,
to the date of such payment, whether or not declared. No payment on
account of any such liquidation, dissolution or winding-up of the
Corporation shall be paid to the holders of the shares of Series A
Preferred or the holders of any Parity Securities unless there shall be
paid at the same time to the holders of the shares of Series A
Preferred and the holders of any Parity Securities proportionate
amounts determined ratably in proportion to the full preferential
amounts to which the holders of all outstanding shares of Series A
Preferred and the holders of all such outstanding Parity Securities are
respectively entitled with respect to such distribution (but only to
the extent of such preferential amounts). For purposes of this Section
5, neither a consolidation or merger of the Corporation with one or
more partnerships, corporations or other entities nor a sale, lease,
exchange or transfer of all or any substantial part of the
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<PAGE> 7
Corporation's assets for cash, securities or other property shall be
deemed to be a liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary.
(b) After payment of the full amount of the liquidation
preference to which the holders of shares of Series A Preferred are
entitled, such holders will not be entitled to any further
participation in any distribution of assets of the Corporation.
(c) Written notice of any liquidation, dissolution or
winding-up of the Corporation, stating the payment date or dates when
and the place or places where the amounts distributable in such
circumstances shall be payable, shall be given by first class mail,
postage prepaid, not less than 15 days prior to any payment date stated
therein, to the holders of record of the shares of Series A Preferred
at their respective addresses as the same shall appear in the records
of the Corporation.
SECTION 6. REDEMPTION. The outstanding shares of Series A Preferred are
subject to redemption in accordance with the following provisions:
(a) Subject to the terms hereof, the Corporation may at its
option elect to redeem outstanding shares of Series A Preferred, in
whole or in part (pro-rata among the outstanding shares), on any
Business Day if both (i) the average of the Closing Prices of the
Corporation's Common Stock during any period of at least 30 consecutive
Trading Days during the preceding 60 Trading Days shall have exceeded
120% of the Conversion Price, and (ii) the Closing Price per share of
the Corporation's Common Stock on the Trading Day immediately preceding
the day on which such notice is given shall have equaled or exceeded
110% of the Conversion Price.
(b) The redemption price per share for Series A Preferred (the
"REDEMPTION PRICE") shall be equal to the Stated Value plus an amount
equal to the aggregate dollar amount of all accrued and unpaid
dividends through the Redemption Date. The Redemption Price shall be
paid in cash from any source of funds legally available therefor.
(c) The Business Day designated by the Corporation for the
redemption of shares of Series A Preferred is referred to herein as the
"REDEMPTION DATE." Not less than 60 days nor more than 75 days prior to
the Redemption Date, a notice specifying the time and place of such
redemption shall be given by first class mail, postage prepaid, to the
holders of record of the shares of Series A Preferred to be redeemed at
their respective addresses as the same shall appear on the books of the
Corporation (but no failure to mail such notice or any defect therein
shall affect the validity of the proceedings for redemption except as
to the holder to whom the Corporation has failed to mail such notice or
except as to the holder whose notice was defective), calling upon each
such holder of record to surrender to the Corporation on the Redemption
Date at the place designated in such notice such holder's certificate
or certificates representing the then outstanding shares of Series A
Preferred held by such holder. Each such notice of redemption shall
specify the Redemption Date, the Redemption Price, the place or places
of payment, that payment will be made upon presentation and surrender
of the shares of Series A Preferred, that dividends will cease to
accrue on such shares on and after
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<PAGE> 8
the Redemption Date, the then-effective Conversion Price pursuant to
Section 9 hereof, and that the right of holders to convert shares of
Series A Preferred will terminate at the close of business on the
Business Day immediately preceding the Redemption Date (unless the
Corporation defaults in the payment of the Redemption Price). On or
after the Redemption Date, each holder of shares of Series A Preferred
called for redemption shall surrender such holder's certificate or
certificates for such shares to the Corporation at the place designated
in the redemption notice and shall thereupon be entitled to receive
payment of the Redemption Price in the manner set forth in Section 6(b)
above. If the redemption is delayed for any reason, dividends shall
continue to accrue on the shares of Series A Preferred outstanding, and
shall be added to and become a part of the Redemption Price of such
shares, until the Redemption Price, as so adjusted, for such shares is
paid in full.
(d) Notwithstanding the foregoing, if notice of redemption has
been given pursuant to Sections 6(a) and 6(c) hereof and any holder of
the Series A Preferred shall, before the close of business on the
Business Day immediately preceding the Redemption Date, give notice to
the Corporation pursuant to Section 9(b) hereof of the conversion of
any or all of the shares to be redeemed held by that holder, then (i)
the Corporation shall not have the right to redeem those shares for
which the conversion notice has been given, (ii) the holder shall not
be entitled to payment of the Redemption Price with respect to those
shares, (iii) the conversion of those shares shall become effective as
provided in Section 9 hereof, and (iv) any funds that have been
deposited for the payment of the Redemption Price of those shares shall
be returned to the Corporation immediately after such conversion.
SECTION 7. SHARES TO BE RETIRED. All shares of Series A Preferred
repurchased, redeemed, converted or otherwise acquired by the Corporation shall
be retired and cancelled and shall be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to series, and may
thereafter be reissued (subject to the provisions of Section 8 hereof).
SECTION 8. VOTING RIGHTS.
(a) Except as otherwise provided in this Section 8 or required
by law or any provision of the Certificate of Incorporation of the
Corporation, the holders of the shares of Series A Preferred shall vote
together with the shares of Common Stock as a single class at any
annual or special meeting of stockholders of the Corporation upon the
following basis: each holder of shares of Series A Preferred shall be
entitled to such number of votes for the shares of Series A Preferred
held by such holder on the record date fixed for such meeting as shall
be equal to the whole number of shares of Underlying Common Stock with
respect to such shares of Series A Preferred immediately after the
close of business on the record date fixed for such meeting. In all
cases where the holders of separate classes or series of the
Corporation's capital stock have the right to vote separately as a
class, the holders of Series A Preferred shall be entitled to one vote
for each such share held by them.
(b) For so long as any shares of Series A Preferred remain
outstanding, the Corporation shall not, without the affirmative vote or
consent of the holders of a majority of the shares of Series A
Preferred voting together as a single class, authorize, create or
issue,
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<PAGE> 9
or increase the authorized or issued amount of, any class or series of
stock of Senior Securities, Parity Securities or Series A Preferred
(except through payment of dividends Payable-in-Kind on the Series A
Preferred), or any security convertible into or exchangeable for Senior
Securities or Parity Securities or reclassify or modify any Junior
Securities so as to become Parity Securities or Senior Securities.
(c) Shares of Series A Preferred acquired by a subsidiary of
the Corporation shall have no voting rights.
(d) For so long as any shares of Series A Preferred remain
outstanding, the Corporation shall not, without the affirmative vote or
consent of the majority (unless a higher percentage shall then be
specified by law) of the shares of Series A Preferred voting together
as a single class, merge or consolidate with or into any other Person
or permit any other Person to merge with or into the Corporation,
unless each share of Series A Preferred shall remain outstanding and
unaffected or shall be converted into or exchanged for convertible
preferred stock of the surviving entity (and, in the case of triangular
mergers, with conversion rights into the common equity of the ultimate
parent entity) having powers, preferences and relative participating,
optional and other rights, and qualifications, limitations and
restrictions thereof identical to a share of Series A Preferred, and
unless the affirmative vote or consent of the holders of all the shares
of Series A Preferred voting together as a single class shall have been
obtained if such exchange, merger or consolidation shall result in the
existence of Senior Securities or Parity Securities (treating
securities issued by the surviving entity as having been issued by the
Corporation) other than those previously approved pursuant to Section
8(b) hereof; provided, however, that the voting rights with respect to
this Section 8(d) shall be exercisable only by the original holder of
the Series A Preferred and such voting rights shall terminate on the
first date on which such original holder no longer owns shares of
Series A Preferred which constitute at least 14.03% of the total issued
and outstanding shares of Common Stock of the Corporation (based upon
the number of shares of Common Stock into which the shares of Series A
Preferred are then convertible and deeming the shares of Series A
Preferred to be converted into issued and outstanding shares of Common
Stock for the purpose of such computation).
SECTION 9. CONVERSION RIGHTS. Holders of shares of Series A Preferred
shall have the right to convert all or a portion of such shares into shares of
Common Stock, as follows:
(a) Subject to and upon compliance with the provisions of this
Section 9, shares of Series A Preferred shall be convertible at the
option of the holder thereof into duly authorized, validly issued,
fully paid and non-assessable shares of Common Stock. The number of
shares of Common Stock deliverable upon conversion of one share of
Series A Preferred shall be determined by dividing the Stated Value of
such share of Series A Preferred by the Conversion Price then in effect
(i.e., prior to any adjustment of the Conversion Price, one share of
Common Stock will be issued for each share of Series A Preferred
surrendered for conversion). In lieu of any fractional share of Common
Stock to which a holder of Series A Preferred Stock would otherwise be
entitled, such holder shall receive the nearest whole share of Common
Stock (i.e., if less than .5 rounded down, and if .5 or more rounded
up).
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<PAGE> 10
A holder of Series A Preferred may provisionally convert any shares of
Series A Preferred that are the subject of a pending registration with
the Securities and Exchange Commission. Unless the holder states an
earlier time in the conversion notice to the Corporation, a provisional
conversion will be effective only as of the closing of the holder's
sale of Common Stock issuable upon conversion of Series A Preferred
made pursuant to such an effective registration statement (and only
with respect to the shares so sold); otherwise, such shares of Series A
Preferred shall be outstanding as Series A Preferred for all purposes
hereunder (including accrual and payment of dividends) during any
period in which a provisional conversion is pending.
(b) The conversion of shares of Series A Preferred may be
effected by the holder thereof by the surrender of the certificate for
such shares to the Corporation at the principal office of the
Corporation. If the conversion is to be provisional as provided in
Section 9(a) above, the holder shall also deliver a notice to the
Corporation with a statement to that effect. If any shares of Series A
Preferred are called for redemption pursuant to Section 6 hereof, such
right of conversion shall cease and terminate as to the shares called
for redemption at the close of business on the Business Day immediately
preceding the Redemption Date, unless the Corporation shall default in
the payment of the Redemption Price, in which event such conversion
right shall remain in effect until full payment of the Redemption Price
has been made.
(c) As promptly as practicable after the surrender of shares
of Series A Preferred for conversion (unless the shares are surrendered
in a provisional conversion as provided in Section 9(a) hereof), the
Corporation shall issue and deliver or cause to be issued and delivered
to the holder of such shares certificates representing the number of
fully paid and non-assessable shares of Common Stock into which such
shares of Series A Preferred have been converted in accordance with the
provisions of this Section 9. In lieu of any fractional share of Common
Stock to which a holder of Series A Preferred Stock would otherwise be
entitled, such holder shall receive the nearest whole share of Common
Stock (i.e., if less than .5 rounded down, and if .5 or more rounded
up). Subject to the following provisions of this Section 9, and, except
with respect to provisional conversions, such conversion shall be
deemed to have been made as of the close of business on the date on
which the shares of Series A Preferred shall have been surrendered for
conversion in the manner herein provided, so that all rights of the
holder of the shares of Series A Preferred so surrendered shall cease
at such time, and the person or persons entitled to receive the shares
of Common Stock upon conversion thereof shall be treated for all
purposes as having become the record holder or holders of such shares
of Common Stock at such time; provided, however, that any such
surrender (other than for provisional conversion) on any date when the
stock transfer books of the Corporation are closed shall be deemed to
have been made, and shall be effective to terminate the rights of the
holder or holders of the shares of Series A Preferred so surrendered
for conversion and to constitute the person or persons entitled to
receive such shares of Common Stock as the record holder or holders
thereof for all purposes, at the opening of business on the next
succeeding day on which such transfer books are open and such
conversion shall be at the Conversion Price in effect at such time. If
shares are surrendered for provisional conversion, the Corporation
shall either (i) reissue certificates for the number
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<PAGE> 11
of shares of Series A Preferred surrendered for provisional conversion,
if the sale of the underlying Common Stock (as provided in Section 9(a)
above) does not occur, or (ii) issue certificates for the number of
shares of Common Stock into which the shares provisionally surrendered
have been converted to the order of the purchaser thereof, if the sale
of the underlying Common Stock (as provided in Section 9(a) above) does
occur. If, following the delivery of a notice of redemption by the
Corporation pursuant to Section 6 hereof, but not otherwise, a holder
of shares of Series A Preferred elects to exercise its rights of
conversion under this Section 9, such holders of shares of Series A
Preferred who surrender their shares of Series A Preferred for
conversion shall be entitled to payment in cash by the Corporation of
all accrued and unpaid dividends to the date the Series A Preferred are
surrendered for conversion (or deemed to have been converted, in the
case of shares provisionally converted), prorated for any portion of
the then current dividend period during which the Series A Preferred
are surrendered for conversion, whether or not any dividend in respect
of the then-current dividend period has been declared or set aside. The
Corporation shall make that payment as promptly as practicable
following the surrender of certificates for shares of Series A
Preferred for conversion as provided herein (or following the sale of
the underlying Common Stock, in the case of shares that are
provisionally converted and subsequently sold as provided in Section
9(a) hereof) and, when applicable, shall accompany the certificates for
Common Stock into which such shares of Series A Preferred have been
converted.
(d) Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value of the shares of
Common Stock deliverable upon conversion of the shares of Series A
Preferred, the Corporation will take any corporate action which may, in
the opinion of its counsel, be necessary in order that the Corporation
may validly and legally issue fully paid and non-assessable shares of
Common Stock at such adjusted Conversion Price.
(e) The Conversion Price shall be subject to adjustment from
time to time as follows:
(i) In case at any time the Corporation shall (A)
subdivide the outstanding shares of Common Stock into a
greater number of shares, or (B) combine the outstanding
shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior thereto shall be
adjusted proportionately so that the adjusted Conversion Price
shall bear the same relation to the Conversion Price in effect
immediately prior to such event as the total number of shares
of Common Stock outstanding immediately prior to such event
shall bear to the total number of shares of Common Stock
outstanding immediately after such event. Such adjustment
shall become effective immediately after the effective date of
a subdivision or combination.
(ii) In case at any time the Corporation shall
declare, order, pay or make any dividend or other distribution
to holders of the Common Stock payable in shares of Common
Stock, then, in each such case, subject to Section 9(e)(v)
hereof, the Conversion Price in effect immediately prior to
the close of business on the record date fixed for
determination of holders of any class of securities entitled
to receive
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such dividend or distribution shall be reduced to a price
(calculated to the nearest .001 of a cent) determined by
multiplying such Conversion Price by a fraction:
(A) the numerator of which shall be the
number of shares of Common Stock outstanding
immediately prior to such dividend or distribution;
and
(B) the denominator of which shall be the
number of shares of Common Stock outstanding
immediately after such dividend or distribution.
Shares of Common Stock owned by or held for the account of the
Corporation shall not be deemed outstanding for the purpose of
any such computation. Such adjustment shall be made on the
date such dividend is paid or such distribution is made and
shall become effective retroactive to the record date for the
determination of stockholders entitled to receive such
dividend or distribution.
(iii) In case at any time the Corporation shall
declare, order, pay or make any dividend or other distribution
to all holders of the Common Stock, other than a dividend
payable in shares of Common Stock (including, without
limitation, dividends or distributions payable in cash,
evidences of indebtedness, rights, options or warrants to
subscribe or purchase any Common Stock or other securities, or
any other securities or other property, but excluding any
rights to purchase any stock or other securities if such
rights are not separable from the Common Stock except upon the
occurrence of a contingency beyond the control of the
Corporation), then, and in each such case, subject to Section
9(e)(v) hereof, the Conversion Price in effect immediately
prior to the close of business on the record date fixed for
the determination of holders of Common Stock entitled to
receive such dividend or distribution shall be reduced to a
price (calculated to the nearest .001 of a cent) determined by
multiplying such Conversion Price by a fraction:
(A) the numerator of which shall be the
Market Price per share of Common Stock in effect as
of such record date or, if the Common Stock trades on
an ex-dividend basis, on the Trading Day immediately
prior to the date of commencement of ex-dividend
trading, less the value of such dividend or
distribution (as determined in good faith by the
Board of Directors of the Corporation) applicable to
one share of Common Stock; and
(B) the denominator of which shall be such
Market Price per share of Common Stock as of such
record date or, if the Capital Stock trades on an
ex-dividend basis, on the Trading Day immediately
prior to the date of commencement of ex-dividend
trading.
Such adjustment shall be made on the date such dividend is
paid or such distribution is made and shall become effective
retroactive to the record date for the determination of
stockholders entitled to receive such dividend or
distribution. In case at any time
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<PAGE> 13
the Corporation shall declare, order, pay or make a dividend
or rights to purchase any stock or other securities that are
not separable from the Common Stock except upon the occurrence
of a contingency beyond the control of the Corporation, the
Corporation shall make provision so that the holder of any
share of Series A Preferred thereafter surrendered for
conversion shall be entitled to receive the number of shares
of Common Stock and rights to purchase stock or other
securities that such holder would have owned or have been
entitled to receive after the occurrence of any of such events
had the share of Series A Preferred been surrendered for
conversion immediately before the occurrence of such event or
the record date therefor, whichever is earlier. If any such
rights are redeemed, the holder of Series A Preferred shall
have the right to receive, in lieu of any such rights, any
cash, property or securities paid in respect of such
redemption.
(iv) In case at any time the Corporation issues or
sells any shares of Common Stock or any rights, options or
warrants to subscribe for or purchase shares of Common Stock
or shares having the same rights, privileges and preferences
as the Common Stock ("EQUIVALENT COMMON STOCK") or securities
convertible into Common Stock or equivalent common stock, at a
price per share of Common Stock or equivalent common stock (or
having a conversion price per share, if a security is
convertible into shares of Common Stock or equivalent common
stock) less than the Market Price of the Common Stock as of
the date of such issue or sale, then upon such issue or sale
the Conversion Price shall be reduced to such Conversion Price
determined by multiplying the Conversion Price in effect
immediately prior to such issue or sale by a fraction, (y) the
numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to such issue or
sale plus the number of shares of Common Stock which the
aggregate offering price of the total number of shares of
Common Stock and/or equivalent common stock so to be offered
(and/or the aggregate initial conversion price of the
convertible securities so to be offered) would purchase at
such Market Price and (z) the denominator of which shall be
the sum of the number of shares of Common Stock outstanding
immediately prior to such issue or sale plus the number of
additional shares of Common Stock and/or equivalent common
stock to be offered for subscription or purchase (or into
which the convertible securities so to be offered are
initially convertible). In case such subscription price may be
paid in a consideration part of or all of which shall be in a
form other than cash, the value of such consideration shall be
determined in good faith by the Board of Directors of the
Corporation. Shares of Common Stock owned by or held for the
account of the Corporation shall not be deemed outstanding for
the purpose of any such computation. Such issue or sale
adjustment shall be made successively upon the issuance or
sale of shares of Common Stock or equivalent common stock or
any rights, options or warrants to subscribe for or purchase
Common Stock or equivalent common stock or securities
convertible into common stock or equivalent common stock.
Notwithstanding the foregoing, no adjustment of the Conversion
Price pursuant to this Section 9(e)(iv) shall be made upon (A)
the conversion or redemption of shares of Series A Preferred;
(B) the payment of any stock dividend on the Series A
Preferred; (C) the issuance of options to officers,
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<PAGE> 14
directors and employees of the Corporation and its
subsidiaries to purchase shares of Common Stock, including any
such options as are issued and outstanding as of the Original
Issue Date, provided that, with respect to all such options,
the number of shares of Common Stock that may be subject to
such options shall be limited to 15% of the Corporation's
fully diluted shares of Common Stock based upon securities
outstanding as of the Original Issue Date; (D) the issuance
and sale of Common Stock upon exercise of any rights or
options referenced in the immediately preceding clause (C) or
in Section 9(e)(iii) above; or (E) the issuance and sale of
Common Stock in an underwritten public offering.
(v) If the amount of any adjustment of the Conversion
Price required pursuant to this Section 9(e) would be less
than 1% of the Conversion Price in effect at the time such
adjustment is otherwise so required to be made, such amount
shall be carried forward and an adjustment with respect
thereto made at the time of and together with any subsequent
adjustment which, together with such amount and any other
amount or amounts so carried forward, shall aggregate at least
1% of such Conversion Price. All calculations under this
Section 9(e) shall be made to the nearest .001 of a cent.
(vi) Except as herein otherwise expressly provided,
for all purposes of this Section 9(e) the term "Common Stock"
shall mean the Common Stock and any shares of stock or other
class of capital stock of the Corporation which is not
preferred as to dividends or assets over any other class of
capital stock of the Corporation and which is not subject to
redemption, or which is issued to the holders of shares of
Common Stock upon any reclassification thereof.
Notwithstanding anything in this Section 9(e), there will be no
adjustment hereunder as a result of the reverse stock split
contemplated in Section 5.17 of the Agreement and Plan of Merger dated
October 8, 1999, to which the Corporation is a party, which reverse
stock split shall be deemed to have occurred prior to effectiveness of
this Certificate.
(f) In case at any time after the Original Issue Date, the
Corporation shall be a party to any transaction (including without
limitation a merger, consolidation, statutory share exchange, sale of
all or substantially all of the Corporation's assets or
recapitalization of the Common Stock), in each case as a result of
which shares of Common Stock (or any other securities of the
Corporation then issuable upon conversion of the Series A Preferred)
shall be converted into the right to receive stock, securities or other
property (including without limitation cash or any combination thereof)
(each of the foregoing transactions being referred to as a "FUNDAMENTAL
CHANGE TRANSACTION"), then the shares of Series A Preferred remaining
outstanding will thereafter no longer be subject to conversion into
Common Stock (or such other securities) pursuant to this Section 9, but
instead each share shall be convertible into the kind and amount of
stock and other securities and property receivable (including without
limitation cash) upon the consummation of such Fundamental Change
Transaction by a holder of that number of shares or fraction thereof of
Common Stock (or such other securities) into which one share of Series
A Preferred was convertible immediately
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prior to such Fundamental Change Transaction assuming such holder of
Common Stock failed to exercise any right of election as to the kind of
consideration to be received in such Fundamental Change Transaction.
The Corporation shall not be a party to any Fundamental Change
Transaction after which shares of the Series A Preferred shall remain
outstanding unless the terms of such Fundamental Change Transaction are
consistent with the provisions of this Section 9(f), and it shall not
consent or agree to the occurrence of any such Fundamental Change
Transaction until the Corporation has entered into an agreement with
the successor or purchasing entity, as the case may be, for the benefit
of the holders of the shares of Series A Preferred which will contain
provisions enabling the holders of shares of the Series A Preferred
which remain outstanding after such Fundamental Change Transaction to
convert such shares into the consideration received by holders of
Common Stock (or any other securities of the Corporation then issuable
upon conversion of the Series A Preferred) at the Conversion Price
immediately after such Fundamental Change Transaction. In the event
that at any time, as a result of an adjustment made pursuant to this
Section 9, the Series A Preferred shall become subject to conversion
into any securities other than shares of Common Stock, thereafter the
number of such other securities so issuable upon conversion of the
shares of Series A Preferred shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the shares of Series A Preferred
contained in this Section 9. The provisions of this Section 9(f) shall
similarly apply to successive Fundamental Change Transactions.
(g) Upon the occurrence of any event requiring an adjustment
of the Conversion Price, then, and in any such case, the Corporation
shall promptly deliver to the holders of shares of Series A Preferred a
notice stating the Conversion Price resulting from such adjustment and
the method of calculation thereof and setting forth a brief statement
of the facts requiring such adjustment and upon which such adjustment
is based.
(h) In case at any time:
(i) the Corporation shall declare or pay to all
holders of Common Stock any dividend (whether payable in
Common Stock, cash, securities or other property);
(ii) there shall be any capital reorganization, or
reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with, or sale of
all or substantially all of its assets to, another corporation
or other entity;
(iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Corporation;
(iv) there shall be any other Fundamental Change
Transaction; or
(v) there shall occur any other event that would
cause an adjustment to the Conversion Price of the Series A
Preferred;
15
<PAGE> 16
then, in any one or more of such cases, the Corporation shall give to
the holder of shares of Series A Preferred (A) at least 15 days prior
to any event referred to in clause (i) or (v) above and at least 30
days prior to any event referred to in clause (ii), (iii) or (iv)
above, written notice of the date on which the books of the Corporation
shall close or records shall be taken for such dividend or distribution
or for determining rights to vote in respect of any such organization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or Fundamental Change Transaction, and (B) in
the case of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, winding-up or Fundamental
Change Transaction known to the Corporation, at least 30 days prior
written notice of the date, or if not then known, a reasonable
approximation thereof by the Corporation) when the same shall take
place. Such notice in accordance with the foregoing clause (A) shall
also specify, in the case of any such dividend or distribution, the
date on which such holders of Common Stock shall be entitled thereto,
and such notice in accordance with the foregoing clause (B) shall also
specify the date on which such holders of Common Stock shall be
entitled to exchange their Common Stock, securities or other property
deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, winding-up or Fundamental
Change Transaction, as the case may be.
(i) Whenever the Conversion Price is adjusted as provided
herein, the Corporation shall prepare and mail to the record holders of
Series A Preferred an officer's certificate signed by the Chairman of
the Board, President, or Chief Financial Officer of the Corporation
setting forth the Conversion Price after the adjustment, the method of
calculation thereof, and a brief statement of the facts requiring the
adjustment and upon which the adjustment is based. If the calculation
of the adjustment requires a determination by the Corporations' Board
of Directors, the certificate shall attach and certify to the
resolution of the Board of Directors relating to the determination.
(j) All shares of Common Stock issuable upon the conversion
set forth in this Section 9 shall be duly authorized, validly issued,
fully-paid and nonassessable.
SECTION 10. RANKING. Without limiting the definition of Junior
Securities, the following securities and obligations of the Corporation shall
rank junior to the Series A Preferred with respect to the payments required or
permitted to be made to the holders thereof pursuant to their respective
governing instruments and payments required to be made to the holders of the
Series A Preferred pursuant hereto: the shares of Common Stock. No Senior
Securities or Parity Securities are outstanding or authorized on the date hereof
or will be outstanding or authorized on the Original Issue Date.
SECTION 11. RECORD HOLDERS. The Corporation may deem and treat the
record holder of any shares of Series A Preferred as the true and lawful owner
thereof for all purposes, and the Corporation shall not be affected by any
notice to the contrary.
SECTION 12. NOTICES. Except as may otherwise be provided by law or
provided for herein, all notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have been given upon receipt, in the case
of a notice of conversion given to the Corporation as
16
<PAGE> 17
contemplated in Section 9(b) hereof, or, in all other cases, upon the earlier of
receipt of such notice or three Business Days after the mailing of such notices
sent by first-class mail, postage prepaid, addressed: If to the Corporation, to
its principal executive offices (Attention: Corporate Secretary) or to any agent
of the Corporation designated as permitted hereby; or if to a holder of the
Series A Preferred, to such holder at the address of such holder as listed in
the stock record books of the Corporation (which shall include the records of
the Transfer Agent), or to such other address as the Corporation or holder, as
the case may be, shall have designated by notice similarly given.
SECTION 13. REGISTRATION OF TRANSFER. Upon the surrender of any
certificate representing the Series A Preferred to the Corporation or its
transfer agent, the Corporation shall, or shall cause its transfer agent to, at
the request of the record holder of such certificate, execute and deliver (at
the Corporation's expense) a new certificate or certificates in exchange
therefor, of Series A Preferred representing in the aggregate the number of
shares of Series A Preferred represented by the surrendered certificate. Each
such new certificate shall be registered in such name and shall represent such
number of shares of Series A Preferred as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Series A Preferred
represented by such new certificate from the date as of which dividends have
been fully paid on the Series A Preferred represented by the surrendered
certificate.
SECTION 14. REPLACEMENT. Upon receipt of evidence satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing shares of Series A Preferred, and, in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided, that, if the holder is a financial institution or other
institutional investor, its own agreement shall be satisfactory), or, in the
case of any such mutilation, upon surrender of such certificate, the Corporation
shall (at its own expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Series A Preferred
of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of the lost, stolen, destroyed or mutilated
certificate, and dividends shall accrue on the Series A Preferred represented by
such new certificate from the date to which dividends have been fully paid on
the Series A Preferred represented by the lost, stolen, destroyed or mutilated
certificate.
SECTION 15. SUCCESSORS AND TRANSFEREES. The provisions applicable to
shares of Series A Preferred shall bind and inure to the benefit of and be
enforceable by the Corporation, the respective successors to the Corporation,
and by any record holder of shares of Series A Preferred.
17
<PAGE> 18
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed this ____ day of _______, _____.
VISTA ENERGY RESOURCES, INC.
By:
----------------------------------------
C. Randall Hill
President
18
<PAGE> 1
EXHIBIT 5.1
[VINSON & ELKINS LETTERHEAD]
January 6, 2000
Vista Energy Resources, Inc.
550 West Texas Avenue
Suite 700
Midland, Texas 79701
Ladies and Gentlemen:
We have acted as counsel for Vista Energy Resources, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933 (the "Securities Act"), of (i) 12,275,495 shares (the
"Common Shares") of common stock, par value $.01 per share, of the Company and
(ii) 3,979,372 shares (the "Preferred Shares" and together with the Common
Shares, the "Shares") of Series A 6% Convertible Preferred Stock of the Company,
pursuant to the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission (the "Commission") on December 10, 1999, (the
"Registration Statement").
In reaching the opinions set forth herein, we have examined and are
familiar with originals or copies, certified or otherwise, of such documents and
records of the Company and such statutes, regulations and other instruments as
we have deemed necessary or advisable for purposes of this opinion, including
(i) the Registration Statement, (ii) the Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State of Delaware, (iii)
the Bylaws of the Company and (iv) the Agreement and Plan of Merger dated as of
October 8, 1999 among the Company, Prize Energy Corp., a Delaware corporation,
and PEC Acquisition Corp., a Delaware corporation (the "Merger Agreement").
We have assumed that (i) all information contained in all documents
reviewed by us is true, correct and complete, (ii) all signatures on all
documents reviewed by us are genuine, (iii) all documents submitted to us as
originals are true and complete, (iv) all documents submitted to us as copies
are true and complete copies of the originals thereof, and (v) all persons
executing and delivering originals or copies of documents examined by us were
competent to execute and deliver such documents.
Based on the foregoing and having due regard for the legal
considerations we deem relevant, we are of the opinion that (i) the Shares that
are issuable pursuant to the Merger Agreement, when issued in accordance with
the terms of the Merger Agreement, will be validly issued by the Company, fully
paid and non-assessable and (ii) those Common Shares that are issuable pursuant
to the Preferred Shares upon conversion of the Preferred Shares, when issued in
accordance with the terms of the Preferred Shares, will be validly issued by the
Company, fully paid and non-assessable.
<PAGE> 2
Vista Energy Resources, Inc.
January 6, 2000
Page 2
This opinion is limited in all respects to the laws of the State of
Texas, the Delaware General Corporation Law and the federal laws of the United
States of America.
This opinion letter may be filed as an exhibit to the Registration
Statement. Consent is also given to the reference to us under the caption "Legal
Matters" in the Registration Statement as having passed on the validity of the
Shares. In giving this consent, we do not thereby admit that it comes within the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 8.1
[CONNER & WINTERS LETTERHEAD]
January 4, 2000
Prize Energy Corp.
20 East 5th Street, Suite 1400
Tulsa, Oklahoma 74103
Gentlemen:
We have acted as counsel to Prize Energy Corp., a Delaware corporation
("Prize"), in connection with the proposed Merger, as defined and described in
the Agreement and Plan of Merger, dated as of October 8, 1999 (the "Merger
Agreement"), by and among Prize, Vista Energy Resources, Inc., a Delaware
corporation ("Parent"), and PEC Acquisition Corp., a Delaware corporation and a
newly-formed, wholly-owned subsidiary of Parent ("Merger Sub"). We are rendering
this opinion to you pursuant to section 5.5(a) of the Merger Agreement. Unless
otherwise indicated, each capitalized term used herein has the meaning ascribed
to it in the Merger Agreement and all section references are to the Internal
Revenue Code of 1986, as amended.
<PAGE> 2
January 4, 2000
Page 2
INFORMATION RELIED UPON
In rendering the opinion expressed herein, we have examined such documents
as we have deemed appropriate, including the Merger Agreement and the Proxy
Statement/Prospectus (the "Prospectus") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act") and the Securities Exchange Act of 1934, as amended. In our
examination of documents, we have assumed that all documents submitted to us as
photocopies or telecopies faithfully reproduce the originals thereof, that such
originals are authentic, that all such documents have been or will be duly
executed to the extent required, that all signatures are genuine, and that all
statements set forth in such documents are accurate. We have assumed that the
Merger will be consummated in the manner described in the Merger Agreement and
the Prospectus. We have also obtained and relied upon written certificates dated
the date hereof of officers of Prize, Parent and Merger Sub who have personal
knowledge of facts and circumstances relating to the Merger as well as to the
operations, assets and liabilities of Prize, Parent and Merger Sub to verify
certain relevant facts that have been represented to us or that we have assumed
in rendering this opinion. With your permission, we have assumed that the
following factual statements (as well as other statements made in such
certificates, but not recited herein) are true on the date hereof and will be
true at the Effective Time:
1. The Merger will be consummated solely in compliance with the material
terms and conditions of the Merger Agreement and none of the material terms and
conditions thereof have been or will be waived or modified.
2. For each holder of Prize Common Stock, the fair market value of the
Parent Common Stock into which such holder's Prize Common Stock will be
converted in the Merger will be approximately equal to the fair market value of
such holder's Prize Common Stock, and for each holder of Prize Preferred Stock,
the fair market value of the Parent Preferred Stock into which such holder's
Prize Preferred Stock will be converted in the Merger will be approximately
equal to the fair market value of such holder's Prize Preferred Stock.
3. In the Merger no holder of Prize Common Stock or Prize Preferred Stock
will receive for such stock, directly or indirectly, any consideration other
than Parent Common Stock or Parent Preferred Stock, as applicable.
4. Neither Parent nor any Related Person (within the relationships
described below) has any plan or intention to purchase, redeem or otherwise
reacquire any of the Parent Common Stock or Parent Preferred Stock into which
Prize Common Stock and Prize Preferred Stock will be converted pursuant to the
Merger. A "Related Person" with respect to Parent means
(i) a corporation that, immediately before or immediately after such
purchase, exchange, redemption, or other acquisition, is a member of an
Affiliated Group (as defined below) of which Parent (or any successor
corporation), as the case may be, is a member, or
<PAGE> 3
January 4, 2000
Page 3
(ii) a corporation in which Parent (or any successor corporation), as
the case may be, owns, or which owns with respect to Parent (or any
successor corporation), as the case may be, directly or indirectly,
immediately before or immediately after such purchase, exchange,
redemption, or other acquisition, at least 50% of the total combined voting
power of all classes of stock entitled to vote or at least 50% of the total
value of shares of all classes of stock, taking into account for purposes
of this clause (ii) any stock owned by 5% or greater stockholders of Parent
(or any successor corporation), as the case may be, or such corporation, a
proportionate share of the stock owned by entities in which Parent (or any
successor corporation), as the case may be, or such corporation owns an
interest, and any stock which may be acquired pursuant to the exercise of
options.
"Affiliated Group" means one or more chains of corporations connected through
stock ownership with a common parent corporation, but only if
(x) the common parent owns directly stock that possesses at least 80%
of the total voting power, and has a value at least equal to 80% of the
total value, of the stock in at least one of the other corporations, and
(y) stock possessing at least 80% of the total voting power, and
having a value at least equal to 80% of the total value, of the stock in
each corporation (except the common parent) is owned directly by one or
more of the other corporations.
5. In the Merger, no liabilities of the stockholders of Prize will be
assumed by Parent, and Parent will not assume any liabilities relating to any
Prize Common Stock or Prize Preferred Stock acquired by Parent in the Merger.
Furthermore, there is no plan or intention for Parent to assume any liabilities
of Prize.
6. Following the Merger, Parent will cause Prize to continue its historic
business or use a significant portion of its historic business assets in a
business.
7. Prize, Parent and Merger Sub and the stockholders of Prize each will
bear its or their own expenses, if any, incurred in connection with or as part
of the Merger or related transactions.
8. There is no intercorporate indebtedness existing between Parent and
Prize or between Merger Sub and Prize that was issued, acquired or will be
settled at a discount.
9. None of Prize, Parent or Merger Sub is a regulated investment company, a
real estate investment trust, or a corporation fifty percent (50%) or more of
the value of whose assets are stock and securities and eighty percent (80%) or
more of the value of whose total assets are assets held for investment (each, an
"Investment Company"). For purposes of this representation, in making the 50%
and 80% determinations under the preceding sentence: (i) stock and securities
<PAGE> 4
January 4, 2000
Page 4
in any subsidiary corporation shall be disregarded and the parent corporation
shall be deemed to own its ratable share of the subsidiary's assets, and (ii) a
corporation shall be considered a subsidiary if the parent owns 50% or more of
the combined voting power of all classes of stock entitled to vote or 50% or
more of the total value of shares of all classes of stock outstanding. In
determining total assets there shall be excluded cash and cash items (including
receivables), government securities, and assets acquired (through incurring
indebtedness or otherwise) for purposes of ceasing to be an Investment Company.
10. None of Prize, Parent or Merger Sub is under the jurisdiction of a
court in a case under title 11 of the United States Code, or a receivership,
foreclosure, or similar proceeding in a Federal or State Court.
11. At the Effective Time, the fair market value of the assets of Prize
will exceed the sum of its liabilities plus the amount of liabilities, if any,
to which assets of Prize are subject.
12. Pursuant to the Merger, shares of Prize Common Stock will be converted
into a number of shares of Parent Common Stock having a value as of the
Effective Time exceeding eighty percent of the aggregate value of all of the
shares of Prize Common Stock outstanding prior to the Merger, including for such
purpose all shares of Prize Common Stock redeemed within the two years
immediately preceding the Merger, and shares of Prize Preferred Stock will be
converted into a number of shares of Parent Preferred Stock having a value as of
the Effective Time exceeding eighty percent of the aggregate value of all of the
shares of Prize Preferred Stock outstanding prior to the Merger, including for
such purpose all shares of Prize Preferred Stock redeemed within the two years
immediately preceding the Merger.
13. After the Merger, Parent has no plan or intention to sell or otherwise
dispose of any of its assets or of any of the assets of Prize, except for
dispositions made in the ordinary course of business or transfers of assets to a
corporation controlled by Parent.
14. None of the employee compensation received or to be received by any
stockholder-employees of Prize is or will be separate consideration for, or
allocable to, any of their shares of Prize Common Stock or Prize Preferred Stock
to be surrendered in the Merger. None of the shares of Parent Common Stock or
Parent Preferred Stock to be received by any stockholder-employee of Prize in
the Merger is or will be separate consideration for, or allocable to, any
employment, consulting or similar arrangement. Any compensation paid or to be
paid to any stockholder of Prize who will be an employee of or perform advisory
services for Parent, Prize, or any affiliate thereof after the Merger, will be
determined by bargaining at arm's length.
We have also assumed that all of the shares of Prize Common Stock and Prize
Preferred Stock outstanding immediately before the Effective Time are held by
the Prize stockholders as capital assets.
<PAGE> 5
January 4, 2000
Page 5
OPINION
Based upon the foregoing, it is our opinion that, for U.S. federal income
tax purposes:
1. The Merger will be treated as a "reorganization" within the meaning of
section 368(a).
2. Each of Prize, Parent and Merger Sub will be a party to such
reorganization within the meaning of section 368(b).
3. No gain or loss will be recognized by Parent, Prize or Merger Sub as a
result of the Merger.
4. No gain or loss will be recognized by a stockholder of Prize as a result
of the Merger with respect to the shares of Prize Common Stock converted into
shares of Parent Common Stock or shares of Prize Preferred Stock converted into
shares of Parent Preferred Stock in the Merger.
5. A Prize stockholder's aggregate tax basis in the Parent Common Stock or
Parent Preferred Stock into which the Prize stockholder's Prize Common Stock or
Prize Preferred Stock is converted in the Merger will equal the Prize
stockholder's aggregate tax basis in the Prize Common Stock or Prize Preferred
Stock, respectively, converted.
6. The holding period of the shares of Parent Common Stock or Parent
Preferred Stock into which a Prize stockholder's Prize Common Stock or Prize
Preferred Stock is converted in the Merger will include the holding period of
the Prize Common Stock or Prize Preferred Stock, respectively, converted.
The preceding are all of the material U.S. federal income tax consequences
of the Merger. However, our opinion does not address U.S. federal income tax
consequences which may vary with, or which are contingent upon, a stockholder's
individual circumstances. In addition, our opinion does not address any
non-income tax or any foreign, state or local tax consequences of the Merger.
This opinion represents and is based upon our best judgment regarding the
application of U.S. federal income tax laws, existing judicial decisions,
administrative regulations and published rulings and procedures as of the date
of this letter. We call your attention to the fact that the opinion set forth in
this letter is an expression of professional judgment and not a guarantee of a
result. Our opinion is not binding upon the Internal Revenue Service or the
courts, and the Internal Revenue Service is not precluded from successfully
asserting a contrary position. Only an advance ruling from the Internal Revenue
Service will give a taxpayer assurance as to the tax consequences of a
transaction such as the Merger. Furthermore, no assurance can be given that
future legislative, judicial or administrative changes, on either a prospective
or retroactive basis,
<PAGE> 6
January 4, 2000
Page 6
would not adversely affect the accuracy of the conclusions stated herein. A
change in the authorities or the accuracy or completeness of any of the
information, documents, corporate records, covenants, statements,
representations or assumptions on which our opinion is based could affect our
conclusions. This opinion is expressed as of the date hereof, and we are under
no obligation to supplement or revise our opinion to reflect any changes
(including changes that have retroactive effect) (i) in applicable law or (ii)
in any information, document, corporate record, covenant, statement,
representation or assumption stated herein which becomes untrue or incorrect.
This letter is furnished to you solely for use in connection with the
Merger, as described in the Merger Agreement and the Prospectus, and is not to
be used, circulated, quoted, or otherwise referred to for any other purpose
without our express written permission. In accordance with the requirements of
Item 601(b) (23) of Regulation S-K under the Securities Act, we hereby consent
to the discussion of this opinion in the Prospectus, to the filing of this
opinion as an exhibit to the Prospectus and to the reference to our firm under
the headings "THE MERGER-Material U.S. Federal Income Tax Consequences", "THE
MERGER AGREEMENT-Conditions to the Merger", and "LEGAL MATTERS" in the
Prospectus. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission thereunder.
Sincerely,
CONNER & WINTERS,
A Professional Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports on the financial
statements of Vista Energy Resources, Inc. and for the I.P. Acquisition dated
March 29, 1999 and February 25, 1999, respectively, included in Vista Energy
Resources, Inc. Form S-4 (Registration No. 333-92561) and to all references to
our Firm included in the attached registration statement.
/s/ Arthur Andersen LLP
Dallas, Texas
January 6, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 13, 1998, accompanying the
financial statements of Midland Resources, Inc. and Subsidiaries contained in
the Registration Statement and Proxy Statement/Prospectus. We consent to the use
of the aforementioned report in the Registration Statement and Proxy
Statement/Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Houston, Texas
January 5, 2000
<PAGE> 1
EXHIBIT 23.3
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the statements of revenues and direct operating expenses
for the producing properties acquired by Prize Energy Corp. from Pioneer Natural
Resources USA, Inc. for the years ended December 31, 1998, 1997 and 1996, dated
September 3, 1999, in the Registration Statement on Form S-4 and related Proxy
Statement/Prospectus dated January 6, 2000 of Vista Energy Resources, Inc.
/s/ Ernst & Young LLP
Ernst & Young LLP
Fort Worth, Texas
January 6, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, Williamson Petroleum Consultants, Inc.
hereby consents to the use of our report entitled, "Review of Estimates Prepared
by Vista Energy Resources, Inc. of Oil and Gas Reserves and Associated Future
Net Revenues of the Major-Value Properties to the Interests of Vista Energy
Resources, Inc. Effective October 1, 1999 For Disclosure to the Securities and
Exchange Commission, Williamson Project 9.8758" dated November 15, 1999, with
respect to Vista Energy Resources, Inc. and to all references to our firm
included in or made part of this Registration Statement on Form S-4 of Vista
Energy Resources, Inc. to be filed with the Securities and Exchange Commission
on or about January 5, 2000.
/s/ Williamson Petroleum Consultants, Inc.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
January 5, 2000
<PAGE> 1
VISTA ENERGY RESOURCES, INC.
550 WEST TEXAS AVENUE, SUITE 700
MIDLAND, TEXAS 79701
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD FEBRUARY 8, 2000.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF VISTA ENERGY RESOURCES,
INC.
The undersigned hereby appoints C. Randall Hill and Steven D. Gray, and each
of them, proxies or proxy with full power of substitution and revocation as to
each of them, to represent the undersigned and to act and vote all of the shares
of common stock of Vista Energy Resources, Inc. the undersigned is entitled to
vote, at the Special Meeting of Stockholders of Vista Energy Resources, Inc. to
be held on the 8th day of February, 2000, at 10:00 a.m., local time, at The
Midland Room, Fasken Center, Tower II, 2nd Floor, 550 West Texas Avenue,
Midland, Texas 79701, on the following matters and in their discretion on any
other matters which may come before the meeting or any adjournments or
postponements thereof. Receipt of the proxy statement dated January , 2000 is
acknowledged.
PLEASE MARK, SIGN AND DATE THE REVERSE SIDE OF THIS PROXY
AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
(CONTINUED ON OTHER SIDE)
<TABLE>
<S> <C> <C>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE PLEASE MARK YOUR VOTE [X]
MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IN THE ABSENCE OF AS INDICATED IN THIS
SUCH DIRECTION, THIS PROXY WILL BE VOTED "FOR" ITEM 1 AND EXAMPLE
"FOR" ITEM 2.
</TABLE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF VISTA ENERGY RESOURCES,
INC.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
1. To approve and adopt:
- the Agreement and Plan of Merger dated as of October 8, 1999, among Vista
Energy Resources, Inc., PEC Acquisition Corp. and Prize Energy Corp.
relating to the merger of PEC Acquisition Corp., a wholly-owned subsidiary
of Vista, with and into Prize; and
- the related one-for-seven reverse stock split of all issued and
outstanding shares of Vista common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Contingent upon the passing of the proposal described in Item 1, to change
the company's name to "Prize Energy Corp."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting and at any and all
adjournments or postponements thereof.
-------------------------------------------
Signature
-------------------------------------------
Signature if held jointly
Dated:
-------------------------------------------
Please sign exactly as name appears herein,
date and return promptly. When shares are
held by joint tenants, both must sign. When
signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by duly
authorized officer and give title of
officer. If a partnership, please sign in
partnership name by authorized person and
give title or capacity of person signing.
<PAGE> 1
----------------------------------------
PRIZE ENERGY CORP.
3500 WILLIAM D. TATE, SUITE 200
GRAPEVINE, TEXAS 76051
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD FEBRUARY 8, 2000.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF PRIZE ENERGY CORP.
The undersigned hereby appoints Philip B. Smith and Lon C. Kile, and each of
them, proxies or proxy with full power of substitution and revocation as to each
of them, to represent the undersigned and to act and vote all of the shares of
common stock or preferred stock of Prize Energy Corp. the undersigned is
entitled to vote at the Special Meeting of Stockholders of Prize Energy Corp. to
be held on the 8th day of February, 2000, at 10:00 a.m., local time, at 3500
William D. Tate, Suite 200, Grapevine, Texas 76051, on the following matters and
in their discretion on any other matters which may come before the meeting or
any adjournments or postponements thereof. Receipt of the proxy statement dated
January , 2000 is acknowledged.
PLEASE MARK, SIGN AND DATE THE REVERSE SIDE OF THIS
PROXY AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
(CONTINUED ON OTHER SIDE)
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<S> <C> <C>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE Please mark your vote
MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IN THE ABSENCE OF as indicated in this
SUCH DIRECTION, THIS PROXY WILL BE VOTED "FOR" ITEM 1. example [X]
</TABLE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF PRIZE ENERGY CORP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1.
1. To approve and adopt the Agreement and Plan of Merger dated as of October 8,
1999, among Prize Energy Corp., Vista Energy Resources, Inc. and PEC
Acquisition Corp. relating to the merger of PEC Acquisition Corp., a
wholly-owned subsidiary of Vista, with and into Prize.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting and at any and all
adjournments or postponements thereof.
Signature
Signature if held jointly
Dated: , ____
Please sign exactly as name appears herein,
date and return promptly. When shares are
held by joint tenants, both must sign. When
signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by duly
authorized officer and give title of
officer. If a partnership, please sign in
partnership name by authorized person and
give title or capacity of person signing.
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